-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T3XCpgJudpJMZHGXQVkbjQ+fveM75UXpI6AZrEOc6aXCJ2tIHJya6KsIDGqGfQDC b/tH+9cmvDptsWJhw7dVZQ== 0000950130-96-002657.txt : 19960723 0000950130-96-002657.hdr.sgml : 19960723 ACCESSION NUMBER: 0000950130-96-002657 CONFORMED SUBMISSION TYPE: 485B24E PUBLIC DOCUMENT COUNT: 21 FILED AS OF DATE: 19960719 EFFECTIVENESS DATE: 19960719 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNAMERICA INCOME FUNDS CENTRAL INDEX KEY: 0000795307 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: NY FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 485B24E SEC ACT: 1933 Act SEC FILE NUMBER: 033-06502 FILM NUMBER: 96596561 FILING VALUES: FORM TYPE: 485B24E SEC ACT: 1940 Act SEC FILE NUMBER: 811-04708 FILM NUMBER: 96596562 BUSINESS ADDRESS: STREET 1: 733 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2123537651 MAIL ADDRESS: STREET 1: 733 THIRD AVENUE CITY: NEW YORK STATE: NY ZIP: 10017 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 POST EFFECTIVE AMENDMENT As filed with the Securities and Exchange Commission on July 19, 1996 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. 21 X - and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 - Amendment No. 18 X (Check appropriate box or boxes) SUNAMERICA INCOME FUNDS (Exact Name of Registrant as Specified in Charter) The SunAmerica Center 733 Third Avenue - Third Floor New York, NY 10017-3204 (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. The SunAmerica Center 733 Third Avenue, Third Floor New York, NY 10017-3204 (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 29, 1996 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, 1996 on May 28, 1996. 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 73,069,933 $7.74 $565,561,281.40 $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, 1996 redeemed or repurchased 95,382,583 shares. Of these shares, 62,188,709 were previously used for a reduction pursuant to Paragraph (c) of Rule 24f-2. 73,032,466 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 and Turnover 5A Management's Discussion of Fund * Performance 6 Capital Stock and Other Dividends, Distributions and Securities Taxes; 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; Investment Policies Restrictions; 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 and Taxes 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 THE SUNAMERICA CENTER, 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 and 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 29, 1996, 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 REPRE- SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - ------------------------------------------------------------------------------- PROSPECTUS DATED JULY 29, 1996 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 Fac- tors............................... 10 Investment Restrictions............. 17
PAGE ---- Management of the Trust.............. 18 Purchase of Shares................... 20 Redemption of Shares................. 22 Exchange Privilege................... 24 Portfolio Transactions, Brokerage and Turnover............................ 25 Determination of Net Asset Value..... 25 Performance Data..................... 25 Dividends, Distributions and Taxes... 26 General Information.................. 27
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 TAX EXEMPT SECURITIES SECURITIES DIVERSIFIED HIGH INCOME INSURED FUND FUND INCOME 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 Maximum 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 AVERAGE NET ASSETS) (NET OF FEE WAIVERS/ EXPENSE REIMBURSEMENTS) Management Fees........ 0.67% 0.67% 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......... 0.42% 0.46% 0.52% 0.51% 0.46% 0.41% 0.43% 0.31% 0.37% 0.40% ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Total Operating Ex- pense(/6/)............. 1.44% 2.13% 1.37% 2.01% 1.46% 2.06% 1.53% 2.06% 1.22% 1.90% ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
- -------- (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, 1996. (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, 1996, the total operating expenses (be- fore waivers) for Government Securities Fund Class A and High Income Fund Class B were: 1.48%, and 2.14%, respectively. All of the foregoing fee waivers and/or expense reimbursements were voluntary, and were terminated by the Adviser effective May 16, 1996. 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)............................... $61 $91 $122 $212 (Class B Shares)*.............................. $62 $97 $134 $220 FEDERAL SECURITIES FUND (Class A Shares)............................... $61 $89 $119 $204 (Class B Shares)*.............................. $60 $93 $128 $209 DIVERSIFIED INCOME FUND (Class A Shares)............................... $62 $91 $123 $214 (Class B Shares)*.............................. $61 $95 $131 $216 HIGH INCOME FUND (Class A Shares)............................... $62 $94 $127 $221 (Class B Shares)*.............................. $61 $95 $131 $219 TAX EXEMPT INSURED FUND (Class A Shares)............................... $59 $84 $111 $188 (Class B Shares)*.............................. $59 $90 $123 $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)............................... $61 $91 $122 $212 (Class B Shares)*.............................. $22 $67 $114 $220 FEDERAL SECURITIES FUND (Class A Shares)............................... $61 $89 $119 $204 (Class B Shares)*.............................. $20 $63 $108 $209 DIVERSIFIED INCOME FUND (Class A Shares)............................... $62 $91 $123 $214 (Class B Shares)*.............................. $21 $65 $111 $216 HIGH INCOME FUND (Class A Shares)............................... $62 $94 $127 $221 (Class B Shares)*.............................. $21 $65 $111 $219 TAX EXEMPT INSURED FUND (Class A Shares)............................... $59 $84 $111 $188 (Class B Shares)*.............................. $19 $60 $103 $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 Financial Highlights for the period July 1, 1993 to March 31, 1994, and for each of the years in the period ended March 31, 1996 and for each of 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, 1996 for the Federal Securities Fund, have been audited by Price Waterhouse LLP, each Fund's independent accountants, whose reports on the financial statements containing such information for each of the five years in the period ended March 31, 1996 are included in the Trust'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, PERIOD BEGINNING MENT AND INVESTMENT INVESTMENT 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- 03/31/94(/3/) $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 03/31/96 8.23 0.62 0.16 0.78 (0.51) -- -- -- (0.51) 8.50 9.62 CLASS B ------- 06/30/87 $9.92 $0.74 $(0.17) $ 0.57 $(0.78) $ -- $ -- $ -- $(0.78) $9.71 6.73% 06/30/88 9.71 0.88 (0.30) 0.58 (0.88) -- -- -- (0.88) 9.41 6.64 06/30/89 9.41 0.87 (0.30) 0.57 (0.87) -- -- -- (0.87) 9.11 6.64 06/30/90 9.11 0.84 (0.21) 0.63 (0.84) -- -- -- (0.84) 8.90 7.61 06/30/91 8.90 0.82 -- 0.82 (0.73) (0.09) -- -- (0.82) 8.90 9.55 06/30/92 8.90 0.73 (0.02) 0.71 (0.57) (0.16) -- -- (0.73) 8.88 8.33 06/30/93(/5/) 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 03/31/96 8.24 0.55 0.17 0.72 (0.45) -- -- -- (0.45) 8.51 8.87
RATIO OF NET EXPENSES RATIO OF NET ASSETS, TO INVESTMENT PORT- END OF AVERAGE INCOME TO FOLIO PERIOD YEAR NET AVERAGE TURN- ENDED (000'S) ASSETS NET ASSETS OVER - ------ ---------- -------- ------------ ----- CLASS A ------- 10/01/93- 03/31/94(/3/) $ 76,586 1.35%(/4/)(/6/) 6.83%(/4/)(/6/) 35% 03/31/95 73,399 1.46(/6/) 7.50(/6/) 105 03/31/96 125,504 1.44(/6/) 7.11(/6/) 142 CLASS B ------- 06/30/87 $ 92,977 2.26% 7.51% 120% 06/30/88 191,413 2.04 9.26 95 06/30/89 300,415 2.03 9.59 51 06/30/90 425,890 1.98 9.45 31 06/30/91 513,062 1.98(/6/) 9.31(/6/) 38 06/30/92 1,075,668 1.92 8.21 54 06/30/93(/5/) 1,259,845 1.82(/6/) 7.27(/6/) 73 07/01/93- 03/31/94 886,089 1.95(/4/)(/6/) 6.61(/4/)(/6/) 35 03/31/95 594,779 2.15(/6/) 6.80(/6/) 105 03/31/96 428,772 2.13 6.46 142
FEDERAL SECURITIES FUND
NET GAIN (LOSS) DISTRI- ON BUTIONS INVESTMENTS IN EXCESS NET NET NET ASSET NET (BOTH DIVIDENDS OF NET ASSET ASSETS, VALUE, INVEST- REALIZED TOTAL FROM FROM NET DISTRIBUTION INVEST- TOTAL VALUE, END OF BEGINNING MENT AND INVESTMENT INVESTMENT FROM CAPITAL MENT DISTRI- END OF TOTAL PERIOD PERIOD ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME GAINS INCOME BUTIONS PERIOD RETURN(/2/) (000'S) - ------------ --------- ------- ----------- ---------- ---------- ------------ --------- ------- ------ ----------- -------- CLASS A ------- 10/11/93- 03/31/94(/3/) $10.58 $0.22(/1/) $(0.34) $(0.12) $(0.23) $(0.01) $ -- $(0.24) $10.22 (1.14)% $ 592 03/31/95 10.22 0.60(/1/) (0.20) 0.40 (0.64) -- -- (0.64) 9.98 4.18 6,259 03/31/96 9.98 0.68(/1/) 0.40 1.08 (0.63) -- -- (0.63) 10.43 10.94 40,278 CLASS B ------- 03/31/87 $10.81 $0.84 $(0.01) $ 0.83 $(0.90) $(0.10) $ -- $(1.00) $10.64 $ 6.99 $220,616 03/31/88 10.64 0.82 (0.49) 0.33 (0.84) -- -- (0.84) 10.13 3.50 186,573 03/31/89 10.13 0.84 (0.45) 0.39 (0.84) -- -- (0.84) 9.68 3.67 163,942 03/31/90 9.68 0.80 0.23 1.03 (0.80) -- -- (0.80) 9.91 10.95 141,277 03/31/91 9.91 0.77 0.44 1.21 (0.77) -- -- (0.77) 10.35 12.78 129,108 03/31/92 10.35 0.77 0.29 1.06 (0.77) -- -- (0.77) 10.64 10.57 120,454 03/31/93 10.64 0.70 0.14 0.84 (0.64) -- -- (0.64) 10.84 8.06 121,267 03/31/94 10.84 0.62(/1/) (0.71) (0.09) (0.49) (0.03) (0.01) (0.53) 10.22 (0.89) 81,011 03/31/95 10.22 0.63(/1/) (0.26) 0.37 (0.58) -- -- (0.58) 10.01 3.81 65,631 03/31/96 10.01 0.56(/1/) 0.44 1.00 (0.56) -- -- (0.56) 10.45 10.13 26,165
RATIO OF NET RATIO OF INVESTMENT PORT- EXPENSES INCOME TO FOLIO PERIOD TO AVERAGE AVERAGE TURN- ENDED NET ASSETS NET ASSETS OVER - ------------ ---------- ------------ ----- CLASS A ------- 10/11/93- 03/31/94(/3/) 1.39%(/4/)(/6/) 4.68%(/4/)(/6/) 68% 03/31/95 1.40(/6/) 6.90(/6/) 267 03/31/96 1.37 6.12 311 CLASS B ------- 03/31/87 1.74% 8.00% 26% 03/31/88 1.82 8.12 22 03/31/89 1.78 8.41 17 03/31/90 1.92 8.06 21 03/31/91 1.93 7.67 23 03/31/92 1.90 7.32 57 03/31/93 1.85 6.36 97 03/31/94 1.98 5.79 68 03/31/95 2.03 6.33 267 03/31/96 2.01 5.64 311
- ------- (1) Calculated based upon average shares outstanding (2) Total Return is not annualized and does not reflect sales load (3) Commencement of sale of respective class of shares (4) Annualized (5) Pursuant to a reorganization of the SunAmerica Mutual Funds, the Fund changed its fiscal year end to March 31 (6) Net of the following expense reimbursements (based on average net assets):
6/30/91 6/30/93 3/31/94 3/31/95 3/31/96 ------- ------- ------- ------- ------- Government Securities Fund Class A -- -- .10% .07% .04% Government Securities Fund Class B .08% .02% .06% .03% -- Federal Securities Fund Class A -- -- 6.74% 1.26% --
4 The following Financial Highlights for each of the periods through March 31, 1996 for the Diversified Income Fund and the High Income Fund, have been audited by Price Waterhouse LLP, each Fund's independent accountants, whose reports on the financial statements containing such information for each of the five years in the period ended March 31, 1996 are included in the Trust'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(/2/)(/5/) $5.05 $0.02(/3/) $ 0.01 $ 0.03 $(0.01) $5.07 0.65% $ 762 1.40%(/4/) 11/01/93 - 3/31/94 5.07 0.13(/3/) (0.23) (0.10) (0.18) 4.79 (2.10) 12,600 1.42(/4/)(/8/) 03/31/95 4.79 0.43(/3/) (0.66) (0.23) (0.42) 4.14 (5.10) 14,213 1.59 03/31/96 4.14 0.39(/3/) 0.16 0.55 (0.40) 4.29 13.78 16,762 1.46 CLASS B ------- 4/06/91 - 10/31/91(/6/) $5.29 $0.28 $(0.08) $ 0.20 $(0.28) $5.21 3.40% $ 39,790 0.00%(/4/)(/8/) 10/31/92(/6/) 5.21 0.42 (0.41) 0.01 (0.40) 4.82 0.16 35,409 0.74(/8/) 10/31/93(/5/)(/6/) 4.82 0.38(/3/) 0.24 0.62 (0.37) 5.07 13.35 102,519 1.78(/8/) 11/01/93 - 3/31/94 5.07 0.15(/3/) (0.27) (0.12) (0.16) 4.79 (2.52) 174,072 2.11(/4/) 03/31/95 4.79 0.40(/3/) (0.65) (0.25) (0.39) 4.15 (5.46) 132,378 2.12 03/31/96 4.15 0.36(/3/) 0.17 0.53 (0.38) 4.30 13.09 110,949 2.06 RATIO OF NET INVESTMENT INCOME TO AVERAGE NET PORTFOLIO PERIOD ENDED ASSETS TURNOVER - ------------ ------------------- --------- CLASS A 10/05/93 - 10/31/93(/2/)(/5/) 8.92%(/4/) 249% 11/01/93 - 3/31/94 8.25(/4/)(/8/) 48 03/31/95 9.58 160 03/31/96 8.96 166 CLASS B 4/06/91 - 10/31/91(/6/) 8.87%(/4/)(/8/) 8% 10/31/92(/6/) 7.81(/8/) 191 10/31/93(/5/)(/6/) 7.53(/8/) 249 11/01/93 - 3/31/94 7.48(/4/) 48 03/31/95 8.98 160 03/31/96 8.42 166
HIGH INCOME FUND
NET RATIO OF GAIN (LOSS) ON NET NET EXPENSES NET ASSET INVESTMENTS DIVIDENDS ASSET ASSETS, TO VALUE, NET (BOTH REALIZED TOTAL FROM FROM NET VALUE, END OF AVERAGE BEGINNING INVESTMENT AND INVESTMENT INVESTMENT END OF TOTAL YEAR NET PERIOD ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME PERIOD RETURN(/1/) (000'S) ASSETS - ------------ --------- ---------- -------------- ---------- ---------- ------ ----------- -------- -------- CLASS A 09/19/86- 03/31/87(7) $10.14 $0.57 $(0.05) $ 0.52 $ 0.57 $10.09 5.08% $ 8,272 1.50%(/4/)(/8/) 03/31/88(7) 10.09 1.20 (1.03) 0.17 (1.16) 9.07 1.28 17,709 1.65(/8/) 03/31/89(7) 9.07 1.14 (0.12) 1.02 (1.11) 8.98 11.21 37,122 1.76 03/31/90(/7/) 8.98 1.05 (1.86) (0.81) (1.06) 7.11 (10.45) 23,162 1.94 03/31/91(/7/) 7.11 0.88 (0.27) 0.61 (0.88) 6.84 9.51 19,347 1.90 03/31/92(/7/) 6.84 0.95 1.28 2.23 (1.00) 8.07 35.27 22,607 1.57 03/31/93(/7/) 8.07 0.95 0.18 1.13 (1.08) 8.12 15.05 30,715 1.77 03/31/94(/7/) 8.12 0.87(/3/) (0.14) 0.73 (0.82) 8.03 9.14 33,724 1.72 03/31/95 8.03 0.78(/3/) (1.03) (0.25) (0.83) 6.95 (2.91) 40,585 1.61 03/31/96 6.95 0.67(/3/) 0.02 0.69 (0.69) 6.95 10.43 35,963 1.53 RATIO OF NET INVESTMENT INCOME TO AVERAGE NET PORTFOLIO PERIOD ENDED ASSETS TURNOVER - ------------ -------------------- --------- 09/19/86- 03/31/87(7) 10.02%(/4/)(/8/) 43% 03/31/88(7) 11.55(/8/) 55 03/31/89(7) 12.43 135 03/31/90(/7/) 12.59 112 03/31/91(/7/) 12.77 95 03/31/92(/7/) 13.19 208 03/31/93(/7/) 11.08 232 03/31/94(/7/) 10.34 290 03/31/95 10.82 196 03/31/96 9.36 183 CLASS B 10/01/93 - 03/31/94 $ 8.18 $0.38(/3/) $(0.17) $ 0.21 $(0.35) $ 8.04 2.46% $131,713 2.15%(/4/)(/8/) 03/31/95 8.04 0.73(/3/) (1.02) (0.29) (0.79) 6.96 (3.42) 153,034 2.16(/8/) 03/31/96 6.96 0.62(/3/) 0.03 0.65 (0.65) 6.96 9.83 91,800 2.06(/8/) RATIO OF NET INVESTMENT INCOME TO AVERAGE NET PORTFOLIO PERIOD ENDED ASSETS TURNOVER - ------------ -------------------- --------- 10/01/93 - 03/31/94 9.07%(/4/)(/8/) 290% 03/31/95 10.26(/8/) 196 03/31/96 8.85(/8/) 183
- ------- (1) Total Return is not annualized and does not reflect sales load (2) Commencement of sale of respective class of shares (3) Calculated based upon average shares outstanding (4) Annualized (5) Pursuant to a reorganization of the SunAmerica Mutual Funds, the Fund changed its fiscal year end to March 31 (6) Restated to reflect 1.889180183-for-1 stock split effective December 16, 1992 (7) Restated to reflect 1.174107276-for-1 stock split effective October 1, 1993 (8) Net of the following expense reimbursements (based on average net assets):
3/31/87 3/31/88 10/31/91 10/31/92 10/31/93 3/31/94 3/31/95 3/31/96 ------- ------- -------- -------- -------- ------- ------- ------- Diversified Income Fund Class A -- -- -- -- -- .62% -- -- Diversified Income Fund Class B -- -- 2.31% 1.25% .38% -- -- -- High Income Fund Class A 4.45% .42% -- -- -- -- -- -- High Income Fund Class B -- -- -- -- -- .08% .08% .08%
5 The following Financial Highlights for each of the periods through March 31, 1996 for the Tax Exempt Insured Fund, have been audited by Price Waterhouse LLP, the Fund's independent accountants, whose report on the financial statements containing such information for each of the five years in the period ended March 31, 1996 is included in the Trust'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 RATIO OF VALUE NET REALIZED TOTAL FROM FROM NET VALUE END OF EXPENSES TO BEGINNING INVESTMENT AND INVESTMENT INVESTMENT END OF TOTAL PERIOD AVERAGE NET PERIOD ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME PERIOD RETURN(1) (000'S) ASSETS - ------------------- --------- ---------- ----------- ---------- ---------- ------ --------- -------- --------------- CLASS A ------- 11/22/85- 10/31/86 $11.91 $0.81 $ 0.56 $ 1.37 $(0.81) $12.47 11.60% $131,503 0.77%(/5/)(/7/) 10/31/87 12.47 0.86 (1.16) (0.30) (0.86) 11.31 (2.78) 112,681 0.98(/7/) 10/31/88 11.31 0.82 0.87 1.69 (0.82) 12.18 15.27 111,476 1.30 10/31/89 12.18 0.82 0.09 0.91 (0.82) 12.27 7.53 105,834 1.32 10/31/90 12.27 0.82 (0.07) 0.75 (0.82) 12.20 6.28 89,950 1.31 10/31/91 12.20 0.81 0.21 1.02 (0.81) 12.41 8.62 95,246 1.32 10/31/92 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(/7/) 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(/5/)(/7/) 03/31/95 11.95 0.63(/4/) 0.17 0.80 (0.62) 12.13 6.97 137,955 1.20(7) 03/31/96 12.13 0.59(/4/) 0.29 0.88 (0.59) 12.42 7.37 121,957 1.22 CLASS B ------- 10/04/93- 10/31/93(/2/)(/6/) $12.84 $0.02(/4/) $(0.05) $(0.03) $(0.02) $12.79 (0.24)% $ 4,922 1.96%(/5/) 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(/5/) 03/31/95 11.95 0.54(/4/) 0.19 0.73 (0.54) 12.14 6.29 25,985 1.92 03/31/96 12.14 0.50(/4/) 0.29 0.79 (0.51) 12.42 6.58 29,315 1.90 RATIO OF NET INVESTMENT INCOME TO AVERAGE PORTFOLIO PERIOD ENDED NET ASSETS TURNOVER - -------------------- ----------------- --------- 11/22/85- 10/31/86 7.12%(/5/)(/7/) 21% 10/31/87 7.06(/7/) 23 10/31/88 6.85 20 10/31/89 6.68 10 10/31/90 6.70 0 10/31/91 6.57 16 10/31/92 6.26 21 10/31/93(/2/) 5.56(/7/) 26 11/01/93- 3/31/94 4.99(/5/)(/7/) 52 03/31/95 5.32(/7/) 162 03/31/96 4.72 46 10/04/93- 10/31/93(/2/)(/6/) 4.09%(/5/) 26% 11/01/93- 3/31/94 4.17(/5/) 52 03/31/95 4.60 162 03/31/96 4.03 46
- -------- (1) Total return is not annualized and does not reflect sales load (2) Pursuant to reorganization of the SunAmerica Mutual Funds, the Fund changed its fiscal year end to March 31 (3) Prior year amounts reclassified to net investment income (4) Calculated based upon average shares outstanding (5) Annualized (6) Commencement of sale of respective class of shares (7) Net of the following expense reimbursements (based on average net assets):
10/31/86 10/31/87 10/31/93 3/31/94 3/31/95 -------- -------- -------- ------- ------- Tax Exempt Insured Fund Class A .55% .27% .10% .11% .04%
6 INVESTMENT OBJECTIVES AND POLICIES The investment objective of the Government Securities Fund is high current income consistent with relative safety of capital. The investment objective of the Federal Securities Fund is current income, with capital appreciation as a secondary objective. The investment objective of the Diversified Income Fund is a high level of current income consistent with moderate investment risk, with preservation of capital as a secondary objective. The investment objec- tive of the High Income Fund is maximum current income. The investment objec- tive of the Tax Exempt Insured Fund is as high a level of current income ex- empt from Federal income taxes as is consistent with preservation of capital. Each Fund seeks to achieve its investment objective through investment primar- ily 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 de- scribed 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 re- strictions, however, may not be changed without approval of shareholders of the affected Fund. See "Investment Restrictions." GOVERNMENT SECURITIES FUND 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 in- strumentality thereof ("U.S. government securities"). See, "Investment Tech- niques 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. Un- der 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 se- curities". Also, in addition to its primary investments, the Fund may invest in short-term invest-ments, 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' accept- ances). See "Investment Techniques and Risk Factors" and the Statement of Ad- ditional Information for a description of other types of securities in which the Fund may invest, including mortgage-backed securities, asset-backed secu- rities and zero-coupon securities. 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 rela- tively greater portions of its assets in short-term investments. The invest- ment 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 in- terest 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, liquid- ity 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 consider- ation and maturities may range from ten to thirty years. FEDERAL SECURITIES FUND The Fund seeks to achieve its objective by investing primarily in U.S. gov- ernment securities. Under normal circumstances, the Fund's strategy is to in- vest its assets in such a way so as to maximize capital appreciation in a de- clining interest rate environment. 7 Under normal market conditions, at least 80% of the Fund's assets will be invested in U.S. government securities, including "mortgage-backed securi- ties". Also, in addition to its primary investments, the Fund may invest in short-term investments, including short-term U.S. government securities, re- purchase agreements secured by U.S. government securities, and high quality money market instruments (including commercial paper and bankers' accept- ances); 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 in- vestments. 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 U.S. government securities, mortgage-backed se- curities, asset-backed securities and zero-coupon securities. 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 Diversified Income Fund invests in a diversified portfolio of securities consisting of: (i) U.S. government securities; (ii) foreign government and corporate debt securities; and (iii) securities issued by domestic corpora- tions, including lower-rated high-yield securities, without regard to the ma- turities 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 addi- tion, the Fund will generally have no more than 75% of its total assets in- vested 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 in- terests, and foreign securities. The higher yields and high income sought by the Fund are generally obtain- able from securities in the lower rating categories of the established rating services. Such securities are rated "Baa" or lower by Moody's Investors Serv- ice, Inc. ("Moody's") or "BBB" or lower by Standard & Poor's Ratings Services, a Division of the McGraw-Hill Companies, Inc. ("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 rat- ings. Such ratings indicate that the obligations are speculative and may be in default. The Fund is not obligated to dispose of securities whose issuers sub- sequently 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 Advis- er, offer comparable yields and risks as those securities which are rated. The weighted average ratings by Moody's as a percentage of all bonds held in the Diversified Income Fund's portfolio during the fiscal year ended March 31, 1996 were "AAA" 21.5%; "Ba3" 5.2%; "Ba2" 4.7%; "B1" 17.4%; "B2" 10.4%; "B3" 29.7%; "Caa" 6.4%; and the balance 4.7% in unrated bonds. See "Investment Techniques and Risk Factors--High Yield/High Risk Securities" below. HIGH INCOME FUND The High Income Fund seeks to achieve its 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 State- ment 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 lower-yielding, higher-rated, fixed income securities. The market value of bonds generally will be affected by changes in the level of interest rates. An 8 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 re- flected 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 Ad- viser believes that the opportunity for gain is greater than the risk of such an investment. From time to time, the Fund will invest in securities which are composed of both fixed income and equity components. See the Appendix to the Statement of Additional Information for a description of some of the risks as- sociated with investing in lower-rated securities. The weighted average rat- ings by Moody's as a percentage of all bonds held in the High Income Fund's portfolio during the fiscal year ended March 31, 1996 were "Ba3," 2.5%; "Ba2," 3.0%; "B1," 3.1%; "B2," 27.1%; "B3," 46.8%; "Caa," 11.4%; "Ca," 1.7%; and the balance 4.4% in unrated bonds. The Adviser considers both the opportunity for gain and the risk of loss in selecting investments. Consistent with the primary objective, the Adviser an- ticipates that, under normal conditions, at least 80% of the High Income Fund's total assets will be invested in bonds, as described above. The remain- ing assets may be invested in other securities, including U.S. government se- curities, asset-backed securities, short-term debt instruments, and common, preferred stock and other equity securities. See "In vestment Techniques and Risk Factors" for a description of the types of securities in which the Fund may invest. TAX EXEMPT INSURED FUND The Tax Exempt Insured Fund seeks to achieve its objective by investing un- der 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 in- vest 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 State- ment of Additional Information for more information with respect to ratings. "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 ("Mu- nicipal Bonds") as well as short-term (i.e., maturing in 1 day to 3 years) mu- nicipal 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 pur- chasing residential mortgages ("Municipal Housing Bonds"). To the extent prac- ticable, the Fund will invest in insured Municipal Housing Bonds that are 9 secured by residential mortgages, when such mortgages are either insured by the Federal Housing Authority ("FHA") or guaranteed by the Veteran's Adminis- tration ("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 fac- tors could include changes in national and state policies relating to transfer payments, such as unemployment insurance and welfare, and adverse economic de- velopments, in particular, those affecting less skilled and low income work- ers. 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 Finan- cial Guaranty Insurance Company ("Financial Guaranty") or another insurer; (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"); or (3) are without insurance coverage, provided that, an escrow or trust account has been established pursuant to the documents creat- ing the Municipal Bonds and containing sufficient U.S. government securities backed by the U.S. government's full faith and credit pledge in order to en- sure the payment of principal and interest on such bonds. 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, other than that described in (3) above, 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 gen- erally does not expect to cover Municipal Notes under its Mutual Fund Insur- ance Policies. Accordingly, the Fund does not presently expect that any sig- nificant portion of the Municipal Notes it purchases will be covered by insur- ance. For the fiscal year ended March 31, 1996, the premiums for a Mutual Fund In- surance 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 se- curity 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 fluctua- tions 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 Cor- poration is a 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 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 backed by the "full faith and cred- it" of the United States. Securities issued or guaranteed by agencies or in- strumentalities 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 10 ("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 ob- ligations 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 obli- gation for ultimate repayment. U.S. government securities also include certain mortgage-backed securities, described below under "Mortgage-Backed Securi- ties." MORTGAGE-BACKED SECURITIES. Each Fund may invest in mortgage-backed securi- ties, 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. In- stead, 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 securi- ties. 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 securi- ties issued by approved institutions such as the FHA or VA and backed by pools of FHA-insured or VA-guaranteed mortgages. Residential mortgage loans are pooled by various other governmental or pri- vate entities, including Freddie Mac. Freddie Mac issues Participation Certif- icates 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 pass-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 non- governmental issuers and CMOs issued by the pools generally offer a higher 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 govern- mental 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 con- ventional mortgages. There can be no assurance that the private insurers can meet their obligations under the policies. 11 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 U.S. government agencies or financial institutions with respect to the mortgage-backed securi- ties in which it may invest. A Fund would be required to place cash, U.S. gov- ernment 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. Each Fund, other than the Diversified Income Fund, may invest up to 15% of its net assets in asset-backed securities meeting such Fund's credit quality restrictions. With respect to Diversified Income, the Fund may invest in asset-backed securities without regard to the aforemen- tioned net asset limitation. Asset-backed securities, issued by trusts and special purpose corporations, are backed by a pool of assets, such as credit card or automobile loan receivables, representing the obligations of a number of different parties. Corporate asset-backed securities present certain risks. For instance, in the case of credit card receivables, these securities may not have the benefit of any security interest in the related collateral. See the Statement of Additional Information for further information on these securi- ties. 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 is- sued by the U.S. Treasury; and, in addition, (ii) the Diversified Income Fund and High Income Fund may invest in zero-coupon securities issued by both do- mestic and foreign corporations, and (iii) the Tax Exempt Insured Fund may in- vest 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 dis- count from its face or par value and will be subject to greater fluctuations of market value in response to changing interest rates than debt obliga 12 tions of comparable maturities which make current distributions of interest. Because the Funds accrue taxable income from these securities without receiv- ing 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 re- ceive dividends in cash rather than reinvesting dividends in additional shares of the Funds. 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 inter- est 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 ma- turity, 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 obliga- tion. 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 partic- ipation 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. Par- ticipation interests are primarily dependent upon the creditworthiness of the borrower for payment of interest and principal. Such borrowers may have diffi- culty 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 inter- est 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 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, 13 the economies of foreign countries, 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 poli- cies) 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 re- sult in a return of capital to shareholders. 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"), European Depositary 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 may be convert- ed. ADRs are certificates issued by a U.S. depository (usually a bank) and represent a specified quantity of shares of an underlying non-U.S. stock on deposit with a custodian bank as collateral. EDRs and other types of deposi- tary receipts are typically issued by foreign depositaries, although they may also be issued by U.S. depositaries, and evidence ownership interests in a se- curity or pool of securities issued by either a foreign or a U.S. corporation. See "Foreign Securities" in the Statement of Additional Information for a fur- ther discussion of these types of securities. Securities of foreign issuers that are represented by ADRs or that are listed on a U.S. securities exchange are not considered "foreign securities" for purposes of a Fund's 25% limita- tion 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 that are not readily marketable in securities markets either within or without the United States. Restricted securities eligible for resale pursu- ant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), or certain private placements of commercial paper issued in reliance on an exemption from the Securities Act pursuant to Section 4(2) thereof, that have a readily available market are not considered illiquid for purposes of a Fund's 10% limitation on purchases of illiquid securities. Because it is not possible to predict with assurance how the market for restricted securities will develop, the Adviser will monitor the liquidity of such restricted secu- rities under the supervision of the Trustees. To the extent that, for a period of time, qualified institutional buyers cease purchasing such restricted secu- rities pursuant to Rule 144A, the Fund's investing in such securities may have the effect of increasing the level of illiquidity in the Fund's portfolio dur- ing such period. See "Illiquid Securities" in the Statement of Additional In- formation 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- 14 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 or- der to generate income while providing liquidity. When a Fund acquires a secu- rity from a bank or securities dealer, it may simultaneously enter into a re- purchase agreement, wherein the seller agrees to repurchase the security at a mutually agreed-upon time (generally within seven days) and price. The repur- chase 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 ma- turity of the underlying security. Repurchase agreements will be fully collat- eralized. 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 liq- uidating 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. WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS. Each Fund may purchase or sell securities on a when-issued or delayed-delivery basis. When-issued or de- layed-delivery transactions 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-deliv- ery 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 se- curities 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 secu- rities' 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. How- ever, 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 Securi- ties 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 bor- rowed 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 oth- erwise 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., 50% of its net assets). The time and extent to which a Fund may employ leverage will be de- termined by the Adviser in light of changing facts and circumstances, includ- ing general economic and market conditions, and 15 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 as- sets falls below the 1940 Act requirement, the Fund must within three business days reduce its borrowings to satisfy such requirement. To do this, a Fund may have to sell a portion of its investments at a time when it may be disadvanta- geous to do so. HEDGING AND INCOME ENHANCEMENT STRATEGIES. Each Fund may write covered calls to enhance income. For hedging purposes as a temporary defensive maneuver, each Fund may use interest rate futures and stock and bond index futures (to- gether, "Futures"); forward contracts on foreign currencies; and call and put options on equity and debt securities, Futures, stock and bond indices and foreign currencies (all of the foregoing are referred to as "Hedging Instru- ments"). A call or put may be purchased only if, after such purchase, the value of all 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 strate- gies are different from those needed to select portfolio securities; (4) the possible absence of a liquid secondary market for any particular instrument at any time; (5) the possible need to defer closing out certain hedged positions to avoid adverse tax consequences; and (6) the possible inability of the Fund to purchase or sell a portfolio security at a time that otherwise would be fa- vorable for it to do so, or the possible need for the Fund to sell a portfolio security at a disadvantageous time, due to the need for the Fund to maintain "cover" or to segregate securities in connection with hedging transactions. A transaction is "covered" when the Fund owns the security subject to the option on such security, or some other security acceptable for applicable escrow re- quirements. See the Statement of Additional Information for further informa- tion concerning income enhancement and hedging strategies and the regulation requirements relating thereto. HIGH-YIELD/HIGH-RISK SECURITIES. The High Income Fund invests primarily in high yielding, lower-rated bonds, commonly called "junk bonds." The Diversi- fied 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 compa- rable 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) sensi- tivity 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, Distri- butions and Taxes." High-yield bonds, like other bonds, may contain redemption or call provi- sions. If an issuer exer 16 cises 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 quo- tations may not be available for some of these bonds. Market quotations are generally available only from a limited number of dealers and may not repre- sent 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. 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 li- quidity 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 se- verely disrupt the market for high yield bonds. In addition, recent legisla- tion impacting high yield bonds may have a materially adverse effect on the market for such 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 obli- gations 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 redemp- tions 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. FUTURE DEVELOPMENTS. Each Fund may invest in securities and other instru- ments which do not presently exist but may be developed in the future, pro- vided that each such investment is consistent with the Fund's investment ob- jectives, policies and restrictions and is otherwise legally permissible under federal and state laws. The Prospectus will be amended or supplemented as ap- propriate to discuss any such new investments. INVESTMENT RESTRICTIONS 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 such assets in the securities of any one issuer (other than obligations issued or guaranteed by the U.S. government, its agencies and instrumentalities) or, with respect to 100% of a Fund's total assets, purchase more than 10% of an issuer's voting securities. The High Income Fund may not purchase 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 agen- cies 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 poli- cies. 17 MANAGEMENT OF THE TRUST TRUSTEES. The Trustees of the Trust are responsible for the overall supervi- sion of the operation of the Trust and each Fund and perform various duties imposed on trustees of investment companies by the 1940 Act and by The Common- wealth of Massachusetts. THE ADVISER. The Adviser selects and manages the investments of each Fund, provides various administrative services and supervises the Funds' daily busi- ness affairs, subject to general review by the Trustees. The Adviser is an in- direct wholly-owned subsidiary of SunAmerica Inc. ("SunAmerica"), an invest- ment grade financial services company which has over $29 billion in assets. 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 and its affiliates serve as adviser, manager and/or ad- ministrator for Anchor Pathway Fund, SunAmerica Equity Funds, SunAmerica Money Market Funds, Inc., Anchor Series Trust and SunAmerica Series Trust. As of March 31, 1996, the Adviser and its affiliates managed, advised and/or admin- istered approximately $7.6 billion of assets for investment companies, indi- viduals, 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 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. 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. 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 fis- cal year ended March 31, 1996, each Fund paid the Adviser a fee equal to the following percentage of average daily net assets: Government Securities Fund-- .67%; Federal Securities Fund--.50%; Diversified Income Fund--.65%; High In- come Fund--.75%; and Tax Exempt Insured Fund--.50%. PORTFOLIO MANAGERS. There are three portfolio managers of the Funds. The following individuals are primarily responsible for the day-to-day management of the particular Funds indicated: Howard B. Udis, formerly assistant portfolio manager of the High Income Fund assumed responsibility for the portfolio management of the Fund effective Au- gust 14, 1995. Mr. Udis has been associated with the Adviser 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 In- come 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 Adviser 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 May 1994. Mr. Mooney is an Assistant Vice President of the Adviser. Pre- viously, Mr. Mooney was a tax exempt trader and assistant portfolio manager with First Investors Management Company. Prior to that he held positions in portfolio management and trading with Alliance Capital Management L.P., and The Boston Company, respectively. THE DISTRIBUTOR. SunAmerica Capital Services, Inc. (the "Distributor"), an indirect wholly owned subsidiary of SunAmerica, acts as distributor of the shares of each Fund pursuant to the Distribution Agreement between the Dis- tributor and the Trust on behalf of each Fund. The Distributor receives all initial and deferred sales charges in connection with the sale of Fund shares, all or a portion of which it may reallow to other broker-dealers. The Distrib- utor and other broker-dealers pay commissions to 18 salespersons, as well as the cost of printing and mailing prospectuses to po- tential investors and of any advertising expenses incurred by them in connec- tion 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., SunAmerica Securities, Inc. and/or Advantage Capital Corporation, affiliates of the Distributor) 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 A or Class B shares; or (iii) financial as- sistance 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 spe- cial 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 ex- penses, 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) travel mileage on major air carriers; (ii) tickets for entertainment events (such as concerts or sporting events); or (iii) mer- chandise (such as clothing, trophies, clocks, pens or other electronic equip- ment). 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 bo- nuses or other incentives may be deemed to be underwriters under the Securi- ties Act. Certain laws and regulations limit the ability of banks and other depository institutions to underwrite and distribute securities. However, in the opinion of the Adviser based upon the advice of counsel, these laws and regulations do not prohibit such depository institutions from providing other services to in- vestment companies of the type contemplated by the Distribution Plans (as de- scribed below). The Trustees will consider appropriate modifications to the operations of the Funds, including discontinuance of payments under the Dis- tribution Plans to banks and other depository institutions, in the event such institutions can no longer provide the services called for under their agree- ments. Banks and other financial services firms may be subject to various state laws regarding services described, and may be required to register as dealers pursuant to state laws. DISTRIBUTION PLANS. Rule 12b-1 under the 1940 Act permits an investment com- pany directly or indirectly to pay expenses associated with the distribution of its shares ("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 likeli- hood 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 pro- viding 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, prospectus printing and distribution and compensation to wholesal- ers. 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 distribu- tion costs as described above. The Distribu- 19 tion 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 ag- gregate average daily net assets of such class of shares for payments to bro- ker-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, 1996, 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 as- sets: Government Securities Fund--1.00%; Federal Securities Fund--1.00%; Di- versified 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 share- holder 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 subse- quent investment is $100. However, for Individual Retirement Accounts ("IRAs"), Keogh Plan accounts and accounts for other qualified plans, the min- imum initial investment is $250 and the minimum subsequent investment is $25. The decision as to which class is most beneficial to an investor depends on the amount and intended length of the investment. Investors making large in- vestments, 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. Sharehold- ers who purchase $1,000,000 or more of shares of the Funds should only pur- chase Class A shares. Dealers may receive different levels of compensation de- pending on which class of shares they sell. Upon making an investment in shares of a Fund, an open account will be es- tablished under which shares of the applicable Fund and additional shares ac- quired through reinvestment of dividends and distributions will be held for each shareholder's account by State Street Bank and Trust Company ("State Street") and its affiliate, National Financial Data Services ("NFDS") (collec- tively, the "Transfer Agent"). Shareholders will not be issued certificates for their shares unless they specifically so request in writing. Shareholders receive regular statements from the Transfer Agent that report each transac- tion affecting their accounts. Further information may be obtained by calling Shareholder/Dealer Services at (800) 858-8850. CLASS A SHARES. Class A shares are offered at net asset value plus an ini- tial sales charge, which varies with the size of the purchase as follows:
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
No sales charge is payable at the time of purchase on investments of $1 mil- lion 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 20 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 (ex- clusive of reinvested dividends and distributions) or the total cost of such shares. This contingent deferred sales charge is paid to the Distributor. Re- demptions 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 pur- chase. In determining whether a deferred sales charge is payable, it is as- sumed that shares purchased with reinvested dividends and distributions and then other shares held the longest are redeemed first. To the extent that sales are made for personal investment purposes, the sales charge is waived as to Class A shares purchased by current or retired officers, directors, and other full-time employees of SunAmerica and its af- filiates, as well as members of the selling group and family members of the foregoing. In addition, the sales charge is waived with respect to shares pur- chased by "wrap accounts" for the benefit of clients of broker-dealers, finan- cial institutions or financial planners adhering to certain standards estab- lished by the Distributor. Shares purchased under this waiver are subject to certain limitations described in the Statement of Additional Information. Com- plete 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 in- formation about "Rights of Accumulation," the "Letter of Intent," "Combined Purchase Privilege," "Reduced Sales Charges for Group Purchases" and the "Net Asset Value Transfer Program," see the Statement of Additional Information. CLASS B SHARES. Class B shares are offered at net asset value. Certain re- demptions of Class B shares within the first six years of the date of purchase are subject to a CDSC. The charge is assessed on an amount equal to the lesser of the then-current market value or the purchase price of the shares being re- deemed. No charge is assessed on shares derived from reinvestment of dividends or capital gains distributions. In determining whether 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 re- demption is first of any Class A shares, second of any shares in the share- holder's Fund account that are not subject to a CDSC (i.e., shares represent- ing reinvested dividends and distributions), third of shares held for more than six years and fourth of shares held the longest during the six-year peri- od. 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 determin- ing 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) re- quested within one year of the death or the initial determination of disabil- ity 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 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, 21 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 ad- visory fee to the Adviser. See the Statement of Additional Information for further information concerning conditions with respect to (a) above. For Fed- eral income tax purposes, the amount of the CDSC will reduce the amount real- ized 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 re- organization effected with another SunAmerica mutual fund will remain subject to the terms of the CDSC in effect for the previous fund at the time of such reorganization. For additional information, see "Additional Information Re- garding Purchase of Shares" in the Statement of Additional Information. Conversion Feature. Class B shares (including a pro rata portion of the Class B shares purchased through the reinvestment of dividends and distribu- tions) 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 share- holder. The Trust and Distributor reserve the right to reject any purchase or- der 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 infor- mation regarding these services and the procedures involved and when orders are deemed to be received. Checks should be made payable to the specific Fund or to "SunAmerica Funds" or, for retirement plan accounts for which the Adviser serves as fiduciary, to "Resources Trust Company." Payments to open new accounts should be mailed to SunAmerica Fund Services, Inc., Mutual Fund Operations, The SunAmerica Center, 733 Third Avenue, New York, New York 10017-3204, together with a completed New Account Application. Payment for subsequent purchases should be mailed to SunAmerica Fund Services, Inc., c/o NFDS, P.O. Box 419373, Kansas City, Mis- souri 64141-6373 and the shareholder's Fund account number should appear on the check. For fiduciary retirement plan accounts, both initial and subsequent purchases should be mailed to SunAmerica Fund Services, Inc., Mutual Fund Op- erations, The SunAmerica Center, 733 Third Avenue, New York, New York 10017- 3204. SAFS reserves the right to reject any check made payable other than in the manner indicated above. Under certain circumstances, a Fund will accept a multi-party check (e.g., a check made payable to the shareholder by another party and then endorsed by the shareholder to the Fund in payment for the pur- chase of shares); however, the processing of such a check may be subject to a delay. The Funds do not verify the authenticity of the endorsement of such multi-party check, and acceptance of the check by a Fund should not be consid- ered verification thereof. Neither the Funds nor their affiliates will be held liable for any losses incurred as a result of a fraudulent endorsement. 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 re- ceipt 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 recog- nized for Federal income tax purposes. See "Dividends, Distributions and Tax- es." REGULAR REDEMPTION. Shareholders may redeem their shares by sending a writ- ten request to SAFS, Mutual Fund Operations, The SunAmerica Center, 733 Third Avenue, New York, NY 10017-3204. All 22 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 Guar- anteed" must appear with the signature. Signature guarantees by notaries will not be accepted. SAFS may request further documentation from corporations, ex- ecutors, 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 ap- plicable 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 Dis- tributor imposes any charge. The offer to repurchase may be suspended at any time, as described below. TELEPHONE REDEMPTION. The Trust accepts telephone requests for redemption of shares with a value of less than $100,000. The proceeds of a telephone redemp- tion 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. Share- holders utilizing the redemption through the electronic funds transfer method will incur a $15.00 transaction fee. The Trust will employ reasonable proce- dures to confirm that instructions communicated by telephone are genuine. Failure to do so may result in liability to the Trust for losses incurred due to unauthorized or fraudulent telephone instructions. Such procedures include, but are not limited to, requiring some form of personal identification prior to acting upon instructions received by telephone and/or tape recording of telephone instructions. A shareholder making a telephone redemption should call Shareholder/Dealer Services at (800) 858-8850, and state (i) the name of the shareholder(s) ap- pearing on the 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 tele- phone 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 addi- tional 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 re- deemed, but in any event, payment is made by check within seven days after re- ceipt 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 pur- chase 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 23 $500 ($250 for retirement plan accounts), as of the close of business on the day preceding such notice, unless such shareholder increases the account bal- ance to at least $500 during such 60-day period. In the alternative, the ap- plicable Fund may impose a $2.00 monthly charge on accounts below the minimum account size. If a shareholder redeems shares of any class of a Fund and then within one year from the date of redemption decides the shares should not have been re- deemed, the shareholder may use all or any part of the redemption proceeds to reinstate, free of sales charges (Class A shares) and with the crediting of any CDSC paid with respect to such reinstated shares at the time of redemption (Class B shares), all or any part of the redemption proceeds in shares of the Fund at the then-current net asset value. Reinstatement may affect the tax status of the prior redemption. EXCHANGE PRIVILEGE GENERAL. Shareholders in any of the Funds may exchange their shares for the same class of shares of any other Fund or other funds in the SunAmerica Family of Mutual Funds that offer such class at the respective net asset value per share. Before making an exchange, a shareholder should obtain and review the prospectus of the fund whose shares are being acquired. All exchanges are sub- ject to applicable minimum initial investment requirements and can only be ef- fected if the shares to be acquired are qualified for sale in the state in which the shareholder resides. Exchanges of shares generally will constitute a taxable transaction except for IRAs, Keogh Plans and other qualified or tax- exempt accounts. The exchange privilege may be terminated or modified upon 60 days' written notice. Further information about the exchange privilege may be obtained by calling Shareholder/Dealer Services at (800) 858-8850. 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 pe- riod 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. RESTRICTIONS ON EXCHANGES. Because excessive trading (including short-term "market timing" trading) can hurt a Fund's performance, each Fund may refuse any exchange sell order (i) if it appears to be a market timing transaction involving a significant portion of a Fund's assets or (ii) from any share- holder account if previous use of the exchange privilege is considered exces- sive. Accounts under common ownership or control, including, but not limited to, those with the same taxpayer identification number and those administered so as to redeem or purchase shares based upon certain predetermined market in- dicators, will be considered one account for this purpose. In addition, a Fund reserves the right to refuse any exchange purchase order if, in the judgment of the Adviser, the Fund would be unable to invest effec- tively in accordance with its investment objective and policies, or would oth- erwise potentially be adversely affected. A shareholder's purchase exchange may be restricted or refused if the Fund receives or anticipates simultaneous orders affecting significant portions of the Fund's assets. In particular, a pattern of exchanges that coincide with a "market timing" strategy may be dis- ruptive to the Fund and may therefore be refused. Finally, as indicated under "Purchase of Shares," the Fund and Distributor reserve the right to refuse any order for the purchase of shares. 24 PORTFOLIO TRANSACTIONS, BROKERAGE AND TURNOVER 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 com- mission (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. Each Fund has no limitation regarding its policy with respect to portfolio turnover. The portfolio turnover rate is calculated by dividing the lesser of sales or purchases of portfolio securities, excluding short-term securities, by the average monthly value of the Fund's long-term portfolio securities. High portfolio turnover involves correspondingly greater brokerage commissions and other transaction costs which will be borne directly by the Fund. In addi- tion, high portfolio turnover may result in short-term capital gains, which, when distributed to shareholders, are treated as ordinary income. DETERMINATION OF NET ASSET VALUE Each Fund calculates the net asset value of each class of its shares sepa- rately 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 val- ued at market as described in the Statement of Additional Information. Securi- ties and assets for which market quotations are not readily available are val- ued 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 val- ue, 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 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 25 performance data represent the average annual percentage changes of a hypo- thetical $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 de- clared 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 dis- tributions of any net realized short-term capital gain, whether paid in cash or reinvested in shares of the Fund, are taxable to shareholders as ordinary income (except as described below). The Federal Securities Fund, Diversified Income Fund, High Income Fund, Gov- ernment Securities Fund and Tax Exempt Insured 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 dis- tribute cash to shareholders so as to comply with the distribution require- ments applicable to regulated investment companies. With respect to the Tax Exempt Insured Fund, distributions out of net in- vestment income attributable to interest received on tax-exempt securities ("exempt-interest dividends") will be exempt from Federal income tax when paid to shareholders. It also should be noted that interest on certain "private ac- tivity 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 al- ternative minimum taxable income for purposes of the adjustment based on ad- justed 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. 26 Statements as to the tax status of distributions to shareholders of the Funds will be mailed annually. Shareholders are urged to consult their own tax advisors regarding specific questions as to Federal, state or local taxes. Foreign Shareholders are also urged to consult their own tax advisors regard- ing the foreign tax consequences of ownership of interests in a Fund. See "Dividends, Distributions and Taxes" in the Statement of Additional Informa- tion. GENERAL INFORMATION REPORTS TO SHAREHOLDERS. The Trust sends to its shareholders audited annual and unaudited semi-annual reports for the Funds. The financial statements ap- pearing in annual reports are audited by independent accountants. In addition, the Transfer Agent sends to each shareholder having an account directly with the Trust a statement confirming transactions in the account. ORGANIZATION. The Trust, a business trust organized under the laws of the Commonwealth of Massachusetts on 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 Ex- empt Insured Fund. The Trustees have the authority to issue an unlimited num- ber of shares of beneficial interest of separate series, par value $.01 per share, of the Trust, and to divide each such series into one or more classes of shares. The Trust does not hold annual shareholder meetings. The Trustees are re- quired to call a meeting of shareholders for the purpose of voting upon the question of removal of any Trustee when so requested in writing by the share- holders of record holding at least 10% of the Trust's outstanding shares. Each share of each Fund has equal voting rights on each matter pertaining to that Fund or matters to be voted upon by the Trust, except as noted above. Each share of each Fund is entitled to participate equally with the other shares of that Fund in dividends and other distributions and the proceeds of any liqui- dation, except that, due to the differing expenses borne by the two classes, such dividends and proceeds are likely to be lower for Class B shares than for Class A shares. See the Statement of Additional Information for more informa- tion with respect to the distinctions among classes. Under Massachusetts law, shareholders of a trust, such as the Trust, in cer- tain circumstances may be held personally liable as partners for the obliga- tions of the trust. However the Declaration of Trust, pursuant to which the Trust was organized, contains an express disclaimer of shareholder liability for acts or obligations of the Trust. The Declaration of Trust also provides for indemnification out of the Trust's property for any shareholder held per- sonally liable for any Trust obligation. Thus the risk of a shareholder being personally liable, as a partner for 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 accoun- tants 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 Pro- spectus. For questions concerning share ownership, dividends, transfer of own- ership or share redemption, contact SAFS, Mutual Fund Operations, The SunAmerica Center, 733 Third Avenue, New York, NY 10017-3204, or call Shareholder/Dealer Services at (800) 858-8850. 27 NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR THE STATEMENT OF ADDITIONAL INFORMATION AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, THE ADVISER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY MAY NOT LAWFULLY BE MADE. [LOGO] SUNAMERICA CAPITAL SERVICES DISTRIBUTOR IFPRO SUNAMERICA INCOME FUNDS Statement of Additional Information dated July 29, 1996 The SunAmerica Center General Marketing and 733 Third Avenue Shareholder Information New York, NY 10017-3204 (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 29, 1996. 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- 2 Investment Restrictions.................................................. B-37 Trustees and Officers.................................................... B-40 Adviser, Personal Securities Trading, Distributor and Administrator...... B-44 Portfolio Transactions and Brokerage..................................... B-49 Additional Information Regarding Purchase of Shares...................... B-51 Additional Information Regarding Redemption of Shares.................... B-59 Determination of Net Asset Value......................................... B-59 Performance Data......................................................... B-61 Dividends, Distributions and Taxes....................................... B-66 Retirement Plans......................................................... B-71 Description of Shares.................................................... B-72 Additional Information................................................... B-73 Financial Statements..................................................... B-75 Appendix........................................................... Appendix-1
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 of SunAmerica Income Funds, a Massachusetts business trust, which is registered as an open-end investment company under the 1940 Act. The five Funds are: SunAmerica U.S. Government Securities Fund, SunAmerica Federal Securities Fund, SunAmerica Diversified Income Fund, SunAmerica High Income Fund and SunAmerica 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. 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, 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 B-2 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 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. B-3 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 the 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. 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 FHA or the Farmers' Home Administration ("FMHA"), or guaranteed by the 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 B-4 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 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 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 CMOs 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 B-5 through to holders of CMOs, CMOs of varying maturities may be secured by the same pool of mortgages, the payments on which are used to pay interest on each class and to retire successive maturities in sequence. Unlike other mortgage- backed securities, CMOs are designed to be retired as the underlying mortgages are repaid. In the event of prepayment on such mortgages, the class of CMO first to mature generally will be paid down. Therefore, although in most cases the issuer of CMOs will not supply additional collateral in the event of such prepayment, there will be sufficient collateral to secure CMOs that remain outstanding. Certain CMOs may be deemed to be investment companies under the 1940 Act. 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 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 U.S. government agency or financial institution and simultaneously agree to repurchase a similar security from the institution at a later date at an agreed upon price. The mortgage-backed B-6 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. Each Fund may invest up to 15% of its net assets in asset-backed securities meeting such Fund's credit quality restrictions. These securities, issued by trusts and special purpose corporations, are backed by a pool of assets, such as credit card and automobile loan receivables, representing the obligations of a number of different parties. Each Fund may also invest in privately issued asset-backed securities. Asset-backed securities present certain risks. For instance, in the case of credit card receivables, these securities may not have the benefit of any security interest in the related collateral. Credit card receivables are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. Most issuers of automobile receivables permit the servicer to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have a proper security interest in all of the obligations backing such receivables. Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on these securities. Asset-backed securities are often backed by a pool of assets representing the obligations of a number of different parties. To lessen the effect of failures by obligors to make payments on underlying assets, the securities may contain elements of credit support which fall into two categories: (i) liquidity protection and (ii) protection against losses resulting from ultimate default by an obligor on the underlying assets. Liquidity protection refers to the provision of advances, generally by the entity administering the pool of assets, to ensure that the receipt of payments on the underlying pool occurs in a timely fashion. Protection against losses resulting from ultimate default ensures payment through insurance policies or letters of credit obtained by the issuer or sponsor from third parties. The Fund will not pay any additional or separate fees for credit support. The degree of credit support provided for each issue is generally based on historical information respecting the level of credit risk B-7 associated with the underlying assets. Delinquency or loss in excess of that anticipated or failure of the credit support could adversely affect the return on an investment in such a security. 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, (ii) the Diversified Income Fund and High Income Fund may invest in zero-coupon securities issued by both domestic and foreign corporations, and (iii) the Tax Exempt Insured Fund may invest in zero-coupon securities issued by state and local government entities. Investors earn a return on a zero-coupon 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. See "Foreign Securities" for a description of the risks involved in investments in foreign corporations. 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 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, B-8 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 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 ADRs, 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. ADRs may be sponsored or unsponsored. A sponsored ADR is issued by a depository which has an exclusive relationship with the issuer of the B-9 underlying security. An unsponsored ADR may be issued by any number of U.S. depositories. Holders of unsponsored ADRs generally bear all the costs associated with establishing the unsponsored ADR. The depository of an unsponsored ADR is under no obligation to distribute shareholder communications received from the underlying issuer or to pass through to the holders of the unsponsored ADR voting rights with respect to the deposited securities or pool of securities. The Funds may invest in either type of ADR. Although the U.S. investor holds a substitute receipt of ownership rather than direct stock certificates, the use of the depository receipts in the United States can reduce costs and delays as well as potential currency exchange and other difficulties. The Funds 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 Funds may also execute trades on the U.S. markets using existing ADRs. A foreign issuer of the security underlying an ADR is generally not subject to the same reporting requirements in the United States as a domestic issuer. Accordingly the information available to a U.S. investor will be limited to the information the foreign issuer is required to disclose in its own country and the market value of an ADR may not reflect undisclosed material information concerning the issuer of the underlying security. For purposes of a Fund's investment policies, the Fund's investments in these types of securities will be deemed to be investments in the underlying securities. Generally, ADRs, in registered form, are dollar denominated securities designed for use in the U.S. securities markets and EDRs, in bearer form, are designed for use in the 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 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 B-10 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 securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under 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 B-11 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 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 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. B-12 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. 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. B-13 Certificates of Deposit and Bankers' Acceptances: Certificates of deposit are receipts issued by a bank in exchange for the deposit of funds. The issuer agrees to pay the amount deposited plus interest to the bearer of the receipt on the date specified on the certificate. The certificate usually can be traded in the secondary market prior to maturity. Bankers' acceptances typically arise from short-term credit arrangements designed to enable businesses to obtain funds to finance commercial transactions. Generally, an acceptance is a time draft drawn on a bank by an exporter or an importer to obtain a stated amount of funds to pay for specific merchandise. The draft is then "accepted" by another bank that, in effect, unconditionally guarantees to pay the face value of the instrument on its maturity date. The acceptance may then be held by the accepting bank as an earning asset or it may be sold in the secondary market at the going rate of discount for a specific maturity. Although maturities for acceptances can be as long as 270 days, most maturities are six months or less. The Funds will generally open interest-bearing accounts only with, or purchase certificates of deposit 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 market value at least equal to 102% of 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-14 Reverse Repurchase Agreements. Each Fund may engage in reverse repurchase agreements. In a reverse repurchase agreement, the Fund sells a security and agrees to repurchase it at a mutually agreed upon date and price, reflecting the interest rate effective for the term of the agreement. The Fund's investment of the proceeds of a reverse repurchase agreement is the speculative factor known as leverage. The Funds will enter into a reverse repurchase agreement only if the interest income from investment of the proceeds is expected to be greater than the interest expense of the transaction and the proceeds are invested for a period no longer than the term of the agreement. The Fund will maintain with the Custodian a separate account with a segregated portfolio of cash, U.S. government securities or other liquid high grade debt obligations in an amount at least equal to 102% of its purchase obligations under these agreements (including accrued interest). In the event that the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, the buyer or its trustee or receiver may receive an extension of time to determine whether to enforce the Fund's repurchase obligation, and the Fund's use of proceeds of the agreement may effectively be restricted pending such decision. Reverse repurchase agreements are considered to be borrowings and are subject to the percentage limitations on borrowings. See "Investment Restrictions." 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 transactions. If incorrect in its forecast of market values, interest rates and other applicable factors, the investment B-15 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 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 B-16 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 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 102% of 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 generally 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 B-17 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 20% of the High Income Fund's total assets may be invested in common stocks, preferred stocks, or other 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 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 B-18 on Futures (defined below) used to enhance income must be covered by deliverable securities or by liquid assets segregated to satisfy the Futures contract. If a call written by the Fund is exercised, the Fund forgoes any profit from any increase in the market price above the call price of the underlying investment on which the call was written. In addition, the Fund could experience capital losses which might cause previously distributed short-term capital gains to be re-characterized as a non-taxable return of capital to shareholders. 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. 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 B-19 (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 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 B-20 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. 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 B-21 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 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 B-22 as it otherwise would have. On the other hand, if interest rates were expected to decline, interest-rate futures contracts may be purchased to hedge in anticipation of subsequent purchases of long-term bonds at higher prices. Since the fluctuations in the value of the interest-rate futures contracts should be similar to that of long-term bonds, a Fund could protect itself against the effects of the anticipated rise in the value of long-term bonds without actually buying them until the necessary cash became available or the market had stabilized. At that time, the interest-rate futures contracts could be liquidated and that Fund's cash reserves could then be used to buy long-term bonds on the cash market. 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 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. B-23 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 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. B-24 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, 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 B-25 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 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. B-26 Additional Information About Hedging Instruments and Their Use - -------------------------------------------------------------- The Fund's custodian, or a securities depository acting for the custodian, will act as the Fund's escrow agent, through the facilities of the Options Clearing Corporation ("OCC"), as to the securities on which the Fund has written options or as to other acceptable escrow securities, so that no margin will be required for such transaction. OCC will release the securities on the expiration of the option or upon a Fund's entering into a closing transaction. An option position may be closed out only on a market which provides secondary trading for options of the same series and there is no assurance that a liquid secondary market will exist for any particular option. A Fund's option activities may affect its turnover rate and brokerage commissions. The exercise by a Fund of puts on securities will cause the sale of related investments, increasing 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 net assets 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. B-27 Transactions in options by a Fund are subject to limitations established by each of the exchanges governing the maximum number of options which may be written or held by a single investor or group of investors acting in concert, regardless of whether the options were written or purchased on the same or different exchanges or are held in one or more accounts or through one or more exchanges or brokers. Thus, the number of options which a Fund may write or hold may be affected by options written or held by other entities, including other investment companies having the same or an affiliated investment adviser. Position limits also apply to Futures. An exchange may order the liquidation of positions found to be in violation of those limits and may impose certain other sanctions. Due to requirements under the 1940 Act, when a Fund purchases a Future, the Fund will 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. 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 B-28 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 or "BBB" or lower by 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. 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 B-29 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 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. B-30 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 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 B-31 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. 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 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 B-32 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 bankers' 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); (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"); or (3) are without insurance coverage, provided that, and escrow or trust account has been established pursuant to the documents creating the Municipal Bonds and containing sufficient U.S. government securities backed by the U.S. government's full faith and credit pledge in order to ensure payment of principal and interest on such bonds. 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, other than that described in (3) above, 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, 1996, the premiums paid by Tax Exempt Insured Fund for a Mutual Fund Insurance Policy were 0.2% 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 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. B-33 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 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 B-34 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 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 B-35 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. 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-36 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, in some states, 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 50 states and the District of Columbia, files reports with state insurance regulatory agencies and is subject to audit and review by such authorities. 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. 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 B-37 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 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 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; B-38 (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 Securities Act that have a readily available market, and commercial paper exempted from registration under the Securities Act pursuant to Section 4(2) of the Securities 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 (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. B-39 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. An asterisk indicates those Trustees who are "interested persons" as that term is defined in the 1940 Act.
Position Principal Occupations Name, Age and Address with the Fund During Past 5 Years - --------------------- ------------- ------------------- S. James Coppersmith, 63 Trustee Director/Trustee of the Boston Stock Exchange, Emerson College Uno Restaurant Corp., Waban Corp., Kushner- 100 Beacon Street Locke Co., Chayron Inc.; Chairman of the Board of Boston, MA 02116 Emerson College; formerly, President and General Manager, WCVB-TV, a division of the Hearst Corporation from 1982 to 1994 (retired); Director/Trustee of the SunAmerica Mutual Funds and Anchor Series Trust. Samuel M. Eisenstat, 56 Chairman of the Board Attorney in private practice; President and Chief 430 East 86th Street Executive Officer, Abjac Energy Corporation; New York, NY 10028 Director/Trustee of Atlantic Realty Trust, UMB Bank and Trust (a subsidiary of United Mizrachi Bank), North European Royalty Trust, Volt Information Sciences Funding, Inc. (a subsidiary of Volt Information Sciences, Inc.) and Venture Partners International (an Israeli venture capital fund); Chairman of the Boards of the Directors/Trustees of the SunAmerica Mutual Funds and Anchor Series Trust. Stephen J. Gutman, 53 Trustee Partner and Chief Operating Officer of B.B. 515 East 79th Street Associates LLC (menswear specialty retailing and New York, NY 10021 other activities) since May 1989; Director/Trustee of the SunAmerica Mutual Funds and Anchor Series Trust.
B-40
Position Principal Occupations Name, Age and Address with the Fund During Past 5 Years - --------------------- ------------- ------------------- Peter A. Harbeck, 42 Trustee and President Director and President, SunAmerica Asset The SunAmerica Center Management Corp. ("SAAMCo"); Director 733 Third Avenue SunAmerica Capital Services, Inc. ("SACS"), since New York, NY 10017-3204 February 1993; Director and President, SunAmerica Fund Services, Inc. ("SAFS"), since May 1988; President of the SunAmerica Mutual Funds and Anchor Series Trust; Executive Vice President and Chief Operating Officer, SAAMCo, from May 1988 to August 1995; Executive Vice President SACS, from November 1991 to August 1995; Director, Resources Trust Company. Peter McMillan III*, 38 Trustee Executive Vice President and Chief Investment 1 SunAmerica Center Officer, SunAmerica Investments, Inc. since August Century City 1989; Director/Trustee of the SunAmerica Mutual Los Angeles, CA 90067 Funds; Director, Resources Trust Company. Sebastiano Sterpa, 67 Trustee Founder of Sterpa Realty, Inc., a full service real Suite 200 estate firm since 1962; Chairman of the Sterpa 200 West Glenoaks Blvd. Group, real estate investments and management Glendale, CA 91202 company; Director/Trustee of the SunAmerica Mutual Funds. Stanton J. Feeley, 59 Executive Vice Executive Vice President and Chief Investment The SunAmerica Center President Officer, SAAMCo, since February 1992; formerly, 733 Third Avenue Senior Portfolio Manager, Delaware Management New York, NY10017-3204 Company, Inc., from December 1987 to February 1992. P. Christopher Leary, 36 Vice President Senior Vice President, SAAMCo, since January The SunAmerica Center 1994; Vice President and Senior Portfolio Manager, 733 Third Avenue SAAMCo, since June 1991; Fixed Income Portfolio New York, NY10017-3204 Manager, SAAMCo, since October 1990. Nancy Kelly, 45 Vice President Vice President and Head Trader, SAAMCo, since The SunAmerica Center April 1994; Formerly Vice President, Whitehorne & 733 Third Avenue Co. Ltd. (1991-1994); Sales Trader, Lynch, Jones New York, NY10017-3204 and Ryan (1992-1994).
B-41
Position Principal Occupations Name, Age and Address with the Fund During Past 5 Years - --------------------- ------------- ------------------- Robert M. Zakem, 38 Secretary Senior Vice President and General Counsel, The SunAmerica Center SAAMCo since April 1993; Executive Vice 733 Third Avenue President and Director, SACS, since February 1993; New York, NY 10017-3204 Vice President, SAFS, since January 1994; Assistant Secretary, SunAmerica Series Trust and Anchor Pathway Fund, since September 1993; formerly, Vice President and Associate General Counsel, SAAMCo, March 1992 to April 1993; Associate, Piper & Marbury from 1989 to 1992. Peter C. Sutton, 31 Treasurer Vice President, SAAMCo, since September 1994; The SunAmerica Center Treasurer, SunAmerica Mutual Funds, since 733 Third Avenue February 1996; Vice President, SunAmerica Series New York, NY 10017-3204 Trust and Anchor Pathway Fund, since October 1994; Controller, SunAmerica Mutual Funds (March 1993 to February 1996); Assistant Controller, SunAmerica Mutual Funds (1990-1993).
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 the Distributor and other affiliates of SunAmerica Inc. The Trust pays each Trustee, who is not an interested person of the Trust or the Adviser (each a "disinterested" Trustee) annual compensation in addition to reimbursement of out-of-pocket expenses in connection with attendance at meetings of the Trustees. Specifically, each disinterested Trustee receives a pro rata portion (based upon the Trust's net assets) of $40,000 in annual compensation for acting as director or trustee to all the retail funds in the SunAmerica Mutual Funds. In addition, Mr. Eisenstat receives an aggregate of $2,000 in annual compensation for serving as the Chairman of the Boards of the SunAmerica Mutual Funds. Officers of the Trust receive no direct remuneration in such capacity from the Trust or any of the Funds. In addition, each disinterested Trustee also serves on the Audit Committee of the Board of Trustees. Each member of the Audit Committee receives an aggregate of $5,000 in annual compensation for serving on the Audit Committees of 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 disinterested Trustees, which recommends to the Trustees those persons to be nominated for election as Trustees by shareholders and selects and proposes nominees B-42 for election by Trustees between shareholders' meetings. Members of the Nominating Committee serve without compensation. The Trustees (and Directors) of the SunAmerica Mutual Funds have adopted the SunAmerica Disinterested Trustees' and Directors' Retirement Plan (the "Retirement Plan") effective January 1, 1993 for the Trustees who are 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 15, 1996, the Trustees and officers of the Trust owned in the aggregate, less than 1% of the Trust's total outstanding shares. The following table sets forth information summarizing the compensation of each disinterested Trustee for his services as Trustee for the fiscal year ended March 31, 1996. Neither the Trustees who are interested persons of the Trust nor any officers of the Trust receive any compensation. COMPENSATION TABLE
Pension or Aggregate Retirement Estimated Total Compensation Compensation Benefits Accrued Annual Benefits from Registrant and from as Part of Fund Upon Fund Complex Paid to Trustee Registrant Expenses* Retirement** Trustees* S. James $24,646 $33,305 $29,670 $65,000 Coppersmith Samuel M. Eisenstat $25,738 $17,484 $46,089 $69,000 Stephen J. Gutman $24,646 $18,522 $60,912 $65,000 Sebastiano Sterpa $24,099 $20,463 $ 7,900 $43,333***
* Information is as of March 31, 1996 for the four investment companies in the complex which pay fees to these directors/trustees. The complex consists of the SunAmerica Mutual Funds and Anchor Series Trust. ** Assuming participant elects to receive benefits in 15 yearly installments. *** Mr. Sterpa is not a trustee of Anchor Series Trust. B-43 ADVISER, PERSONAL SECURITIES TRADING, DISTRIBUTOR AND ADMINISTRATOR The Adviser. The Adviser, organized as a Delaware corporation in 1982, is located at The SunAmerica Center, 733 Third Avenue, New York, NY 10017-3204, and acts as adviser to each of the Funds pursuant to the Investment Advisory and Management Agreement dated September 23, 1993 (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 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.
B-44 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 following table sets forth the total advisory fees received by the Adviser from each Fund pursuant to the Advisory Agreement for the fiscal years ended March 31, 1996 and 1995 and for the fiscal period ended March 31, 1994. Advisory Fees
Fund 1996 1995 1994 Government Securities Fund $4,212,162 $5,033,634 $5,419,370 Amount Waived -- 226,804 -- Federal Securities Fund 360,738 365,395 506,648 Diversified Income Fund 915,671 1,153,494 393,249 High Income Fund 1,273,169 1,192,998 824,761 Tax Exempt Insured Fund 802,564 874,281 407,968
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, 1996 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. B-45 The Advisory Agreement continues with respect to each Fund from year to year, if such continuance is 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 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, by the holders of a majority of the respective Fund's outstanding voting securities or by the Adviser. The Advisory Agreement automatically terminates with respect to each Fund in the event of its assignment (as defined in the 1940 Act and the rules thereunder). Under the terms of the Advisory Agreement, the Adviser is not liable to the Funds, or their shareholders, for any act or omission by it or for any losses sustained by the Funds or their shareholders, except in the case of willful misfeasance, bad faith, gross negligence or reckless disregard of duty. 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 (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. 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. 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 B-46 personal securities trading by "Access Persons" thereof. An Access Person as defined in the Code of Ethics is an individual who is a trustee, director, officer, general partner or advisory person of the Trust or the Adviser. The guidelines on personal securities trading include: (i) securities being considered for purchase or sale, or purchased or sold, by any Investment Company advised by the Adviser, (ii) Initial Public Offerings, (iii) private placements, (iv) blackout periods, (v) short-term trading profits, (vi) gifts, and (vii) services as a director. These guidelines are substantially similar to those contained in the Report of the Advisory Group on Personal Investing issued by the Investment Company Institute's Advisory Panel. The Adviser reports to the Board of Trustees, on a quarterly basis, as to whether there were any violations of the Code of Ethics by Access Persons of the Trust or the Adviser during the quarter. The Distributor. The Trust, on behalf of each Fund, has entered into a distribution agreement (the "Distribution Agreement") with the Distributor, a registered broker-dealer and an indirect wholly owned subsidiary of SunAmerica Inc., to act as the principal underwriter of the shares of each Fund. The address of the Distributor is The SunAmerica Center, 733 Third Avenue, New York, NY 10017-3204. 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 continues in effect from year to year, with respect to each Fund, if such continuance is approved at least annually by vote of a majority of the Trustees, including a majority of the disinterested Trustees. The Trust or the Distributor each has the right to terminate the Distribution Agreement with respect to a Fund on 60 days' written notice, without penalty. The Distribution Agreement automatically terminates with respect to each Fund in the event of its assignment (as defined in the 1940 Act and the rules thereunder). The Distributor may, from time to time, pay additional commissions or promotional incentives to brokers, dealers or other financial services firms that sell shares of the Funds. In some instances, such additional commissions, fees or other incentives may be offered only to certain firms, including Royal Alliance Associates, Inc., SunAmerica Securities, Inc. and Advantage Capital Corporation, affiliates of the Distributor, that sell or are expected to sell during specified time periods certain minimum amounts of shares of the Funds, or of other funds underwritten by the Distributor. In addition, the terms and conditions of any given promotional incentive may differ from firm to firm. Such differences will, nevertheless, be fair and equitable, and based on such factors as size, geographic location, or other reasonable determinants, and will in no way affect the amount paid to any investor. Distribution Plans. As indicated in the Prospectus, the Trustees of the Trust and the shareholders of each class of shares of each Fund have adopted Distribution Plans (the "Class A Plan" and the B-47 "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 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 following table sets forth the distribution and service maintenance fees the Distributor received from the Funds for the fiscal years ended March 31, 1996 and 1995 and for the fiscal period ended March 31, 1994. Distribution and Service Maintenance Fees
Fund 1996 1995 1994 Class A Class B Class A Class B Class A Class B Government Securities Fund $388,894 $5,201,895 $251,367 $7,088,417 $137,217 $8,132,385 Federal Securities Fund 116,954 384,150 5,831 711,995 598 997,988 Diversified Income Fund 56,515 1,247,253 52,416 1,624,850 6,475 586,500 High Income Fund 144,739 1,284,954 109,589 1,277,571 124,115 756,964 Tax Exempt Insured Fund 462,514 283,659 528,127 239,626 264,951 58,933
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 disinterested 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 B-48 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 disinterested 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 disinterested Trustees of the Trust shall be committed to the discretion of the disinterested 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. The Administrator. The Trust has entered into a Service Agreement, under the terms of which SunAmerica Fund Services Inc. ("SAFS"), an indirect wholly owned subsidiary of SunAmerica Inc., acts as a servicing agent assisting State Street Bank and Trust Company ("State Street") in connection with certain services offered to the shareholders of each of the Funds. Under the terms of the Service Agreement, SAFS may receive reimbursement of its costs in providing such shareholder services. SAFS is located at The SunAmerica Center, 733 Third Avenue, New York, NY 10017-3204. The Service Agreement continues in effect from year to year provided that such continuance is approved annually by vote of a majority of the Trustees including a majority of the disinterested Trustees. Pursuant to the Service Agreement, as compensation for services rendered, SAFS receives a fee from each Fund, computed and payable monthly based upon an annual rate of 0.22% of average daily net assets. This fee represents the full cost of providing shareholder and transfer agency services to the Trust. From this fee, SAFS pays a fee to State Street, and its affiliate, National Financial Data Services ("NFDS" and with State Street, the "Transfer Agent") (other than out-of-pocket charges of the Transfer Agent which are paid by the Trust). 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 B-49 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 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. B-50 The following table sets forth the brokerage commissions paid by those Funds that paid commissions and the amounts of such brokerage commissions which were paid to affiliated broker-dealers by the Funds for the fiscal year ended March 31, 1996. 1996 Brokerage Commissions
Aggregate Amount paid to Percentage paid to Brokerage Affiliated Broker- Affiliated Broker- Fund Commissions Dealers Dealers Federal Securities Fund $400 $0 0% High Income Fund $30,000 $0 0% Diversified Income Fund $3,000 $0 0%
For the fiscal years ended March 31, 1995 and March 31, 1994, the High Income Fund paid brokerage commissions of $34,028, and $4,250, respectively, of which $0 was paid to affiliated brokers. None of the other Portfolios of the Trust paid any commissions during these periods. 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. The following tables set forth the front-end sales charges with respect to Class A shares of each Fund, the amount of the front-end sales charges which was reallowed to affiliated broker-dealers, and the contingent deferred sales charges with respect to Class B shares of each Fund, received by the Distributor for the fiscal years ended March 31, 1996 and 1995 and for the fiscal period ended March 31, 1994. 1996
Front-End Sales Amount Reallowed to Amount Reallowed to Contingent Deferred Charges Affiliated Broker- Non-Affiliated Sales Charge - Class B Fund Class A Shares Dealers Broker-Dealers Shares Government $ 34,701 $23,047 $ 6,065 $1,767,247 Securities Fund Federal Securities 51,871 26,836 17,101 92,902 Fund
B-51 Diversified 59,956 41,282 9,079 353,984 Income Fund High Income Fund 110,516 75,941 17,311 379,578 Tax Exempt 118,382 78,270 19,723 113,374 Insured Fund
1995
Front-End Sales Amount Reallowed to Amount Reallowed to Contingent Deferred Concessions Affiliated Broker- Non-Affiliated Sales Charge - Class B Fund Class A Shares Dealers Broker-Dealers Shares Government $ 84,710 $ 56,872 $10,813 $4,729,948 Securities Fund Federal Securities 19,976 11,597 3,947 68,586 Fund Diversified 201,057 144,342 26,811 776,679 Income Fund High Income Fund 148,782 107,889 16,642 420,741 Tax Exempt 149,429 85,321 40,047 85,661 Insured Fund
1994
Front-End Sales Amount Reallowed to Amount Reallowed to Contingent Deferred Concessions Affiliated Broker- Non-Affiliated Sales Charge - Class B Fund Class A Shares Dealers Broker-Dealers Shares Government $ 80,688 $ 53,360 $ 13,521 $3,733,888 Securities Fund Federal Securities 14,286 11,503 0 192,962 Fund Diversified 167,367 118,893 24,373 131,716 Income Fund High Income Fund 281,934 191,584 45,772 268,221 Tax Exempt 244,958 102,031 107,207 19,084 Insured Fund
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 B-52 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 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 B-53 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. 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 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. Checks should be made payable to the specific Fund or to "SunAmerica Funds" or, for retirement plan accounts for which the Adviser serves as fiduciary, to "Resources Trust Company." In the case of a new account, purchase orders by check must be submitted directly by mail to SunAmerica Fund Services, Inc., Mutual Fund Operations, The SunAmerica Center, 733 Third Avenue, New York, New York 10017-3204, together with payment for the purchase price of such shares and a completed New Account Application. Payment for subsequent purchases should be mailed to SunAmerica Fund Services, Inc., c/o NFDS, P.O. Box 419373, Kansas City, Missouri 64141-6373 and the shareholder's Fund account number should appear on the check. For fiduciary retirement plan accounts, both initial and subsequent purchases should be mailed to SunAmerica Fund Services, Inc., Mutual Fund Operations, The SunAmerica Center, 733 Third Avenue, New York, New York 10017-3204. Certified checks are not necessary but checks are accepted subject to collection at full face value in United States funds and must be drawn on a bank located in the United States. Upon receipt of the completed New Account Application and payment check, the Transfer Agent will purchase full and fractional shares of the applicable Fund at the net asset value next computed after the check is received, plus the applicable sales charge. Subsequent purchases of shares of each Fund may be purchased directly through the Transfer Agent. SAFS reserves the right to reject any check made payable other than in the manner indicated above. Under certain circumstances, a Fund will accept a multi-party check (e.g., a check made payable to the shareholder by another party and then endorsed by the shareholder to the Fund in payment for the purchase of shares); however, the processing of such a check may be subject to a delay. The Funds do not verify the authenticity of the endorsement of such multi-party check, and acceptance of the check by a Fund should not be considered verification thereof. Neither the Funds nor their affiliates will be held liable for any losses incurred as a result of a fraudulent endorsement. There are restrictions on the redemption of shares purchased by check for which funds are being collected. (See "Redemption of Shares.") 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. B-54 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. Further, the sales charge is waived with respect to shares purchased by "wrap accounts" for the benefit of clients of broker-dealers, financial institutions or financial planners adhering to the following standards established by the Distributor: (i) the broker-dealer, financial institution or financial planner charges its client(s) an advisory fee based on the assets under management on an annual basis, and (ii) such broker-dealer, financial institution or financial planner does not advertise that shares of the Funds may be purchased by clients at net asset value. Shares purchased under this waiver may not be resold except to the Fund. Shares are offered at net asset value to the foregoing persons because of anticipated economies in sales effort and sales related expenses. Reductions in sales charges apply to purchases or shares by a "single person" including an individual; members of a family unit comprising husband, wife and minor children; or a trustee or other fiduciary purchasing for a single fiduciary account. Complete details concerning how an investor may purchase shares at reduced sales charges may be obtained by contacting the Distributor. Reduced Sales Charges (Class A Shares only). As discussed under "Purchase of Shares" in the Prospectus, investors in Class A shares of a Fund may be entitled to reduced sales charges pursuant to the following special purchase plans made available by the Trust. Combined Purchase Privilege. The following persons may qualify for the sales - --------------------------- charge reductions or eliminations by combining purchases of Fund shares into a single transaction: B-55 (i) an individual, or a "company" as defined in Section 2(a)(8) of the 1940 Act (which includes corporations which are corporate affiliates of each other); (ii) an individual, his or her spouse and their minor children, purchasing for his, her or their own account; (iii) a trustee or other fiduciary purchasing for a single trust estate or single fiduciary account (including a pension, profit- sharing, or other employee benefit trust created pursuant to a plan qualified under Section 401 of the Code); (iv) tax-exempt organizations qualifying under Section 501(c)(3) of the Code (not including 403(b) plans); (v) employee benefit plans of a single employer or of affiliated employers, other than 403(b) plans; and (vi) group purchases as described below. A combined purchase currently may also include shares of other funds in the SunAmerica 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. 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, 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 B-56 during the period will be subject to a reduced sales charge applicable to the goal amount. The initial purchase must be at least 5% of the stated investment goal and shares totaling 5% of the dollar amount of the Letter of Intent will be held in escrow by the Transfer Agent, in the name of the investor. Shares of any class of shares of any Fund, or of other funds advised by the Adviser which impose a sales charge at the time of purchase, which the investor intends to purchase or has previously purchased during a 30-day period prior to the date of execution of the Letter of Intent and still owns, may also be included in determining the applicable reduction; provided, the dealer or shareholder notifies the Distributor of such prior purchase(s). The Letter of Intent does not obligate the investor to purchase, nor the Trust to sell, the indicated amounts of the investment goal. In the event the investment goal is not achieved within the thirteen-month period, the investor is required to pay the difference between the sales charge otherwise applicable to the purchases made during this period and sales charges actually paid. Such payment may be made directly to the Distributor or, if not paid, the Distributor is authorized by the Letter of Intent to liquidate a sufficient number of escrowed shares to obtain such difference. If the goal is exceeded and purchases pass the next sales charge break-point, the sales charge on the entire amount of the purchase that results in passing that break-point, and on subsequent purchases, will be subject to a further reduced sales charge in the same manner as set forth above under "Rights of Accumulation," but there will be no retroactive reduction of sales charges on previous purchases. At any time while a Letter of Intent is in effect, a shareholder may, by written notice to the Distributor, increase the amount of the stated goal. In that event, shares of the applicable Funds purchased during the previous 90-day period and still owned by the shareholder will be included in determining the applicable sales charge. The 5% escrow and the minimum purchase requirement will be applicable to the new stated goal. Investors electing to purchase shares of one or more of the Funds pursuant to this purchase plan should carefully read such Letter of Intent. Investors electing to purchase shares of one or more of the Funds pursuant to this purchase plan should carefully read such Letter of Intent. Reduced Sales Charge for Group Purchases. Members of qualified groups may - ---------------------------------------- purchase Class A shares of the Funds under the combined purchase privilege as described above. To receive a rate based on combined purchases, group members must purchase Class A shares of a Fund through a single investment dealer designated by the group. The designated dealer must transmit each member's initial purchase to the Distributor, together with payment and completed New Account Application. After the initial purchase, a member may send funds for the purchase of Class A shares directly to the Transfer Agent. Purchases of a Fund's shares are made at the public offering 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. B-57 Qualified groups include the employees of a corporation or a sole proprietorship, members and employees of a partnership or association, or other organized groups of persons (the members of which may include other qualified groups) provided that: (i) the group has at least 25 members of which at least ten members participate in the initial purchase; (ii) the group has been in existence for at least six months; (iii) the group has some purpose in addition to the purchase of investment company shares at a reduced sales charge; (iv) the group's sole organizational nexus or connection is not that the members are credit card customers of a bank or broker-dealer, clients of an investment adviser or security holders of a company; (v) the group agrees to provide its designated investment dealer access to the group's membership by means of written communication or direct presentation to the membership at a meeting on not less frequently than an annual basis; (vi) the group or its investment dealer will provide annual certification, in form satisfactory to the Transfer Agent, that the group then has at least 25 members and that at least ten members participated in group purchases during the immediately preceding 12 calendar months; and (vii) the group or its investment dealer will provide periodic certification, in form satisfactory to the Transfer Agent, as to the eligibility of the purchasing members of the group. Members of a qualified group include: (i) any group which meets the requirements stated above and which is a constituent member of a qualified group; (ii) any individual purchasing for his or her own account who is carried on the records of the group or on the records of any constituent member of the group as being a good standing employee, partner, member or person of like status of the group or constituent member; or (iii) any fiduciary purchasing shares for the account of a member of a qualified group or a member's beneficiary. For example, a qualified group could consist of a trade association which would have as its members individuals, sole proprietors, partnerships and corporations. The members of the group would then consist of the individuals, the sole proprietors and their employees, the members of the partnership and their employees, and the corporations and their employees, as well as the trustees of employee benefit trusts acquiring a Fund's shares for the benefit of any of the foregoing. Interested groups should contact their investment dealer or the Distributor. The Trust reserves the right to revise the terms of or to suspend or discontinue group sales with respect to shares of the Funds at any time. Net Asset Value Transfer Program. Investors may purchase Class A -------------------------------- shares of a Fund at net asset value to the extent that the investment represents the proceeds from a redemption of a non-SunAmerica mutual fund in which the investor either (a) paid a front-end sales load or (b) was subject to, or paid a CDSC on the redemption proceeds. Nevertheless, the Distributor will pay a commission to any dealer who initiates or is responsible for such an investment, in the amount of .50% of the amount invested, subject, however, to forfeiture in the event of a redemption during the first year from the date of purchase. In addition, it is essential that 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 may be revised or terminated without notice by the Distributor. For current information, contact Shareholder/Dealer Services at (800) 858-8850. B-58 ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES Reference is made to "Redemption of Shares" in the Prospectus for certain information as to the redemption of Fund shares. If the Trustees determine that it would be detrimental to the best interests of the remaining shareholders of a Fund to make payment wholly or partly in cash, the Trust, having filed with the SEC a notification of election pursuant to Rule 18f-1 on behalf of each of the Funds, may pay the redemption price in whole, or in part, by a distribution in kind of securities from a Fund in lieu of cash. In conformity with applicable rules of the SEC, the Funds are committed to pay in cash all requests for redemption, by any shareholder of record, limited in amount with respect to each shareholder during any 90-day period to the lesser of (i) $250,000, or (ii) 1% of the net asset value of the applicable Fund at the beginning of such period. If shares are redeemed in kind, the redeeming shareholder would incur brokerage costs in converting the assets into cash. The method of valuing portfolio securities is described below in the section entitled "Determination of Net Asset Value," and such valuation will be made as of the same time the redemption price is determined. 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 B-59 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. 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. 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. B-60 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)/n/ = ERV P = a hypothetical initial purchase payment of $1,000 T = average annual total return N = number of years ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof). The above formula assumes that: 1. The maximum sales load (i.e., either the front-end sales load in the case of the Class A shares or the deferred sales load that would be applicable to a complete redemption of the investment at the end of the specified period in the case of the Class B 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, 1996, are as follows:
Class A Shares Since Inception One Year Five Years Ten Years -------------- --------------- -------- ---------- --------- Government Securities Fund /(1)/ 3.02% 4.42% N/A N/A Federal Securities Fund /(1)/ 3.44% 5.67% N/A N/A Diversified Income Fund /(1)/ 0.54% 8.38% N/A N/A High Income Fund /(2)/ 7.73% 5.19% 11.65% N/A Tax Exempt Insured Fund /(3)/ 6.34% 2.27% 5.00% 5.75%
- --------------- /(1)/ From date of October 1, 1993. /(2)/ From date of inception of September 16, 1986. /(3)/ From date of inception of November 21, 1985. B-61
Class B Shares Since Inception One Year Five Years Ten Years -------------- --------------- -------- ---------- --------- Government Securities Fund /(4)/ 6.28% 4.52% 5.07% 6.28% Federal Securities Fund /(5)/ 8.29% 5.73% 5.82% 6.88% Diversified Income Fund /(6)/ 3.63% 8.57% N/A N/A High Income Fund /(7)/ 2.13% 5.43% N/A N/A Tax Exempt Insured Fund /(7)/ 1.70% 2.32% N/A N/A
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}/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 The yields for the one month periods ended March 31, 1996, 1995 and 1994 are as follows: - ----------------------------- /(4)/ From date of inception of March 3, 1986. /(5)/ From date of inception of April 25, 1983. /(6)/ From date of inception of April 6, 1991. /(7)/ From date of October 1, 1993. B-62
Fund March 31, 1996 March 31, 1995 March 31, 1994 Class Class Class Class Class Class A B A B A B Government Securities Fund 5.71% 5.33% 6.04% 5.64% 4.16% 3.52% Federal Securities Fund 5.44% 5.09% 6.48% 6.07% 5.31% 4.67% Diversified Income Fund 8.15% 7.88% 10.39% 10.65% 8.84% 8.43% High Income Fund 9.02% 8.91% 9.99% 9.93% 11.42% 11.45% Tax Exempt Insured Fund 4.50% 4.08% 5.10% 4.73% 4.99% 4.55%
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 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. B-63 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. 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: The 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. B-64 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. 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. 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 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. B-66 Taxes. Each Fund is qualified and intends to remain qualified and elects to be treated as a regulated investment company under Subchapter M of the Code for each taxable year. In order to 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 capital 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 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 ("ordinary income dividends") are taxable to the shareholder as ordinary dividend income regardless of whether the shareholder receives such distributions in additional shares or in cash. The portion of such dividends received from each Fund that will be eligible for the dividends received deduction for corporations will be determined on the basis of the amount of each Fund's gross income, exclusive of capital gains from sales of stock or securities, which is derived as dividends from domestic corporations, other than certain tax-exempt corporations and certain real estate investment trusts, and will be designated as such in a written notice to shareholders mailed not later than 60 days after the end of each fiscal year. 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. B-67 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, 1996, Government Securities Fund, Federal Securities Fund, Diversified Income Fund, High Income Fund, and Tax Exempt Insured Fund had capital loss carryforwards of $28,309,121, $796,117, $31,843,774, $44,735,276 and $8,864,098, respectively, which are available to the extent not utilized to offset future gains from 1997 through 2004. 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 may 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. The amount of any CDSC will reduce the amount realized on the sale or exchange of shares for purposes of determining gain or loss. 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. 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, sales 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. B-68 The Code includes special rules applicable to the listed non-equity options, regulated futures contracts, and options on futures contracts which a Fund may write, purchase or sell. Such options and contracts are classified as Section 1256 contracts under the Code. The character of gain or loss resulting from the sale, disposition, closing out, expiration or other termination of Section 1256 contracts, except forward foreign currency exchange contracts, is generally treated as long-term capital gain or loss to the extent of 60% thereof and short-term capital gain or loss to the extent of 40% thereof ("60/40 gain or loss"). Such contracts, when held by a Fund at the end of a fiscal year, generally are required to be treated as sold at market value on the last day of such fiscal year for Federal income tax purposes ("marked-to-market"). Over- the-counter options are not classified as Section 1256 contracts and are not subject to the marked-to-market rule or to 60/40 gain or loss treatment. Any gains or losses recognized by a Fund from transactions in over-the-counter options generally constitute short-term capital gains or losses. When call options written, or put options purchased, by a Fund are exercised, the gain or loss realized on the sale of the underlying securities may be either short-term or long-term, depending on the holding period of the securities. In determining the amount of gain or loss, the sales proceeds are reduced by the premium paid for the 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, Diversified Income Fund, High Income Fund, Tax Exempt Insured Fund and Government Securities 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. B-69 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, 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. 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 (or in the case of a bond issued with original issue discount, the adjusted issue price at the time of purchase) 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. Foreign shareholders generally will be subject to a withholding tax at the rate of 30% (or lower treaty rate) on any ordinary income dividends paid by the Funds. 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 qualified retirement plans. The summary below is only a brief description of the Federal income tax laws for each Plan and does not purport to be complete. B-70 Further information or an application to invest in shares of the Fund by establishing any of the retirement plans described below may be obtained by calling Retirement Plans at (800) 858-8850. However, it is recommended that a shareholder considering any retirement plan consult a tax adviser before participating. Pension and Profit-Sharing Plans. Sections 401(a) and 401(k) of the Code permit business employers and certain associations to establish pension and profit sharing plans for employees. Shares of the Fund may be purchased by those who would have been covered under the rules governing old H.R. 10 (Keogh) Plans, as well as by corporate plans. Each business retirement plan provides tax advantages for owners and participants. Contributions made by the employer are tax-deductible, and participants do not pay taxes on contributions or earnings until withdrawn. Tax-Sheltered Custodial Accounts. Section 403(b)(7) of the Code permits public school employees and employees of certain types of charitable, educational and scientific organizations specified in Section 501(c)(3) of the Code, to purchase shares of the Fund and, subject to certain limitations, exclude the amount of purchase payments from gross income for tax purposes. Individual Retirement Accounts (IRA). Section 408 of the Code permits eligible individuals to contribute to an individual retirement program, including Simplified Employee Pension Plans, commonly referred to as SEP-IRA. These IRA's are subject to limitations with respect to the amount that may be contributed, the eligibility of individuals, and the time in which distributions would be allowed to commence. In addition, certain distributions from some other types of retirement plans may be placed on a tax-deferred basis in an IRA. Salary Reduction Simplified Employee Pension (SARSEP). This plan was introduced by a provision of the Tax Reform Act of 1986 as a unique way for small employers to provide the benefit of retirement planning for their employees. Contributions are deducted from the employee's paycheck before tax deductions and are deposited into an IRA by the employer. These contributions are not included in the employee's income and therefore are not reported or deducted on his or her tax return. 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 B-71 within the Trust that would operate independently from the Trust's present portfolios, or to distinguish among shareholders, as may be necessary, to comply with future regulations or other unforeseen circumstances. Each series of the Trust's shares represents the interests of the shareholders of that series in a particular portfolio of Trust assets. In addition, the Trustees may authorize the creation of additional classes of shares in the future, which may have fee structures different from those of existing classes and/or may be offered only to certain qualified investors. Shareholders are entitled to a full vote for each full share held. The Trustees have terms of unlimited duration (subject to certain removal procedures) and have the power to alter the number of Trustees, and appoint their own successors, provided that at all times at least a majority of the Trustees have been elected by shareholders. The voting rights of shareholders are not cumulative, so that holders of more than 50% of the shares voting can, if they choose, elect all Trustees being elected, while the holders of the remaining shares would be unable to elect any Trustees. Although the Trust need not hold annual meetings of shareholders, the Trustees may call special meetings of shareholders for action by shareholder vote as may be required by the 1940 Act or the Declaration of Trust. Also, a shareholders meeting must be called, if so requested in writing by the holders of record of 10% or more of the outstanding shares of the Trust. In addition, the Trustees may be removed by the action of the holders of record of two-thirds or more of the outstanding shares. All series of shares will vote with respect to certain matters, such as election of Trustees. When all series of shares are not affected by a matter to be voted upon, such as approval of investment advisory agreements or changes in 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, 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 B-72 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, 1996, is calculated as follows: [This area intentionally left blank.] B-73
Government Securities Federal Securities Diversified Income Class A Class B Class A Class B Class A Class B Net Assets $125,503,637 $428,772,048 $40,277,524 $26,164,824 $ 16,761,844 $110,949,367 Number of Shares Outstanding 14,756,884 50,389,486 3,862,927 2,504,077 3,905,764 25,797,521 Net Asset Value (net assets $ 8.50 $ 8.51 $ 10.43 $ 10.45 $ 4.29 $ 4.30 divided by number of shares) Sales Charge (for Class A Shares: $ 0.42 ** $ 0.52 ** $ 0.21 ** 4.75% of offering price (6.10% of net asset value per share))* Offering Price $ 8.92 $ 8.51 $ 10.95 $ 10.45 $ 4.50 $ 4.30
High Income Tax Exempt Insured Class A Class B Class A Class B Net Assets $35,962,610 $91,800,393 $121,957,311 $ 29,314,839 Number of Shares Outstanding 5,176,395 13,190,350 9,818,201 2,359,606 Net Asset Value (net assets $ 6.95 $ 6.96 $ 12.42 $ 12.42 divided by number of shares) Sales Charge (for Class A Shares: $ 0.35 ** $ 0.62 ** 4.75% of offering price (6.10% of net asset value per share))* Offering Price $ 7.30 $ 6.96 $ 13.04 $ 12.42
* 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-74 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 Agent. 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., The SunAmerica Center, 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. 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, 1996. B-75 SUNAMERICA INCOME FUNDS STATEMENT OF ASSETS AND LIABILITIES -- March 31, 1996
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 $505,857,350; $58,883,174; $120,943,172; $121,290,514 and $140,630,966, respectively)........... $505,472,082 $58,969,751 $122,816,785 $124,664,854 $149,454,718 Short-term securities (cost equals market).... -- 198,814 -- -- -- Joint repurchase agreements (cost equals market)................. 109,319,000 16,631,000 3,328,000 1,051,000 -- Cash..................... 29,470 6,933 6,483 889 -- Interest receivable...... 5,042,643 406,756 2,508,277 2,777,526 2,242,339 Receivable for investments sold........ 1,244,003 145 -- -- 20,108 Receivable for shares of beneficial interest sold.................... 32,676 56,315 8,744 72,879 276,316 Prepaid expenses......... 25,038 27,444 2,269 8,941 18,889 Receivable for variation margin on futures contracts............... 6,806 1,361 -- -- -- Receivable from distributor............. 4,276 -- -- 6,873 -- ------------ ----------- ------------ ------------ ------------ Total assets............ 621,175,994 76,298,519 128,670,558 128,582,962 152,012,370 ------------ ----------- ------------ ------------ ------------ LIABILITIES: Payable for securities loaned.................. 63,493,750 9,500,000 -- -- -- Dividends payable........ 1,371,199 174,321 515,198 479,173 308,829 Payable for shares of beneficial interest redeemed................ 838,118 43,243 170,623 46,573 148,169 Accrued expenses......... 422,683 68,411 93,977 107,802 93,113 Distribution and service maintenance fees payable................. 405,625 34,374 100,987 97,388 61,569 Investment advisory and management fees payable. 323,986 28,647 72,590 89,023 64,830 Payable for variation margin on futures contracts............... 44,948 7,175 5,972 -- -- Payable to custodian..... -- -- -- -- 63,710 ------------ ----------- ------------ ------------ ------------ Total liabilities....... 66,900,309 9,856,171 959,347 819,959 740,220 ------------ ----------- ------------ ------------ ------------ Net assets........... $554,275,685 $66,442,348 $127,711,211 $127,763,003 $151,272,150 ============ =========== ============ ============ ============ NET ASSETS WERE COMPOSED OF: Shares of beneficial interest, $.01 par value................... $ 651,464 $ 63,670 $ 297,033 $ 183,667 $ 121,778 Paid-in capital.......... 585,381,836 67,613,871 159,376,243 170,695,156 151,543,027 ------------ ----------- ------------ ------------ ------------ 586,033,300 67,677,541 159,673,276 170,878,823 151,664,805 Accumulated distributions in excess of net investment income....... (1,255,322) (174,321) (522,977) (228,649) (308,829) Accumulated net realized loss on investments, futures contracts and foreign currency........ (30,117,025) (1,147,449) (33,312,686) (46,261,511) (8,907,578) Net unrealized appreciation (depreciation) on investments............. (385,268) 86,577 1,873,613 3,374,340 8,823,752 Net unrealized depreciation on foreign currency, other assets and liabilities......... -- -- (15) -- -- ------------ ----------- ------------ ------------ ------------ Net assets........... $554,275,685 $66,442,348 $127,711,211 $127,763,003 $151,272,150 ============ =========== ============ ============ ============ CLASS A (UNLIMITED SHARES AUTHORIZED): Net asset value and redemption price per share ($125,503,637/14,756,884; $40,277,524/3,862,927; $16,761,844/3,905,764; $35,962,610/5,176,395 and $121,957,311/9,818,201 net assets and shares of beneficial interest issued and outstanding, respectively)........... $ 8.50 $ 10.43 $ 4.29 $ 6.95 $ 12.42 Maximum sales charge (4.75% of offering price).................. 0.42 0.52 0.21 0.35 0.62 ------------ ----------- ------------ ------------ ------------ Maximum offering price to public.................. $ 8.92 $ 10.95 $ 4.50 $ 7.30 $ 13.04 ============ =========== ============ ============ ============ CLASS B (UNLIMITED SHARES AUTHORIZED): Net asset value, offering price and redemption price (less any applicable contingent deferred sales charge) per share ($428,772,048/50,389,486; $26,164,824/2,504,077; $110,949,367/25,797,521; $91,800,393/13,190,350 and $29,314,839/2,359,606 net assets and shares of beneficial interest issued and outstanding, respectively)........... $ 8.51 $ 10.45 $ 4.30 $ 6.96 $ 12.42 ============ =========== ============ ============ ============
See Notes to Financial Statements 4 SUNAMERICA INCOME FUNDS STATEMENT OF OPERATIONS -- For the year ended March 31, 1996
U.S. GOVERNMENT FEDERAL DIVERSIFIED HIGH TAX EXEMPT SECURITIES FUND SECURITIES FUND INCOME FUND INCOME FUND INSURED FUND --------------- --------------- ----------- ----------- ------------ INVESTMENT INCOME: Income: Interest............... $54,240,281 $5,439,937 $14,755,985 $18,337,792 $ 9,527,826 Dividends.............. -- -- -- 189,688 -- ----------- ---------- ----------- ----------- ----------- Total investment income................ 54,240,281 5,439,937 14,755,985 18,527,480 9,527,826 ----------- ---------- ----------- ----------- ----------- Expenses: Investment advisory and management fees....... 4,212,162 360,738 915,671 1,273,169 802,564 Distribution and service maintenance fees--Class A......... 388,894 116,954 56,515 144,739 462,514 Distribution and service maintenance fees--Class B......... 5,201,895 384,150 1,247,253 1,284,954 283,659 Transfer agent fees and expenses--Class A..... 288,579 93,492 44,348 116,344 322,325 Transfer agent fees and expenses--Class B..... 1,329,862 105,331 325,486 329,464 68,813 Custodian fees and expenses.............. 936,775 115,545 90,515 99,210 100,440 Interest expense....... 153,337 585 49,501 44,123 -- Trustees' fees and expenses.............. 73,383 8,115 16,165 18,884 18,163 Audit and tax consulting fees....... 55,490 15,985 21,960 27,200 22,535 Registration fees-- Class A............... 8,869 8,160 7,570 8,739 14,745 Registration fees-- Class B............... 22,688 7,435 11,849 13,945 10,916 Printing expense....... 21,410 2,705 5,350 7,830 3,925 Legal fees and expenses.............. 17,210 5,395 7,035 7,455 5,795 Insurance expense...... 16,652 1,706 3,956 3,728 30,886 Miscellaneous expenses. 26,737 3,402 5,288 7,096 6,910 ----------- ---------- ----------- ----------- ----------- Total expenses......... 12,753,943 1,229,698 2,808,462 3,386,880 2,154,190 Less: expenses waived by distributor........ (44,445) -- -- (102,796) -- ----------- ---------- ----------- ----------- ----------- Net expenses........... 12,709,498 1,229,698 2,808,462 3,284,084 2,154,190 ----------- ---------- ----------- ----------- ----------- Net investment income... 41,530,783 4,210,239 11,947,523 15,243,396 7,373,636 ----------- ---------- ----------- ----------- ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) on investments......... 9,603,179 2,758,114 (8,084,041) (7,236,768) 1,630,756 Net realized gain (loss) on futures contracts... 45,590 (23,056) (292,616) -- (199,383) Net change in unrealized appreciation (depreciation) on investments............ 5,738,709 423,129 13,961,546 7,416,828 2,644,616 Net change in unrealized appreciation (depreciation) on foreign currency, other assets and liabilities. -- -- (102) -- -- ----------- ---------- ----------- ----------- ----------- Net realized and unrealized gain on investments and foreign currency............... 15,387,478 3,158,187 5,584,787 180,060 4,075,989 ----------- ---------- ----------- ----------- ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............. $56,918,261 $7,368,426 $17,532,310 $15,423,456 $11,449,625 =========== ========== =========== =========== ===========
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 YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR ENDED ENDED ENDED ENDED ENDED ENDED MARCH 31, 1996 MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1995 --------------- --------------- -------------- -------------- -------------- -------------- DECREASE IN NET ASSETS: OPERATIONS: Net investment income.. $ 41,530,783 $ 53,583,054 $ 4,210,239 $ 4,623,379 $ 11,947,523 $ 16,024,304 Net realized gain (loss) on investments .......... 9,603,179 (45,098,323) 2,758,114 (3,546,056) (8,084,041) (23,976,569) Net realized gain (loss) on futures contracts............. 45,590 -- (23,056) -- (292,616) -- Net realized loss on foreign currency, other assets and liabilities........... -- -- -- -- -- (335,830) Net change in unrealized appreciation (depreciation) on investments........... 5,738,709 12,685,155 423,129 1,261,503 13,961,546 (1,943,292) Net change in unrealized appreciation (depreciation) on foreign currency, other assets and liabilities........... -- -- -- -- (102) 4,974 --------------- --------------- ----------- ----------- ------------ ------------ Net increase (decrease) in net assets resulting from operations........ 56,918,261 21,169,886 7,368,426 2,338,826 17,532,310 (10,226,413) --------------- --------------- ----------- ----------- ------------ ------------ DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: From net investment income (Class A)...... (6,676,176) (4,146,499) (1,985,432) (106,644) (1,513,903) (1,404,506) From net investment income (Class B)...... (27,782,092) (35,858,561) (2,098,335) (4,158,525) (11,028,301) (14,176,998) --------------- --------------- ----------- ----------- ------------ ------------ Total dividends and distributions to shareholders........... (34,458,268) (40,005,060) (4,083,767) (4,265,169) (12,542,204) (15,581,504) --------------- --------------- ----------- ----------- ------------ ------------ NET DECREASE IN NET ASSETS RESULTING FROM CAPITAL SHARE TRANSACTIONS (NOTE 7).. (136,362,670) (275,662,086) (8,732,579) (7,785,923) (23,870,313) (14,272,578) --------------- --------------- ----------- ----------- ------------ ------------ TOTAL DECREASE IN NET ASSETS................. (113,902,677) (294,497,260) (5,447,920) (9,712,266) (18,880,207) (40,080,495) NET ASSETS: Beginning of period..... 668,178,362 962,675,622 71,890,268 81,602,534 146,591,418 186,671,913 --------------- --------------- ----------- ----------- ------------ ------------ End of period [including undistributed (distributions in excess of) net investment income for March 31, 1996 and March 31, 1995 of $(1,255,322), $(1,295,646), $(174,321), $(99,141), $(522,977) and $311,631, respectively].......... $ 554,275,685 $ 668,178,362 $66,442,348 $71,890,268 $127,711,211 $146,591,418 =============== =============== =========== =========== ============ ============
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 YEAR ENDED ENDED ENDED ENDED MARCH 31, MARCH 31, MARCH 31, MARCH 31, 1996 1995 1996 1995 ------------ ------------ ------------ ------------ INCREASE (DECREASE) IN NET ASSETS: OPERATIONS: Net investment income.. $ 15,243,396 $ 16,493,914 $ 7,373,636 $ 9,127,948 Net realized gain (loss) on investments ...................... (7,236,768) (22,330,854) 1,630,756 (9,524,226) Net realized loss on futures contracts..... -- -- (199,383) -- Net realized loss on foreign currency, other assets and liabilities........... -- (105,175) -- -- Net change in unrealized appreciation (depreciation) on investments........... 7,416,828 1,183,178 2,644,616 11,417,085 Net change in unrealized appreciation (depreciation) on foreign currency, other assets and liabilities........... -- 2,926 -- -- ------------ ------------ ------------ ------------ Net increase (decrease) in net assets resulting from operations........ 15,423,456 (4,756,011) 11,449,625 11,020,807 ------------ ------------ ------------ ------------ DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: From net investment income (Class A)...... (4,100,978) (3,535,939) (6,307,717) (7,962,945) From net investment income (Class B)...... (12,111,523) (13,736,255) (1,156,665) (1,089,883) ------------ ------------ ------------ ------------ Total dividends and distributions to shareholders........... (16,212,501) (17,272,194) (7,464,382) (9,052,828) ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL SHARE TRANSACTIONS (NOTE 7).. (65,066,720) 50,209,365 (16,652,927) (24,008,980) ------------ ------------ ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS................. (65,855,765) 28,181,160 (12,667,684) (22,041,001) NET ASSETS: Beginning of period..... 193,618,768 165,437,608 163,939,834 185,980,835 ------------ ------------ ------------ ------------ End of period [including undistributed (distributions in excess of) net investment income for March 31, 1996 and March 31, 1995 of $(228,649), $146,988, $(308,829) and $(216,286), respectively].......... $127,763,003 $193,618,768 $151,272,150 $163,939,834 ============ ============ ============ ============
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(3)..... $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 3/31/96......... 8.23 0.62 0.16 0.78 (0.51) -- -- -- (0.51) 8.50 9.62 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 - ---------------- ---------- ------------- -------------- --------- 10/01/93- 3/31/94(3)..... $ 76,586 1.35%(4)(6) 6.83%(4)(6) 35% 3/31/95......... 73,399 1.46(6) 7.50(6) 105 3/31/96......... 125,504 1.44(6) 7.11(6) 142 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 B 6/30/92(5)...... $8.90 $0.73 $(0.02) $0.71 $(0.57) $(0.16) $ -- $ -- $(0.73) $8.88 8.33% 6/30/93(5)...... 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 3/31/96......... 8.24 0.55 0.17 0.72 (0.45) -- -- -- (0.45) 8.51 8.87 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 - ---------------- ---------- ------------- -------------- --------- 6/30/92(5)...... $1,075,668 1.92% 8.21% 54% 6/30/93(5)...... 1,259,845 1.82(6) 7.27(6) 73 7/01/93- 3/31/94........ 886,089 1.95(4)(6) 6.61(4)(6) 35 3/31/95......... 594,779 2.15(6) 6.80(6) 105 3/31/96......... 428,772 2.13 6.46 142
- -------------------------------------------------------------------------------- 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(3)..... $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 3/31/96......... 9.98 0.68(1) 0.40 1.08 (0.63) -- -- (0.63) 10.43 10.94 40,278 RATIO OF RATIO OF EXPENSES NET TO INVESTMENT AVERAGE INCOME TO PERIOD NET AVERAGE PORTFOLIO ENDED ASSETS NET ASSETS TURNOVER - ---------------- ------------- -------------- --------- 10/11/93- 3/31/94(3)..... 1.39%(4)(6) 4.68%(4)(6) 68% 3/31/95......... 1.40(6) 6.90(6) 267 3/31/96......... 1.37 6.12 311 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 B 3/31/92......... $10.35 $0.77 $ 0.29 $ 1.06 $(0.77) $ -- $ -- $(0.77) $10.64 10.57% $120,454 3/31/93......... 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 3/31/96......... 10.01 0.56(1) 0.44 1.00 (0.56) -- -- (0.56) 10.45 10.13 26,165 RATIO OF RATIO OF EXPENSES NET TO INVESTMENT AVERAGE INCOME TO PERIOD NET AVERAGE PORTFOLIO ENDED ASSETS NET ASSETS TURNOVER - ---------------- ------------- -------------- --------- 3/31/92......... 1.90% 7.32% 57% 3/31/93......... 1.85 6.36 97 3/31/94......... 1.98 5.79 68 3/31/95......... 2.03 6.33 267 3/31/96......... 2.01 5.64 311
- ------------ (1) Calculated based upon average shares outstanding (2) Total return is not annualized and does not reflect sales load (3) Commencement of sale of respective class of shares (4) Annualized (5) Pursuant to a reorganization of the SunAmerica Mutual Funds, the Fund changed its fiscal year end to March 31 (6) Net of the following expense reimbursements (based on average net assets):
6/30/93 3/31/94 3/31/95 3/31/96 ------- ------- ------- ------- U.S. Government Securities Fund Class A -- .10% .07% .04% U.S. Government Securities Fund Class B .02% .06% .03% -- Federal Securities Fund Class A -- 6.74% 1.26% --
See Notes to Financial Statements 8 SUNAMERICA INCOME FUNDS FINANCIAL HIGHLIGHTS DIVERSIFIED INCOME FUND
NET GAIN (LOSS) ON RATIO OF INVESTMENTS NET NET EXPENSES RATIO OF NET NET ASSET (BOTH DIVIDENDS ASSET ASSETS TO INVESTMENT VALUE, NET REALIZED TOTAL FROM FROM NET VALUE, END OF AVERAGE INCOME TO BEGINNING INVESTMENT AND INVESTMENT INVESTMENT END OF TOTAL PERIOD NET AVERAGE NET PERIOD ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME PERIOD RETURN(1) (000'S) ASSETS ASSETS - ---------------- --------- ---------- ----------- ---------- ---------- ------ --------- -------- -------- ------------ CLASS A 10/05/93 - 10/31/93(2)(5). $5.05 $0.02(3) $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(3) (0.23) (0.10) (0.18) 4.79 (2.10) 12,600 1.42 (4)(8) 8.25 (4)(8) 3/31/95......... 4.79 0.43(3) (0.66) (0.23) (0.42) 4.14 (5.10) 14,213 1.59 9.58 3/31/96......... 4.14 0.39(3) 0.16 0.55 (0.40) 4.29 13.78 16,762 1.46 8.96 PORTFOLIO PERIOD ENDED TURNOVER - ----------------- --------- 10/05/93 - 10/31/93(2)(5). 249% 11/01/93 - 3/31/94........ 48 3/31/95......... 160 3/31/96......... 166 NET GAIN (LOSS) ON RATIO OF INVESTMENTS NET NET EXPENSES RATIO OF NET NET ASSET (BOTH DIVIDENDS ASSET ASSETS TO INVESTMENT VALUE, NET REALIZED TOTAL FROM FROM NET VALUE, END OF AVERAGE INCOME TO BEGINNING INVESTMENT AND INVESTMENT INVESTMENT END OF TOTAL PERIOD NET AVERAGE NET PERIOD ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME PERIOD RETURN(1) (000'S) ASSETS ASSETS - ---------------- --------- ---------- ----------- ---------- ---------- ------ --------- -------- -------- ------------ CLASS B 10/31/92(5)(6).. $5.21 $0.42 $(0.41) $0.01 $(0.40) $4.82 0.16 % $ 35,409 0.74%(8) 7.81%(8) 10/31/93(5)(6).. 4.82 0.38(3) 0.24 0.62 (0.37) 5.07 13.35 102,519 1.78 (8) 7.53 (8) 11/01/93 - 3/31/94........ 5.07 0.15(3) (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(3) (0.65) (0.25) (0.39) 4.15 (5.46) 132,378 2.12 8.98 3/31/96......... 4.15 0.36(3) 0.17 0.53 (0.38) 4.30 13.09 110,949 2.06 8.42 PORTFOLIO PERIOD ENDED TURNOVER - ----------------- --------- 10/31/92(5)(6).. 191% 10/31/93(5)(6).. 249 11/01/93 - 3/31/94........ 48 3/31/95......... 160 3/31/96......... 166 - -------------------------------------------------------------------------------- HIGH INCOME FUND NET GAIN (LOSS) ON RATIO OF INVESTMENTS NET NET EXPENSES RATIO OF NET NET ASSET (BOTH DIVIDENDS ASSET ASSETS TO INVESTMENT VALUE, NET REALIZED TOTAL FROM FROM NET VALUE, END OF AVERAGE INCOME TO BEGINNING INVESTMENT AND INVESTMENT INVESTMENT END OF TOTAL PERIOD NET AVERAGE NET PERIOD ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME PERIOD RETURN(1) (000'S) ASSETS ASSETS - ---------------- --------- ---------- ----------- ---------- ---------- ------ --------- -------- -------- ------------ CLASS A 3/31/92(7)...... $6.84 $0.95 $1.28 $2.23 $(1.00) $8.07 35.27% $ 22,607 1.57% 13.19% 3/31/93(7)...... 8.07 0.95 0.18 1.13 (1.08) 8.12 15.05 30,715 1.77 11.08 3/31/94(7)...... 8.12 0.87(3) (0.14) 0.73 (0.82) 8.03 9.14 33,724 1.72 10.34 3/31/95......... 8.03 0.78(3) (1.03) (0.25) (0.83) 6.95 (2.91) 40,585 1.61 10.82 3/31/96......... 6.95 0.67(3) 0.02 0.69 (0.69) 6.95 10.43 35,963 1.53 9.36 PORTFOLIO PERIOD ENDED TURNOVER - ----------------- --------- 3/31/92(7)...... 208% 3/31/93(7)...... 232 3/31/94(7)...... 290 3/31/95......... 196 3/31/96......... 183 CLASS B NET GAIN (LOSS) ON RATIO OF INVESTMENTS NET NET EXPENSES RATIO OF NET NET ASSET (BOTH DIVIDENDS ASSET ASSETS TO INVESTMENT VALUE, NET REALIZED TOTAL FROM FROM NET VALUE, END OF AVERAGE INCOME TO BEGINNING INVESTMENT AND INVESTMENT INVESTMENT END OF TOTAL PERIOD NET AVERAGE NET PERIOD ENDED OF PERIOD INCOME UNREALIZED) OPERATIONS INCOME PERIOD RETURN(1) (000'S) ASSETS ASSETS - ---------------- --------- ---------- ----------- ---------- ---------- ------ --------- -------- -------- ------------ 10/01/93 - 3/31/94(2)..... $8.18 $0.38(3) $(0.17) $ 0.21 $(0.35) $8.04 2.46% $131,713 2.15%(4)(8) 9.07%(4)(8) 3/31/95......... 8.04 0.73(3) (1.02) (0.29) (0.79) 6.96 (3.42) 153,034 2.16 (8) 10.26 (8) 3/31/96......... 6.96 0.62(3) 0.03 0.65 (0.65) 6.96 9.83 91,800 2.06 (8) 8.85 (8) 10/01/93 - 3/31/94(2)..... 290% 3/31/95......... 196 3/31/96......... 183
- ------------ (1)Total return is not annualized and does not reflect sales load (2)Commencement of sale of respective class of shares (3)Calculated based upon average shares outstanding (4)Annualized (5)Pursuant to a reorganization of the SunAmerica Mutual Funds, the Fund changed its fiscal year end to March 31 (6)Restated to reflect 1.889180183-for-1 stock split effective December 16, 1992 (7)Restated to reflect 1.174107276-for-1 stock split effective October 1, 1993 (8)Net of the following expense reimbursements (based on average net assets):
10/31/92 10/31/93 3/31/94 3/31/95 3/31/96 -------- -------- ------- ------- ------- Diversified Income Fund Class A -- -- .62% -- -- Diversified Income Fund Class B 1.25% .38% -- -- -- High Income Fund Class B -- -- .08% .08% .08%
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 10/31/92(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 (7) 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 (5)(7) 3/31/95......... 11.95 0.63(4) 0.17 0.80 (0.62) 12.13 6.97 137,955 1.20 (7) 3/31/96......... 12.13 0.59(4) 0.29 0.88 (0.59) 12.42 7.37 121,957 1.22 RATIO OF NET INVESTMENT INCOME TO AVERAGE PORTFOLIO PERIOD ENDED NET ASSETS TURNOVER - ----------------- --------------- --------- 10/31/92(2)..... 6.26% 21% 10/31/93(2)..... 5.56 (7) 26 11/01/93- 3/31/94........ 4.99 (5)(7) 52 3/31/95......... 5.32 (7) 162 3/31/96......... 4.72 46 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 B 10/04/93- 10/31/93(2)(6). $12.84 $0.02(4) $(0.05) $(0.03) $(0.02) $12.79 (0.24)% $ 4,922 1.96%(5) 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 (5) 3/31/95......... 11.95 0.54(4) 0.19 0.73 (0.54) 12.14 6.29 25,985 1.92 3/31/96......... 12.14 0.50(4) 0.29 0.79 (0.51) 12.42 6.58 29,315 1.90 RATIO OF NET INVESTMENT INCOME TO AVERAGE PORTFOLIO PERIOD ENDED NET ASSETS TURNOVER - ----------------- --------------- --------- 10/04/93- 10/31/93(2)(6). 4.09%(5) 26% 11/01/93- 3/31/94........ 4.17 (5) 52 3/31/95......... 4.60 162 3/31/96......... 4.03 46
- ------------ (1)Total return is not annualized and does not reflect sales load (2)Pursuant to a reorganization of the SunAmerica Mutual Funds, the Fund changed its fiscal year end to March 31 (3)Prior year amounts reclassified to net investment income (4)Calculated based upon average shares outstanding (5)Annualized (6)Commencement of sale of respective class of shares (7)Net of the following expense reimbursements (based on average net assets):
10/31/93 3/31/94 3/31/95 -------- ------- ------- Tax Exempt Insured Fund Class A .10% .11% .04%
See Notes to Financial Statements 10 SUNAMERICA U.S. GOVERNMENT SECURITIES FUND PORTFOLIO OF INVESTMENTS -- March 31, 1996
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2) - -------------------------------------------------------------------------------- FEDERAL HOME LOAN MORTGAGE CORP.--28.8% 6.50% due 3/15/24................................. $ 9,624 $ 8,715,864 7.50% due 2/01/22 - 6/01/25....................... 24,289 24,242,475 8.50% due 6/01/01................................. 5 5,679 9.00% due 1/01/02 - 10/01/16...................... 609 636,928 9.25% due 9/01/08 - 3/01/17....................... 526 551,591 9.50% due 9/01/16 - 9/01/21....................... 7,195 7,640,917 9.63% due 5/15/06(2).............................. 5,000 4,687,501 10.00% due 10/01/02 - 8/01/21..................... 24,683 27,138,010 10.00% due 5/01/05(1)............................. 170 173,516 10.50% due 6/01/00 - 1/01/21...................... 969 1,057,083 10.75% due 9/01/00 - 1/01/15...................... 274 300,945 11.00% due 9/01/00 - 6/01/17...................... 2,555 2,838,134 11.25% due 11/01/13............................... 88 97,852 11.50% due 11/01/01 - 7/01/19..................... 1,256 1,407,217 11.75% due 8/01/11 - 10/01/14..................... 188 211,148 12.00% due 7/01/99 - 7/01/20...................... 15,671 17,587,195 12.13% due 9/01/11................................ 877 997,245 12.25% due 10/01/99 - 7/01/15..................... 1,092 1,239,226 12.50% due 8/01/99 - 4/01/19...................... 26,291 30,272,662 12.75% due 2/01/00 - 6/01/15...................... 1,316 1,508,303 13.00% due 5/01/00 - 10/01/15..................... 13,804 16,087,500 13.25% due 11/01/10 - 5/01/15..................... 1,374 1,598,796 13.50% due 2/01/10 - 2/01/19...................... 7,916 9,346,950 13.75% due 7/01/11 - 8/01/14...................... 96 112,997 14.00% due 10/01/09 - 4/01/16..................... 780 921,196 14.50% due 12/01/10 - 5/01/13..................... 140 164,848 14.72% due 2/15/21(1)(2).......................... 221 201,045 ------------ TOTAL FEDERAL HOME LOAN MORTGAGE CORP. (cost $154,776,200)............................... 159,742,823 ------------ FEDERAL NATIONAL MORTGAGE ASSOCIATION--16.7% 6.00% due 9/01/00(1).............................. 9,200 9,044,783 6.00% due 11/01/03................................ 6,429 6,314,466 6.50% due 8/01/99 - 1/01/01....................... 7,355 7,295,546 8.00% due 12/01/22 - 1/01/23...................... 16,712 17,004,784 8.50% due 9/25/20(1).............................. 600 606,750 9.00% due 12/01/97 - 4/01/07...................... 3,146 3,308,747 9.25% due 12/01/10 - 1/01/17...................... 473 498,255 10.25% due 6/01/14 - 7/01/16...................... 114 124,965 10.50% due 3/01/15................................ 360 392,410 11.00% due 3/01/09 - 8/01/20...................... 1,647 1,833,586 11.50% due 5/01/00 - 3/01/14...................... 797 844,708 11.75% due 3/01/15 - 11/01/15..................... 61 68,789 12.00% due 9/01/07 - 5/01/16...................... 14,009 15,947,455 12.25% due 9/01/99 - 10/01/15..................... 1,930 2,191,959 12.50% due 12/01/97 - 9/01/15..................... 8,241 9,444,558 12.75% due 9/01/12 - 9/01/15...................... 845 972,798 13.00% due 10/01/09 - 9/01/16..................... 10,947 12,773,140 13.25% due 10/01/13 - 2/01/15..................... 239 278,211 13.50% due 10/01/10 - 2/01/17..................... 1,900 2,245,639 13.75% due 11/01/11 - 10/01/14.................... 190 224,583
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2) FEDERAL NATIONAL MORTGAGE ASSOCIATION (CONTINUED) 14.00% due 10/01/14.............................. $ 515 $ 613,962 14.50% due 7/01/11............................... 273 325,892 14.75% due 7/01/12............................... 127 157,382 15.00% due 10/01/12 - 2/01/13.................... 165 196,515 15.50% due 10/01/12.............................. 85 102,712 ------------ TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION (cost $91,364,378)............................... 92,812,595 ------------ GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--27.0% 6.50% due 12/15/98 - 10/15/04.................... 6,044 5,882,411 7.00% due 11/15/22 - 10/15/23.................... 21,558 21,002,408 7.50% due 1/15/17 - 10/15/23..................... 27,794 27,737,641 8.50% due 6/15/01 - 11/15/20..................... 15,230 15,951,135 9.00% due 5/15/01 - 12/15/20..................... 10,652 11,260,200 9.50% due 2/15/98 - 7/15/20...................... 3,667 3,946,056 10.00% due 3/15/98 - 5/15/19..................... 2,576 2,771,585 10.25% due 7/15/15............................... 50 55,778 10.50% due 11/15/97 - 6/15/21.................... 10,292 11,218,191 11.00% due 2/15/98 - 4/15/21..................... 7,253 8,028,757 11.50% due 3/15/98 - 1/15/21..................... 9,425 10,645,070 11.75% due 7/15/13 - 11/15/15.................... 1,071 1,190,134 12.00% due 9/15/98 - 10/15/19.................... 4,286 4,904,405 12.25% due 8/15/13 - 7/15/15..................... 1,233 1,429,063 12.50% due 4/15/10 - 3/15/16..................... 9,009 10,483,519 12.75% due 10/15/13.............................. 6 6,571 13.00% due 11/15/10 - 6/15/15.................... 4,799 5,635,165 13.25% due 7/15/14 - 11/15/14.................... 119 139,688 13.50% due 5/15/10 - 1/15/15..................... 3,223 3,834,176 14.00% due 5/15/11 - 12/15/14.................... 1,651 1,996,924 15.00% due 6/15/11 - 2/15/13..................... 957 1,159,746 16.00% due 12/15/11 - 7/15/12.................... 295 348,126 ------------ TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (cost $151,845,292).............................. 149,626,749 ------------ GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II--2.0% 10.00% due 9/20/16 - 4/20/19..................... 25 27,355 11.00% due 7/20/00............................... 38 39,728 11.50% due 8/20/13 - 7/20/20..................... 1,308 1,481,043 11.75% due 11/20/14 - 2/20/16.................... 569 652,550 12.00% due 10/20/13 - 5/20/15.................... 870 994,801 12.25% due 5/20/14 - 10/20/15.................... 84 96,026 12.50% due 9/20/13 - 1/20/15..................... 4,351 5,049,054 12.75% due 11/20/13 - 7/20/15.................... 195 226,804 13.00% due 9/20/13 - 10/20/14.................... 1,993 2,340,956 13.25% due 8/20/14 - 5/20/15..................... 89 103,432 13.50% due 10/20/14.............................. 78 92,771 ------------ TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II (cost $10,757,426)............................... 11,104,520 ------------
11 SUNAMERICA U.S. GOVERNMENT SECURITIES FUND PORTFOLIO OF INVESTMENTS -- March 31, 1996 -- (continued)
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2) - -------------------------------------------------------------------------------- U.S. FEDERAL AGENCY--0.2% United States Department of Veteran Affairs 6.50% due 10/15/05 (cost $986,926).................................. $ 961 $ 959,145 ------------ U.S. TREASURY NOTES--8.7% 5.63% due 2/15/06 (3)............................. 30,000 28,453,200 5.88% due 11/15/05 (3)............................ 20,400 19,660,500 ------------ TOTAL U.S. TREASURY NOTES (cost $50,586,524)................................ 48,113,700 ------------ U.S. TREASURY BONDS--7.8% 6.00% due 2/15/26................................. 8,000 7,308,720 6.88% due 8/15/25 (3)............................. 19,000 19,296,780 7.63% due 2/15/25................................. 15,000 16,507,050 ------------ TOTAL U.S. TREASURY BONDS (cost $45,540,604)................................ 43,112,550 ------------ TOTAL INVESTMENT SECURITIES--91.2% (cost $505,857,350)............................... 505,472,082 ------------
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2) REPURCHASE AGREEMENTS--19.7% Joint Repurchase Agreement Account (Note 3)...... $65,000 $ 65,000,000 Joint Repurchase Agreement Account (Note 3)...... 44,319 44,319,000 ------------ TOTAL REPURCHASE AGREEMENTS (cost $109,319,000).............................. 109,319,000 ------------ TOTAL INVESTMENTS-- (cost $615,176,350*)............................. 110.9% 614,791,082 Liabilities in excess of other assets (4)......... (10.9) (60,515,397) ------- ------------ NET ASSETS-- 100.0% $554,275,685 ======= ============
- ------- * See Note 6 (1) Fair valued security; see Note 2 (2) Inverse floater (3) The security or a portion thereof is out on loan; see Note 2 (4) Reflects a liability for fully collateralized securities on loan; see Note 2 See Notes to Financial Statements 12 SUNAMERICA FEDERAL SECURITIES FUND PORTFOLIO OF INVESTMENTS -- March 31, 1996
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2) - ------------------------------------------------------------------------------- FEDERAL HOME LOAN MORTGAGE CORP.--11.4% 7.50% due 2/01/23 - 6/01/25....................... $ 4,183 $ 4,176,572 10.00% due 1/01/17................................ 3,056 3,362,044 12.50% due 9/30/13................................ 26 27,386 13.50% due 2/01/14................................ 7 8,598 ----------- TOTAL FEDERAL HOME LOAN MORTGAGE CORP. (cost $7,566,708)................................. 7,574,600 ----------- FEDERAL NATIONAL MORTGAGE ASSOCIATION--2.7% 6.00% due 9/01/00(1).............................. 1,840 1,808,957 15.50% due 10/01/12............................... 11 12,683 ----------- TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION (cost $1,810,303)................................. 1,821,640 ----------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--51.9% 7.00% due 3/15/23 - 9/15/23....................... 13,332 12,994,764 8.50% due 3/15/17 - 9/15/24....................... 12,945 13,539,160 9.00% due 6/15/16 - 5/15/17....................... 4,859 5,210,409 11.00% due 11/15/15............................... 559 625,108 11.25% due 8/15/15................................ 82 92,243 12.00% due 5/15/15................................ 93 107,322 12.25% due 9/15/13 - 7/15/15...................... 927 1,073,791 12.50% due 11/15/10 - 6/15/15..................... 212 246,040 13.00% due 1/15/11 - 4/15/15...................... 370 434,863 13.25% due 10/15/13............................... 20 24,018 13.50% due 5/15/11 - 10/15/14..................... 98 116,219 ----------- TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (cost $34,352,991)................................ 34,463,937 ----------- GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II--2.5% 10.00% due 10/20/13 - 3/20/17..................... 581 634,862 11.00% due 12/20/13............................... 95 106,594 12.00% due 3/20/15 - 1/20/16...................... 332 379,360 12.25% due 12/20/14 - 10/20/15.................... 404 464,995 13.00% due 6/20/14................................ 18 21,126 13.75% due 9/20/14................................ 15 17,497 ----------- TOTAL GOVERNMENT NATIONAL MORTGAGE ASSOCIATION II (cost $1,511,074)................................. 1,624,434 -----------
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2) U.S. TREASURY NOTES--13.4% 5.63% due 2/28/01 (2)............................. $ 5,000 $ 4,901,550 6.50% due 8/15/05................................. 4,000 4,015,640 ----------- TOTAL U.S. TREASURY NOTES (cost $9,043,346)................................. 8,917,190 ----------- U.S. TREASURY BONDS--6.9% 6.00% due 2/15/26 (2) (cost $4,598,752) ............................... 5,000 4,567,950 ----------- TOTAL INVESTMENT SECURITIES--88.8% (cost $58,883,174)................................ 58,969,751 ----------- SHORT-TERM SECURITIES--0.3% United States Treasury Bills 4.74% due 5/16/96 (cost $198,814).................................. 200 198,814 ----------- REPURCHASE AGREEMENTS--25.0% Joint Repurchase Agreement Account (Note 3)....... 5,000 5,000,000 Joint Repurchase Agreement Account (Note 3)....... 11,631 11,631,000 ----------- TOTAL REPURCHASE AGREEMENTS (cost $16,631,000)................................ 16,631,000 ----------- TOTAL INVESTMENTS-- (cost $75,712,988*)............................... 114.1% 75,799,565 Liabilities in excess of other assets (3).......... (14.1) (9,357,217) ------- ----------- NET ASSETS-- 100.0% $66,442,348 ======= ===========
- ------- * See Note 6 (1) Fair valued security; see Note 2 (2) The security or a portion thereof is out on loan; see Note 2 (3) Reflects a liability for fully collateralized securities on loan; see Note 2 See Notes to Financial Statements 13 SUNAMERICA DIVERSIFIED INCOME FUND PORTFOLIO OF INVESTMENTS -- March 31, 1996
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2) - -------------------------------------------------------------------------------- CORPORATE BONDS & NOTES--46.7% BROADCASTING--4.4% Argyle Television, Inc. Sr. Subordinated Notes 9.75% due 11/01/05................................ $ 1,000 $ 960,000 NWCG Holding Corp. Sr. Disc. Notes, Series B zero coupon due 6/15/99........................... 5,000 3,612,500 Sinclair Broadcast Group, Inc. Sr. Subordinated Notes 10.00% due 9/30/05................................ 1,000 982,500 ------------ 5,555,000 ------------ BUSINESS SERVICES--2.2% Katz Corp. Sr. Subordinated Notes 12.75% due 11/15/02............................... 2,500 2,803,125 ------------ CABLE--4.2% Echostar Communications Corp. Sr. Secured Disc. Notes zero coupon due 6/01/04(4)........................ 2,000 1,457,500 Echostar Satellite Broadcasting Corp. Sr. Disc. Notes zero coupon due 3/15/04(1)(4)..................... 1,250 753,906 International CableTel, Inc. Sr. Deferred Coupon zero coupon due 4/15/05(4)........................ 1,000 645,000 International CableTel, Inc. Sr. Deferred Coupon zero coupon due 2/01/06(1)(4)..................... 1,000 565,000 United International Holdings, Inc. Sr. Disc. Notes, Series B zero coupon due 11/15/99.......................... 1,500 967,500 United International Holdings, Inc. Sr. Disc. Notes zero coupon due 11/15/99.......................... 1,500 967,500 ------------ 5,356,406 ------------ CELLULAR--2.6% Cellular Communications International, Inc. Sr. Disc. Notes zero coupon due 8/15/00........................... 2,000 1,220,000 Comcast Cellular Corp. Notes zero coupon due 3/05/00........................... 3,000 2,160,000 ------------ 3,380,000 ------------
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2) CHEMICALS--2.6% Arcadian Partners L.P. Sr. Notes, Series B 10.75% due 5/01/05................................ $ 1,000 $ 1,087,500 LaRoche Industries, Inc. Sr. Subordinated Notes 13.00% due 8/15/04................................ 2,000 2,175,000 ------------ 3,262,500 ------------ FINANCE--4.7% CSFB Ltd. Sr. Secured Notes, Series A 7.00% due 11/15/05(1)(2).......................... 4,000 3,812,500 Olympic Financial Ltd. Sr. Notes 13.00% due 5/01/00................................ 2,000 2,170,000 ------------ 5,982,500 ------------ FOOD & BEVERAGES--0.7% Specialty Foods Corp. Sr. Notes 11.13% due 10/01/02............................... 1,000 935,000 ------------ GAMING--2.3% Station Casinos, Inc. Sr. Subordinated Notes 10.13% due 3/15/06................................ 1,000 990,625 Trump Castle Funding, Inc. First Mortgage Notes 11.75% due 11/15/03............................... 2,000 1,950,000 ------------ 2,940,625 ------------ GROCERY--3.5% Kash 'N Karry Food Stores, Inc. Sr. Notes 11.50% due 2/01/03................................ 4,517 4,527,822 ------------ HEALTH SERVICES-- 4.7% Amerisource Distribution Corp. Sr. Debentures 11.25% due 7/15/05................................ 1,028 1,118,086 Dade International, Inc. Sr. Subordinated Notes, Series B 13.00% due 2/01/05................................ 1,500 1,680,000 OrNda Healthcorp. Sr. Subordinated Notes 12.25% due 5/15/02................................ 1,000 1,085,000 Tenet Healthcare Corp. Sr. Subordinated Notes 10.13% due 3/01/05................................ 2,000 2,140,000 ------------ 6,023,086 ------------
14 SUNAMERICA DIVERSIFIED INCOME FUND PORTFOLIO OF INVESTMENTS -- March 31, 1996 -- (continued)
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2) - -------------------------------------------------------------------------------- CORPORATE BONDS & NOTES (CONTINUED) LEISURE--0.8% AMF Group, Inc. Sr. Subordinated Notes 10.88% due 3/15/06 (1)............................ $ 1,000 $ 998,125 ------------ MEDIA--0.8% Hollinger International Publishing, Inc. Sr. Subordinated Notes 9.25% due 2/01/06................................. 1,000 970,000 ------------ METALS--2.1% Renco Metals, Inc. Sr. Notes 12.00% due 7/15/00................................ 2,500 2,678,125 ------------ OIL & GAS--0.4% DeepTech International, Inc. Sr. Secured Notes 12.00% due 12/15/00............................... 500 471,250 ------------ PACKAGING--1.0% Riverwood International Corp. Sr. Subordinated Notes 10.88% due 4/01/08................................ 1,250 1,250,000 ------------ PAGING--1.2% Arch Communications Group, Inc. Sr. Disc. Notes zero coupon due 3/15/08(4)........................ 875 500,938 Paging Network, Inc. Sr. Subordinated Notes 10.13% due 8/01/07................................ 1,000 1,050,000 ------------ 1,550,938 ------------ RETAIL--5.9% County Seat Stores, Inc. Sr. Subordinated Notes 12.00% due 10/01/02............................... 2,000 1,480,000 Hills Stores Co. Sr. Notes 10.25% due 9/30/03................................ 2,000 1,985,000 Thrifty PayLess Holdings, Inc. Sr. Subordinated Notes 12.25% due 4/15/04(6)............................. 2,000 2,420,000 Thrifty PayLess Holdings, Inc. Sr. Subordinated Notes 12.25% due 4/15/04................................ 1,500 1,665,000 ------------ 7,550,000 ------------
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2) TELECOMMUNICATIONS--2.6% PanAmSat, L.P. Sr. Subordinated Notes zero coupon due 8/01/03(4)........................ $ 4,000 $ 3,360,000 ------------ TOTAL CORPORATE BONDS & NOTES (cost $57,173,575)................................ 59,594,502 ------------ FOREIGN BONDS & NOTES--28.8% BANKS--0.8% Unibanco--Uniao de Bancos Brasileiros SA Notes 11.13% due 11/28/97(1)............................ 1,000 1,016,250 ------------ CABLE--4.1% Bell Cablemedia PLC Sr. Disc. Notes zero coupon due 9/15/05(4)........................ 1,750 1,106,875 Comcast UK Cable Partners Ltd. Sr. Disc. Notes zero coupon due 11/15/07(4)....................... 2,000 1,155,000 Diamond Cable Communications PLC Sr. Disc. Notes zero coupon due 12/15/05(4)....................... 2,000 1,170,000 Telewest PLC Sr. Disc. Notes zero coupon due 10/01/07(4)....................... 1,875 1,115,625 Videotron Holdings PLC Sr. Disc. Notes zero coupon due 8/15/05(4)........................ 1,000 635,000 ------------ 5,182,500 ------------ CEMENT--0.8% Cemex SA and Tolmex Debentures 10.00% due 11/05/99............................... 1,000 997,500 ------------ FINANCE--0.8% European Investment Bank Debentures 6.63% due 3/15/00(3).............................. JPY 100,000 1,095,116 ------------ FOOD & BEVERAGES-- 0.8% Fomento Economico Mexicano SA de CV Unsubordinated Notes 9.50% due 7/22/97................................. 1,000 1,005,625 ------------
15 SUNAMERICA DIVERSIFIED INCOME FUND PORTFOLIO OF INVESTMENTS -- March 31, 1996 -- (continued)
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2) - -------------------------------------------------------------------------------- FOREIGN BONDS & NOTES (CONTINUED) GOVERNMENT AGENCY--12.0% Federative Republic of Brazil Variable Rate Disc. Notes 4.25% due 4/15/24(5).............................. $ 4,000 $ 2,025,000 Federative Republic of Brazil Capitalization Bonds 4.00% due 4/15/14................................. 3,184 1,874,358 Republic of Argentina Sr. Unsubordinated Bonds 8.38% due 12/20/03................................ 4,000 3,370,000 Republic of Argentina Bonds 9.25% due 2/23/01................................. 3,000 2,776,875 Republic of Argentina Sr. Unsubordinated Bonds 10.95% due 11/01/99............................... 2,000 2,065,000 United Mexican States Par Bonds 6.25% due 12/31/19................................ 2,000 1,265,000 United Mexican States Global Bonds 9.75% due 2/06/01................................. 2,000 1,961,250 ------------ 15,337,483 ------------ INDUSTRIAL--1.9% International Semi-Tech Microelectronic, Inc. Sr. Secured Disc. Notes zero coupon due 8/15/03(4)........................ 4,000 2,420,000 ------------ INSURANCE--0.9% Terra Nova Insurance United Kingdom Holdings PLC Sr. Notes 10.75% due 7/01/05................................ 1,000 1,121,250 ------------ OIL & GAS--1.6% Bridas Corp. Sr. Notes 12.50% due 11/15/99............................... 2,000 2,082,500 ------------ TELECOMMUNICATIONS--4.3% Comunicacion Celular SA Sr. Deferred Coupon Bond zero coupon due 11/15/03(1)(4)(6)................. 2,750 1,595,000 Fonorola, Inc. Sr. Secured Notes 12.50% due 8/15/02................................ 1,000 1,090,000 Telecom Argentina Debentures 8.38% due 10/18/00................................ 3,000 2,850,000 ------------ 5,535,000 ------------
PRINCIPAL AMOUNT (IN THOUSANDS)/ VALUE SECURITY DESCRIPTION SHARES/WARRANTS (NOTE 2) TOBACCO--0.8% Empresas La Moderna Bearer Notes 10.25% due 11/12/97.............................. $ 1,000 $ 995,000 ------------ TOTAL FOREIGN BONDS & NOTES (cost $36,664,639)............................... 36,788,224 ------------ U.S. GOVERNMENT AND AGENCIES--19.6% FEDERAL HOME LOAN BANK--3.7% 4.35% due 12/02/97............................... 4,850 4,719,656 ------------ FEDERAL NATIONAL MORTGAGE ASSOCIATION--2.6% 6.00% due 9/01/00(2)............................. 3,385 3,327,443 ------------ U.S. TREASURY BONDS--6.9% 6.00% due 2/15/26................................ 1,000 913,590 6.88% due 8/15/25................................ 4,000 4,062,480 11.13% due 8/15/03............................... 3,000 3,832,020 ------------ 8,808,090 ------------ U.S. TREASURY NOTES--6.4% 5.13% due 11/30/98............................... 5,000 4,903,900 7.75% due 2/15/01................................ 3,000 3,205,770 ------------ 8,109,670 ------------ TOTAL U.S. GOVERNMENT AND AGENCIES (cost $26,012,162)............................... 24,964,859 ------------ PREFERRED STOCK--0.9% FOREST PRODUCTS--0.9% SDW Holdings Corp.(2) (cost $950,530)................................. 37,000 1,110,000 ------------ COMMON STOCK--0.2% CABLE--0.2% Echostar Communications Corp.+ (cost $83,740)................................... 9,000 303,750 ------------ WARRANTS--0.0%+ CABLE--0.0% United International Holdings, Inc............... 3,000 7,350 ------------ FOREST PRODUCTS--0.0% SDW Holdings Corp.(2)............................ 3,700 48,100 ------------ TOTAL WARRANTS (cost $58,526)................................... 55,450 ------------ TOTAL INVESTMENT SECURITIES--96.2% (cost $120,943,172).............................. 122,816,785 ------------
16 SUNAMERICA DIVERSIFIED INCOME FUND PORTFOLIO OF INVESTMENTS -- March 31, 1996 -- (continued)
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2) - -------------------------------------------------------------------------------- REPURCHASE AGREEMENT--2.6% Joint Repurchase Agreement Account (Note 3) (cost $3,328,000)................................. $ 3,328 $ 3,328,000 ------------ TOTAL INVESTMENTS-- (cost $124,271,172*).............................. 98.8% 126,144,785 Other assets less liabilities...................... 1.2 1,566,426 -------- ------------ NET ASSETS-- 100.0% $127,711,211 ======== ============
- -------- * See Note 6 + Non-income producing security (1) Resale restricted to qualified institutional buyers (2) Fair valued security; see Note 2 (3) JPY--Security denominated in Japanese Yen (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, 1996 (6) Bond issued as part of a unit which includes an equity component (7) Allocation of net assets by country as of March 31, 1996: United States 67.6% Argentina 10.3% Mexico 4.9% Britain 4.0% Brazil 3.8% Canada 2.7% Colombia 1.2% Bermuda 0.9% Japan 0.8%
See Notes to Financial Statements 17 SUNAMERICA HIGH INCOME FUND PORTFOLIO OF INVESTMENTS -- March 31, 1996
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2) - -------------------------------------------------------------------------------- CORPORATE BONDS & NOTES--82.7% AUTOMOTIVE--1.0% APS, Inc. Sr. Subordinated Notes 11.88% due 1/15/06(1)............................. $ 1,250 $ 1,275,000 ------------ BROADCASTING--4.3% NWCG Holding Corp. Sr. Disc. Notes, Series B zero coupon due 6/15/99........................... 6,250 4,515,625 Sinclair Broadcast Group, Inc. Sr. Subordinated Notes 10.00% due 9/30/05................................ 1,000 982,500 ------------ 5,498,125 ------------ BUSINESS SERVICES--4.6% Katz Corp. Sr. Subordinated Notes 12.75% due 11/15/02............................... 3,500 3,924,375 Sullivan Graphics, Inc. Sr. Subordinated Notes 12.75% due 8/01/05................................ 2,000 1,967,500 ------------ 5,891,875 ------------ CABLE--7.9% Echostar Communications Corp. Sr. Secured Disc. Notes zero coupon due 6/01/04(3)........................ 3,000 2,186,250 Echostar Satellite Broadcasting Corp. Sr. Disc. Notes zero coupon due 3/15/04(1)(3)..................... 3,000 1,809,375 International CableTel, Inc. Sr. Deferred Coupon zero coupon due 4/15/05(3)........................ 2,000 1,290,000 Simmons Cable Co. Sr. Subordinated Notes(2)(6)...................... 3,000 1,800,000 United International Holdings, Inc. Sr. Disc. Notes, Series B zero coupon due 11/15/99.......................... 1,500 967,500 United International Holdings, Inc. Sr. Disc. Notes zero coupon due 11/15/99.......................... 1,500 967,500 Wireless One, Inc. Sr. Notes 13.00% due 10/15/03............................... 1,000 1,062,500 ------------ 10,083,125 ------------
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2) CELLULAR--5.4% Cellular Communications International, Inc. Sr. Disc. Notes zero coupon due 8/15/00........................... $ 4,000 $ 2,440,000 Comcast Cellular Corp. Notes zero coupon due 3/05/00........................... 4,000 2,880,000 Pricecellular Wireless Corp. Sr. Disc. Notes zero coupon due 10/01/03(3)....................... 2,000 1,570,000 ------------ 6,890,000 ------------ CHEMICALS--5.5% Agriculture Minerals & Chemicals Sr. Notes 10.75% due 9/30/03................................ 2,500 2,712,500 Arcadian Partners L.P. Sr. Notes, Series B 10.75% due 5/01/05................................ 1,500 1,631,250 LaRoche Industries, Inc. Sr. Subordinated Notes 13.00% due 8/15/04................................ 2,500 2,718,750 ------------ 7,062,500 ------------ FINANCE--1.7% Olympic Financial Ltd. Sr. Notes 13.00% due 5/01/00................................ 2,000 2,170,000 ------------ FOOD & BEVERAGES--1.5% Specialty Foods Corp. Sr. Notes 11.13% due 10/01/02............................... 2,000 1,870,000 ------------ GAMING--5.6% Capital Gaming International, Inc. Promissory Notes zero coupon due 8/01/95(2)(5)+.................... 20 2,000 Showboat Marina Finance Corp. First Mortgage Notes 13.50% due 3/15/03(1)............................. 1,250 1,279,687 Showboat, Inc. Sr. Subordinated Notes 13.00% due 8/01/09................................ 3,000 3,435,000
18 SUNAMERICA HIGH INCOME FUND PORTFOLIO OF INVESTMENTS -- March 31, 1996 -- (continued)
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2) - -------------------------------------------------------------------------------- CORPORATE BONDS & NOTES (CONTINUED) GAMING (CONTINUED) Station Casinos, Inc. Sr. Subordinated Notes 10.13% due 3/15/06................................ $ 500 $ 495,313 Trump Castle Funding, Inc. First Mortgage Notes 11.75% due 11/15/03............................... 2,000 1,950,000 ------------ 7,162,000 ------------ GROCERY--5.9% Kash 'N Karry Food Stores, Inc. Sr. Notes 11.50% due 2/01/03................................ 7,473 7,492,015 ------------ HEALTH SERVICES--6.1% Amerisource Distribution Corp. Sr. Debentures 11.25% due 7/15/05................................ 2,089 2,272,025 Dade International, Inc. Sr. Subordinated Notes, Series B 13.00% due 2/01/05................................ 2,000 2,240,000 OrNda Healthcorp. Sr. Subordinated Notes 12.25% due 5/15/02................................ 3,000 3,255,000 ------------ 7,767,025 ------------ INDUSTRIAL--2.7% Alvey Systems, Inc. Sr. Subordinated Notes 11.38% due 1/31/03(1)............................. 1,000 1,040,000 J.B. Poindexter & Co. Sr. Notes 12.50% due 5/15/04(2)............................. 3,000 2,460,000 ------------ 3,500,000 ------------ METALS--2.9% Renco Metals, Inc. Sr. Notes 12.00% due 7/15/00................................ 3,500 3,749,375 ------------ OFFICE PRODUCTS--1.7% Williamhouse Regency Delaware, Inc. Sr. Subordinated Notes 13.00% due 11/15/05(1)............................ 2,000 2,210,000 ------------ OIL & GAS--0.7% DeepTech International, Inc. Sr. Secured Notes 12.00% due 12/15/00............................... 1,000 942,500 ------------
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2) PACKAGING--2.0% Riverwood International Corp. Sr. Subordinated Notes 10.88% due 4/01/08................................ $ 2,500 $ 2,500,000 ------------ PAGING--6.6% A+ Network, Inc. Sr. Subordinated Notes 11.88% due 11/01/05............................... 2,000 2,040,000 Arch Communications Group, Inc. Sr. Disc. Notes zero coupon due 3/15/08(3)........................ 1,750 1,001,875 Paging Network, Inc. Sr. Subordinated Notes 10.13% due 8/01/07................................ 3,000 3,150,000 Paging Network, Inc. Sr. Subordinated Notes 11.75% due 5/15/02................................ 2,000 2,180,000 ------------ 8,371,875 ------------ RETAIL--11.6% County Seat Stores, Inc. Sr. Subordinated Notes 12.00% due 10/01/02............................... 3,000 2,220,000 Finlay Fine Jewelry Corp. Sr. Notes 10.63% due 5/01/03................................ 2,000 1,945,000 Hills Stores Co. Sr. Notes 10.25% due 9/30/03................................ 3,000 2,977,500 Thrifty PayLess Holdings, Inc Sr. Subordinated Notes 12.25% due 4/15/04(4)............................. 4,000 4,840,000 Thrifty PayLess Holdings, Inc. Sr. Subordinated Notes 12.25% due 4/15/04................................ 2,500 2,775,000 ------------ 14,757,500 ------------ TELECOMMUNICATIONS--5.0% Brooks Fiber Properties Sr. Disc. Notes zero coupon due 3/01/06(1)(3)..................... 3,500 2,030,000 Intercel, Inc. Sr. Disc. Notes zero coupon due 2/01/06(3)(4)..................... 1,750 1,041,250 PanAmSat, L.P. Sr. Subordinated Notes zero coupon due 8/01/03(3)........................ 4,000 3,360,000 ------------ 6,431,250 ------------ TOTAL CORPORATE BONDS & NOTES (cost $102,506,515)............................... 105,624,165 ------------
19 SUNAMERICA HIGH INCOME FUND PORTFOLIO OF INVESTMENTS -- March 31, 1996 -- (continued)
PRINCIPAL AMOUNT (IN THOUSANDS)/ VALUE SECURITY DESCRIPTION SHARES (NOTE 2) - -------------------------------------------------------------------------------- FOREIGN BONDS & NOTES--10.7% CABLE--7.0% Bell Cablemedia PLC Sr. Disc. Notes zero coupon due 9/15/05(3)....................... $ 3,000 $ 1,897,500 Comcast UK Cable Partners Ltd. Sr. Disc. Notes zero coupon due 11/15/07(3)...................... 2,000 1,155,000 Diamond Cable Communications PLC Sr. Disc. Notes zero coupon due 12/15/05(3)...................... 2,000 1,170,000 Telewest PLC Sr. Disc. Notes zero coupon due 10/01/07(3)...................... 3,750 2,231,250 Videotron Holdings PLC Sr. Disc. Notes zero coupon due 8/15/05(3)....................... 4,000 2,540,000 ------------ 8,993,750 ------------ INDUSTRIAL--2.8% International Semi-Tech Microelectronic, Inc. Sr. Secured Disc. Notes zero coupon due 8/15/03(3)....................... 6,000 3,630,000 ------------ TELECOMMUNICATIONS--0.9% Fonorola, Inc. Sr. Secured Notes 12.50% due 8/15/02............................... 1,000 1,090,000 ------------ TOTAL FOREIGN BONDS & NOTES (cost $13,339,672)............................... 13,713,750 ------------ PREFERRED STOCK--1.9% BANKING--1.0% Chevy Chase Savings Bank, F.S.B. ................ 40,000 1,250,000 ------------ CABLE--0.0% Maryland Cable Partners L.P.+(2)................. 16,009 16,009 ------------ FOREST PRODUCTS--0.9% SDW Holdings Corp. (2)........................... 37,000 1,110,000 ------------ TOTAL PREFERRED STOCK (cost $2,196,539)................................ 2,376,009 ------------
PRINCIPAL AMOUNT (IN THOUSANDS)/ VALUE SECURITY DESCRIPTION SHARES/WARRANTS (NOTE 2) COMMON STOCK--2.2% CABLE--0.4% Echostar Communications Corp.+................... 13,500 $ 455,625 M.L. Opportunity L.P.+(2)........................ 70,106 70,106 MGCP Holdings, Inc.+(2).......................... 1 0 ------------ 525,731 ------------ COMPUTERS--0.6% Open Text Corp.+(1)(2)(7)........................ 70,754 749,550 ------------ GAMING--0.0% Capital Gaming International, Inc.+............................ 30,000 6,563 ------------ GROCERY--0.0% Smittys Supermarkets, Inc........................ 500 4,125 ------------ MEDIA--0.0% TMM, Inc.+(2)(7)................................. 2,000,000 20,000 ------------ TELECOMMUNICATIONS--1.2% PanAmSat Corp. .................................. 50,000 1,525,000 ------------ TOTAL COMMON STOCK (cost $3,105,787)................................ 2,830,969 ------------ WARRANTS--0.1%+ CABLE--0.0% United International Holdings, Inc................................... 3,000 7,350 Wireless One, Inc................................ 3,000 25,500 ------------ 32,850 ------------ FOREST PRODUCTS--0.1% SDW Holdings Corp.(2)............................ 3,700 48,100 ------------ GAMING--0.0% Capital Gaming International, Inc.............................. 45,500 4,266 Casino Magic Finance Corp........................ 24,000 10,620 Fitzgerald Gaming Corp.(1)(2).................... 2,000 20,000 ------------ 34,886 ------------ HOUSEHOLD PRODUCTS--0.0% Chattem, Inc. ................................... 1,500 4,125 ------------ TOTAL WARRANTS (cost $142,001).................................. 119,961 ------------ TOTAL INVESTMENT SECURITIES--97.6% (cost $121,290,514).............................. 124,664,854 ------------
20 SUNAMERICA HIGH INCOME FUND PORTFOLIO OF INVESTMENTS -- March 31, 1996 -- (continued)
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2) - -------------------------------------------------------------------------------- REPURCHASE AGREEMENT--0.8% Joint Repurchase Agreement Account (Note 3) (cost $1,051,000)................................. $ 1,051 $ 1,051,000 ------------ TOTAL INVESTMENTS-- (cost $122,341,514*)............................... 98.4% 125,715,854 Other assets less liabilities...................... 1.6 2,047,149 ---------- ------------ NET ASSETS-- 100.0% $127,763,003 ========== ============
- -------- * See Note 6 + Non-income producing security (1) Resale restricted to qualified institutional buyers (2) Fair valued security; see Note 2 (3) Represents a zero coupon bond which will convert to an interest-bearing security at a later date (4) Bond issued as part of a unit which includes an equity component (5) Bond in default (6) Principal and interest payments for this security are governed by terms set forth in an override agreement dated December 31, 1995. (7) At March 31, 1996 the Fund held restricted securities amounting to 0.6% 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 AS OF DATE OF UNIT MARCH 31, DESCRIPTION ACQUISITION COST 1996 ------------------------------------------------- ----------- ----- --------- Open Text Corp. ................................. 7/12/95 $3.92 $10.59375 TMM, Inc. ....................................... 2/1/95 .83 .01
See Notes to Financial Statements 21 SUNAMERICA TAX EXEMPT INSURED FUND PORTFOLIO OF INVESTMENTS -- March 31, 1996
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2) - -------------------------------------------------------------------------------- MUNICIPAL BONDS--98.8% ALASKA--1.4% Alaska State Housing Finance Corp., 7.50% due 12/01/15+............................... $1,975 $ 2,047,522 ------------ ARIZONA--0.8% Maricopa County, Arizona General Obligation, School District Number 213, 7.00% due 7/01/08+................................ 1,000 1,162,510 ------------ ARKANSAS--0.9% Arkansas State Development Finance Authority, Single Family Mortgage Revenue, 9.00% due 6/01/14+................................ 150 154,643 Arkansas State Development Finance Authority, Single Family Mortgage Revenue, Series A, 9.38% due 8/01/14+................................ 295 306,045 Arkansas State, General Obligation, Capital Appreciation College Savings, Series A zero coupon due 6/01/15........................... 2,575 839,836 ------------ 1,300,524 ------------ CALIFORNIA--10.2% California Housing Finance Agency, Home Mortgage Revenue, Series A, 8.13% due 8/01/19+................................ 840 890,291 California Housing Finance Agency, Home Mortgage Revenue, Series A, 8.20% due 8/01/17+................................ 1,000 1,047,830 Los Angeles, California Convention And Exhibition Center Authority, Lease Revenue, 6.00% due 8/15/10+................................ 1,155 1,228,365 San Francisco, California City & County Redevelopment Agency, Lease Revenue, 6.75% due 7/01/15+................................ 1,000 1,087,750 San Jose, California Redevelopment Agency Tax Allocation, Merged Area Redevelopment Project, 6.00% due 8/01/11+................................ 3,700 3,909,383
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2) CALIFORNIA (CONTINUED) San Jose, California Airport Revenue, 5.88% due 3/01/07+................................ $2,905 $ 3,070,411 San Jose, California Redevelopment Agency Tax Allocation, Merged Area Redevelopment Project, 6.00% due 8/01/07+................................ 3,000 3,214,050 Turlock, California Irrigation District Revenue, Series A 6.00% due 1/01/10+................................ 1,000 1,061,620 ------------ 15,509,700 ------------ COLORADO--0.1% Colorado Housing Finance Authority, Single Family Revenue, Series C, 9.38% due 3/01/12+................................ 140 145,090 ------------ DISTRICT OF COLUMBIA--0.8% District of Columbia Housing Finance Agency, Mortgage Revenue Collateral, Single Family, Series A, 7.75% due 12/01/18+............................... 1,125 1,172,025 ------------ FLORIDA--0.0% Florida Housing Finance Agency, Single Family Mortgage, Series A, 9.25% due 7/01/07+................................ 25 25,031 ------------ GEORGIA--4.2% Georgia State General Obligation, Series C, 6.50% due 4/01/07................................. 1,700 1,901,603 Municipal Electric Authority, Georgia Special Obligation, Fifth Crossover Series, 6.40% due 1/01/09+................................ 1,250 1,373,738 Municipal Electric Authority, Georgia Special Obligation, Fifth Crossover Series, 6.40% due 1/01/13+................................ 1,000 1,086,120 Paulding County, Georgia, General Obligation, School District, 6.00% due 2/01/13+................................ 1,875 1,976,925 ------------ 6,338,386 ------------
22 SUNAMERICA TAX EXEMPT INSURED FUND PORTFOLIO OF INVESTMENTS -- March 31, 1996 -- (continued)
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2) - -------------------------------------------------------------------------------- MUNICIPAL BONDS (CONTINUED) ILLINOIS--5.4% Cook County, Illinois Community College, District Number 508, 7.70% due 12/01/07+............................... $4,000 $ 4,858,520 Illinois Health Facilities Authority, Lutheran General Health System, 7.00% due 4/01/08+................................ 2,850 3,257,179 ------------ 8,115,699 ------------ INDIANA--1.0% Indiana State Housing Finance Authority, Multi- Unit Mortgage Program, Series A, 9.00% due 1/01/14+................................ 1,470 1,490,521 ------------ KENTUCKY--0.2% Kentucky Housing Corp., Multi-Family Revenue Mortgage, Series A, 8.88% due 7/01/19+................................ 250 255,955 ------------ LOUISIANA--1.2% Louisiana State, General Obligation, Series A, 5.80% due 8/01/10+................................ 1,750 1,813,788 ------------ MARYLAND--2.0% Maryland State Community Development Administration, Multi-Family Housing Revenue, 1985 Series B, 8.75% due 5/15/12................................. 3,000 3,071,970 ------------ MASSACHUSETTS--6.5% Massachusetts State Housing Finance Agency, Insured Rental, Series A, 6.60% due 7/01/14+................................ 5,375 5,593,655 Massachusetts State Water Resources Authority, 6.25% due 11/01/10+............................... 4,000 4,247,920 ------------ 9,841,575 ------------ MICHIGAN--1.1% Michigan Municipal Bond Authority, Revenue Capital Appreciation, Local Government Loan, zero coupon due 5/01/17+.......................... 2,875 820,324
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2) MICHIGAN (CONTINUED) Michigan Municipal Bond Authority, Revenue Capital Appreciation, Local Government Loan, zero coupon due 5/01/16+.......................... $2,735 $ 838,934 ------------ 1,659,258 ------------ MISSOURI--4.4% Missouri State Housing Development Commission, Insured, Single Family Mortgage Revenue, 9.38% due 4/01/16+................................ 85 87,876 Sikeston, Missouri Electric, Revenue, 6.20% due 6/01/10+................................ 6,000 6,507,840 ------------ 6,595,716 ------------ NEVADA--3.2% Nevada Housing Division, Single Family Mortgage, Series A, zero coupon due 4/01/16+.......................... 5,945 4,838,338 ------------ NEW HAMPSHIRE--0.2% New Hampshire State Housing Finance Authority, Single Family Residential Mortgage, Series A, 9.25% due 7/01/11+................................ 285 294,767 ------------ NEW JERSEY--1.1% New Jersey Economic Development Authority, Market Transition Facility Revenue, 7.00% due 7/01/04+................................ 1,500 1,712,715 ------------ NEW MEXICO--0.8% Las Cruces, New Mexico Electric Revenue 5.45% due 12/01/08+.............................. 1,000 986,430 New Mexico Mortgage Finance Authority, Single Family Mortgage Revenue, Series C, 8.63% due 7/01/17+................................ 210 222,728 ------------ 1,209,158 ------------ NEW YORK--12.3% New York City Industrial Development Agency, Civic Facility, Revenue, 6.25% due 11/15/06+............................... 2,000 2,184,680 New York City, New York, General Obligation, Series H 5.75% due 3/15/10................................. 1,000 955,640
23 SUNAMERICA TAX EXEMPT INSURED FUND PORTFOLIO OF INVESTMENTS -- March 31, 1996 -- (continued)
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2) - -------------------------------------------------------------------------------- MUNICIPAL BONDS (CONTINUED) NEW YORK (CONTINUED) New York City, New York, General Obligation, Series E, 6.20% due 8/01/07+................................ $2,250 $ 2,450,812 New York City, New York, General Obligation, Series G 6.75% due 2/01/09................................. 1,000 1,046,290 New York City, New York, General Obligation, Series I 6.50% due 3/15/06................................. 1,000 1,043,910 New York State Dormitory Authority Revenue, State University Educational Facilities, Series A, 5.50% due 5/15/10+................................ 1,720 1,728,273 New York State Medical Care Facilities Finance Agency, Revenue, New York Hospital, Mortgage A, 6.75% due 8/15/14+................................ 2,850 3,075,492 Niagara Falls, New York, General Obligation, 7.50% due 3/01/14+................................ 555 679,736 Niagara Falls, New York, General Obligation, 7.50% due 3/01/13+................................ 445 542,184 Niagara Falls, New York, General Obligation, 7.50% due 3/01/18+................................ 500 621,260 Suffolk County, New York Industrial Development Agency, Southwest Sewer Systems Revenue, 6.00% due 2/01/07+................................ 4,000 4,296,600 ------------ 18,624,877 ------------ NORTH CAROLINA--5.0% Harnett County, North Carolina Certificates of Participation, 6.20% due 12/01/09+............................... 2,400 2,576,160 North Carolina Municipal Power Agency, Catawba Electric Revenue, 6.00% due 1/01/11+................................ 2,000 2,112,420 North Carolina Municipal Power Agency, Catawba Electric Revenue, 6.00% due 1/01/10+................................ 2,750 2,922,232 ------------ 7,610,812 ------------
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2) NORTH DAKOTA--0.4% North Dakota State Housing Finance Agency, Single Family Mortgage Revenue, Series A, 7.38% due 7/01/17+................................ $ 635 $ 659,251 ------------ OHIO--4.0% Adams County, Ohio Valley Local School District, General Obligation, 7.00% due 12/01/15+............................... 1,000 1,161,600 Lucas County, Ohio Hospital Revenue, St Vincent Medical Center, 6.50% due 8/15/07+................................ 3,500 3,826,480 Woodridge, Ohio Local School District, General Obligation, 6.80% due 12/01/14+............................... 1,000 1,126,540 ------------ 6,114,620 ------------ OKLAHOMA--2.0% Grand River Dam Authority, Oklahoma Electric Revenue, 5.75% due 6/01/08+................................ 1,850 1,942,482 Oklahoma State Industrial Authority Revenue Refunding Integris Baptist Health Systems, 6.00% due 8/15/10+................................ 1,000 1,052,220 ------------ 2,994,702 ------------ OREGON--0.3% Oregon Health Sciences University Revenue zero coupon due 7/01/16+.......................... 1,500 459,225 ------------ PENNSYLVANIA--5.9% Northeastern Pennsylvania Hospital & Education Authority, Health Care Revenue, 6.20% due 1/01/04+................................ 2,000 2,163,220 Pennsbury, Pennsylvania School District, General Obligation, 6.80% due 8/15/14+................................ 3,800 4,299,320 Pennsylvania Housing Finance Agency, Multi-Family Mortgage, 9.38% due 8/01/28+................................ 170 174,124 Pennsylvania State Industrial Development Authority, Economic Development, Series B, 7.00% due 1/01/07+................................ 2,000 2,302,420 ------------ 8,939,084 ------------
24 SUNAMERICA TAX EXEMPT INSURED FUND PORTFOLIO OF INVESTMENTS -- March 31, 1996 -- (continued)
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2) - -------------------------------------------------------------------------------- MUNICIPAL BONDS (CONTINUED) PUERTO RICO--3.8% Puerto Rico Commonwealth, General Obligation 5.50% due 7/01/08+................................ $3,000 $ 3,080,550 Puerto Rico Electric Power Authority, Power Revenue Refunding, 7.00% due 7/01/06................................. 1,435 1,632,040 University of Puerto Rico, University System Revenue Refunding, Series N, 6.25% due 6/01/08+................................ 1,000 1,103,250 ------------ 5,815,840 ------------ RHODE ISLAND--0.7% Rhode Island Housing & Mortgage Finance Corp., Supplementary Insurance, Series B, 8.38% due 10/01/16+............................... 1,000 1,060,010 ------------ TEXAS--12.8% Bexar County, Texas Health Facilities Development Corp., Hospital Revenue, 6.75% due 8/15/19+................................ 4,000 4,276,760 Grand Prairie, Texas Health Facilities Development Corp., Hospital Revenue, 6.88% due 11/01/10+............................... 1,600 1,763,168 Harris County, Texas Hospital District Mortgage, Revenue, 7.40% due 2/15/10+................................ 2,500 2,997,325 Houston, Texas Water And Sewer Systems, Revenue, Series C, zero coupon due 12/01/09+......................... 1,420 656,764 Houston, Texas Water Conveyance Systems Contract, Certificates of Participation, 6.13% due 12/15/08+............................... 1,250 1,355,238 Houston, Texas Water Conveyance Systems Contract, Certificates of Participation 6.13% due 12/15/09+............................... 1,000 1,082,630 Houston, Texas Water Conveyance Systems Contract, Certificates of Participation, 6.38% due 12/15/07+............................... 3,500 3,857,000 Sherman, Texas Independent School District, General Obligation, 6.50% due 2/15/20................................. 3,000 3,328,320 ------------ 19,317,205 ------------
PRINCIPAL AMOUNT VALUE SECURITY DESCRIPTION (IN THOUSANDS) (NOTE 2) UTAH--1.2% Utah State Housing Finance Agency, Single Family Mortgage, Series B, 7.38% due 7/01/16+................................ $ 260 $ 268,884 Utah State Housing Finance Agency, Single Family Mortgage, Series D, 7.50% due 7/01/16+................................ 1,410 1,495,728 ------------ 1,764,612 ------------ WASHINGTON--2.6% Washington State Housing Finance Commission, Multi-Family Mortgage Revenue, Series A, 9.13% due 7/01/10+................................ 380 405,802 Washington State Series B, General Obligation, 6.00% due 6/01/11................................. 3,400 3,598,288 ------------ 4,004,090 ------------ WEST VIRGINIA--2.1% West Virginia State Housing Development Fund, Series A, 7.25% due 5/01/17+................................ 3,000 3,122,520 ------------ WISCONSIN--0.2% Wisconsin Housing & Economic Development Authority, Homeownership Revenue, 1985 Issue III, 9.13% due 6/01/05+................................ 145 148,971 Wisconsin Housing & Economic Development Authority, Homeownership Revenue, 1985 Issue I, 9.13% due 12/01/11+............................... 215 218,651 ------------ 367,622 ------------ TOTAL INVESTMENT SECURITIES--98.8% (COST $140,630,966)............................... 149,454,718 ------------ TOTAL INVESTMENTS-- (COST $140,630,966*).............................. 98.8% 149,454,718 Other assets less liabilities...................... 1.2 1,817,432 ------ ------------ NET ASSETS-- 100.0% $151,272,150 ====== ============
- ------- * See Note 6 + All or part of this security is insured by Municipal Bond Insurance Association ("MBIA"), Bond Insurance Guarantee ("BIG"), Financial Guarantee Insurance Corp. ("FGIC"), Financial Security Assurance ("FSA") or Capital Guarantee ("CAP") ($132,054,821 or 87.3% of total assets). See Notes to Financial Statements 25 SUNAMERICA INCOME FUNDS NOTES TO FINANCIAL STATEMENTS -- March 31, 1996 Note 1. Organization SunAmerica Income Funds is an open-end diversified management investment company organized as a Massachusetts business trust (the "Trust"). It currently consists of five different investment series (each, a "Fund" and collectively, the "Funds"). Each Fund is a separate series of the Trust with distinct investment objectives and/or strategies. Each Fund is managed by SunAmerica Asset Management Corp. (the "Adviser" or "SAAMCo"). An investor may invest in one or more of the following Funds: SunAmerica U.S. Government Securities Fund, SunAmerica Federal Securities Fund, SunAmerica Diversified Income Fund, SunAmerica High Income Fund and SunAmerica Tax Exempt Insured Fund. The Funds are considered to be separate entities for financial and tax reporting purposes. The investment objectives for each of the Funds are as follows: U.S. Government Securities Fund seeks high current income consistent with relative safety of capital by investing primarily in securities issued or guaranteed by the U.S. government, or any agency or instrumentality thereof. Federal Securities Fund seeks current income, with capital appreciation as a secondary objective, by investing primarily in securities issued or guaranteed by the U.S. government or any agency or instrumentality thereof. Diversified Income Fund seeks a high level of current income consistent with moderate investment risk, with preservation of capital as a secondary objective. High Income Fund seeks maximum current income by investing primarily in high-yield, high-risk corporate bonds. Tax Exempt Insured Fund seeks a high level of current income exempt from Federal income taxes as is consistent with preservation of capital. Each Fund currently offers two classes of shares. Class A shares are offered at net asset value per share plus an initial sales charge. Class B shares are offered without an initial sales charge, although a declining contingent sales charge may be imposed on redemptions made within six years of purchase. Additionally, 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 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. 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 26 SUNAMERICA INCOME FUNDS NOTES TO FINANCIAL STATEMENTS -- March 31, 1996 -- (continued) 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 closing bid price on the NYSE or other primary exchange for that day. However, if the last sale price on the NYSE is different than the last sale price on any other exchange, the NYSE price is used. 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 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 first business day following 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 27 SUNAMERICA INCOME FUNDS NOTES TO FINANCIAL STATEMENTS -- March 31, 1996 -- (continued) 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 for 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, 1996, the reclassification arising from book/tax differences resulted in increases (decreases) to the components of net assets. The following table discloses the effect of such differences reclassified between accumulated undistributed net investment income/loss, accumulated undistributed net realized gain/loss on investments and 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, 1996.
ACCUMULATED ACCUMULATED UNDISTRIBUTED NET UNDISTRIBUTED NET INVESTMENT REALIZED PAID-IN INCOME/(LOSS) GAIN/(LOSS) CAPITAL ----------------- ----------------- ---------- U.S. Government Securities Fund........................ $(7,032,191) $7,032,191 $ -- Federal Securities Fund...... (201,652) 201,895 (243) Diversified Income Fund...... (239,927) 345,885 (105,958) High Income Fund............. 593,468 (593,468) -- Tax Exempt Insured Fund...... (1,797) 1,968,588 (1,966,791)
Dividends from net investment income are paid monthly. Capital gain distributions, if any, are paid annually. USE OF ESTIMATES IN FINANCIAL STATEMENT PREPARATION: The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from these estimates. INVESTMENT SECURITIES LOANED: During the year ended March 31, 1996, 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 102% 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. Alternatively, an interest expense allocation is recorded on the books when the cash collateral from the securities on loan is used to 28 SUNAMERICA INCOME FUNDS NOTES TO FINANCIAL STATEMENTS -- March 31, 1996 -- (continued) cover an overdraft. 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, 1996, U.S. Government Securities Fund and Federal Securities Fund have loaned securities having a value of $63,740,849 and $9,531,092, respectively, and held cash collateral of $63,493,750 and $9,500,000, respectively, for these loans. The value of the collateral was sufficient at the time the loan agreements were entered into. As a result of an increase in the market value of the loaned securities on the last business day of the fiscal year, the Funds were furnished with additional collateral on the following business day. FOREIGN CURRENCY TRANSLATION: The books and records of the Funds are maintained in U.S. dollars. 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. 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. Realized foreign exchange gains and losses on other assets and liabilities and change in unrealized foreign exchange gains and losses on other assets and liabilities include foreign exchange gains and losses from currency gains or losses between the trade and settlement dates of securities transactions, the difference between the amounts of interest, dividends and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid and changes in the unrealized foreign exchange gains and losses relating to other assets and liabilities arising as a result of changes in the exchange 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 29 SUNAMERICA INCOME FUNDS NOTES TO FINANCIAL STATEMENTS -- March 31, 1996 -- (continued) 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 or other appropriate allocation methods. Note 3. 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, 1996, the U.S. Government Securities Fund, Federal Securities Fund, Diversified Income Fund and High Income Fund had a 60.4%, 4.6%, 3.1% and 1.0% undivided interest which represented $65,000,000, $5,000,000, $3,328,000 and $1,051,000 respectively, in principal amount in a joint repurchase agreement with Chemical Securities, Inc. In addition, the U.S. Government Securities Fund and Federal Securities Fund had a 38.1% and 10.0% undivided interest which represented $44,319,000 and $11,631,000 respectively, in principal amount in a joint repurchase agreement with Yamaichi International (America), Inc. As of such date, the repurchase agreements in the joint account and the collateral therefore were as follows: Chemical Securities, Inc. Repurchase Agreement, 5.35% dated 3/29/96, in the principal amount of $107,576,000 repurchase price $107,623,961 due 4/01/96 collateralized by $50,000,000 U.S. Treasury Bill 5.07% due 10/17/96, $50,000,000 U.S. Treasury Bill 5.07% due 10/17/96 and $12,815,000 U.S. Treasury Bill 5.00% due 6/27/96, approximate aggregate value $109,828,144. Yamaichi International, Inc. Repurchase Agreement, 5.45% dated 3/29/96, in the principal amount of $116,221,000 repurchase price $116,273,784 due 4/01/96 collateralized by $12,385,000 U.S. Treasury Bond 8.50% due 2/15/20, $20,850,000 U.S. Treasury Bond 9.875% due 11/15/15, $12,500,000 U.S. Treasury Bond 12.00% due 8/15/13, $20,000,000 U.S. Treasury Note 7.625% due 2/15/07, $19,430,000 U.S. Treasury Bill 5.33% due 4/18/96 and $15,865,000 U.S. Treasury Note 6.625% due 3/31/97, approximate aggregate value $117,381,445. Note 4. 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 30 SUNAMERICA INCOME FUNDS NOTES TO FINANCIAL STATEMENTS -- March 31, 1996 -- (continued) "Agreement") with SAAMCo. Under the Agreement, SAAMCo provides continuous supervision of a Fund's portfolio and administers its corporate affairs, subject to general review by the Trustees. In connection therewith, SAAMCo furnishes the Funds with office facilities, maintains certain of the Funds' books and records, and pays the salaries and expenses of all personnel, including officers of the Funds, who are employees of SAAMCo and its affiliates. The Funds pay SAAMCo a monthly investment advisory and management fee calculated daily at the following annual percentages of each Fund's net assets:
MANAGEMENT ASSETS FEES ----------------- ---------- U.S. Government Securities Fund and High In- come Fund.................................... $0 - $200 million 0.75% > $200 million 0.72% > $400 million 0.55% Federal Securities Fund....................... $0 - $25 million 0.55% > $25 million 0.50% > $50 million 0.45% Diversified Income Fund....................... $0 - $350 million 0.65% > $350 million 0.60% Tax Exempt Insured Fund....................... $0 - $350 million 0.50% > $350 million 0.45%
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, 1996, no such reimbursement was required. The Trust, on behalf of each Fund, has a Distribution Agreement with SunAmerica Capital Services, Inc. ("SACS"), an indirect wholly owned subsidiary of SunAmerica Inc. 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 trustees and approved by its shareholders. Pursuant to such rule, the Trustees and the shareholders of each class of shares of each Fund have adopted Distribution Plans, hereinafter referred to as the "Class A Plan" 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 and Class B Plan, the Distributor receives payments from a Fund at an annual rate of up to 0.10% and .75%, respectively, of average daily net assets of such Fund's Class 31 SUNAMERICA INCOME FUNDS NOTES TO FINANCIAL STATEMENTS -- March 31, 1996 -- (continued) A and 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 of up to 0.25% of the aggregate average daily net assets of such class of shares for payments to broker-dealers for providing continuing account maintenance. Accordingly, for the year ended March 31, 1996, SACS received fees (see Statement of Operations) based upon the aforementioned rates (of which $44,445 and $102,796 was waived for the U.S. Government Securities Fund Class A and High Income Fund Class B, respectively). SACS receives sales charges on each Fund's Class A shares, portions of which are reallowed to affiliated broker-dealers and non-affiliated broker- dealers. SACS also receives the proceeds of contingent deferred sales charges paid by investors in connection with certain redemptions of Class B fund shares. SACS has advised the Funds that for the year ended March 31, 1996, the proceeds received from Class A sales (and paid out to affiliated and non-affiliated broker-dealers) and Class B redemptions are as follows:
CLASS A CLASS B ------------------------------------- ------------ CONTINGENT SALES AFFILIATED NON-AFFILIATED DEFERRED CHARGES BROKER-DEALERS BROKER-DEALERS SALES CHARGE ------- -------------- -------------- ------------ U.S. Government Securi- ties Fund.............. $34,701 $23,047 $6,065 $1,767,247 Federal Securities Fund. 51,871 26,836 17,101 92,902 Diversified Income Fund. 59,956 41,282 9,079 353,984 High Income Fund........ 110,516 75,941 17,311 379,578 Tax Exempt Insured Fund. 118,382 78,270 19,723 113,374
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, 1996, the Funds incurred the following expenses to reimburse SAFS pursuant to the terms of the Service Agreement:
PAYABLE AT EXPENSES MARCH 31, 1996 ------------------- --------------- CLASS A CLASS B CLASS A CLASS B -------- ---------- ------- ------- U.S. Government Securities Fund.......... $244,448 $1,144,417 $23,517 $81,007 Federal Securities Fund.................. 73,514 84,513 7,523 4,929 Diversified Income Fund.................. 35,524 274,396 3,618 20,950 High Income Fund......................... 90,979 282,690 7,212 18,901 Tax Exempt Insured Fund.................. 290,723 62,405 23,046 5,479
32 SUNAMERICA INCOME FUNDS NOTES TO FINANCIAL STATEMENTS -- March 31, 1996 -- (continued) Note 5. Purchases and Sales of Investment Securities The aggregate cost of purchases and proceeds from sales and maturities of long-term investments (excluding U.S. Government securities in the Diversified Income and High Income Funds, respectively) during the year ended March 31, 1996 were as follows:
U.S. GOVERNMENT FEDERAL DIVERSIFIED HIGH TAX EXEMPT SECURITIES SECURITIES INCOME INCOME INSURED FUND FUND FUND FUND FUND ------------ ------------ ------------ ------------ ----------- Aggregate purchases..... $880,205,959 $209,939,662 $138,628,017 $274,280,092 $72,677,050 ============ ============ ============ ============ =========== Aggregate sales......... $970,794,439 $216,971,920 $155,167,680 $339,295,010 $88,075,655 ============ ============ ============ ============ ===========
Note 6. Portfolio Securities (Tax Basis) The costs of securities and the aggregate appreciation and depreciation of securities for federal income tax purposes at March 31, 1996 were as follows:
U.S. GOVERNMENT FEDERAL DIVERSIFIED HIGH TAX EXEMPT SECURITIES SECURITIES INCOME INCOME INSURED FUND FUND FUND FUND FUND ------------ ----------- ------------ ------------ ------------ Cost (tax basis)........ $616,853,175 $76,050,488 $124,864,491 $122,379,322 $140,674,446 ============ =========== ============ ============ ============ Appreciation............ $ 9,123,730 $ 624,633 $ 5,457,011 $ 8,226,185 $ 8,971,081 Depreciation............ (11,185,823) (875,556) (4,176,717) (4,889,653) (190,809) ------------ ----------- ------------ ------------ ------------ Unrealized appreciation/ depreciation--net...... $ (2,062,093) $ (250,923) $ 1,280,294 $ 3,336,532 $ 8,780,272 ============ =========== ============ ============ ============
Capital losses and currency losses after October 31 within the taxable year are deemed to arise on the first business day of the Funds' net taxable year. Accordingly, the U.S. Government Securities Fund, Federal Securities Fund, Diversified Income Fund and High Income Fund incurred and elected to defer capital losses of $131,079, $13,833, $875,593 and $1,342,211, respectively, to the taxable year ended March 31, 1997. Diversified Income Fund incurred and elected to defer currency losses of $7,779 to the taxable year ended March 31, 1997. 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, 1996, U.S. Government Securities Fund, Federal Securities Fund, Diversified Income Fund, High Income Fund and Tax Exempt Insured Fund had capital loss carryforwards of $28,309,121, $796,117, $31,843,774, $44,735,276 and $8,864,098, respectively, which were available to the extent provided in regulations and which will expire between 1997-2004. To the extent that these carryover losses are used to offset future capital gains, it is probable that the gains so offset will not be distributed. U.S. Government Securities Fund and Federal Securities Fund utilized capital loss carryforwards of $2,453,957 and $2,115,737, respectively, to offset the Funds' net taxable gains realized and recognized in the year ended March 31, 1996. Tax Exempt Insured Fund had capital loss carryforwards expire of $1,573,186 in the year ended March 31, 1996. 33 SUNAMERICA INCOME FUNDS NOTES TO FINANCIAL STATEMENTS -- March 31, 1996 -- (continued) Note 7. Capital Share Transactions Transactions in capital shares of each class of each series were as follows:
U.S. GOVERNMENT SECURITIES FUND ---------------------------------------------------------------------------------------------------------- CLASS A CLASS B -------------------------------------------------- ------------------------------------------------------ FOR THE FOR THE FOR THE FOR THE YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, 1996 MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1995 ------------------------ ------------------------ -------------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------- ------------ ---------- ------------ ----------- ------------- ----------- ------------- Shares sold..... 13,131,939 $112,301,977 2,544,560 $ 20,825,728 9,360,875 $ 79,755,257 10,324,909 $ 84,569,618 Reinvested dividends...... 410,804 3,519,824 254,756 2,091,612 1,974,201 16,845,172 2,655,859 21,791,813 Shares redeemed. (7,702,779) (65,848,530) (3,015,559) (24,712,085) (33,167,131) (282,936,370) (46,389,311) (380,228,772) ---------- ------------ ---------- ------------ ----------- ------------- ----------- ------------- Net increase (decrease)..... 5,839,964 $ 49,973,271 (216,243) $ (1,794,745) (21,832,055) $(186,335,941) (33,408,543) $(273,867,341) ========== ============ ========== ============ =========== ============= =========== ============= FEDERAL SECURITIES FUND ---------------------------------------------------------------------------------------------------------- CLASS A CLASS B -------------------------------------------------- ------------------------------------------------------ FOR THE FOR THE FOR THE FOR THE YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, 1996 MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1995 ------------------------ ------------------------ -------------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------- ------------ ---------- ------------ ----------- ------------- ----------- ------------- Shares sold..... 4,123,463 $ 43,030,581 859,631 $ 8,566,946 814,487 $ 8,530,005 895,438 $ 9,024,876 Reinvested dividends...... 111,354 1,172,357 3,735 36,932 153,756 1,604,033 312,480 3,098,412 Shares redeemed. (998,837) (10,515,594) (294,336) (2,931,987) (5,023,383) (52,553,961) (2,574,743) (25,581,102) ---------- ------------ ---------- ------------ ----------- ------------- ----------- ------------- Net increase (decrease)..... 3,235,980 $ 33,687,344 569,030 $ 5,671,891 (4,055,140) $(42,419,923) (1,366,825) $ (13,457,814) ========== ============ ========== ============ =========== ============= =========== ============= DIVERSIFIED INCOME FUND ---------------------------------------------------------------------------------------------------------- CLASS A CLASS B -------------------------------------------------- ------------------------------------------------------ FOR THE FOR THE FOR THE FOR THE YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, 1996 MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1995 ------------------------ ------------------------ -------------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------- ------------ ---------- ------------ ----------- ------------- ----------- ------------- Shares sold..... 2,955,037 $ 12,861,772 1,911,715 $ 8,713,009 2,801,046 $ 12,136,400 13,562,550 $ 62,234,623 Reinvested dividends...... 195,515 841,738 179,521 791,930 1,377,852 5,943,373 1,784,570 7,929,584 Shares redeemed. (2,674,706) (11,458,461) (1,294,317) (5,722,753) (10,248,505) (44,195,135) (19,804,466) (88,218,971) ---------- ------------ ---------- ------------ ----------- ------------- ----------- ------------- Net increase (decrease)..... 475,846 $ 2,245,049 796,919 $ 3,782,186 (6,069,607) $ (26,115,362) (4,457,346) $ (18,054,764) ========== ============ ========== ============ =========== ============= =========== ============= HIGH INCOME FUND ---------------------------------------------------------------------------------------------------------- CLASS A CLASS B -------------------------------------------------- ------------------------------------------------------ FOR THE FOR THE FOR THE FOR THE YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, 1996 MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1995 ------------------------ ------------------------ -------------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------- ------------ ---------- ------------ ----------- ------------- ----------- ------------- Shares sold..... 8,359,027 $ 57,916,776 4,517,500 $32,145,067 12,736,686 $ 88,552,474 18,144,837 $ 132,472,191 Reinvested dividends...... 368,814 2,562,289 285,804 2,048,889 977,729 6,803,888 982,211 7,057,922 Shares redeemed. (9,390,977) (64,906,948) (3,162,108) (23,140,910) (22,505,915) (155,995,199) (13,525,747) (100,373,794) ---------- ------------ ---------- ------------ ----------- ------------- ----------- ------------- Net increase (decrease)..... (663,136) $ (4,427,883) 1,641,196 $11,053,046 (8,791,500) $ (60,638,837) 5,601,301 $ 39,156,319 ========== ============ ========== ============ =========== ============= =========== =============
34 SUNAMERICA INCOME FUNDS NOTES TO FINANCIAL STATEMENTS -- March 31, 1996 -- (continued)
TAX EXEMPT INSURED FUND ---------------------------------------------------------------------------------------------------- CLASS A CLASS B -------------------------------------------------- ------------------------------------------------ FOR THE FOR THE FOR THE FOR THE YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, 1996 MARCH 31, 1995 MARCH 31, 1996 MARCH 31, 1995 ------------------------ ------------------------ ------------------------ ---------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------- ------------ ---------- ------------ ---------- ------------ --------- ----------- Shares sold.......... 561,023 $ 7,051,303 1,153,762 $ 13,706,273 1,455,371 $ 18,163,807 1,052,706 $12,534,448 Reinvested dividends. 264,543 3,294,346 353,885 4,191,241 55,207 688,264 52,888 626,133 Shares redeemed...... (2,378,115) (29,684,179) (3,966,717) (46,779,234) (1,292,255) (16,166,468) (701,719) (8,287,841) ---------- ------------ ---------- ------------ ---------- ------------ --------- ----------- Net increase (decrease).......... (1,552,549) $(19,338,530) (2,459,070) $(28,881,720) 218,323 $ 2,685,603 403,875 $ 4,872,740 ========== ============ ========== ============ ========== ============ ========= ===========
Note 8. 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. Borrowings under the line of credit will commence when the Fund's cash shortfall exceeds $100,000. During the year ended March 31, 1996, the High Income Fund had borrowings outstanding for 46 days under the line of credit and incurred $43,583 in interest charges related to these borrowings. The High Income Fund's average amount of debt under the line of credit for the days utilized during the year ended March 31, 1996 was $4,797,070 at a weighted average interest of 7.01%. The Funds did not have any outstanding borrowings at March 31, 1996. Note 9. Trustees Retirement Plan The Trustees (and Directors) of the SunAmerica Family of Mutual Funds have adopted the SunAmerica Disinterested Trustees' and Directors' Retirement Plan (the "Retirement Plan") effective January 1, 1993 for the unaffiliated Trustees. The Retirement Plan provides generally that if an unaffiliated Trustee who has at least 10 years of consecutive service as a Disinterested Trustee of any of the SunAmerica mutual funds (an "Eligible Trustee") retires after reaching age 60 but before age 70 or dies while a Trustee, such person will be eligible to receive a retirement or death benefit from each SunAmerica mutual fund with respect to which he or she is an Eligible Trustee. As of each birthday, prior to the 70th birthday, but in no event for a period greater than 10 years, each Eligible Trustee will be credited with an amount equal to 50% of his or her regular fees (excluding committee fees) for services as a Disinterested Trustee of each SunAmerica mutual fund for the calendar year in which such birthday occurs. In addition, an amount equal to 8.5% of any amounts credited under the preceding clause during prior years is added to each Eligible Trustee's Account until such Eligible Trustee reaches his or her 70th birthday. An Eligible Trustee may receive any benefits payable under the Retirement Plan, at his or her election, either in one lump sum or in up to fifteen annual installments. As of March 31, 1996, U.S. Government Securities Fund, Federal Securities Fund, Diversified Income Fund, High Income Fund and Tax Exempt Insured Fund had accrued $30,620, $2,882, $5,893, $5,951 and $6,696, respectively, for the Retirement Plan, which is included in accrued expenses on the Statement of Assets and Liabilities and for the year ended March 31, 1996 expensed $17,403, $1,755, $3,929, $3,681 and $4,188, respectively, for the Retirement Plan, which is included in Trustees' fees and expenses on the Statement of Operations. 35 SUNAMERICA INCOME FUNDS REPORT OF INDEPENDENT ACCOUNTANTS To the 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, 1996, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended 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, 1996 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP 1177 Avenue of the Americas New York, New York May 13, 1996 36 SUNAMERICA INCOME FUNDS SHAREHOLDER TAX INFORMATION--(UNAUDITED) 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, 1996. The information and distributions reported herein may differ from the information and distributions taxable to the shareholders for the calendar year ending December 31, 1996. 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 1997. During the year ended March 31, 1996 Tax Exempt Insured Fund paid tax exempt interest dividends of $.59 per share to Class A shareholders and $.51 per share to Class B shareholders. For the year ended March 31, 1996, 1.2% of the dividends paid from ordinary income by High Income Fund qualified for the 70% dividends received deductions for corporations. 37 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. Appendix-1 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 an investment security and not distinctly or predominantly speculative. Appendix-2 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. Issuers rated Not Prime do not fall within any of the Prime rating categories. Appendix-3 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 Ratings Services, a Division of The McGraw-Hill Companies, Inc. ("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 of bankruptcy, reorganization or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights. Appendix-4 AAA Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the highest-rated issues only in small degree. A Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. BBB Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than for debt in higher-rated categories. Debt rated BB, B, CCC, CC and C are regarded as having predominantly speculative characteristics with respect to capacity to pay interest and repay principal. BB indicates the least degree of speculation and C the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposure to adverse conditions. BB Debt rated BB has less near-term vulnerability to default than other speculative grade debt. However, it faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to inadequate capacity to meet timely interest and principal payment. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB - rating. B Debt rated B has a greater vulnerability to default but presently has the capacity to meet interest payments and principal repayments. Adverse business, financial or economic conditions would likely impair capacity or willingness to pay interest and repay principal. The B rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BB or BB-rating. CCC Debt rated CCC has a current identifiable vulnerability to default, and is dependent upon favorable business, financial and economic conditions to meet timely payments of interest and repayments of principal. In the event of adverse business, financial or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The CCC rating category is also used for debt subordinated to senior debt that is assigned an actual or implied B or B- rating. CC The rating CC is typically applied to debt subordinated to senior debt which is assigned an actual or implied CCC rating. Appendix-5 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 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. Appendix-6 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. 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. Appendix-7 C This rating is assigned to short-term debt obligations with a doubtful capacity for payment. D This rating indicates that the issue is either in default or is expected to be in default upon maturity. The commercial paper rating is not a recommendation to purchase or sell a security. The ratings are based on current information furnished to Standard & Poor's by the issuer or obtained from other sources it considers reliable. The ratings may be changed, suspended, or withdrawn as a result of changes in or unavailability of such information. Appendix-8 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, 1996. 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. Incorporated herein by reference to Post-Effective Amendment No. 20 to Registrant's Registration Statement on form N-1A filed on July 27, 1995. (2) By-Laws, as amended. Incorporated herein by reference to Post-Effective Amendment No. 20 to Registrant's Registration Statement on form N-1A filed on July 27, 1995. (3) Inapplicable. (4) Specimen Certificates. (5) Investment Advisory and Management Agreement between Registrant and SunAmerica Asset Management Corp. Incorporated herein by reference to Post-Effective Amendment No. 20 to Registrant's Registration Statement on form N-1A filed on July 27, 1995. (6) (a) Distribution Agreement between Registrant and SunAmerica Capital Services, Inc. Incorporated herein by reference to Post-Effective Amendment No. 20 to Registrant's Registration Statement on form N-1A filed on July 27, 1995. (b) Dealer Agreement. (7) Directors'/Trustees' Retirement Plan. (8) Custodian Agreement between Registrant and State Street Bank and Trust Company. (9) (a) Transfer Agency and Service Agreement between Registrant and State Street Bank and Trust Company. (b) Service Agreement between Registrant and SunAmerica Fund Services, Inc. Incorporated herein by reference to Post- Effective Amendment No. 20 to Registrant's Registration Statement on form N-1A filed on July 27, 1995. (10) Opinion of Counsel. (11) Consent of Independent Accountants. (12) Inapplicable. (13) Inapplicable. (14) Model Retirement Plan. Incorporated herein by reference to Post-Effective Amendment No. 20 to Registrant's Registration Statement on form N-1A filed on July 27, 1995. (15) Distribution Plans pursuant to Rule 12b-1 (Class A Shares and Class B Shares). (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 June 30, 1996 June 30, 1996 - --------------------------------- ---------------- ---------------- U.S. Government Securities Fund 6,310 17,893 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 June 30, 1996 June 30, 1996 - --------------------------------- ---------------- ---------------- Federal Securities Fund 3,333 1,829 Shares of Beneficial Interest ($.01 par value) Diversified Income Fund 1,099 4,953 Shares of Beneficial Interest ($.01 par value) High Income Fund 3,119 4,806 Shares of Beneficial Interest ($.01 par value) Tax Exempt Insured Fund 3,660 651 Shares of Beneficial Interest
($.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. 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 C-3 (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:
Name and Principal Position With Position with the Business Address Underwriter Registrant - ------------------ ------------- ---------------- J. Steven Neamtz President None The SunAmerica Center 733 Third Avenue New York, NY 10017-3204 Peter A. Harbeck Director President The SunAmerica Center 733 Third Avenue New York, NY 10017-3204 Gary W. Krat Director None The SunAmerica Center 733 Third Avenue New York, NY 10017-3204 Robert M. Zakem Executive Vice Secretary & The SunAmerica Center President, and Chief 733 Third Avenue General Counsel Compliance New York, NY and Director Officer 10017-3204 Joseph M. Tumbler Director None SunAmerica Inc. 1 Sun America Center Century City Los Angeles, CA 90067-6022
C-4
Name and Principal Position With Position with the Business Address Underwriter Registrant - ------------------ ------------- ---------------- Susan L. Harris Secretary None SunAmerica Inc. 1 Sun America Center Century City Los Angeles, CA 90067-6022 Steven E. Rothstein Treasurer None The SunAmerica Center 733 Third Avenue New York, NY 10017-3204
(c) Inapplicable. ITEM 30. LOCATION OF ACCOUNTS AND RECORDS. SunAmerica Asset Management Corp., The SunAmerica Center, 733 Third Avenue, New York, NY 10017-3204, or an affiliate thereof, will maintain physical possession of each such accounts, books or other documents 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 419572, 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. 21 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. 21 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 18th day of July, 1996. 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. 21 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 and Trustee July 18, 1996 Peter A. Harbeck (Principal Executive Officer) * Treasurer (Principal July 18, 1996 Peter C. Sutton Financial and Accounting Officer) * Trustee July 18, 1996 S. James Coppersmith * Chairman of the Board July 18, 1996 Samuel M. Eisenstat * Trustee July 18, 1996 Stephen J. Gutman * Trustee July 18, 1996 Peter McMillan III * Trustee July 18, 1996 Sebastiano Sterpa
*By:/s/Robert M. Zakem Robert M. Zakem, Attorney-in-Fact SUNAMERICA INCOME FUNDS EXHIBIT INDEX
Exhibit No. Name 4 Specimen Certificates 6b Dealer Agreement 7 Directors'/Trustees' Retirement Plan 8 Custodian Agreement 9 Transfer Agency Agreement 10 Opinion of Counsel 11 Consent of Independent Auditors 15 Distribution Plans Pursuant to Rule 12b-1 (Class A Shares and Class B Shares) 16 Schedule for Computation of Performance Quotations 17 Power of Attorney 27 Financial Data Schedules
EX-27.1 2 DIVERSIFIED INCOME FUND / CLASS A
6 0000795307 SUNAMERICA INCOME FUNDS 041 SUNAMERICA DIVERSIFIED INCOME FUND - CLASS A 12-MOS MAR-31-1996 APR-01-1995 MAR-31-1996 124,271,172 126,144,785 2,517,021 2,269 6,483 128,670,558 0 0 959,347 959,347 0 159,673,276 3,905,764 3,429,918 (522,977) 0 (33,312,686) 0 1,873,598 127,711,211 0 14,755,985 0 2,808,462 11,947,523 (8,376,657) 13,961,444 17,532,310 0 12,542,204 0 0 2,955,037 (2,674,706) 195,515 (18,880,207) 311,631 (25,281,914) 0 0 915,671 49,501 2,808,462 16,147,186 4.14 .39 .16 (.40) 0 0 4.29 1.46 0 0 Information given pertains to the SunAmerica Diversified Income Fund as a whole. Information given pertains to SunAmerica Diversified Income Fund Class A.
EX-27.2 3 DIVERSIFIED INCOME FUND / CLASS B
6 0000795307 SUNAMERICA INCOME FUNDS 042 SUNAMERICA DIVERSIFIED INCOME FUND - CLASS B 12-MOS MAR-31-1996 APR-01-1995 MAR-31-1996 124,271,172 126,144,785 2,517,021 2,269 6,483 128,670,558 0 0 959,347 959,347 0 159,673,276 25,797,521 31,867,128 (522,977) 0 (33,312,686) 0 1,873,598 127,711,211 0 14,755,985 0 2,808,462 11,947,523 (8,376,657) 13,961,444 17,532,310 0 12,542,204 0 0 2,801,046 (10,248,505) 1,377,852 (18,880,207) 311,631 (25,281,914) 0 0 915,671 49,501 2,808,462 124,725,312 4.15 .36 .17 (.38) 0 0 4.30 2.06 0 0 Information given pertains to the SunAmerica Diversified Income Fund as a whole. Information given pertains to SunAmerica Diversified Income Fund Class B.
EX-27.3 4 FEDERAL SECURITIES FUND / CLASS A
6 0000795307 SUNAMERICA INCOME FUNDS 031 SUNAMERICA FEDERAL SECURITIES FUND - CLASS A 12-MOS MAR-31-1996 APR-01-1995 MAR-31-1996 75,712,988 75,799,565 464,577 27,444 6,933 76,298,519 0 0 9,856,171 9,856,171 0 67,677,541 3,862,927 626,947 (174,321) 0 (1,1471,449) 0 86,577 66,442,348 0 5,439,937 0 1,229,698 4,210,239 2,735,058 423,129 7,368,426 0 4,083,767 0 0 4,123,463 (998,837) 111,354 (5,447,920) (99,141) (4,084,402) 0 0 360,738 585 1,229,698 33,415,566 9.98 .68 .40 (.63) 0 0 10.43 1.37 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-27.4 5 FEDERAL INCOME SECURITIES FUND / CLASS B
6 0000795307 SUNAMERICA INCOME FUNDS 032 SUNAMERICA FEDERAL SECURITIES FUND - CLASS B 12-MOS MAR-31-1996 APR-01-1995 MAR-31-1996 75,712,988 75,799,565 464,577 27,444 6,933 76,298,519 0 0 9,856,171 9,856,171 0 67,677,541 2,504,077 6,559,217 (174,321) 0 (1,147,449) 0 86,577 66,442,348 0 5,439,937 0 1,229,698 4,210,239 2,735,058 423,129 7,368,426 0 4,083,767 0 0 814,487 (5,023,383) 153,756 (5,447,920) (99,141) (4,084,402) 0 0 360,738 585 1,229,698 33,415,566 10.01 .56 .44 (.56) 0 0 10.45 2.01 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-27.5 6 HIGH INCOME FUND / CLASS A
6 0000795307 SUNAMERICA INCOME FUNDS 011 SUNAMERICA HIGH INCOME FUND - CLASS A 12-MOS MAR-31-1996 APR-01-1995 MAR-31-1996 122,341,514 125,715,854 2,857,278 8,941 889 128,582,962 0 0 819,959 819,959 0 170,878,823 5,176,395 5,839,531 (228,649) 0 (46,261,511) 0 3,374,340 127,763,003 189,688 18,337,792 0 3,284,084 15,243,396 (7,236,768) 7,416,828 15,423,456 0 16,212,501 0 0 8,359,027 (9,390,977) 368,814 (65,855,765) 146,988 (38,431,275) 0 0 1,273,169 44,123 3,386,880 41,353,907 6.95 .67 .02 (.69) 0 0 6.95 1.53 0 0 Information given pertains to the SunAmerica High Income Fund as a whole. Information given pertains to SunAmerica High Income Fund Class A.
EX-27.6 7 HIGH INCOME FUND / CLASS B
6 0000795307 SUNAMERICA INCOME FUNDS 012 SUNAMERICA HIGH INCOME FUND - CLASS B 12-MOS MAR-31-1996 APR-01-1995 MAR-31-1996 122,341,514 125,715,854 2,857,278 8,941 889 128,582,962 0 0 819,959 819,959 0 170,878,823 13,190,350 21,981,850 (228,649) 0 (46,261,511) 0 3,374,340 127,763,003 189,688 18,337,792 0 3,284,084 15,243,396 (7,236,768) 7,416,828 15,423,456 0 16,212,501 0 0 12,736,686 (22,505,915) 977,729 (65,855,765) 146,988 (38,431,275) 0 0 1,273,169 44,123 3,386,880 128,495,417 6.96 .62 .03 (.65) 0 0 6.96 2.06 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-27.7 8 TAX EXEMPT INS. FUND / CLASS A
6 0000795307 SUNAMERICA INCOME FUNDS 051 SUNAMERICA TAX EXEMPT INSURED FUND CLASS A 12-MOS MAR-31-1996 APR-01-1995 MAR-31-1996 140,630,966 149,454,718 2,538,763 18,889 0 152,012,370 0 0 740,220 740,220 0 151,664,805 9,818,201 11,370,750 (308,829) 0 (8,907,578) 0 8,823,752 151,272,150 0 9,527,826 0 2,154,190 7,373,636 1,431,373 2,644,616 11,449,625 0 7,464,382 0 0 561,023 (2,378,115) 264,543 (12,307,539) (216,286) (12,307,539) 0 0 802,564 0 2,154,190 132,146,918 12.13 .59 .29 (.59) 0 0 12.42 1.22 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-27.8 9 TAX EXEMPT INS. FUND / CLASS B
6 0000795307 SUNAMERICA INCOME FUNDS 052 SUNAMERICA TAX EXEMPT INSURED FUND CLASS B 12-MOS MAR-31-1996 APR-01-1995 MAR-31-1996 140,630,966 149,454,718 2,538,763 18,889 0 152,012,370 0 0 740,220 740,220 0 151,664,805 2,359,606 2,141,283 (308,829) 0 (8,907,578) 0 8,823,752 151,272,150 0 9,527,826 0 2,154,190 7,373,636 1,431,373 2,644,616 11,449,625 0 7,464,382 0 0 1,455,371 (1,292,255) 55,207 (12,307,539) (216,286) (12,307,539) 0 0 (802,564) 0 (2,154,190) 28,365,912 12.14 .50 .29 (.51) 0 0 12.42 1.90 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 B.
EX-27.9 10 U.S. GOVN'T SECURITIES FUND / CLASS A
6 0000795307 SUNAMERICA INCOME FUNDS 021 SUNAMERICA U.S. GOVERNMENT SECURITIES FUND CLASS A 12-MOS MAR-31-1996 APR-01-1995 MAR-31-1996 615,176,350 614,791,082 6,330,404 25,038 29,470 621,175,994 0 0 66,900,309 66,900,309 0 586,033,300 14,756,884 8,916,920 (1,255,322) 0 (30,117,025) 0 (385,268) 554,275,685 0 54,240,281 0 12,709,498 41,530,783 9,648,769 5,738,709 56,918,261 0 34,458,268 0 0 13,131,939 (7,702,779) 410,804 (113,902,677) (1,295,646) (46,797,985) 0 0 4,212,162 153,337 12,753,943 111,112,696 8.23 .62 .16 (.51) 0 0 8.50 1.44 0 0 Information given pertains to SunAmerica U.S. Government Securities Fund as a whole. Information given pertains to SunAmerica U.S. Government Securities Fund Class A.
EX-27.10 11 U.S. GOVN'T SECURITIES FUND / CLASS B
6 0000795307 SUNAMERICA INCOME FUNDS 022 SUNAMERICA U.S. GOVERNMENT SECURITIES FUND CLASS B 12-MOS MAR-31-1996 APR-01-1995 MAR-31-1996 615,176,350 614,791,082 6,330,404 25,038 29,470 621,175,994 0 0 66,900,309 66,900,309 0 586,033,300 50,389,486 72,221,541 (1,255,322) 0 (30,117,025) 0 (385,268) 554,275,685 0 54,240,281 0 12,709,498 41,530,783 9,648,769 5,738,709 56,918,261 0 34,458,268 0 0 9,360,875 (33,167,131) 1,974,201 (113,902,677) (1,295,646) (46,797,985) 0 0 4,212,162 153,337 12,753,943 520,189,478 8.24 .55 .17 (.45) 0 0 8.51 2.13 0 0 Information given pertains to SunAmerica U.S. Government Securities Fund as a whole. Information given pertains to SunAmerica U.S. Government Securities Fund Class B.
EX-99.4 12 SPECIMEN CERTIFICATES EXHIBIT 99.4 NUMBER SHARES SUNAMERICA DIVERSIFIED INCOME FUND-CLASS A SUNAMERICA INCOME FUNDS AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS THIS CERTIFIES that is the owner of *SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP 866918 70 9 FULLY-PAID AND NON-ASSESSABLE CLASS A SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE SUNAMERICA INCOME FUNDS, SUNAMERICA DIVERSIFIED INCOME FUND. hereafter called the "Trust," transferable on the books of the Trust by the owner in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be held subject to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereof, copies of which are on file at the office of the Trust, to all of which the holder, by acceptance hereof assents. This Certificate is not valid unless countersigned by the Transfer Agent. IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by its proper officers and to be sealed with its Seal. Dated: SUNAMERICA INCOME FUNDS CORPORATE SEAL 1986 MASSACHUSETTS SECRETARY PRESIDENT /s/ Robert M. Zakem /s/ Charles J. Mohr COUNTERSIGNED: NATIONAL FINANCIAL DATA SERVICES, SERVICING AGENT FOR STATE STREET BANK AND TRUST COMPANY P.O. BOX 419572, KANSAS CITY, MO 64141-6572 BY - ------------------------------------------- AUTHORIZED OFFICER KCK 6502 This Certificate and the Class A shares represented hereby are issued and shall be held subject to all the provisions of the Declaration of Trust dated April 24, 1986 and By-Laws of the Trust, and all amendments thereto, including the Establishment and Designation relating to the series and class, to all of which the holder by acceptance hereof assents. Reference is made to the Declaration of Trust and By-Laws, as well as the Establishment and Designation of such series and class, for a description of the redemption rights and obligations of the Trust, the series and class and their shareholders. The Board of Trustees may authorize additional series and/or classes and shares thereof. The Trust will furnish to the shareholder, without charge and upon written request made to the Transfer Agent, a full statement of: (1) the designations and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of each series and/or class authorized by the Board of Trustees; and (2) the authority of the Board of Trustees to authorize such additional series and/or classes and shares thereof. The Shares represented by this Certificate may not be redeemed by the Trust without prior surrender of this Certificate. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -------------Custodian--------------- (Cust) (Minor) under Uniform Gifts to Minors Act------------------------- (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, I/WE Hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFICATION NUMBER OF ASSIGNEE --------------------------------- - ---------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - --------------------------------------------------------(-----------)Class A shares of the beneficial interest represented by the within Certificate, and do hereby irrevocably constitute and appoint - -------------------------------------------------------------------attorney to transfer the said Class A shares on the books of the within named Massachusetts Business Trust with full power of substitution in the premises. Dated-------------- Signature(s) ------------------------------- SIGNATURE GUARANTEED BY ----------------------------------------- (THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THIS CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.) This certificate is transferable or redeemable at the offices of National Financial Data Services, 1004 Baltimore, Kansas City, MO 64105, Servicing Agent for State Street Bank and Trust, Transfer Agent National Data Services, P.O. Box 419572, Kansas City, MO 64141-6572. A SIGNATURE GUARANTEE MAY BE EXECUTED BY ANY "ELIGIBLE" GUARANTOR. ELIGIBLE GUARANTORS INCLUDE COMMERCIAL BANKS, TRUST COMPANIES, SAVINGS AND LOANS AND CREDIT UNIONS AS DEFINED BY THE FEDERAL DEPOSIT INSURANCE ACT. ALSO INCLUDED ARE MEMBER FIRMS OF A DOMESTIC STOCK EXCHANGE. YOU SHOULD VERIFY WITH THE INSTITUTION THAT THEY ARE AN ACCEPTABLE (ELIGIBLE) GUARANTOR PRIOR TO SIGNING. PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED SUNAMERICA DIVERSIFIED INCOME FUND-CLASS A NUMBER SHARES KCK ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO. TRADE DATE CONFIRM DATE BATCH I.D. NO. CHANGE NOTICE: IF THE ABOVE INFORMATION IS INCORRECT OR MISSING, PLEASE PRINT THE CORRECT INFORMATION BELOW, AND RETURN TO: National Financial Data Services Servicing Agent for State Street Bank and Trust Company P.O. Box 419572 Kansas City, MO 64141-6572 - ---------------------------------------- - ---------------------------------------- - ---------------------------------------- IDENT. OR SOC. SEC. NO.----------------- NUMBER SHARES SUNAMERICA DIVERSIFIED INCOME FUND-CLASS B SUNAMERICA INCOME FUNDS AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS THIS CERTIFIES that is the owner of *SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP 866918 80 8 FULLY-PAID AND NON-ASSESSABLE CLASS B SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE SUNAMERICA INCOME FUNDS, SUNAMERICA DIVERSIFIED INCOME FUND. hereafter called the "Trust," transferable on the books of the Trust by the owner in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be held subject to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereof, copies of which are on file at the office of the Trust, to all of which the holder, by acceptance hereof assents. This Certificate is not valid unless countersigned by the Transfer Agent. IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by its proper officers and to be sealed with its Seal. Dated: SUNAMERICA INCOME FUNDS CORPORATE SEAL 1986 MASSACHUSETTS SECRETARY PRESIDENT /s/ Robert M. Zakem /S/ Charles J. Mohr COUNTERSIGNED: NATIONAL FINANCIAL DATA SERVICES, SERVICING AGENT FOR STATE STREET BANK AND TRUST COMPANY P.O. BOX 419572, KANSAS CITY, MO 64141-6572 BY - ------------------------------------------- AUTHORIZED OFFICER KCK 6102 This Certificate and the Class B shares represented hereby are issued and shall be held subject to all the provisions of the Declaration of Trust dated April 24, 1986 and By-Laws of the Trust, and all amendments thereto, including the Establishment and Designation relating to the series and class, to all of which the holder by acceptance hereof assents. Reference is made to the Declaration of Trust and By-Laws, as well as the Establishment and Designation of such series and class, for a description of the redemption rights and obligations of the Trust, the series and class and their shareholders. The Board of Trustees may authorize additional series and/or classes and shares thereof. The Trust will furnish to the shareholder, without charge and upon written request made to the Transfer Agent, a full statement of: (1) the designations and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of each series and/or class authorized by the Board of Trustees; and (2) the authority of the Board of Trustees to authorize such additional series and/or classes and shares thereof. The Shares represented by this Certificate may not be redeemed by the Trust without prior surrender of this Certificate. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -------------Custodian--------------- (Cust) (Minor) under Uniform Gifts to Minors Act------------------------- (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, I/WE Hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFICATION NUMBER OF ASSIGNEE --------------------------------- - ---------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - --------------------------------------------------------(-----------)Class B shares of the beneficial interest represented by the within Certificate, and do hereby irrevocably constitute and appoint - -------------------------------------------------------------------attorney to transfer the said Class B shares on the books of the within named Massachusetts Business Trust with full power of substitution in the premises. Dated-------------- Signature(s) ------------------------------- SIGNATURE GUARANTEED BY ----------------------------------------- (THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THIS CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.) This certificate is transferable or redeemable at the offices of National Financial Data Services, 1004 Baltimore, Kansas City, MO 64105, Servicing Agent for State Street Bank and Trust, Transfer Agent National Data Services, P.O. Box 419572, Kansas City, MO 64141-6572. A SIGNATURE GUARANTEE MAY BE EXECUTED BY ANY "ELIGIBLE" GUARANTOR. ELIGIBLE GUARANTORS INCLUDE COMMERCIAL BANKS, TRUST COMPANIES, SAVINGS AND LOANS AND CREDIT UNIONS AS DEFINED BY THE FEDERAL DEPOSIT INSURANCE ACT. ALSO INCLUDED ARE MEMBER FIRMS OF A DOMESTIC STOCK EXCHANGE. YOU SHOULD VERIFY WITH THE INSTITUTION THAT THEY ARE AN ACCEPTABLE (ELIGIBLE) GUARANTOR PRIOR TO SIGNING. PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED SUNAMERICA DIVERSIFIED INCOME FUND-CLASS B NUMBER SHARES KCK ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO. TRADE DATE CONFIRM DATE BATCH I.D. NO. CHANGE NOTICE: IF THE ABOVE INFORMATION IS INCORRECT OR MISSING, PLEASE PRINT THE CORRECT INFORMATION BELOW, AND RETURN TO: National Financial Data Services Servicing Agent for State Street Bank and Trust Company P.O. Box 419572 Kansas City, MO 64141-6572 - ---------------------------------------- - ---------------------------------------- - ---------------------------------------- IDENT. OR SOC. SEC. NO.----------------- NUMBER SHARES SUNAMERICA FEDERAL SECURITIES FUND-CLASS A SUNAMERICA INCOME FUNDS AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS THIS CERTIFIES that is the owner of *SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP 866918 40 2 FULLY-PAID AND NON-ASSESSABLE CLASS A SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE SUNAMERICA INCOME FUNDS, SUNAMERICA FEDERAL SECURITIES FUND. hereafter called the "Trust," transferable on the books of the Trust by the owner in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be held subject to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereof, copies of which are on file at the office of the Trust, to all of which the holder, by acceptance hereof assents. This Certificate is not valid unless countersigned by the Transfer Agent. IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by its proper officers and to be sealed with its Seal. Dated: SUNAMERICA INCOME FUNDS CORPORATE SEAL 1986 MASSACHUSETTS SECRETARY PRESIDENT /s/ Robert M. Zakem /S/ Charles J. Mohr COUNTERSIGNED: NATIONAL FINANCIAL DATA SERVICES, SERVICING AGENT FOR STATE STREET BANK AND TRUST COMPANY P.O. BOX 419572, KANSAS CITY, MO 64141-6572 BY - ------------------------------------------- AUTHORIZED OFFICER KCK 7502 This Certificate and the Class A shares represented hereby are issued and shall be held subject to all the provisions of the Declaration of Trust dated April 24, 1986 and By-Laws of the Trust, and all amendments thereto, including the Establishment and Designation relating to the series and class, to all of which the holder by acceptance hereof assents. Reference is made to the Declaration of Trust and By-Laws, as well as the Establishment and Designation of such series and class, for a description of the redemption rights and obligations of the Trust, the series and class and their shareholders. The Board of Trustees may authorize additional series and/or classes and shares thereof. The Trust will furnish to the shareholder, without charge and upon written request made to the Transfer Agent, a full statement of: (1) the designations and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of each series and/or class authorized by the Board of Trustees; and (2) the authority of the Board of Trustees to authorize such additional series and/or classes and shares thereof. The Shares represented by this Certificate may not be redeemed by the Trust without prior surrender of this Certificate. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -------------Custodian--------------- (Cust) (Minor) under Uniform Gifts to Minors Act------------------------- (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, I/WE Hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFICATION NUMBER OF ASSIGNEE --------------------------------- - ---------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - --------------------------------------------------------(-----------)Class A shares of the beneficial interest represented by the within Certificate, and do hereby irrevocably constitute and appoint - -------------------------------------------------------------------attorney to transfer the said Class A shares on the books of the within named Massachusetts Business Trust with full power of substitution in the premises. Dated-------------- Signature(s) ------------------------------- SIGNATURE GUARANTEED BY ----------------------------------------- (THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THIS CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.) This certificate is transferable or redeemable at the offices of National Financial Data Services, 1004 Baltimore, Kansas City, MO 64105, Servicing Agent for State Street Bank and Trust, Transfer Agent National Data Services, P.O. Box 419572, Kansas City, MO 64141-6572. A SIGNATURE GUARANTEE MAY BE EXECUTED BY ANY "ELIGIBLE" GUARANTOR. ELIGIBLE GUARANTORS INCLUDE COMMERCIAL BANKS, TRUST COMPANIES, SAVINGS AND LOANS AND CREDIT UNIONS AS DEFINED BY THE FEDERAL DEPOSIT INSURANCE ACT. ALSO INCLUDED ARE MEMBER FIRMS OF A DOMESTIC STOCK EXCHANGE. YOU SHOULD VERIFY WITH THE INSTITUTION THAT THEY ARE AN ACCEPTABLE (ELIGIBLE) GUARANTOR PRIOR TO SIGNING. PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED SUNAMERICA FEDERAL SECURITIES FUND-CLASS A NUMBER SHARES KCK ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO. TRADE DATE CONFIRM DATE BATCH I.D. NO. CHANGE NOTICE: IF THE ABOVE INFORMATION IS INCORRECT OR MISSING, PLEASE PRINT THE CORRECT INFORMATION BELOW, AND RETURN TO: National Financial Data Services Servicing Agent for State Street Bank and Trust Company P.O. Box 419572 Kansas City, MO 64141-6572 - ---------------------------------------- - ---------------------------------------- - ---------------------------------------- IDENT. OR SOC. SEC. NO.----------------- NUMBER SHARES SUNAMERICA FEDERAL SECURITIES FUND-CLASS B SUNAMERICA INCOME FUNDS AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS THIS CERTIFIES that is the owner of *SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP 866918 86 5 FULLY-PAID AND NON-ASSESSABLE CLASS B SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE SUNAMERICA INCOME FUNDS, SUNAMERICA FEDERAL SECURITIES FUND. hereafter called the "Trust," transferable on the books of the Trust by the owner in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be held subject to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereof, copies of which are on file at the office of the Trust, to all of which the holder, by acceptance hereof assents. This Certificate is not valid unless countersigned by the Transfer Agent. IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by its proper officers and to be sealed with its Seal. Dated: SUNAMERICA INCOME FUNDS CORPORATE SEAL 1986 MASSACHUSETTS SECRETARY PRESIDENT /s/ Robert M. Zakem /S/ Charles J. Mohr COUNTERSIGNED: NATIONAL FINANCIAL DATA SERVICES, SERVICING AGENT FOR STATE STREET BANK AND TRUST COMPANY P.O. BOX 419572, KANSAS CITY, MO 64141-6572 BY - ------------------------------------------- AUTHORIZED OFFICER KCK 7102 This Certificate and the Class B shares represented hereby are issued and shall be held subject to all the provisions of the Declaration of Trust dated April 24, 1986 and By-Laws of the Trust, and all amendments thereto, including the Establishment and Designation relating to the series and class, to all of which the holder by acceptance hereof assents. Reference is made to the Declaration of Trust and By-Laws, as well as the Establishment and Designation of such series and class, for a description of the redemption rights and obligations of the Trust, the series and class and their shareholders. The Board of Trustees may authorize additional series and/or classes and shares thereof. The Trust will furnish to the shareholder, without charge and upon written request made to the Transfer Agent, a full statement of: (1) the designations and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of each series and/or class authorized by the Board of Trustees; and (2) the authority of the Board of Trustees to authorize such additional series and/or classes and shares thereof. The Shares represented by this Certificate may not be redeemed by the Trust without prior surrender of this Certificate. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -------------Custodian--------------- (Cust) (Minor) under Uniform Gifts to Minors Act------------------------- (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, I/WE Hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFICATION NUMBER OF ASSIGNEE --------------------------------- - ---------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - --------------------------------------------------------(-----------)Class B shares of the beneficial interest represented by the within Certificate, and do hereby irrevocably constitute and appoint - -------------------------------------------------------------------attorney to transfer the said Class B shares on the books of the within named Massachusetts Business Trust with full power of substitution in the premises. Dated-------------- Signature(s) ------------------------------- SIGNATURE GUARANTEED BY ----------------------------------------- (THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THIS CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.) This certificate is transferable or redeemable at the offices of National Financial Data Services, 1004 Baltimore, Kansas City, MO 64105, Servicing Agent for State Street Bank and Trust, Transfer Agent National Data Services, P.O. Box 419572, Kansas City, MO 64141-6572. A SIGNATURE GUARANTEE MAY BE EXECUTED BY ANY "ELIGIBLE" GUARANTOR. ELIGIBLE GUARANTORS INCLUDE COMMERCIAL BANKS, TRUST COMPANIES, SAVINGS AND LOANS AND CREDIT UNIONS AS DEFINED BY THE FEDERAL DEPOSIT INSURANCE ACT. ALSO INCLUDED ARE MEMBER FIRMS OF A DOMESTIC STOCK EXCHANGE. YOU SHOULD VERIFY WITH THE INSTITUTION THAT THEY ARE AN ACCEPTABLE (ELIGIBLE) GUARANTOR PRIOR TO SIGNING. PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED SUNAMERICA FEDERAL SECURITIES FUND-CLASS B NUMBER SHARES KCK ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO. TRADE DATE CONFIRM DATE BATCH I.D. NO. CHANGE NOTICE: IF THE ABOVE INFORMATION IS INCORRECT OR MISSING, PLEASE PRINT THE CORRECT INFORMATION BELOW, AND RETURN TO: National Financial Data Services Servicing Agent for State Street Bank and Trust Company P.O. Box 419572 Kansas City, MO 64141-6572 - ---------------------------------------- - ---------------------------------------- - ---------------------------------------- IDENT. OR SOC. SEC. NO.----------------- NUMBER SHARES SUNAMERICA HIGH INCOME FUND-CLASS A SUNAMERICA INCOME FUNDS AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS THIS CERTIFIES that is the owner of *SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP 866918 10 5 FULLY-PAID AND NON-ASSESSABLE CLASS A SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE SUNAMERICA INCOME FUNDS, SUNAMERICA HIGH INCOME FUND. hereafter called the "Trust," transferable on the books of the Trust by the owner in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be held subject to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereof, copies of which are on file at the office of the Trust, to all of which the holder, by acceptance hereof assents. This Certificate is not valid unless countersigned by the Transfer Agent. IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by its proper officers and to be sealed with its Seal. Dated: SUNAMERICA INCOME FUNDS CORPORATE SEAL 1986 MASSACHUSETTS SECRETARY PRESIDENT /s/ Robert M. Zakem /S/ Charles J. Mohr COUNTERSIGNED: NATIONAL FINANCIAL DATA SERVICES, SERVICING AGENT FOR STATE STREET BANK AND TRUST COMPANY P.O. BOX 419572, KANSAS CITY, MO 64141-6572 BY - ------------------------------------------- AUTHORIZED OFFICER KCK 3102 This Certificate and the Class A shares represented hereby are issued and shall be held subject to all the provisions of the Declaration of Trust dated April 24, 1986 and By-Laws of the Trust, and all amendments thereto, including the Establishment and Designation relating to the series and class, to all of which the holder by acceptance hereof assents. Reference is made to the Declaration of Trust and By-Laws, as well as the Establishment and Designation of such series and class, for a description of the redemption rights and obligations of the Trust, the series and class and their shareholders. The Board of Trustees may authorize additional series and/or classes and shares thereof. The Trust will furnish to the shareholder, without charge and upon written request made to the Transfer Agent, a full statement of: (1) the designations and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of each series and/or class authorized by the Board of Trustees; and (2) the authority of the Board of Trustees to authorize such additional series and/or classes and shares thereof. The Shares represented by this Certificate may not be redeemed by the Trust without prior surrender of this Certificate. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -------------Custodian--------------- (Cust) (Minor) under Uniform Gifts to Minors Act------------------------- (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, I/WE Hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFICATION NUMBER OF ASSIGNEE --------------------------------- - ---------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - --------------------------------------------------------(-----------)Class A shares of the beneficial interest represented by the within Certificate, and do hereby irrevocably constitute and appoint - -------------------------------------------------------------------attorney to transfer the said Class A shares on the books of the within named Massachusetts Business Trust with full power of substitution in the premises. Dated-------------- Signature(s) ------------------------------- SIGNATURE GUARANTEED BY ----------------------------------------- (THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THIS CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.) This certificate is transferable or redeemable at the offices of National Financial Data Services, 1004 Baltimore, Kansas City, MO 64105, Servicing Agent for State Street Bank and Trust, Transfer Agent National Data Services, P.O. Box 419572, Kansas City, MO 64141-6572. A SIGNATURE GUARANTEE MAY BE EXECUTED BY ANY "ELIGIBLE" GUARANTOR. ELIGIBLE GUARANTORS INCLUDE COMMERCIAL BANKS, TRUST COMPANIES, SAVINGS AND LOANS AND CREDIT UNIONS AS DEFINED BY THE FEDERAL DEPOSIT INSURANCE ACT. ALSO INCLUDED ARE MEMBER FIRMS OF A DOMESTIC STOCK EXCHANGE. YOU SHOULD VERIFY WITH THE INSTITUTION THAT THEY ARE AN ACCEPTABLE (ELIGIBLE) GUARANTOR PRIOR TO SIGNING. PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED SUNAMERICA HIGH INCOME FUND-CLASS A NUMBER SHARES KCK ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO. TRADE DATE CONFIRM DATE BATCH I.D. NO. CHANGE NOTICE: IF THE ABOVE INFORMATION IS INCORRECT OR MISSING, PLEASE PRINT THE CORRECT INFORMATION BELOW, AND RETURN TO: National Financial Data Services Servicing Agent for State Street Bank and Trust Company P.O. Box 419572 Kansas City, MO 64141-6572 - ---------------------------------------- - ---------------------------------------- - ---------------------------------------- IDENT. OR SOC. SEC. NO.----------------- NUMBER SHARES SUNAMERICA HIGH INCOME FUND-CLASS B SUNAMERICA INCOME FUNDS AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS THIS CERTIFIES that is the owner of *SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP 866918 60 0 FULLY-PAID AND NON-ASSESSABLE CLASS B SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE SUNAMERICA INCOME FUNDS, SUNAMERICA HIGH INCOME FUND. hereafter called the "Trust," transferable on the books of the Trust by the owner in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be held subject to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereof, copies of which are on file at the office of the Trust, to all of which the holder, by acceptance hereof assents. This Certificate is not valid unless countersigned by the Transfer Agent. IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by its proper officers and to be sealed with its Seal. Dated: SUNAMERICA INCOME FUNDS CORPORATE SEAL 1986 MASSACHUSETTS SECRETARY PRESIDENT /s/ Robert M. Zakem /S/ Charles J. Mohr COUNTERSIGNED: NATIONAL FINANCIAL DATA SERVICES, SERVICING AGENT FOR STATE STREET BANK AND TRUST COMPANY P.O. BOX 419572, KANSAS CITY, MO 64141-6572 BY - ------------------------------------------- AUTHORIZED OFFICER KCK 3502 This Certificate and the Class B shares represented hereby are issued and shall be held subject to all the provisions of the Declaration of Trust dated April 24, 1986 and By-Laws of the Trust, and all amendments thereto, including the Establishment and Designation relating to the series and class, to all of which the holder by acceptance hereof assents. Reference is made to the Declaration of Trust and By-Laws, as well as the Establishment and Designation of such series and class, for a description of the redemption rights and obligations of the Trust, the series and class and their shareholders. The Board of Trustees may authorize additional series and/or classes and shares thereof. The Trust will furnish to the shareholder, without charge and upon written request made to the Transfer Agent, a full statement of: (1) the designations and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of each series and/or class authorized by the Board of Trustees; and (2) the authority of the Board of Trustees to authorize such additional series and/or classes and shares thereof. The Shares represented by this Certificate may not be redeemed by the Trust without prior surrender of this Certificate. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -------------Custodian--------------- (Cust) (Minor) under Uniform Gifts to Minors Act------------------------- (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, I/WE Hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFICATION NUMBER OF ASSIGNEE --------------------------------- - ---------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - --------------------------------------------------------(-----------)Class B shares of the beneficial interest represented by the within Certificate, and do hereby irrevocably constitute and appoint - -------------------------------------------------------------------attorney to transfer the said Class B shares on the books of the within named Massachusetts Business Trust with full power of substitution in the premises. Dated-------------- Signature(s) ------------------------------- SIGNATURE GUARANTEED BY ----------------------------------------- (THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THIS CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.) This certificate is transferable or redeemable at the offices of National Financial Data Services, 1004 Baltimore, Kansas City, MO 64105, Servicing Agent for State Street Bank and Trust, Transfer Agent National Data Services, P.O. Box 419572, Kansas City, MO 64141-6572. A SIGNATURE GUARANTEE MAY BE EXECUTED BY ANY "ELIGIBLE" GUARANTOR. ELIGIBLE GUARANTORS INCLUDE COMMERCIAL BANKS, TRUST COMPANIES, SAVINGS AND LOANS AND CREDIT UNIONS AS DEFINED BY THE FEDERAL DEPOSIT INSURANCE ACT. ALSO INCLUDED ARE MEMBER FIRMS OF A DOMESTIC STOCK EXCHANGE. YOU SHOULD VERIFY WITH THE INSTITUTION THAT THEY ARE AN ACCEPTABLE (ELIGIBLE) GUARANTOR PRIOR TO SIGNING. PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED SUNAMERICA HIGH INCOME FUND-CLASS B NUMBER SHARES KCK ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO. TRADE DATE CONFIRM DATE BATCH I.D. NO. CHANGE NOTICE: IF THE ABOVE INFORMATION IS INCORRECT OR MISSING, PLEASE PRINT THE CORRECT INFORMATION BELOW, AND RETURN TO: National Financial Data Services Servicing Agent for State Street Bank and Trust Company P.O. Box 419572 Kansas City, MO 64141-6572 - ---------------------------------------- - ---------------------------------------- - ---------------------------------------- IDENT. OR SOC. SEC. NO.----------------- NUMBER SHARES SUNAMERICA TAX EXEMPT INSURED FUND-CLASS A SUNAMERICA INCOME FUNDS AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS THIS CERTIFIES that is the owner of *SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP 866918 88 1 FULLY-PAID AND NON-ASSESSABLE CLASS A SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE SUNAMERICA INCOME FUNDS, SUNAMERICA TAX EXEMPT INSURED FUND. hereafter called the "Trust," transferable on the books of the Trust by the owner in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be held subject to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereof, copies of which are on file at the office of the Trust, to all of which the holder, by acceptance hereof assents. This Certificate is not valid unless countersigned by the Transfer Agent. IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by its proper officers and to be sealed with its Seal. Dated: SUNAMERICA INCOME FUNDS CORPORATE SEAL 1986 MASSACHUSETTS SECRETARY PRESIDENT /s/ Robert M. Zakem /S/ Charles J. Mohr COUNTERSIGNED: NATIONAL FINANCIAL DATA SERVICES, SERVICING AGENT FOR STATE STREET BANK AND TRUST COMPANY P.O. BOX 419572, KANSAS CITY, MO 64141-6572 BY - ------------------------------------------- AUTHORIZED OFFICER KCK 10002 This Certificate and the Class A shares represented hereby are issued and shall be held subject to all the provisions of the Declaration of Trust dated April 24, 1986 and By-Laws of the Trust, and all amendments thereto, including the Establishment and Designation relating to the series and class, to all of which the holder by acceptance hereof assents. Reference is made to the Declaration of Trust and By-Laws, as well as the Establishment and Designation of such series and class, for a description of the redemption rights and obligations of the Trust, the series and class and their shareholders. The Board of Trustees may authorize additional series and/or classes and shares thereof. The Trust will furnish to the shareholder, without charge and upon written request made to the Transfer Agent, a full statement of: (1) the designations and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of each series and/or class authorized by the Board of Trustees; and (2) the authority of the Board of Trustees to authorize such additional series and/or classes and shares thereof. The Shares represented by this Certificate may not be redeemed by the Trust without prior surrender of this Certificate. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -------------Custodian--------------- (Cust) (Minor) under Uniform Gifts to Minors Act------------------------- (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, I/WE Hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFICATION NUMBER OF ASSIGNEE --------------------------------- - ---------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - --------------------------------------------------------(-----------)Class A shares of the beneficial interest represented by the within Certificate, and do hereby irrevocably constitute and appoint - -------------------------------------------------------------------attorney to transfer the said Class A shares on the books of the within named Massachusetts Business Trust with full power of substitution in the premises. Dated-------------- Signature(s) ------------------------------- SIGNATURE GUARANTEED BY ----------------------------------------- (THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THIS CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.) This certificate is transferable or redeemable at the offices of National Financial Data Services, 1004 Baltimore, Kansas City, MO 64105, Servicing Agent for State Street Bank and Trust, Transfer Agent National Data Services, P.O. Box 419572, Kansas City, MO 64141-6572. A SIGNATURE GUARANTEE MAY BE EXECUTED BY ANY "ELIGIBLE" GUARANTOR. ELIGIBLE GUARANTORS INCLUDE COMMERCIAL BANKS, TRUST COMPANIES, SAVINGS AND LOANS AND CREDIT UNIONS AS DEFINED BY THE FEDERAL DEPOSIT INSURANCE ACT. ALSO INCLUDED ARE MEMBER FIRMS OF A DOMESTIC STOCK EXCHANGE. YOU SHOULD VERIFY WITH THE INSTITUTION THAT THEY ARE AN ACCEPTABLE (ELIGIBLE) GUARANTOR PRIOR TO SIGNING. PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED SUNAMERICA TAX EXEMPT INSURED FUND-CLASS A NUMBER SHARES KCK ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO. TRADE DATE CONFIRM DATE BATCH I.D. NO. CHANGE NOTICE: IF THE ABOVE INFORMATION IS INCORRECT OR MISSING, PLEASE PRINT THE CORRECT INFORMATION BELOW, AND RETURN TO: National Financial Data Services Servicing Agent for State Street Bank and Trust Company P.O. Box 419572 Kansas City, MO 64141-6572 - ---------------------------------------- - ---------------------------------------- - ---------------------------------------- IDENT. OR SOC. SEC. NO.----------------- NUMBER SHARES SUNAMERICA TAX EXEMPT INSURED FUND-CLASS B SUNAMERICA INCOME FUNDS AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS THIS CERTIFIES that is the owner of *SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP 866918 87 3 FULLY-PAID AND NON-ASSESSABLE CLASS B SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE SUNAMERICA INCOME FUNDS, SUNAMERICA TAX EXEMPT INSURED FUND. hereafter called the "Trust," transferable on the books of the Trust by the owner in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be held subject to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereof, copies of which are on file at the office of the Trust, to all of which the holder, by acceptance hereof assents. This Certificate is not valid unless countersigned by the Transfer Agent. IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by its proper officers and to be sealed with its Seal. Dated: SUNAMERICA INCOME FUNDS CORPORATE SEAL 1986 MASSACHUSETTS SECRETARY PRESIDENT /s/ Robert M. Zakem /S/ Charles J. Mohr COUNTERSIGNED: NATIONAL FINANCIAL DATA SERVICES, SERVICING AGENT FOR STATE STREET BANK AND TRUST COMPANY P.O. BOX 419572, KANSAS CITY, MO 64141-6572 BY - ------------------------------------------- AUTHORIZED OFFICER KCK 10502 This Certificate and the Class B shares represented hereby are issued and shall be held subject to all the provisions of the Declaration of Trust dated April 24, 1986 and By-Laws of the Trust, and all amendments thereto, including the Establishment and Designation relating to the series and class, to all of which the holder by acceptance hereof assents. Reference is made to the Declaration of Trust and By-Laws, as well as the Establishment and Designation of such series and class, for a description of the redemption rights and obligations of the Trust, the series and class and their shareholders. The Board of Trustees may authorize additional series and/or classes and shares thereof. The Trust will furnish to the shareholder, without charge and upon written request made to the Transfer Agent, a full statement of: (1) the designations and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of each series and/or class authorized by the Board of Trustees; and (2) the authority of the Board of Trustees to authorize such additional series and/or classes and shares thereof. The Shares represented by this Certificate may not be redeemed by the Trust without prior surrender of this Certificate. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -------------Custodian--------------- (Cust) (Minor) under Uniform Gifts to Minors Act------------------------- (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, I/WE Hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFICATION NUMBER OF ASSIGNEE --------------------------------- - ---------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - --------------------------------------------------------(-----------)Class B shares of the beneficial interest represented by the within Certificate, and do hereby irrevocably constitute and appoint - -------------------------------------------------------------------attorney to transfer the said Class B shares on the books of the within named Massachusetts Business Trust with full power of substitution in the premises. Dated-------------- Signature(s) ------------------------------- SIGNATURE GUARANTEED BY ----------------------------------------- (THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THIS CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.) This certificate is transferable or redeemable at the offices of National Financial Data Services, 1004 Baltimore, Kansas City, MO 64105, Servicing Agent for State Street Bank and Trust, Transfer Agent National Data Services, P.O. Box 419572, Kansas City, MO 64141-6572. A SIGNATURE GUARANTEE MAY BE EXECUTED BY ANY "ELIGIBLE" GUARANTOR. ELIGIBLE GUARANTORS INCLUDE COMMERCIAL BANKS, TRUST COMPANIES, SAVINGS AND LOANS AND CREDIT UNIONS AS DEFINED BY THE FEDERAL DEPOSIT INSURANCE ACT. ALSO INCLUDED ARE MEMBER FIRMS OF A DOMESTIC STOCK EXCHANGE. YOU SHOULD VERIFY WITH THE INSTITUTION THAT THEY ARE AN ACCEPTABLE (ELIGIBLE) GUARANTOR PRIOR TO SIGNING. PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED SUNAMERICA TAX EXEMPT INSURED FUND-CLASS B NUMBER SHARES KCK ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO. TRADE DATE CONFIRM DATE BATCH I.D. NO. CHANGE NOTICE: IF THE ABOVE INFORMATION IS INCORRECT OR MISSING, PLEASE PRINT THE CORRECT INFORMATION BELOW, AND RETURN TO: National Financial Data Services Servicing Agent for State Street Bank and Trust Company P.O. Box 419572 Kansas City, MO 64141-6572 - ---------------------------------------- - ---------------------------------------- - ---------------------------------------- IDENT. OR SOC. SEC. NO.----------------- NUMBER SHARES SUNAMERICA U.S. GOVERNMENT SECURITIES FUND-CLASS A SUNAMERICA INCOME FUNDS AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS THIS CERTIFIES that is the owner of *SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP 866918 20 4 FULLY-PAID AND NON-ASSESSABLE CLASS A SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE SUNAMERICA INCOME FUNDS, SUNAMERICA U.S. GOVERNMENT SECURITIES FUND. hereafter called the "Trust," transferable on the books of the Trust by the owner in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be held subject to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereof, copies of which are on file at the office of the Trust, to all of which the holder, by acceptance hereof assents. This Certificate is not valid unless countersigned by the Transfer Agent. IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by its proper officers and to be sealed with its Seal. Dated: SUNAMERICA INCOME FUNDS CORPORATE SEAL 1986 MASSACHUSETTS SECRETARY PRESIDENT /s/ Robert M. Zakem /S/ Charles J. Mohr COUNTERSIGNED: NATIONAL FINANCIAL DATA SERVICES, SERVICING AGENT FOR STATE STREET BANK AND TRUST COMPANY P.O. BOX 419572, KANSAS CITY, MO 64141-6572 BY - ------------------------------------------- AUTHORIZED OFFICER KCK 4102 This Certificate and the Class A shares represented hereby are issued and shall be held subject to all the provisions of the Declaration of Trust dated April 24, 1986 and By-Laws of the Trust, and all amendments thereto, including the Establishment and Designation relating to the series and class, to all of which the holder by acceptance hereof assents. Reference is made to the Declaration of Trust and By-Laws, as well as the Establishment and Designation of such series and class, for a description of the redemption rights and obligations of the Trust, the series and class and their shareholders. The Board of Trustees may authorize additional series and/or classes and shares thereof. The Trust will furnish to the shareholder, without charge and upon written request made to the Transfer Agent, a full statement of: (1) the designations and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of each series and/or class authorized by the Board of Trustees; and (2) the authority of the Board of Trustees to authorize such additional series and/or classes and shares thereof. The Shares represented by this Certificate may not be redeemed by the Trust without prior surrender of this Certificate. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -------------Custodian--------------- (Cust) (Minor) under Uniform Gifts to Minors Act------------------------- (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, I/WE Hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFICATION NUMBER OF ASSIGNEE --------------------------------- - ---------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - --------------------------------------------------------(-----------)Class A shares of the beneficial interest represented by the within Certificate, and do hereby irrevocably constitute and appoint - -------------------------------------------------------------------attorney to transfer the said Class A shares on the books of the within named Massachusetts Business Trust with full power of substitution in the premises. Dated-------------- Signature(s) ------------------------------- SIGNATURE GUARANTEED BY ----------------------------------------- (THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THIS CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.) This certificate is transferable or redeemable at the offices of National Financial Data Services, 1004 Baltimore, Kansas City, MO 64105, Servicing Agent for State Street Bank and Trust, Transfer Agent National Data Services, P.O. Box 419572, Kansas City, MO 64141-6572. A SIGNATURE GUARANTEE MAY BE EXECUTED BY ANY "ELIGIBLE" GUARANTOR. ELIGIBLE GUARANTORS INCLUDE COMMERCIAL BANKS, TRUST COMPANIES, SAVINGS AND LOANS AND CREDIT UNIONS AS DEFINED BY THE FEDERAL DEPOSIT INSURANCE ACT. ALSO INCLUDED ARE MEMBER FIRMS OF A DOMESTIC STOCK EXCHANGE. YOU SHOULD VERIFY WITH THE INSTITUTION THAT THEY ARE AN ACCEPTABLE (ELIGIBLE) GUARANTOR PRIOR TO SIGNING. PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED SUNAMERICA U.S. GOVERNMENT SECURITIES FUND-CLASS A NUMBER SHARES KCK ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO. TRADE DATE CONFIRM DATE BATCH I.D. NO. CHANGE NOTICE: IF THE ABOVE INFORMATION IS INCORRECT OR MISSING, PLEASE PRINT THE CORRECT INFORMATION BELOW, AND RETURN TO: National Financial Data Services Servicing Agent for State Street Bank and Trust Company P.O. Box 419572 Kansas City, MO 64141-6572 - ---------------------------------------- - ---------------------------------------- - ---------------------------------------- IDENT. OR SOC. SEC. NO.----------------- NUMBER SHARES SUNAMERICA U.S. GOVERNMENT SECURITIES FUND-CLASS B SUNAMERICA INCOME FUNDS AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS THIS CERTIFIES that is the owner of *SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP 866918 50 1 FULLY-PAID AND NON-ASSESSABLE CLASS B SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE SUNAMERICA INCOME FUNDS, SUNAMERICA U.S. GOVERNMENT SECURITIES FUND. hereafter called the "Trust," transferable on the books of the Trust by the owner in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be held subject to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereof, copies of which are on file at the office of the Trust, to all of which the holder, by acceptance hereof assents. This Certificate is not valid unless countersigned by the Transfer Agent. IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by its proper officers and to be sealed with its Seal. Dated: SUNAMERICA INCOME FUNDS CORPORATE SEAL 1986 MASSACHUSETTS SECRETARY PRESIDENT /s/ Robert M. Zakem /S/ Charles J. Mohr COUNTERSIGNED: NATIONAL FINANCIAL DATA SERVICES, SERVICING AGENT FOR STATE STREET BANK AND TRUST COMPANY P.O. BOX 419572, KANSAS CITY, MO 64141-6572 BY - ------------------------------------------- AUTHORIZED OFFICER KCK 8502 This Certificate and the Class B shares represented hereby are issued and shall be held subject to all the provisions of the Declaration of Trust dated April 24, 1986 and By-Laws of the Trust, and all amendments thereto, including the Establishment and Designation relating to the series and class, to all of which the holder by acceptance hereof assents. Reference is made to the Declaration of Trust and By-Laws, as well as the Establishment and Designation of such series and class, for a description of the redemption rights and obligations of the Trust, the series and class and their shareholders. The Board of Trustees may authorize additional series and/or classes and shares thereof. The Trust will furnish to the shareholder, without charge and upon written request made to the Transfer Agent, a full statement of: (1) the designations and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of each series and/or class authorized by the Board of Trustees; and (2) the authority of the Board of Trustees to authorize such additional series and/or classes and shares thereof. The Shares represented by this Certificate may not be redeemed by the Trust without prior surrender of this Certificate. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -------------Custodian--------------- (Cust) (Minor) under Uniform Gifts to Minors Act------------------------- (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, I/WE Hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFICATION NUMBER OF ASSIGNEE --------------------------------- - ---------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- - --------------------------------------------------------(-----------)Class B shares of the beneficial interest represented by the within Certificate, and do hereby irrevocably constitute and appoint - -------------------------------------------------------------------attorney to transfer the said Class B shares on the books of the within named Massachusetts Business Trust with full power of substitution in the premises. Dated-------------- Signature(s) ------------------------------- SIGNATURE GUARANTEED BY ----------------------------------------- (THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THIS CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.) This certificate is transferable or redeemable at the offices of National Financial Data Services, 1004 Baltimore, Kansas City, MO 64105, Servicing Agent for State Street Bank and Trust, Transfer Agent National Data Services, P.O. Box 419572, Kansas City, MO 64141-6572. A SIGNATURE GUARANTEE MAY BE EXECUTED BY ANY "ELIGIBLE" GUARANTOR. ELIGIBLE GUARANTORS INCLUDE COMMERCIAL BANKS, TRUST COMPANIES, SAVINGS AND LOANS AND CREDIT UNIONS AS DEFINED BY THE FEDERAL DEPOSIT INSURANCE ACT. ALSO INCLUDED ARE MEMBER FIRMS OF A DOMESTIC STOCK EXCHANGE. YOU SHOULD VERIFY WITH THE INSTITUTION THAT THEY ARE AN ACCEPTABLE (ELIGIBLE) GUARANTOR PRIOR TO SIGNING. PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED SUNAMERICA U.S. GOVERNMENT SECURITIES FUND-CLASS B NUMBER SHARES KCK ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO. TRADE DATE CONFIRM DATE BATCH I.D. NO. CHANGE NOTICE: IF THE ABOVE INFORMATION IS INCORRECT OR MISSING, PLEASE PRINT THE CORRECT INFORMATION BELOW, AND RETURN TO: National Financial Data Services Servicing Agent for State Street Bank and Trust Company P.O. Box 419572 Kansas City, MO 64141-6572 - ---------------------------------------- - ---------------------------------------- - ---------------------------------------- IDENT. OR SOC. SEC. NO.----------------- EX-99.6B 13 DEALER AGREEMENT EXHIBIT 99.6(b) SUNAMERICA CAPITAL SERVICES INC. ________________________________________ Name of Firm ________________________________________ City State Zip Code RE: DEALER AGREEMENT Gentlemen: We are the national distributor and principal underwriter of the shares of mutual funds sponsored, managed and/or advised by SunAmerica Asset Management Corp.(hereinafter referred to as a "Fund," or collectively as the "Funds"). The Funds and each individual investment series thereof are set forth on Schedule A, which may be amended from time to time. We invite you to participate in making available to your customers shares of the Funds on the following terms: 1a. NON-BANK PARTICIPANTS ONLY. You represent and warrant that you are a member of the National Association of Securities Dealers, Inc. (the "NASD"). You agree to abide by the Rules of Fair Practice, the Constitution and By-Laws of the NASD and to all other rules and regulations that are now or may become applicable to transactions thereunder. b. BANK PARTICIPANTS ONLY. You represent and warrant to us that (i)(a) you are a "Bank" as such term is defined in Section 3(a)(6) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") or (b) you are a "bank holding company" as such term is defined in the Bank Holding Act of 1956, as amended (the "Act"); (ii) you are duly organized and an existing "bank" or "bank holding company" in good standing under the laws of jurisdiction in which you were organized; (iii) all authorization (if any) required for your lawful execution of this Agreement and your performance hereunder have been obtained; and (iv) upon execution and delivery by you, and assuming due and valid execution and delivery by us, the Agreement will constitute a valid and binding agreement, enforceable against you in accordance with its terms. In the event you are a "bank holding company" as such term is defined in the Act, you shall attach as an exhibit, and which will be made a part of this Agreement, which sets forth the names and addresses of the "banks" on whose behalf you are authorized to execute this Agreement. You agree to give written notice to us promptly in the event you shall cease to be a "bank" as such term is defined in Section 3(a)(6) of the Exchange Act or a "bank holding company" as such term is defined in the Act. In such event, this Agreement shall be automatically terminated upon such written notice. You also agree to abide by the Rules of Fair Practice of the National Association of Securities Dealers, Inc. applicable to the sale of investment company shares to your customers. We recognize that you may be subject to the provisions of the Glass-Stegall Act and other laws governing, among other things, the conduct of activities by federally chartered and supervised banks and affiliated organizations. Because you will be the only one having a direct relationship with the customer, you will comply and are complying with all laws and regulations, including those of the applicable regulatory authorities and any federal or state regulatory body having jurisdiction over you or your customers, to the extent applicable to securities purchases hereunder for the account of your customer. 2. Orders for shares received from you and accepted by a Fund will be at its next-determined net asset value, plus the applicable sales charge, if any, at the time of such acceptance as established pursuant to the then-current prospectus of the Fund. Procedures relating to the handling of orders, including the Policies and Procedures With Respect to Sales of SunAmerica Mutual Funds Under the Multiple Pricing Structure, as may be amended from time to time, set forth as Schedule B hereto, shall be subject to instructions which we shall forward from time to time to all firms (the "Participants") through which we make available shares of the Funds. All orders are subject to acceptance by the applicable Fund, which reserves the right in its sole discretion to reject any order in whole or in part. We will confirm transactions for each of your customers, it being understood in all cases that (a) you are acting as the agent for the customer; (b) the transactions are without recourse against you by the customer except to the extent that (i) your failure to transmit orders in a timely fashion results in a loss to your customer, or (ii) in the event you do not receive a confirmation of the transaction within ten (10) business days following the order date, your failure to inquire as to the status of the transaction during such time period results in a loss to your customer; (c) as between you and the customer, the customer shall have beneficial ownership of the Fund shares; (d) each transaction is initiated solely upon the order of the customer; and (e) each transaction is for the account of the customer and not for you account. 3. As a Participant, you agree to purchase shares of the Funds only through us or from your customers. Purchases through us shall be made only for the purpose of covering purchase orders already received from your customers or for your own bona fide investment. 4. You agree to sell shares of the Funds only (a) to your customers at the net asset value plus applicable sales charge, if any, then in effect as established by the then-current prospectus of the applicable Fund or (b) to us as agent for the Fund or the Fund itself at the redemption price as described in the prospectus. 5. We reserve the right in our discretion, and without notice to you, to suspend sales or withdraw the offering of shares entirely, or to modify or cancel this Agreement. All sales shall be subject to the terms and provisions set forth in the Fund's then-current Prospectus. 6. No person is authorized to make any representations concerning a Fund or its shares except those contained in its prospectus and any such information (including any applicable "Statement of Additional Information") as may be approved by a Fund as information supplemental to its prospectus. In purchasing shares through us, you shall rely solely on the representations contained in the then-effective Prospectus and supplemental information above-mentioned. You agree to hold us harmless and indemnify the Funds and us in the event that you, or any of your sales representatives, should violate any law, rule or regulation, or any provisions of this Agreement, which may result in liability to the Funds or us. Additional copies of any prospectus and/or supplemental information (including any applicable "Statement of Additional Information") will be supplied by us to you in reasonable quantities upon request. 7. You shall have no authority whatever to act as agent of the Funds or us, or any other Participant, and nothing in this Agreement shall constitute you or the Funds as the agent of the other. In all transactions in these shares between you and us, we are acting as agent for the Funds and not as principal. 8. All communication to us shall be sent to SunAmerica Capital Services, Inc., The SunAmerica Center, 733 Third Avenue, New York, New York 10017-3204. Any notice to you shall be duly given if mailed or telegraphed to you at your address set forth below, unless you give us written instructions otherwise. It is your responsibility to provide us with updated information concerning where written communications should be sent. 9. This Agreement may be terminated without penalty upon written notice by either party at any time, and shall automatically terminate upon its assignment, or upon any event that terminates a Fund's Distribution Agreement with us. This Agreement shall be goverened by and construed in accordance with the laws of the State of New York. The indemnification provision in Section 6 hereof shall survive any termination of this Agreement hereunder. 10. NON-BANK PARTICIPANTS ONLY. By accepting this Agreement, you represent that you are (i) registered as a broker-dealer under the Securities Exchange Act of 1934; (ii) are qualified to act as a dealer in the states or other jurisdictions where you transact business; and (iii) are a member in good standing of the NASD. You agree that you will maintain such registration, qualifications, and membership in full force and effect throughout the terms of this Agreement. You further agree to comply with all applicable federal laws, the laws of the states or other jurisdictions concerned, and the rules and regulations promulgated thereunder, and with the Constitution, By-Laws and Rules of Fair Practice of the NASD and that you will not offer or sell the shares of the Funds in any state or jurisdiction where they may not lawfully be offered or sold, or where you are not registered as a broker-dealer. 11a. SERVICE FEES. We expect you to provide administration and marketing services in the promotion of the Funds' shares, including services and assistance to your customers who own Fund shares. For such services, you will be entitled to compensation as set forth in Schedule A, as may be amended from time to time, and in the Funds' current prospectuses. b. CONTINGENT DEFERRED SALES CHARGE ("CDSC"). For purchases of Class B shares (of for certain purchases of Class A shares), we advance commissions with the presumption that assets will remain in the Fund(s) long enough for expenses to be recouped. In the event of a redemption of shares purchased before the holding period expires, a CDSC is deducted for the redemption proceeds as described in the Funds' prospectuses. c. CDSC WAIVERS. An exemptive order issued by the Securities and Exchange Commission provides for a waiver of the CDSC on the following redemptions: (a) CDSC Shares (Class B shares and certain Class A shares) requested to be redeemed within one year of the death or initial determination of disability, as defined in Section 72(m)(7) of the Internal Revenue Code of 1986 (the "Code"), of a shareholder; (b) Class B shares representing taxable distributions made by qualified retirement plans or retirement accounts (not including rollovers) for which SunAmerica Asset Management Corp. serves as fiduciary; provided that, the plan participant or account holder has attained the age of 59 1/2 at the time the redemption is made; (c) Class B shares being redeemed up to the limit specified in the Funds' prospectuses made pursuant to any systematic withdrawal plan established by the Funds. The CDSC waiver, with respect to (a) above (i.e., death or disability), is only applicable in cases where the shareholder account is registered (i) in the name of an individual person, (ii) as a joint tenency with rights of survivorship, (iii) as community property, or (iv) in the name of a minor under the Uniform Gift or Uniform Transfer to Minors Acts. Notwithstanding the foregoing, we reserve the right to terminate any or all of these waiver provisions in the future. d. COMMISSION RECLAIMS. With respect to shares redeemed on which the CDSC is waived pursuant to (b) above (i.e., taxable distributions from the qualified retirement plans as described therein), 100% of the commission advanced to the selling Broker/Dealer in respect of such shares is subject to reclaim in the event the redemption occurs within the first year from the date of purchase, and 50% of the commission advanced is subject to reclaim if the redemption occurs in the second year form the date of purchase. With respect to Class A shares purchased at net asset value (which were part of a purchase of $1 million or more, and which were subject to a CDSC if redeemed within one year of purchase), 50% of the commission advanced is subject to reclaim if the redemption occurs during the second year from the date of purchase. For all other purchases of Class A share at net asset value, the entire commission advanced is subject to reclaim for any redemption occurring within the first two years form the date of purchase. The foregoing reclamations will be subtracted from future dealer concession payments payable according to Schedule A and, if sufficient dealer concession payments are not available to offset these reclamations, you will reimburse us for these amounts. 12. This Agreement shall become effective upon receipt by us of a signed copy hereof, and shall continue in effect until and unless terminated (i) pursuant to Section 9, above, or (ii) on account of your violation of any representation contained herein. This Agreement shall supersede all prior Selling Agreements with you relating to the shares of the Funds. This Agreement may be amended in writing signed by each of the parties hereto, except that we may amend Schedule A in our sole discretion upon notice to you. Any such amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors. SUNAMERICA CAPITAL SERVICES, INC. By: __________________________________ Name: ________________________________ Date ________ Title: _______________________________ The undersigned accepts your invitation to make available to its customers shares of the Funds and agrees to abide by the foregoing terms and conditions. The undersigned acknowledges receipt of prospectuses of the Funds in connection with this offering. _________________________ _____________________________ Firm Name Authorized Signatory _________________________ _____________________________ Address Print Name _________________________ _____________________________ Title of Signatory _________________________ _____________________________ Telephone Number Date _________________________ Fax Number SCHEDULE A SUNAMERICA MUTUAL FUNDS SUNAMERICA INCOME FUNDS SunAmerica Federal Securities Fund SunAmerica U.S. Government Securities Fund SunAmerica High Income Fund SunAmerica Diversified Income Fund SunAmerica Tax Exempt Insured Fund COMPENSATION (concession to selling dealer is based on amount of purchase) A SHARES PURCHASE AMOUNT DEALER CONCESSION $0 to $99,999 4.00% $100,000 to $249,999 3.00% $250,000 to $499,999 2.25% $500,000 to $999,999 1.35% $1,000,000 or more 1.00% Up to .25% Service Fee, paid quarterly, effective immediately B SHARES - 4.00% (no breakpoints) Up to .25% Service Fee, paid quarterly, beginning the 13th month following purchase ___________________________________________________________________ SUNAMERICA EQUITY FUNDS SunAmerica Blue Chip Growth Fund SunAmerica Mid-Cap Growth Fund SunAmerica Small Company Growth Fund SunAmerica Balanced Assets Fund SunAmerica Global Balanced Fund SunAmerica Growth and Income Fund COMPENSATION (concession to selling dealer is based on amount of purchase) A SHARES PURCHASE AMOUNT DEALER CONCESSION $0 to $49,999 5.00% $50,000 to $99,999 4.00% $100,000 to $249,999 3.00% $250,000 to $499,999 2.25% $500,000 to $999,999 1.35% $1,000,000 or more 1.00% Up to .25% Service Fee and .25% Marketing Allowance, paid quarterly, effective immediately B SHARES - 4.00% (no breakpoints) Up to .25% Service Fee, paid quarterly, beginning the 13th month following purchase SUNAMERICA MONEY MARKET FUNDS, INC. SunAmerica Money Market Fund A SHARES Up to .15% Service Fee, paid quarterly, effective immediately B SHARES - 4.00% (no breakpoints) Up to .15% Service Fee, paid quarterly, beginning the 13th month following purchase SCHEDULE B POLICIES AND PROCEDURES WITH RESPECT TO SALES OF SUNAMERICA MUTUAL FUNDS UNDER THE MULTIPLE PRICING STRUCTURE As certain SunAmerica mutual funds (the "Multiple Pricing Funds") offer shares subject to a front-end sales load ("Class A Shares") and shares subject to a contingent deferred sales charge ("Class B Shares"), it is important for investors, not only to choose a mutual fund that best suits their investment objectives, but also to choose the sales financing method best suits their particular needs. To assist your clients in these decisions and to ensure proper supervision of mutual fund purchase recommendations, we are instituting the following policies: (1) Any purchase of a SunAmerica Mutual Fund, for less than $100,000, may be of either Class A Shares or Class B shares. (2) Any purchase of a SunAmerica Mutual Fund, for either Class A Shares or Class B Shares, in the amount of $100,000 or more, but less than $1 million, must be reviewed and approved for appropriateness by the Broker/Dealer (who must maintain a written record of this review) in light of the relevant facts and circumstances pertaining to your client, including, but not limited to: (a) the specific purchase order dollar amount; (b) the length of time the client expects to hold his or her shares; and (c) any other relevant circumstances, such as the availability of purchases under letters of intent or pursuant to rights of accumulation. (3) A purchase of any SunAmerica Mutual Fund for $1 million or more must be for Class A Shares. (4) Generally, initial purchases of the SunAmerica Money Market Fund must be of Class A Shares. Class B Shares of such Fund are only available to those investors exchanging from Class B shares of another SunAmerica Mutual Fund, or those investors making an initial purchase who intend to exchange into Class B shares of another SunAmerica Mutual Fund within 90 days. GENERAL GUIDELINES There are instances where one financing method may be more advantageous to an investor than the other. For example, investors who may take advantage of breakpoints and those qualifying for a discount from the maximum sales load on Class A Shares, may determine that the purchase of Class A Shares with the payment of a reduced front-end sales charge is preferable to payment of the ongoing distribution fee imposed upon Class B Shares for the first seven years. On the other hand, investors whose orders would not take advantage of breakpoints to qualify for a discount may wish to defer the sales load and have all of their funds invested in Class B Shares initially. After a holding period of seven years, the Class B Shares convert to Class A Shares, and ongoing charges are thereafter equal. A National Association of Securities Dealers, Inc. rule specifically prohibits "breakpoint sales" of front-end load shares. A "breakpoint sale" is a sale to an investor of an amount of front-end load (Class A) shares just below the amount which would be subject to the next breakpoint on the fund's sales charge schedule. Because the deferred sales charge on Class B shares is gradually reduced to 0% over the six-year period in which the shares are held, a redemption of Class B shares just before an "anniversary date" is in some ways analogous to a breakpoint sale. An investor might wish to redeem just before an anniversary date for tax or other reasons, and an investor who chose to wait would continue to be at market risk. Nevertheless, you should inform your clients intending to redeem Class B shares near an anniversary date that, if the redemption were delayed, the deferred sales charge might be reduced. RESPONSIBILITIES OF THE BROKER/DEALER You must ensure that all employees receiving investor inquiries about the purchase of shares of Multiple Pricing Funds have advised the investor of the available financing methods offered by the mutual funds, and the impact of choosing one method over another. In certain instances, it may be appropriate to discuss the purchase directly with the investor. The foregoing guidelines, as well as the examples cited above, should assist you in reviewing purchase orders less than, equal to, or greater than $100,000. EFFECTIVENESS This policy is effective as of October 1, 1993 with respect to any order for shares of all Multiple Pricing Funds. Question relating to this policy should be directed to SunAmerica Capital Services, Inc., The SunAmerica Center, 733 Third Avenue, New York, NY 10017-3204. EX-99.7 14 DIRECTORS'/TRUSTEES' RETIREMENT PLAN EXHIBIT 7 SunAmerica Disinterested Trustees' and Directors' Retirement Plan Section 1. Adoption and Purpose. The SunAmerica Fund or the Anchor Series -------------------- Trust designated on Schedule A, as the case may be (the "Adopting Fund"), has adopted the SunAmerica Disinterested Trustees' and Directors' Retirement Plan (the "Plan"). The purpose of this Plan is to provide, in accordance with the following terms, deferred compensation in the nature of pension benefits for (i) Trustees of the Adopting Fund, if it is organized as a Massachusetts business trust, and (ii) Directors of the Adopting Fund, if it is organized as a corporation, who in either such case are not "interested persons" (as that term is defined in the Investment Company Act of 1940, as amended). Such disinterested Trustees or disinterested Directors are referred to herein collectively as "Trustees." Section 2. Effective Date. This Plan shall be effective as of January 1, -------------- 1993. Section 3. Participation. Each Trustee shall become a participant in this ------------- Plan ("Participant") upon the earlier of (a) attainment of age 55 and completion of ten consecutive years of service as a Trustee of any of the SunAmerica Funds or the Anchor Series Trust or (b) attainment of age 60 and completion of five consecutive years of service as a Trustee of any of the SunAmerica Funds or the Anchor Series Trust. Notwithstanding the foregoing, a Trustee who was a Trustee on January 1, 1993, and who at that time, was under age 55, shall become a Participant in this Plan upon completion of ten consecutive years of service, without regard to his age at the time of completion of such service. Years of service shall include service prior to the adoption of this Plan, and service as a Trustee of any predecessor fund of an Adopting Fund. Section 4. Eligibility for Benefits. Any Participant shall be eligible for ------------------------ the benefits described in Section 5 of the Plan upon (i) his death or disability (within the meaning of Subsection 5(c) of the Plan) while a Trustee or (ii) the termination of his tenure as a Trustee, other than by removal for cause, after becoming a Participant, as provided in Section 3 of the Plan, and on or before his 70th birthday. No benefits shall be payable to any Trustee whose service as a Trustee terminates otherwise than as provided in this Section 4. Failure to satisfy the requirements of this Section 4 shall result in forfeiture of any benefits to which a Trustee might otherwise have been entitled under this Plan. Section 5. Benefits. -------- (a) Amount. As of each of the first ten birthdays, prior to his 70th ------ birthday, on which he is both a Trustee and a Participant, each Participant shall be credited with an amount equal to 50% of his regular fees, excluding separate committee meeting fees, for his services as a Trustee of the Adopting Fund for the calendar year in which such birthday occurs (but in no event shall such amount be less than 50% of the regular fees, excluding separate committee meeting fees, in effect for 1993). As of each birthday, prior to his 70th birthday, on which he is both a Trustee and a Participant, each Participant shall also be credited with an amount equal to 8.50% of any amount credited under this Section 5(a) as of any previous birthday. Following a Participant's satisfaction of the requirements of Section 4 for eligibility for benefits under the Plan, any amounts previously credited under this Section 5 that have not been distributed as of any subsequent birthday of the Participant (or any subsequent corresponding date on which the Participant's birthday would have occurred if he were alive) shall be credited as of such subsequent birthday or corresponding date with 8.5% of such undistributed amounts. (b) Retirement Benefits. On or before the earlier of (i) the last day ------------------- of the calendar year immediately preceding the calendar year in which payment of benefits commences under this Subsection 5(b) or (ii) the date six months preceding the date on which payment of benefits commences under this Subsection 5(b), each Participant may elect in writing, in a form and manner acceptable to the Committee, as defined herein in Section 7, the form for payment of benefits under the Plan. Any such election may be revoked and a new election made prior to the earlier of (i) the last day of the calendar year immediately preceding the calendar year in which payment of benefits commences under this Subsection 5(b) or (ii) the date six months preceding the date on which payment of benefits commences under this Subsection 5(b), but any election in effect as of the earlier of such dates shall be irrevocable. No Participant may make more than one election in any calendar year, and all elections shall be subject to approval by the Committee. A Participant may elect to receive such benefits in the form of either (i) a lump sum or (ii) quarterly, semi-annual or annual installments for a period of 5, 10 or 15 years, as the Participant may elect, with payment of each installment on the quarterly, semiannual or annual anniversary of the initial payment hereunder. The amount of each installment shall be a quotient, the numerator of which is the aggregate amount credited to the Participant under Subsection 5(a) as of the date for payment under this Subsection 5(b), reduced by the amount of all previous payments under the Plan, and the denominator of which is the number of installments remaining. Payment of benefits shall commence as soon as practicable following the Participant's satisfaction of the requirements of Section 4 by reason of the termination of his tenure as a Trustee. If no election is in effect at such time, benefits shall be paid in a lump SUM. (c) Disability Benefits. If a Participant satisfies the requirements ------------------- of Section 4 by becoming disabled while a Trustee, all amounts credited to him under Subsection 5(a) shall be paid to him as soon as practicable in accordance with his election for the form for payment of retirement benefits. If no election is in effect at such time, benefits shall be paid in a lump sum. A Participant shall be disabled if the Committee determines, in its sole discretion, that he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration. (d) Death Benefits. If a Participant dies after satisfying the -------------- requirements of Section 4 (or satisfies such requirements by reason of his death) but before receiving all amounts credited to him under Subsection 5(a), any such remaining amounts shall be paid to the beneficiary designated in writing by the Participant, which designation shall be in a form and manner acceptable to the Committee, with payment commencing as soon as practicable after the Participant's death. Payment to the Participant's designated beneficiary shall be in a lump sum or installments for a period of years, in accordance with the Participant's election for the form for payment of retirement benefits. If no election is in effect at such time, benefits shall be paid in a lump sum. If the Participant fails to execute a valid beneficiary designation, any amounts otherwise payable to a designated beneficiary under this Subsection 5(d) shall be paid in a lump sum to the Participant's estate as soon as practicable after the Participant's death. If the Committee is unable to locate the Participant's beneficiary within two years following the Participant's death, any amounts otherwise payable to the beneficiary under this Subsection 5(d) shall be paid in a lump sum to the Participant's estate. Notwithstanding any provision of this Subsection 5(d) or any beneficiary designation by the Participant to the contrary, any Participant's surviving spouse whose interests in marital property are determined under the community property laws of any state shall receive 50% of amounts otherwise payable under this Subsection 5(d), and the remainder of such amounts shall be paid in accordance with this Subsection 5(d). Section 6. Participants' Rights Unfunded and Unsecured. This Plan shall not ------------------------------------------- be deemed to create any trust, escrow or other funding arrangement. The right of any Participant to benefits under this Plan shall be an unsecured claim against the general assets of the Adopting Fund. If the Adopting Fund is merged with any other SunAmerica Fund(s), the obligations of the Adopting Fund under this Plan shall become obligations of the merged fund and shall be aggregated with any similar pre-merger obligations of the other SunAmerica Fund(s) involved in the merger under any similar retirement plan. If the Adopting Fund is liquidated, all amounts credited to a Participant under Section 5(a) as of the liquidation date shall be paid to him in a lump sum as soon as practicable, provided that if the Participant has not yet reached age 60, such amounts shall be discounted to reflect payment prior to age 60, using the interest rates used by the Pension Benefit Guaranty Corporation as of the date of distribution to determine the present value of a lump sum distribution on termination of a tax-qualified pension plan. Section 7. Administration. This Plan shall be administered by a committee -------------- (the "Committee"), the members of which shall be appointed by the Board of Trustees or Board of Directors of the Adopting Fund. The Committee shall be responsible for the interpretation of the Plan and establishment of the rules and regulations governing Plan administration. Any decision or action made or taken by the Committee, arising out of or in connection with the construction, administration or interpretation of the Plan or of its rules and regulations, shall be conclusive and binding upon all Participants. In making any such decision or taking any such action, the Committee shall have full and complete discretion and authority to make eligibility determinations, construe provisions of the Plan and resolve factual issues. All expenses of administering the Plan shall be paid by the Adopting Fund and shall not affect the Participants, right to or amount of benefits. Section 8. Termination of Plan. The Board of Trustees of the Adopting Fund ------------------- may terminate the Plan at any time. Upon termination of the Plan, benefits shall continue to be credited and paid in accordance with Section 5 hereof to, or in respect of, any deceased Participant or any Trustee or former Trustee who is a Participant as of the date of termination of the Plan. No other payments shall be made to any person under the Plan after the date of termination of the Plan. Section 9. Amendment of Plan. The Board of Trustees or Board of Directors ----------------- of the Adopting Fund may, without the consent of any Participant, amend the Plan at any time and from time to time, provided, however, that no amendment shall divest any Participant of rights to which he would have been entitled under Section 8 if the Plan had been terminated on the effective date of such amendment. Section 10. Rights Non-Assignable. The rights of a Participant to receive --------------------- payments under Section 5 shall not be assignable, nor shall they be subject to garnishment, attachment, or any other legal process of creditors of a Participant. Nothing in the Plan shall create any benefit, right, cause of action, assignment, transfer or encumbrance in favor of any spouse, heirs or the estate of any Participant. Notwithstanding the provisions of this Section 10, each Participant agrees, as a condition of participation, to hold the Adopting Fund, its officers, Board of Trustees or Board of Directors, employees and agents harmless from any claim that may arise out of the Adopting Fund's compliance with an order of any state or Federal court, whether such order effects a judgment of such court or is issued to enforce a judgment or order of another court. Section 11. Withholding of Taxes. The Adopting Fund shall have the right to -------------------- retain from distributions payable to a Participant amounts required by any government to be withheld and paid to such government with respect to such payments. Section 12. No Agreement to Retain Trustees. Nothing in this Plan shall be ------------------------------- construed to provide any Trustee with an agreement or understanding, express or implied, that the Trustee shall be retained as a Trustee for any specified period of time or that the Board of Trustees or Board of Directors of the Adopting Fund shall nominate the Trustee for reelection. Section 13. Acceptance. The acceptance of payments under this Plan by any ---------- Participant constitutes his acceptance of the terms of the Plan and his agreement to be bound thereby. SUNAMERICA DIRECTORS'/TRUSTEES' RETIREMENT PLAN ENROLLMENT APPLICATION FORM 1. PERSONAL DATA Name:______________________________ Date Elected:____________________________ Address:___________________________ Social Securities Number:________________ ___________________________________ Telephone Number:________________________ City, State, Zip:__________________ Birthdate:_______________________________ ________________________________________________________________________________ 2. METHOD OF PAYMENT OF BENEFITS (Please Check One) (a)___Lump Sum or (b)___Quarterly, ___Semi-Annual or ___ Annual installments made over a period of: ___5 years ___10 years ___15 years Any such election may be revoked and a new election made prior to the earlier of (i) the last day of the calendar year immediately preceding the calendar year in which payment of benefits commences under Subsection 5(b)of the Plan or (ii) the date six months preceding the date on which payment of benefits commences under Subsection 5(b), but any election in effect as of the earlier of such dates shall be irrevocable. You may make only one election per calendar year, and all elections are subject to approval by the Committee. ________________________________________________________________________________ 3. DESIGNATION OF BENEFICIARY Name:___________________________________________________________________________ Address:________________________________________________________________________ Telephone:______________________________________________________________________ Social Security Number:_________________________________________________________ If you fail to designate a beneficiary or your beneficiary cannot be located within two (2) years after your death, any death benefits shall be paid to your estate in accordance with the provisions of Subsection 5(d) of the Plan. Notwithstanding any beneficiary designation, if you are subject to the community property laws of any state, 50% of the amount of the death benefits shall be payable to your surviving spouse under Subsection 5(d) of the Plan. Any beneficiary named which can be located by reasonable efforts within two (2) years after your death will receive payments in accordance with your election for the method of payment of benefits in Part 2 above. This Form automatically revokes any prior beneficiary designations you have made. ______________________________________ ____________________________ Participant's Signature Date ________________________________________________________________________________ Acknowledgment -------------- I understand that I shall become a participant in the Retirement Plan in accordance with the provisions of Section 3 of the Plan. Signature ____________________________ Date________________________ EX-99.8 15 CUSTODIAN CONTRACT EXHIBIT 99.8 CUSTODIAN CONTRACT Between SUNAMERICA INCOME FUNDS and STATE STREET BANK AND TRUST COMPANY TABLE OF CONTENTS Page 1. Employment of Custodian and Property to be Held By It 1 2. Duties of the Custodian with Respect to Property of the Fund Held by the Custodian in the United States 3 2.1 Holding Securities 3 2.2 Delivery of Securities 3 2.3 Registration of Securities 8 2.4 Bank Accounts 9 2.5 Availability of Federal Funds 10 2.6 Collection of Income 10 2.7 Payment of Fund Monies 11 2.8 Liability for Payment in Advance of Receipt of Securities Purchased 14 2.9 Appointment of Agents 14 2.10 Deposit of Fund Assets in Securities System 14 2.11 Segregated Account 17 2.12 ownership certificates for Tax Purposes 19 2.13 Proxies 19 2.14 Communications Relating to Portfolio Securities 19 3. Duties of the Custodian with Respect to Property of the Fund Held Outside of the United States 20 3.1 Appointment of Foreign Sub-Custodians 20 3.2 Assets to be Held 21 3.3 Foreign securities Depositories 21 3.4 Agreements with Foreign Banking Institutions 22 3.5 Access of Independent Accountants of the Fund 22 3.6 Reports by Custodian 23 3.7 Transactions in Foreign Custody Account 23 3.8 Liability of Foreign Sub-Custodians 24 3.9 Liability of Custodian 25 3.10 Reimbursement for Advances 26 3.11 monitoring Responsibilities 26 3.12 Branches of U.S. Banks 27 3.13 Tax Law 27 4. Payments for Sales or Repurchase or Redemptions of Shares of the Fund 28 5. Proper Instructions 29 6. Actions Permitted Without Express Authority 30 7. Evidence of Authority 30 8. Duties of Custodian With Respect to the Books of Account and Calculation of Net Asset Value and Net Income 31 9. Records 32 10. Opinion of Fund's Independent Accountants 32 11. Reports to Fund by Independent Public Accountants 33 12. Compensation of Custodian 33 13. Responsibility of Custodian 33 14. Effective Period, Termination and Amendment 35 15. Successor Custodian 36 16. Interpretive and Additional Provisions 38 17. Additional Funds 38 18. Massachusetts Law to Apply 38 19. Prior Contracts 39 20. Shareholder Communications Election 39 CUSTODIAN CONTRACT This Contract between SunAmerica Income Funds, a business trust organized and existing under the laws of Massachusetts, having its principal place of business at 733 Third Avenue, New York, New York, 10017-3204, hereinafter called the "Fund", and State Street Bank and Trust Company, a Massachusetts trust company, having its principal place of business at 225 Franklin Street, Boston, Massachusetts, 02110, hereinafter called the "Custodian", WITNESSETH: WHEREAS, the Fund is authorized to issue shares in separate series, with each such series representing interests in a separate portfolio of securities and other assets; and WHEREAS, the Fund intends to initially offer shares in five series, SunAmerica U.S. Government Securities Fund, SunAmerica Federal Securities Fund, SunAmerica Diversified Income Fund, SunAmerica High Income Fund and SunAmerica Tax Exempt Insured Fund (such series together with all other series subsequently established by the Fund and made subject to this Contract in accordance with paragraph 17, being herein referred to as the "Portfolio(s) 11); NOW THEREFORE, in consideration of the mutual covenants and agreements hereinafter contained, the parties hereto agree as follows: 1. Employment of Custodian and Property to be Held by It The Fund hereby employs the Custodian as the custodian of the assets of the Portfolios of the Fund, including securities which the Fund, on behalf of the applicable Portfolio desires to be held in places within the United States ("domestic securities") and securities it desires to be held outside the United States ("foreign securities") pursuant to the provisions of the Declaration of Trust. The Fund on behalf of the Portfolio(s) agrees to deliver to the Custodian all securities and cash of the Portfolios, and all payments of income, payments of principal or capital distributions received by it with respect to all securities owned by the Portfolio(s) from time to time, and the cash consideration received by it for such new or treasury shares of beneficial interest of the Fund representing interests in the Portfolios, ("Shares") as may be issued or sold from time to time. The Custodian shall not be responsible for any property of a Portfolio held or received by the Portfolio and not delivered to the Custodian. Upon receipt of "Proper Instructions" (within the meaning of Article 5), the Custodian shall on behalf of the applicable Portfolio(s) from time to time employ one or more sub-custodians, located in the United States but only in accordance with an applicable vote by the Board of Trustees of the Fund on behalf of the applicable Portfolio(s), and provided that the Custodian shall have no more or less responsibility or liability to the Fund on account of any actions or omissions of any sub-custodian so employed than any such sub-custodian has to the Custodian. The Custodian may employ as sub-custodian for the Fund's foreign securities on behalf of the applicable Portfolio(s) the foreign banking institutions and foreign securities depositories designated in Schedule A hereto but only in accordance with the provisions of Article 3. 2. Duties of the Custodian with Respect to Property of the Fund Held By the Custodian in the United States 2.1 Holding Securities. The Custodian shall hold and physically segregate for the account of each Portfolio all non-cash property, to be held by it in the United States including all domestic securities owned by such Portfolio, other than (a) securities which are maintained pursuant to Section 2.10 in a clearing agency which acts as a securities depository or in a book-entry system authorized by the U.S. Department of the Treasury, collectively referred to herein as "Securities System". 2.2 Delivery of Securities. The Custodian shall release and deliver domestic securities owned by a Portfolio held by the Custodian or in a Securities System account of the Custodian only upon receipt of Proper Instructions from the Fund on behalf of the applicable Portfolio, which may be continuing instructions when deemed appropriate by the parties, and only in the following cases: 1) Upon sale of such securities for the account of the Portfolio and receipt of payment therefor; 2) Upon the receipt of payment in connection with any repurchase agreement related to such securities entered into by the Portfolio; 3) In the case of a sale effected through a Securities System, in accordance with the provisions of section 2.10 hereof; 4) To the depository agent in connection with tender or other similar offers for securities of the Portfolio; 5) To the issuer thereof or its agent when such securities are called, redeemed, retired or otherwise become payable; provided that, in any such case, the cash or other consideration is to be delivered to the Custodian; 6) To the issuer thereof, or its agent, for transfer into the name of the Portfolio or into the name of any nominee or nominees of the Custodian or into the name or nominee name of any agent appointed pursuant to Section 2.9 or into the name or nominee name of any sub custodian appointed pursuant to Article 1; or for exchange for a different number of bonds, certificates or other evidence representing the same aggregate face amount or number of units; provided that, in any such case, the new securities are to be delivered to the Custodian; 7) Upon the sale of such securities for the account of the Portfolio, to the broker or its clearing agent, against a receipt, for examination in accordance with "street delivery" custom; provided that in any such case, the Custodian shall have no responsibility or liability for any loss arising from the delivery of such securities prior to receiving payment for such securities except as may arise from the Custodian's own negligence or willful misconduct; 8) For exchange or conversion pursuant to any plan of merger, consolidation, recapitalization, reorganization or readjustment of the securities of the issuer of such securities, or pursuant to provisions for conversion contained in such securities, or pursuant to any deposit agreement; provided that, in any such case, the new securities and cash, if any, are to be delivered to the Custodian; 9) In the case of warrants, rights or similar securities, the surrender thereof in the exercise of such warrants, rights or similar securities or the surrender of interim receipts or temporary securities for definitive securities; provided that, in any such case, the new securities and cash, if any, are to be delivered to the Custodian; 10) For delivery in connection with any loans of securities made by the Portfolio, but only against receipt of adequate collateral as agreed upon from time to time by the Custodian and the Fund on behalf of the Portfolio, which may be in the form of cash or obligations issued by the United States government, its agencies or instrumentalities, except that in connection with any loans for which collateral is to be credited to the Custodian's account in the book-entry system authorized by the U.S. Department of the Treasury, the Custodian will, not be held liable or responsible for the delivery of securities owned by the Portfolio prior to the receipt of such collateral; 11) For delivery as security in connection with any borrowings by the Fund on behalf of the Portfolio requiring a pledge of assets by the Fund on behalf of the Portfolio, but only against receipt of amounts borrowed; 12) For delivery in accordance with the provisions of any agreement among the Fund on behalf of the Portfolio, the Custodian and a broker dealer registered under the Securities Exchange Act of 1934 (the "Exchange Act") and a member of The National Association of Securities Dealers, Inc. ("NASD"), relating to compliance with the rules of The options Clearing Corporation and of any registered national securities exchange, or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Portfolio of the Fund; 13) For delivery in accordance with the provisions of any agreement among the Fund on behalf of the Portfolio, the Custodian, and a Futures commission Merchant registered under the Commodity Exchange Act, relating to compliance with the rules of the Commodity Futures Trading Commission and/or any Contract Market, or any similar organization or organizations, regarding account deposits in connection with transactions by the Portfolio of the Fund; 14) Upon receipt of instructions from the transfer agent ("Transfer Agent") for the Fund, for delivery to such Transfer Agent or to the holders of shares in connection with distributions in kind, as may be described from time to time in the currently effective prospectus and statement of additional information of the Fund, related to the Portfolio ("Prospectus"), in satisfaction of requests by holders of Shares for repurchase or redemption; and 15) For any other proper corporate purpose, but only upon receipt of, in addition to Proper Instructions from the Fund on behalf of the applicable Portfolio, a certified copy of a resolution of the Board of Trustees or of the Executive Committee signed by an officer of the Fund and certified by the Secretary or an Assistant Secretary, specifying the securities of the Portfolio to be delivered, setting forth the purpose for which such delivery is to be made, declaring such purpose to be a proper corporate purpose, and naming the person or persons to whom delivery of such securities shall be made. 2.3 Registration of Securities. Domestic securities held by the Custodian (other than bearer securities) shall be registered in the name of the Portfolio or in the name of any nominee of the Fund on behalf of the Portfolio or of any nominee of the Custodian which nominee shall be assigned exclusively to the Portfolio, unless the Fund has authorized in writing the appointment of a nominee to be used in common with other registered investment companies having the same investment adviser as the Portfolio, or in the name or nominee name of any agent appointed pursuant to Section 2.9 or in the name or nominee name of any sub-custodian appointed pursuant to Article 1. All securities accepted by the Custodian on behalf of the Portfolio under the terms of this Contract shall be in "street name" or other good delivery form. If, however, the Fund directs the Custodian to maintain securities in "street name", the Custodian shall utilize its best efforts only to timely collect income due the Fund on such securities and to notify the Fund on a best efforts basis only of relevant corporate actions including, without limitation, pendency of calls, maturities, tender or exchange offers. 2.4 Bank Accounts. The Custodian shall open and maintain a separate bank account or accounts in the United States in the name of each Portfolio of the Fund, subject only to draft or order by the Custodian acting pursuant to the terms of this Contract, and shall hold in such account or accounts, subject to the provisions hereof, all cash received by it from or for the account of the Portfolio, other than cash maintained by the Portfolio in a bank account established and used in accordance with Rule 17f-3 under the Investment Company Act of 1940. Funds held by the Custodian for a Portfolio may be deposited by it to its credit as Custodian in the Banking Department of the Custodian or in such other banks or trust companies as it may in its discretion deem necessary or desirable; provided, however, that every such bank or trust company shall be qualified to act as a custodian under the Investment Company Act of 1940 and that each such bank or trust company and the funds to be deposited with each such bank or trust company shall on behalf of each applicable Portfolio be approved by vote of a majority of the Board of Trustees of the Fund. Such funds shall be deposited by the Custodian in its capacity as Custodian and shall be withdrawable by the Custodian only in that capacity. 2.5 Availability of Federal funds. Upon mutual agreement between the Fund on behalf of each applicable Portfolio and the Custodian, the Custodian shall, upon the receipt of Proper Instructions from the Fund on behalf of a Portfolio, make federal funds available to such Portfolio as of specified times agreed upon from time to time by the Fund and the Custodian in the amount of checks received in payment for Shares of such Portfolio which are deposited into the Portfoliol's account. 2.6 Collection of Income. Subject to the provisions of Section 2.3, the Custodian shall collect on a timely basis all income and other payments with respect to registered domestic securities held hereunder to which each Portfolio shall be entitled either by law or pursuant to custom in the securities business, and shall collect on a timely basis all income and other payments with respect to bearer domestic securities if, on the date of payment by the issuer, such securities are held by the Custodian or its agent thereof and shall credit such income, as collected, to such Portfoliol's custodian account. Without limiting the generality of the foregoing, the Custodian shall detach and present for payment all coupons and other income items requiring presentation as and when they become due and shall collect interest when due on securities held hereunder. Income due each Portfolio on securities loaned pursuant to the provisions of Section 2.2 (10) shall be the responsibility of the Fund. The Custodian will have no duty or responsibility in connection therewith, other than to provide the Fund with such information or data as may be necessary to assist the Fund in arranging for the timely delivery to the Custodian of the income to which the Portfolio is properly entitled. 2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from the Fund on behalf of the applicable Portfolio, which may be continuing instructions when deemed appropriate by the parties, the Custodian shall pay out monies of a Portfolio in the following cases only: 1) Upon the purchase of domestic securities, options, futures contracts or options on futures contracts for the account of the Portfolio but only (a) against the delivery of such securities or evidence of title to such options, futures contracts or options on futures contracts to the Custodian (or any bank, banking firm or trust company doing business in the United States or abroad which is qualified under the Investment Company Act of 1940, as amended, to act as a custodian and has been designated by the Custodian as its agent for this purpose) registered in the name of the Portfolio or in the name of a nominee of the Custodian referred to in Section 2.3 hereof or in proper form for transfer; (b) in the case of a purchase effected through a Securities System, in accordance with the conditions set forth in Section 2.10 hereof; (c) in the case of repurchase agreements entered into between the Fund on behalf of the Portfolio and the Custodian, or another bank, or a broker-dealer which is a member of NASD, (i) against delivery of the securities either in certificate form or through an entry crediting the Custodian's account at the Federal Reserve Bank with such securities or (ii) against delivery of the receipt evidencing purchase by the Portfolio of securities owned by the Custodian along with written evidence of the agreement by the Custodian to repurchase such securities from the Portfolio or (d) for transfer to a time deposit account of the Fund in any bank, whether domestic or foreign; such transfer may be effected prior to receipt of a confirmation from a broker and/or the applicable bank pursuant to Proper Instructions from the Fund as defined in Article 5; 2) In connection with conversion, exchange or surrender of securities owned by the Portfolio as set forth in Section 2.2 hereof; 3) For the redemption or repurchase of Shares issued by the Portfolio as set forth in Article 4 hereof; 4) For the payment of any expense or liability incurred by the Portfolio, including but not limited to the following payments for the account of the Portfolio: interest, taxes, management, accounting, transfer agent and legal fees, and operating expenses of the Fund whether or not such expenses are to be in whole or part capitalized or treated as deferred expenses; 5) For the payment of any dividends on Shares of the Portfolio declared pursuant to the governing documents of the Fund; 6) For payment of the amount of dividends received in respect of securities sold short; 7) For any other proper purpose, but only upon receipt of, in addition to Proper Instructions from the Fund on behalf of the Portfolio, a certified copy of a resolution of the Board of Trustees or of the Executive Committee of the Fund signed by an officer of the Fund and certified by its Secretary or an Assistant Secretary, specifying the amount of such payment, setting forth the purpose for which such payment is to be made, declaring such purpose to be a proper purpose, and naming the person or persons to whom such payment is to be made. 2.8 Liability for Payment in Advance of Receipt of Securities Purchased. Except as specifically stated otherwise in this Contract, in any and every case where payment for purchase of domestic securities for the account of a Portfolio is made by the Custodian in advance of receipt of the securities purchased in the absence of specific written instructions from the Fund on behalf of such Portfolio to so pay in advance, the Custodian shall be absolutely liable to the Fund for such securities to the same extent as if the securities had been received by the Custodian. 2.9 Appointment of Agents. The Custodian may at any time or times in its discretion appoint (and may at any time remove) any other bank or trust company which is itself qualified under the Investment Company Act of 1940, as amended, to act as a custodian, as its agent to carry out such of the provisions of this Article 2 as the Custodian may from time to time direct; provided, however, that the appointment of any agent shall not relieve the Custodian of its responsibilities or liabilities hereunder. 2.10 Deposit of Fund Assets in securities Systems. The Custodian may deposit and/or maintain securities owned by a Portfolio in a clearing agency registered with the Securities and Exchange Commission under Section 17A of the Securities Exchange Act of 1934, which acts as a securities depository, or in the book-entry system authorized by the U.S. Department of the Treasury and certain federal agencies, collectively referred to herein as "Securities System" in accordance with applicable Federal Reserve Board and Securities and Exchange Commission rules and regulations, if any, and subject to the following provisions: 1) The Custodian may keep securities of the Portfolio in a Securities System provided that such securities are represented in an account ("Account") of the Custodian in the Securities System which shall not include any assets of the Custodian other than assets held as a fiduciary, custodian or otherwise for customers; 2) The records of the Custodian with respect to securities of the Portfolio which are maintained in a securities System shall identify by book-entry those securities belonging to the Portfolio; 3) The Custodian shall pay for securities purchased for the account of the Portfolio upon (i) receipt of advice from the Securities System that such securities have been transferred to the Account, and (ii) the making of an entry on the records of the Custodian to reflect such payment and transfer for the account of the Portfolio. The Custodian shall transfer securities sold for the account of the Portfolio upon (i) receipt of advice from the Securities System that payment for such securities has been transferred to the Account, and (ii) the making of an entry on the records of the Custodian to reflect such transfer and payment for the account of the Portfolio. Copies of all advices from the Securities System of transfers of securities for the account of the Portfolio shall identify the Portfolio, be maintained for the Portfolio by the Custodian and be provided to the Fund at its request. Upon request, the Custodian shall furnish the Fund on behalf of the Portfolio confirmation of each transfer to or from the account of the Portfolio in the form of a written advice or notice and shall furnish to the Fund on behalf of the Portfolio copies of daily transaction sheets reflecting each day's transactions in the Securities System for the account of the Portfolio; 4) The Custodian shall provide the Fund for the Portfolio with any report obtained by the Custodian on the Securities System's accounting system, internal accounting control and procedures for safeguarding securities deposited in the Securities System; 5) The Custodian shall have received from the Fund on behalf of the Portfolio the initial or annual certificate, as the case may be, required by Article 14 hereof; 6) Anything to the contrary in this Contract notwithstanding, the Custodian shall be liable to the Fund for the benefit of the Portfolio for any loss or damage to the Portfolio resulting from use of the Securities System by reason of any negligence, misfeasance or misconduct of the Custodian or any of its agents or of any of its or their employees or from failure of the Custodian or any such agent to enforce effectively such rights as it may have against the Securities System; at the election of the Fund, it shall be entitled to be subrogated to the rights of the Custodian with respect to any claim against the Securities System or any other person which the Custodian may have as a consequence of any such loss or damage if and to the extent that the Portfolio has not been made whole for any such loss or damage. 2.11 Segregated Account. The Custodian shall upon receipt of Proper Instructions from the Fund on behalf of each applicable Portfolio establish and maintain a segregated account or accounts for and on behalf of each such Portfolio, into which account or accounts may be transferred cash and/or securities, including securities maintained in an account by the Custodian pursuant to Section 2.10 hereof, (i) in accordance with the provisions of any agreement among the Fund on behalf of the Portfolio, the Custodian and a broker-dealer registered under the Exchange Act and a member of the NASD (or any futures commission merchant registered under the Commodity Exchange Act), relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange (or the Commodity Futures Trading Commission or any registered contract market), or of any similar organization or organizations, regarding escrow or other arrangements in connection with transactions by the Portfolio, (ii) for purposes of segregating cash or government securities in connection with options purchased, sold or written by the Portfolio or commodity futures contracts or options thereon purchased or sold by the Portfolio, (iii) for the purposes of compliance by the Portfolio with the procedures required by Investment Company Act Release No. 10666, or any subsequent release or releases of the Securities and Exchange Commission relating to the maintenance of segregated accounts by registered investment companies and (iv) for other proper corporate purposes, but only, in the case of clause (iv), upon receipt of, in addition to Proper Instructions from the Fund on behalf of the applicable Portfolio, a certified copy of a resolution of the Board of Trustees or of the Executive Committee signed by an officer of the Fund and certified by the Secretary or an Assistant Secretary, setting forth the purpose or purposes of such segregated account and declaring such purposes to be proper corporate purposes. 2.12 Ownership Certificates for Tax Purposes. The Custodian shall execute ownership and other certificates and affidavits for all federal and state tax purposes in connection with receipt of income or other payments with respect to domestic securities of each Portfolio held by it and in connection with transfers of securities. 2.13 Proxies. The Custodian shall, with respect to the domestic securities held hereunder, cause to be promptly executed by the registered holder of such securities, if the securities are registered otherwise than in the name of the Portfolio or a nominee of the Portfolio, all proxies, without indication of the manner in which such proxies are to be voted, and shall promptly deliver to the Portfolio such proxies, all proxy soliciting materials and all notices relating to such securities. 2.14 Communications Relating to Portfolio Securities Subject to the provisions of Section 2.3, the Custodian shall transmit promptly to the Fund for each Portfolio all written information (including, without limitation, pendency of calls and maturities of domestic securities and expirations of rights in connection therewith and notices of exercise of call and put options written by the Fund on behalf of the Portfolio and the maturity of futures contracts purchased or sold by the Portfolio) received by the Custodian from issuers of the securities being held for the Portfolio. With respect to tender or exchange offers, the Custodian shall transmit promptly to the Portfolio all written information received by the Custodian from issuers of the securities whose tender or exchange is sought and from the party (or his agents) making the tender or exchange offer. If the Portfolio desires to take action with respect to any tender offer, exchange offer or any other similar transaction, the Portfolio shall notify the Custodian at least three business days prior to the date on which the Custodian is to take such action. 3. Duties of the Custodian with Respect to Property of the Fund Held Outside of the United States 3.1 Appointment of Foreign Sub-Custodians The Fund hereby authorizes and instructs the Custodian to employ as sub-custodians for the Portfoliol's securities and other assets maintained outside the United States the foreign banking institutions and foreign securities depositories designated on Schedule A hereto ("foreign sub-custodians"). Upon receipt of "Proper Instructions", as defined in Section 5 of this Contract, together with a certified resolution of the Fund's Board of Trustees, the Custodian and the Fund may agree to amend Schedule A hereto from time to time to designate additional foreign banking institutions and foreign securities depositories to act as sub-custodian. Upon receipt of Proper Instructions, the Fund may instruct the Custodian to cease the employment of any one or more such sub-custodians for maintaining custody of the Portfoliol's assets. 3.2 Assets to be Held. The Custodian shall limit the securities and other assets maintained in the custody of the foreign sub-custodians to: (a) "foreign securities", as defined in paragraph (c)(1) of Rule 17f-5 under the Investment Company Act of 1940, and (b) cash and cash equivalents in such amounts as the Custodian or the Fund may determine to be reasonably necessary to effect the Portfoliol's foreign securities transactions. The Custodian shall identify on its books as belonging to the Fund, the foreign securities of the Fund held by each foreign sub-custodian. 3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon in writing by the Custodian and the Fund, assets of the Portfolios shall be maintained in foreign securities depositories only through arrangements implemented by the foreign banking institutions serving as sub-custodians pursuant to the terms hereof. Where possible, such arrangements shall include entry into agreements containing the provisions set forth in Section 3.4 hereof. 3.4 Agreements with Foreign Banking Institutions. Each agreement with a foreign banking institution shall be substantially in the form set forth in Exhibit 1 hereto and shall provide that: (a) the assets of each Portfolio will not be subject to any right, charge, security interest, lien or claim of any kind in favor of the foreign banking institution or its creditors or agent, except a claim of payment for their safe custody or administration; (b) beneficial ownership for the assets of each Portfolio will be freely transferable without the payment of money or value other than for custody or administration; (c) adequate records will be maintained identifying the assets as belonging to each applicable Portfolio; (d) officers of or auditors employed by, or other representatives of the Custodian, including to the extent permitted under applicable law the independent public accountants for the Fund, will be given access to the books and records of the foreign banking institution relating to its actions under its agreement with the Custodian; and (e) assets of the Portfolios held by the foreign sub-custodian will be subject only to the instructions of the Custodian or its agents. 3.5 Access of Independent Accountants of the Fund. Upon request of the Fund, the Custodian will use its best efforts to arrange for the independent accountants of the Fund to be afforded access to the books and records of any foreign banking institution employed as a foreign sub-custodian insofar as such books and records relate to the performance of such foreign banking institution under its agreement with the Custodian. 3.6 Reports by Custodian. The Custodian will supply to the Fund from time to time, as mutually agreed upon, statements in respect of the securities and other assets of the Portfolio(s) held by foreign sub-custodians, including but not limited to an identification of entities having possession of the Portfolio(s) securities and other assets and advices or notifications of any transfers of securities to or from each custodial account maintained by a foreign banking institution for the Custodian on behalf of each applicable Portfolio indicating, as to securities acquired for a Portfolio, the identity of the entity having physical possession of such securities. 3.7 Transactions in Foreign Custody Account (a) Except as otherwise provided in paragraph (b) of this Section 3.7, the provision of Sections 2.2 and 2.7 of this Contract shall apply, mutatis mutandis to the foreign securities of the Fund held outside the United States by foreign sub-custodians. (b) Notwithstanding any provision of this Contract to the contrary, settlement and payment for securities received for the account of each applicable Portfolio and delivery of securities maintained for the account of each applicable Portfolio may be effected in accordance with the customary established securities trading or securities processing practices and procedures in the jurisdiction or market in which the transaction occurs, including, without limitation, delivering securities to the purchaser thereof or to a dealer therefor (or an agent for such purchaser or dealer) against a receipt with the expectation of receiving later payment for such securities from such purchaser or dealer. (c) Securities maintained in the custody of a foreign sub- custodian may be maintained in the name of such entity's nominee to the same extent as set forth in Section 2.3 of this Contract, and the Fund agrees to hold any such nominee harmless from any liability as a holder of record of such securities. 3.8 Liability of Foreign Sub-Custodians. Each agreement pursuant to which the Custodian employs a foreign banking institution as a foreign sub-custodian shall require the institution to exercise reasonable care in the performance of its duties and to indemnify, and hold harmless, the Custodian and the Fund from and against any loss (including reasonable attorneys fees and court cost), damage, cost, expense, liability or claim arising out of or in connection with the institution's performance of such obligations. At the election of the Fund, it shall be entitled to be subrogated to the rights of the Custodian with respect to any claims against a foreign banking institution as a consequence of any such loss (including reasonable attorneys fees and court cost), damage, cost, expense, liability or claim if and to the extent that the Fund has not been made whole for any such loss, damage, cost, expense, liability or claim. 3.9 Liability of Custodian. The Custodian shall be liable for the acts or omissions of a foreign banking institution to the same extent as set forth with respect to sub-custodians generally in this Contract and, regardless of whether assets are maintained in the custody of a foreign banking institution, a foreign securities depository or a branch of a U.S. bank as contemplated by paragraph 3.12 hereof, the Custodian shall not be liable for any loss, damage, cost, expense, liability or claim resulting from nationalization, expropriation, currency restrictions, or acts of war or terrorism or any loss where the sub-custodian has otherwise exercised reasonable care. Notwithstanding the foregoing provisions of this paragraph 3.9, in delegating custody duties to State Street London Ltd., the Custodian shall not be relieved of any responsibility to the Fund for any loss due to such delegation, except such loss as may result from (a) unforeseen political risk (including, but not limited to, exchange control restrictions, confiscation, expropriation, nationalization, insurrection, civil strife or armed hostilities) or (b) other losses (excluding a bankruptcy or insolvency of State Street London Ltd. not caused by political risk) due to Acts of God, nuclear incident or other losses under circumstances beyond the control of the Custodian and State Street. 3.10 Reimbursement for Advances. If the Fund requires the Custodian to advance cash or securities for any purpose for the benefit of a Portfolio including the purchase or sale of foreign exchange or of contracts for foreign exchange, or in the event that the Custodian or its nominee shall incur or be assessed any taxes, charges, expenses, assessments, claims or liabilities in connection with the performance of this Contract, except such as may arise from its or its nominee's own negligent action, negligent failure to act or willful misconduct, any property at any time held for the account of the applicable Portfolio shall be security therefor and should the Fund fail to repay the Custodian promptly, the Custodian shall be entitled to utilize available cash and to dispose of such Portfolios assets to the extent necessary to obtain reimbursement. 3.11 Monitoring Responsibilities. The Custodian shall furnish annually to the Fund, during the month of June, information concerning the foreign sub-custodians employed by the Custodian. Such information shall be similar in kind and scope to that furnished to the Fund in connection with the initial approval of this Contract. In addition, the Custodian will promptly inform the Fund in the event that the Custodian learns of a material adverse change in the financial condition of a foreign sub-custodian or any material loss of the assets of the Fund or in the case of any foreign sub-custodian not the subject of an exemptive order from the Securities and Exchange Commission is notified by such foreign sub-custodian that there appears to be a substantial likelihood that its shareholders' equity will decline below $200 million (U.S. dollars or the equivalent thereof) or that its shareholders' equity has declined below $200 million (in each case computed in accordance with generally accepted U.S. accounting principles). 3.12 Branches of U.S. Banks (a) Except as otherwise set forth in this Contract, the provisions hereof shall not apply where the custody of the Portfolios' assets are maintained in a foreign branch of a banking institution which is a "bank" as defined by Section 2(a)(5) of the Investment Company Act of 1940 meeting the qualification set forth in Section 26(a) of said Act. The appointment of any such branch as a sub-custodian shall be governed by paragraph 1 of this Contract. (b) Cash held for each Portfolio of the Fund in the United Kingdom shall be maintained in an interest bearing account established for the Fund with the Custodian's London branch, which account shall be subject to the direction of the Custodian, State Street London Ltd. or both. 3.13 Tax Law The Custodian shall have no responsibility or liability for any obligations now or hereafter imposed on the Fund or the Custodian as custodian of the Fund by the tax law of the United States of America or any state or political subdivision thereof. It shall be the responsibility of the Fund to notify the Custodian of the obligations imposed on the Fund or the Custodian as custodian of the Fund by the tax law of jurisdictions other than those mentioned in the above sentence, including responsibility for withholding and other taxes, assessments or other governmental charges, certifications and governmental reporting. The sole responsibility of the Custodian with regard to such tax law shall be to use reasonable efforts to assist the Fund with respect to any claim for exemption or refund under the tax law of jurisdictions for which the Fund has provided such information. 4. Payments for Sales or Repurchases or Redemptions of Shares of the Fund The Custodian shall receive from the distributor for the Shares or from the Transfer Agent of the Fund and deposit into the account of the appropriate Portfolio such payments as are received for Shares of that Portfolio issued or sold from time to time by the Fund. The Custodian will provide timely notification to the Fund on behalf of each such Portfolio and the Transfer Agent of any receipt by it of payments for Shares of such Portfolio. From such funds as may be available for the purpose but subject to the limitations of the Declaration of Trust and any applicable votes of the Board of Trustees of the Fund pursuant thereto, the Custodian shall, upon receipt of instructions from the Transfer Agent, make funds available for payment to holders of Shares who have delivered to the Transfer Agent a request for redemption or repurchase of their Shares. In connection with the redemption or repurchase of Shares of a Portfolio, the custodian is authorized upon receipt of instructions from the Transfer Agent to wire funds to or through a commercial bank designated by the redeeming shareholders. In connection with the redemption or repurchase of Shares of the Fund, the Custodian shall honor checks drawn on the Custodian by a holder of Shares, which checks have been furnished by the Fund to the holder of Shares, when presented to the Custodian in accordance with such procedures and controls as are mutually agreed upon from time to time between the Fund and the Custodian. 5. Proper Instructions Proper Instructions as used throughout this Contract means a writing signed or initialled by two or more persons as the Board of Trustees shall have from time to time authorized. Each such writing shall set forth the specific transaction or type of transaction involved, including a specific statement of the purpose for which such action is requested. Oral instructions will be considered Proper Instructions if the Custodian reasonably believes them to have been given by a person authorized to give such instructions with respect to the transaction involved. The Fund shall cause all oral instructions to be confirmed in writing. Upon receipt of a certificate of the Secretary or an Assistant Secretary as to the authorization by the Board of Trustees of the Fund accompanied by a detailed description of procedures approved by the Board of Trustees, Proper instructions may include communications effected directly between electromechanical or electronic devices provided that the Board of Trustees and the Custodian are satisfied that such procedures afford adequate safeguards for the Portfolios, assets. For purposes of this Section, Proper Instructions shall include instructions received by the Custodian pursuant to any three-party agreement which requires a segregated asset account in accordance with Section 2.11. 6. Actions Permitted without Express Authority The Custodian may in its discretion, without express authority from the Fund on behalf of each applicable Portfolio: 1) make payments to itself or others for minor expenses of handling securities or other similar items relating to its duties under this Contract, provided that all such payments shall be accounted for to the Fund on behalf of the Portfolio; 2) surrender securities in temporary form for securities in definitive form; 3) endorse for collection, in the name of the Portfolio, checks, drafts and other negotiable instruments; and 4) in general, attend to all non-discretionary details in connection with the sale, exchange, substitution, purchase, transfer and other dealings with the securities and property of the Portfolio except as otherwise directed by the Board of Trustees of the Fund. 7. Evidence of Authority The Custodian shall be protected in acting upon any instructions, notice, request, consent, certificate or other instrument or paper believed by it to be genuine and to have been properly executed by or on behalf of the Fund. The Custodian may receive and accept a certified copy of a vote of the Board of Trustees of the Fund as conclusive evidence (a) of the authority of any person to act in accordance with such vote or (b) of any determination or of any action by the Board of Trustees pursuant to the Declaration of Trust as described in such vote, and such vote may be considered as in full force and effect until receipt by the Custodian of written notice to the contrary. 8. Duties of Custodian with Respect to the Books of Account and Calculation of Net Asset Value and Net Income The Custodian shall cooperate with and supply necessary information to the entity or entities appointed by the Board of Trustees of the Fund to keep the books of account of each Portfolio and/or compute the net asset value per share of the outstanding shares of each Portfolio or, if directed in writing to do so by the Fund on behalf of the Portfolio, shall itself keep such books of account and/or compute such net asset value per share. If so directed, the Custodian shall also calculate daily the net income of the Portfolio as described in the Fund's currently effective prospectus related to such Portfolio and shall advise the Fund and the Transfer Agent daily of the total amounts of such net income and, if instructed in writing by an officer of the Fund to do so, shall advise the Transfer Agent periodically of the division of such net income among its various components. The calculations of the net asset value per share and the daily income of each Portfolio shall be made at the time or times described from time to time in the Fund's currently effective prospectus related to such Portfolio. 9. Records The Custodian shall with respect to each Portfolio create and maintain all records relating to its activities and obligations under this Contract in such manner as will meet the obligations of the Fund under the Investment Company Act of 1940, with particular attention to Section 31 thereof and Rules 3la-1 and 3la-2 thereunder. All such records shall be the property of the Fund and shall at all times during the regular business hours of the Custodian be open for inspection by duly authorized officers, employees or agents of the Fund and employees and agents of the Securities and Exchange Commission. The Custodian shall, at the Fund's request, supply the Fund with a tabulation of securities owned by each Portfolio and held by the Custodian and shall, when requested to do so by the Fund and for such compensation as shall be agreed upon between the Fund and the Custodian, include certificate numbers in such tabulations. 10. Opinion of Fund's Independent Accountant The Custodian shall take all reasonable action, as the Fund on behalf of each applicable Portfolio may from time to time request, to obtain from year to year favorable opinions from the Fund's independent accountants with respect to its activities hereunder in connection with the preparation of the Fund's Form N-1A, and Form N-SAR or other annual reports to the Securities and Exchange Commission and with respect to any other requirements of such Commission. 11. Reports to Fund by Independent Public Accountants The Custodian shall provide the Fund, on behalf of each of the Portfolios at such times as the Fund may reasonably require, with reports by independent public accountants on the accounting system, internal accounting control and procedures for safeguarding securities, futures contracts and options on futures contracts, including securities deposited and/or maintained in a Securities System, relating to the services provided by the Custodian under this Contract; such reports, shall be of sufficient scope and in sufficient detail, as may reasonably be required by the Fund to provide reasonable assurance that any material inadequacies would be disclosed by such examination, and, if there are no such inadequacies, the reports shall so state. 12. Compensation of Custodian The Custodian shall be entitled to reasonable compensation for its services and expenses as Custodian, as agreed upon from time to time between the Fund on behalf of each applicable Portfolio and the Custodian. 13. Responsibility of Custodian So long as and to the extent that it is the exercise of reasonable care, the Custodian shall not be responsible for the title, validity or genuineness of any property or evidence of title thereto received by it or delivered by it pursuant to this Contract and shall be held harmless in acting upon any notice, request, consent, certificate or other instrument reasonably believed by it to be genuine and to be signed by the proper party or parties, including any futures commission merchant acting pursuant to the terms of a three-party futures or options agreement. The Custodian shall be held to the exercise of reasonable care in carrying out the provisions of this Contract, but shall be kept indemnified by and shall be without liability to the Fund for any action taken or omitted by it in good faith without negligence. It shall be entitled to rely on and may act upon advice of counsel (who may be counsel for the Fund) on all matters, and shall be without liability for any action reasonably taken or omitted pursuant to such advice. If the Fund on behalf of a Portfolio requires the Custodian to take any action with respect to securities, which action involves the payment of money or which action may, in the opinion of the Custodian, result in the Custodian or its nominee assigned to the Fund or the Portfolio being liable for the payment of money or incurring liability of some other form, the Fund on behalf of the Portfolio, as a prerequisite to requiring the Custodian to take such action, shall provide indemnity to the Custodian in an amount and form satisfactory to it. If the Fund requires the Custodian, its affiliates, subsidiaries or agents, to advance cash or securities for any purpose (including but not limited to securities settlements, foreign exchange contracts and assumed settlement) for the benefit of a Portfolio including the purchase or sale of foreign exchange or of contracts for foreign exchange or in the event that the Custodian or its nominee shall incur or be assessed any taxes, charges, expenses, assessments, claims or liabilities in connection with the performance of this Contract, except such as may arise from its or its nominee's own negligent action, negligent failure to act or willful misconduct, any property at any time held for the account of the applicable Portfolio shall be security therefor and should the Fund fail to repay the Custodian promptly, the Custodian shall be entitled to utilize available cash and to dispose of such Portfolio's assets to the extent necessary to obtain reimbursement. 14. Effective Period, Termination and Amendment This Contract shall become effective as of its execution, shall continue in full force and effect until terminated as hereinafter provided, may be amended at any time by mutual agreement of the parties hereto and may be terminated by either party by an instrument in writing delivered or mailed, postage prepaid to the party, such termination to take effect not sooner than thirty (30) days after the date of such delivery or mailing; provided, however that the Custodian shall not with respect to a Portfolio act under Section 2.10 hereof in the absence of receipt of an initial certificate of the Secretary or an Assistant Secretary that the Board of Trustees of the Fund has approved the initial use of a particular Securities System by such Portfolio and the receipt of an annual certificate of the Secretary or an Assistant Secretary that the Board of Trustees has reviewed the use by such Portfolio of such Securities System, as required in each case by Rule 17f-4 under the Investment Company Act of 1940, as amended; provided further, however, that the Fund shall not amend or terminate this Contract in contravention of any applicable federal or state regulations, or any provision of the Declaration of Trust, and further provided, that the Fund on behalf of one or more of the Portfolios may at any time by action of its Board of Trustees (i) substitute another bank or trust company for the Custodian by giving notice as described above to the Custodian, or (ii) immediately terminate this Contract in the event of the appointment of a conservator or receiver for the Custodian by the Comptroller of the Currency or upon the happening of a like event at the direction of an appropriate regulatory agency or court of competent jurisdiction. Upon termination of the Contract, the Fund on behalf of each applicable Portfolio shall pay to the Custodian such compensation as may be due as of the date of such termination and shall likewise reimburse the Custodian for its costs, expenses and disbursements. 15. Successor Custodian If a successor custodian for the Fund, of one or more of the Portfolios shall be appointed by the Board of Trustees of the Fund, the Custodian shall, upon termination, deliver to such successor custodian at the office of the Custodian, duly endorsed and in the form for transfer, all securities of each applicable Portfolio then held by it hereunder and shall transfer to an account of the successor custodian all of the securities of each such Portfolio held in a Securities System. If no such successor custodian shall be appointed, the Custodian shall, in like manner, upon receipt of a certified copy of a vote of the Board of Trustees of the Fund, deliver at the office of the Custodian and transfer such securities, funds and other properties in accordance with such vote. In the event that no written order designating a successor custodian or certified copy of a vote of the Board of Trustees shall have been delivered to the Custodian on or before the date when such termination shall become effective, then the Custodian shall have the right to deliver to a bank or trust company, which is a "bank" as defined in the Investment Company Act of 1940, doing business in Boston, Massachusetts, of its own selection, having an aggregate capital, surplus, and undivided profits, as shown by its last published report, of not less than $25,000,000, all securities, funds and other properties held by the Custodian on behalf of each applicable Portfolio and all instruments held by the Custodian relative thereto and all other property held by it under this Contract on behalf of each applicable Portfolio and to transfer to an account of such successor custodian all of the securities of each such Portfolio held in any Securities System. Thereafter, such bank or trust company shall be the successor of the Custodian under this Contract. In the event that securities, funds and other properties remain in the possession of the Custodian after the date of termination hereof owing to failure of the Fund to procure the certified copy of the vote referred to or of the Board of Trustees to appoint a successor custodian, the Custodian shall be entitled to fair compensation for its services during such period as the Custodian retains possession of such securities, funds and other properties and the provisions of this Contract relating tot he duties and obligations of the Custodian shall remain in full force and effect. 16. Interpretive and Additional Provisions In connection with the operation of this Contract, the Custodian and the Fund on behalf of the Portfolios, may form time to time agree on such provisions interpretive of or in addition to the provisions of this Contract as may in their joint opinion be consistent with the general tenor of this Contract. Any such interpretive or additional provisions shall be in a writing signed by both parties and shall be annexed hereto, provided that no such interpretive or additional provisions shall contravene any applicable federal or state regulations or any provision of the Declaration of Trust of the Fund. No interpretive or additional provisions made as provided in the preceding sentence shall be deemed to be an amendment of this Contract. 17. Additional Funds In the event that the Fund establishes one or more series of Shares in addition to SunAmerica U.S. Government Securities Fund, SunAmerica Federal Securities Fund, SunAmerica Diversified Income Fund, SunAmerica High Income Fund and SunAmerica Tax Exempt Insured Fund with respect to which it desires to have the Custodian render services as custodian under the terms hereof, it shall so notify the Custodian in writing, and if the Custodian agrees in writing to provide such services, such series of Shares shall become a Portfolio hereunder. 18. Massachusetts Law to Apply This Contract shall be construed and the provisions thereof interpreted under and in accordance with laws of the Commonwealth of Massachusetts. 19. Prior Contracts This Contract supersedes and terminated, as of the date hereof, all prior contracts between the Fund on behalf of each of the Portfolios and the Custodian relating to the custody of the Fund's assets. 20. Shareholder Communications Election Securities and Exchange Commission Rule 14b-2 requires banks which hold securities for the account of customers to respond to requests by issuers of securities for the names, addresses and holdings of beneficial owner has expressly objected to disclosure of this information. In order to comply with the rule, the Custodian needs the Fund to indicate whether it authorizes the Custodian to provide the Fund's name, address, and share position to requesting companies whose securities the Fund owns. If the Fund tells the Custodian "no", the Custodian will not provide this information to requesting companies. If the Fund tells the Custodian "yes" or does not check either "yes" or "no" below, the Custodian is required by the rule to treat the Fund as consenting to disclosure of this information for all securities owned by the Fund or any funds or accounts established by the Fund. For the Fund's protection, the Rule prohibits the requesting company from using the Fund's name and address for any purpose other than corporate communications. Please indicate below whether the Fund consents or objects by checking one of the alternatives below. YES ( ) The Custodian is authorized to release the Fund's name, address and share positions. NO ( x ) The Custodian is not authorized to release the Fund's name, address, and share positions. IN WITNESS WHEREOF, each of the parties has caused this instrument to be executed in its name and behalf by its duly authorized representatives and its seal to be hereunder affixed as of the 29th day of November, 1994. SUNAMERICA INCOME FUNDS By /s/ Peter A. Harbeck ATTEST: /s/ Robert M. Zakem STATE STREET BANK AND TRUST COMPANY By /s/ Executive Vice President ATTEST: /s/ Schedule A The following foreign banking institutions and foreign securities depositories have been approved by the Board of Trustees of SunAmerica Income Funds for use as sub-custodians for the Fund's securities and other assets: (Insert banks and securities depositories) Certified: Fund's Authorized Officer Date: State Street Bank and Trust Company SaFire Fee Schedule SunAmerica, Anchor Series Trust, Anchor Pathway, SunAmerica Series Trust I. Installation Fee per fund $1,500.00 per fund (one time charge) II. Annual Fees per fund # of Funds Portfolio and General Ledger Portfolio Only 1-10 $4,000.00 $3,000.00 11-25 $3,500.00 $2,500.00 26 and up $3,000.00 $2,000.00 These charges will be billed in two equal payments semi-annually per each fund's year-end dates. III. Payment The above fee's will be paid within (15) fifteen days of receipt of bill. SunAmerica Inc. State Street Bank & Trust Co. Name: /s/Peter C. Sutton Name: /s/ Title: Vice President Title: Vice President Date: 8/3/93 Date: 7/30/93 AMENDMENT STATE STREET BANK & TRUST COMPANY CUSTODIAN FEE SCHEDULE AMENDMENT SUNAMERICA FUNDS Monthly Multiple Class Fee per Additional Class: 2nd Class $1,500 3rd Class $1,000 Each Additional Class $ 750 SUNAMERICA VALUE FUND SUNAMERICA GROWTH FUND SUNAMERICA EMERGING GROWTH FUND SUNAMERICA BALANCED ASSETS FUND SUNAMERICA TAX-EXEMPT INSURED PORTFOLIO SUNAMERICA DIVERSIFIED INCOME SUNAMERICA U.S. GOVERNMENT SECURITIES FUND SUNAMERICA HIGH INCOME FUND SUNAMERICA MONEY MARKET FUND SUNAMERICA FEDERAL SECURITIES PORTFOLIO By: /s/Lori D. Nawn Title: Treasurer Date: 9/17/93 STATE STREET BANK & TRUST CO. By: /s/ Kevin J. Morrissey Date: 9/15/93 EX-99.9 16 TRANSFER AGENCY AGREEMENT EXHIBIT 99.9 TRANSFER AGENCY AND SERVICE AGREEMENT between SUNAMERICA INCOME FUNDS and STATE STREET BANK AND TRUST COMPANY TABLE OF CONTENTS Page Article 1 Terms of Appointment; Duties of the Bank 2 Article 2 Fees and Expenses 6 Article 3 Representations and Warranties of the Bank 6 Article 4 Representations and Warranties of the Fund 6 Article 5 Data Access and Proprietary Information 7 Article 6 Indemnification 10 Article 7 Standard of Care 12 Article 8 Covenants of the Fund and the Bank 12 Article 9 Termination of Agreement 14 Article 10 Additional Funds 14 Article 11 Assignment 14 Article 12 Amendment 15 Article 13 Massachusetts Law to Apply 15 Article 14 Force Majeure 15 Article 15 Consequential Damages 16 Article 16 Merger of Agreement 16 Article 17 Limitations of Liability of the Trustees and the Shareholders 16 Article 18 Counterparts 16 TRANSFER AGENCY AND SERVICE AGREEMENT AGREEMENT made as of the 29th day of November, 1994, by and between SUNAMERICA INCOME FUNDS, a Massachusetts business trust, having its principal office and place of business at 733 Third Avenue, New York, New York 10017-3204 (the "Fund"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company having its principal office and place of business at 225 Franklin Street, Boston, Massachusetts 02110 (the "Bank"). WHEREAS, the Fund is authorized to issue shares in separate series, with each such series representing interests in a separate portfolio of securities and other assets; and WHEREAS, the Fund intends to initially offer shares in five series, SunAmerica U.S. Government Securities Fund, SunAmerica Federal Securities Fund, SunAmerica Diversified Income Fund, SunAmerica High Income and SunAmerica Tax Exempt Insured Fund (each such series, together with all other series subsequently established by the Fund and made subject to this Agreement in accordance with Article 10, being herein referred to as a "Portfolio", and collectively as the "Portfolios"); WHEREAS, the Fund on behalf of the Portfolios desires to appoint the Bank as its transfer agent, dividend disbursing agent, custodian of certain retirement plans and agent in connection with certain other activities, and the Bank desires to accept such appointment; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: Article 1 Terms of Appointment; Duties of the Bank 1.01 Subject to the terms and conditions set forth in this Agreement, the Fund, on behalf of the Portfolios, hereby employs and appoints the Bank to act as, and the Bank agrees to act as its transfer agent for the authorized and issued shares of beneficial interest of the Fund representing interests in each of the respective Portfolios ("Shares"), dividend disbursing agent, custodian of certain retirement plans and agent in connection with any accumulation, open-account or similar plans provided to the shareholders of each of the respective Portfolios of the Fund ("Shareholders") and set out in the currently effective prospectus and statement of additional information ("prospectus") of the Fund on behalf of the applicable Portfolio, including without limitation any periodic investment plan or periodic withdrawal program. 1.02 The Bank agrees that it will perform the following services: (a) In accordance with procedures established from time to time by agreement between the Fund on behalf of each of the Portfolios, as applicable and the Bank, the Bank shall: (i) Receive for acceptance, orders for the purchase of Shares, and promptly deliver payment and appropriate documentation thereof to the Custodian of the Fund authorized pursuant to the Declaration of Trust of the Fund (the "Custodian"); (ii) Pursuant to purchase orders, issue the appropriate number of Shares and hold such Shares in the appropriate Shareholder account; Receive for acceptance redemption requests and redemption directions and deliver the appropriate documentation thereof to the Custodian; (iv) In respect to the transactions in items (i), (ii) and (iii) above, the Bank shall execute transactions directly with broker-dealers authorized by the Fund who shall thereby be deemed to be acting on behalf of the Fund; (v) At 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; (vi) Effect transfers of Shares by the registered owners thereof upon receipt of appropriate instructions; (vii) Prepare and transmit payments for dividends and distributions declared by the Fund on behalf of the applicable Portfolio; (viii) Issue replacement certificates for those certificates alleged to have been lost, stolen or destroyed upon receipt by the Bank of indemnification satisfactory to the Bank and protecting the Bank and the Fund, and the Bank at its option, may issue replacement certificates in place of mutilated stock certificates upon presentation thereof and without such indemnity; (ix) Maintain records of account for and advise the Fund and its Shareholders as to the foregoing; and (x) Record the issuance of Shares of the Fund and maintain pursuant to SEC Rule 17Ad-10(e) a record of the total number of Shares which are authorized, based upon data provided to it by the Fund, and issued and outstanding. The Bank shall also provide the Fund on a regular basis with the total number of Shares which are authorized and issued and outstanding and shall have no obligation, when recording the issuance of Shares, to monitor the issuance of such Shares or to take cognizance of any laws relating to the issue or sale of such Shares, which functions shall be the sole responsibility of the Fund. (b) In addition to and neither in lieu nor in contravention of the services set forth in the above paragraph (a), the Bank shall: (i) perform the customary services of a transfer agent, dividend disbursing agent, custodian of certain retirement plans and, as relevant, agent in connection with accumulation, open-account or similar plans (including without limitation any periodic investment plan or periodic withdrawal program), including but not limited to: maintaining all Shareholder accounts, preparing Shareholder meeting lists, mailing proxies, mailing Shareholder reports and prospectuses to current Shareholders, withholding taxes on U.S. resident and non-resident alien accounts, preparing and filing U.S. Treasury Department Forms 1099 and other appropriate forms required with respect to dividends and distributions by federal authorities for all Shareholders, preparing and mailing confirmation forms and statements of account to Shareholders for all purchases and redemptions of Shares and other confirmable transactions in Shareholder accounts, preparing and mailing activity statements for Shareholders, and providing Shareholder account information and (ii) provide a system which will enable the Fund to monitor the total number of Shares sold in each State. (c) In addition, the Fund shall (i) identify to the Bank in writing those transactions and assets to be treated as exempt from blue sky reporting for each State and (ii) verify the establishment of transactions for each State on the system prior to activation and thereafter monitor the daily activity for each State. The responsibility of the Bank for the Fund's blue sky State registration status is solely limited to the initial establishment of transactions subject to blue sky compliance by the Fund and the reporting of such transactions to the Fund as provided above. (d) Procedures as to who shall provide certain of these services in Article 1 may be established from time to time by agreement between the Fund on behalf of each Portfolio and the Bank per the attached service responsibility schedule. The Bank may at times perform only a portion of these services and the Fund or its agent may perform these services on the Fund's behalf. (e) The Bank shall provide additional services on behalf of the Fund (i.e., escheatment services) which may be agreed upon in writing between the Fund and the Bank. Article 2 Fees and Expenses 2.01 The Custodian shall be entitled to reasonable compensation (including out of pocket expenses) for its services and expenses as Custodian, as agreed upon from time to time between the Fund on behalf of each applicable Portfolio and the Custodian. Article 3 Representations and Warranties of the Bank The Bank represents and warrants to the Fund that: 3.01 It is a trust company duly organized and existing and in good standing under the laws of the Commonwealth of Massachusetts. 3.02 It is duly qualified to carry on its business in the Commonwealth of Massachusetts. 3.03 It is empowered under applicable laws and by its Charter and By-Laws to enter into and perform this Agreement. 3.04 All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement. 3.05 It has and will continue to have access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement. Article 4 Representations and Warranties of the Fund The Fund represents and warrants to the Bank that: 4.01 It is a business trust duly organized and existing and in good standing under the laws of Massachusetts. 4.02 It is empowered under applicable laws and by its Declaration of Trust and By-Laws to enter into and perform this Agreement. 4.03 All corporate proceedings required by said Declaration of Trust and By-Laws have been taken to authorize it to enter into and perform this Agreement. 4.04 It is an open-end and diversified management investment company registered under the Investment Company Act of 1940, as amended. 4.05 A registration statement under the Securities Act of 1933, as amended on behalf of each of the Portfolios 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 Fund being offered for sale. Article 5 Data Access and Proprietary Information 5.01 The Fund acknowledges that the data bases, computer programs, screen format, report formats, interactive design techniques, and documentation manuals furnished to the Fund by the Bank as part of the Fund's ability to access certain Fund-related data ("Customer Data") maintained by the Bank on data bases under the control and ownership of the Bank or other third party ("Data Access Services") constitute copyrighted, trade secret, or other proprietary information (collectively, "Proprietary Information") of substantial value to the Bank or other third party. In no event shall Proprietary Information be deemed Customer Data. The Fund agrees to treat all Proprietary Information as proprietary to the Bank and further agrees that it shall not divulge any Proprietary Information to any person or organization except as may be provided hereunder. Without limiting the foregoing, the Fund agrees for itself and its employees and agents: (a) to access Customer Data solely from locations as may be designated in writing by the Bank and solely in accordance with the Bank's applicable user documentation; (b) to refrain from copying or duplicating in any way the Proprietary Information; (c) to refrain from obtaining unauthorized access to any portion of the Proprietary Information, and if such access is inadvertently obtained, to inform in a timely manner of such fact and dispose of such information in accordance with the Bank's instructions; (d) to refrain from causing or allowing third-party data required hereunder from being retransmitted to any other computer facility or other location, except with the prior written consent of the Bank; (e) that the Fund shall have access only to those authorized transactions agreed upon by the parties; (f) to honor all reasonable written requests made by the Bank to protect at the Bank's expense the rights of the Bank in Proprietary Information at common law, under federal copyright law and under other federal or state law. Each party shall take reasonable efforts to advise its employees of their obligations pursuant to this Article 5. The obligations of this Article shall survive any earlier termination of this Agreement. 5.02 If the Fund notifies the Bank that any of the Data Access Services do not operate in material compliance with the most recently issued user documentation for such services, the Bank shall endeavor in a timely manner to correct such failure. Organizations from which the Bank may obtain certain data included in the Data Access Services are solely responsible for the contents of such data and the Fund agrees to make no claim against the Bank arising out of the contents of such third-party data, including, but not limited to, the accuracy thereof. DATA ACCESS SERVICES AND ALL COMPUTER PROGRAMS AND SOFTWARE SPECIFICATIONS USED IN CONNECTION THEREWITH ARE PROVIDED ON AN AS IS, AS AVAILABLE BASIS. THE BANK EXPRESSLY DISCLAIMS ALL WARRANTIES EXCEPT THOSE EXPRESSLY STATED HEREIN INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 5.03 If the transactions available to the Fund include the ability to originate electronic instructions to the Bank in order to (i) effect the transfer or movement of cash of Shares or (ii) transmit Shareholder information or other information (such transactions constituting a "COEFI"), then in such event the Bank shall be entitled to rely on the validity and authenticity of such instruction without undertaking any further inquiry as long as such instruction is undertaken in conformity with security procedures established by the Bank from time to time. Article 6 Indemnification 6.01 The Bank shall not be responsible for, and the Fund shall on behalf of the applicable Portfolio indemnify and hold the Bank harmless from and against, any and all losses, damages, costs, charges, counsel fees, payments, expenses and liability arising out of or attributable to: (a) All actions of the Bank or its agent 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 negligent or willful breach of any representation or warranty of the Fund hereunder. (c) The reliance on or use by the Bank or its agents or subcontractors of information, records, documents or services which (i) are received by the Bank or its agents or subcontractors, and (ii) have been prepared, maintained or performed by the Fund or any other person or firm on behalf of the Fund including but not limited to any previous transfer agent or registrar. (d) The reliance on, or the carrying out by the Bank or its agents or subcontractors of any instructions or requests of the Fund on behalf of the applicable Portfolio. (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. 6.02 At any time the Bank may apply to any officer of the Fund for instructions, and may consult with legal counsel with respect to any matter arising in connection with the services to be performed by the Bank under this Agreement, and the Bank and its agents or subcontractors shall not be liable and shall be indemnified by the Fund on behalf of the applicable Portfolio for any action taken or omitted by it in reliance upon such instructions or upon the opinion of such counsel. The Bank, its agents and subcontractors shall be protected and indemnified in acting upon any paper or document furnished by or on behalf of the Fund, 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 the Bank or its agents or subcontractors by machine readable input, telex, CRT data entry or other similar means authorized by the Fund, and shall not be held to have notice of any change of authority of any person, until receipt of written notice thereof from the Fund. The Bank, 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 officers of the Fund, and the proper countersignature of any former transfer agent or former registrar, or of a co-transfer agent or co-registrar. 6.03 In order that the indemnification provisions contained in this Article 6 shall apply, upon the assertion of a claim for which the Fund may be required to indemnify the Bank, the Bank shall promptly notify the Fund of such assertion, and shall keep the Fund advised with respect to all developments concerning such claim. The Fund shall have the option to participate with the Bank in the defense of such claim or to defend against said claim in its own name or in the name of the Bank. The Bank shall in no case confess any claim or make any compromise in any case in which the Fund may be required to indemnify the Bank except with the Fund's prior written consent. Article 7 Standard of Care 7.01 The Bank shall at all times act in good faith and agrees to use its best efforts to insure the accuracy of all services performed under this Agreement, but assumes no responsibility and shall not be liable for loss or damage due to errors unless said errors are caused by its negligence, bad faith, or willful misconduct of that of its employees. Article 8 Covenants of the Fund and the Bank 8.01 The Fund shall on behalf of each of the Portfolios promptly furnish to the Bank the following: (a) A certified copy of the resolution of the Trustees of the Fund authorizing the appointment of the Bank and the execution and delivery of this Agreement. (b) A copy of the Declaration of Trust and By-Laws of the Fund and all amendments thereto. 8.02 The Bank hereby agrees to establish and maintain facilities and procedures reasonably acceptable to the Fund for safekeeping of stock certificates, check forms and facsimile signature imprinting devices, if any; and for the preparation or use, and for keeping account of, such certificates, forms and devices. 8.03 The Bank shall keep records relating to the services to be performed hereunder, in the form and manner as it may deem advisable. To the extent required by Section 31 of the Investment Company Act of 1940, as amended, and the Rules thereunder, the Bank agrees that all such records prepared or maintained by the Bank relating to the services to be performed by the Bank hereunder are the property of the Fund and will be preserved, maintained and made available in accordance with such Section and Rules, and will be surrendered promptly to the Fund on and in accordance with its request. 8.04 The Bank and the Fund agree that all books, records, information and data pertaining to the business of the other party which are exchanged or received pursuant to the negotiation or the carrying out of this Agreement shall remain confidential, and shall not be voluntarily disclosed to any other person, except as may be required by law. 8.05 In case of any requests or demands for the inspection of the Shareholder records of the Fund, the Bank will endeavor to notify the Fund and to secure instructions from an authorized officer of the Fund as to such inspection. The Bank reserves the right, however, to exhibit the Shareholder records to any person whenever it is advised by its counsel that it may be held liable for the failure to exhibit the Shareholder records to such person. Article 9. Termination of Agreement 9.01 This Agreement may be terminated by either party upon one hundred twenty (120) days written notice to the other. 9.02 Should the Fund exercise its right to terminate, all out-of-pocket expenses associated with the movement of records and material will be borne by the Fund on behalf of the applicable Portfolio(s). Additionally, the Bank reserves the right to charge for any other reasonable expenses associated with such termination and/or a charge equivalent to the average of three (3) months' fees. Article 10 Additional Funds 10.01 In the event that the Fund establishes one or more series of Shares in addition to SunAmerica U.S. Government Securities Fund, SunAmerica Federal Securities Fund, SunAmerica Diversified Income Fund, SunAmerica High Income and SunAmerica Tax Exempt Insured Fund with respect to which it desires to have the Bank render services as transfer agent under the terms hereof, it shall so notify the Bank in writing, and if the Bank agrees in writing to provide such services, such series of Shares shall become a Portfolio hereunder. Article 11 Assignment 11.01 Except as provided in Section 11.03 below, neither this Agreement nor any rights or obligations hereunder may be assigned by either party without the written consent of the other party. 11.02 This Agreement shall inure to the benefit of and be binding upon the parties and their respective permitted successors and assigns. 11.03 The Bank may, without further consent on the part of the Fund, subcontract for the performance hereof with (i) Boston Financial Data Services, Inc., a Massachusetts corporation ("BFDS") which is duly registered as a transfer agent pursuant to Section 17A(c)(1) of the Securities Exchange Act of 1934, as amended ("Section 17A(c)(l)"), (ii) a BFDS subsidiary duly registered as a transfer agent pursuant to Section 17A(c)(1) or (iii) a BFDS affiliate; provided, however, that the Bank shall be as fully responsible to the Fund for the acts and omissions of any subcontractor as it is for its own acts and omissions. Article 12 Amendment 12.01 This Agreement may be amended or modified by a written agreement executed by both parties and authorized or approved by a resolution of the Trustees of the Fund. Article 13 Massachusetts Law to Apply 13.01 This Agreement shall be construed and the provisions thereof interpreted under and in accordance with the laws of the Commonwealth of Massachusetts. Article 14 Force Majeure 14.01 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 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. Article 15 Consequential Damages 15.01 Neither party to this Agreement shall be liable to the other party for consequential damages under any provision of this Agreement or for any consequential damages arising out of any act or failure to act hereunder. Article 16 Merger of Agreement 16.01 This Agreement constitutes the entire agreement between the parties hereto and supersedes any prior agreement with respect to the subject matter hereof whether oral or written. Article 17 Limitations of Liability of the Trustees and Shareholders 17.01 A copy of the Declaration of Trust of the Trust is on file with the Secretary of the Commonwealth of Massachusetts, and notice is hereby given that this instrument is executed on behalf of the Trustees of the Trust as Trustees and not individually and that the obligations of this instrument are not binding upon any of the Trustees or Shareholders individually but are binding only upon the assets and property of the Fund. Article 18 Counterparts 18.01 This Agreement may be executed by the parties hereto on any number of counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their names and on their behalf by and through their duly authorized officers, as of the day and year first above written. SUNAMERICA INCOME FUNDS BY: /s/Peter A. Harbeck ATTEST: /s/ Robert M. Zakem STATE STREET BANK AND COMPANY BY: /s/ Executive Vice President ATTEST: /s/ STATE STREET BANK & TRUST COMPANY FUND SERVICE RESPONSIBILITIES* Service Performed Responsibility Bank Fund/Agent 1. Receives orders for the purchase of Shares. x x 2. Issue Shares and hold Shares in Shareholders accounts. x 3. Receive redemption requests. x 4. Effect transactions 1-3 above directly with broker-dealers. x 5. Pay over monies to redeeming Shareholders. x 6. Effect transfers of Shares. x 7. Prepare and transmit dividends and distributions. x 8. Issue Replacement Certificates. x 9. Reporting of abandoned property. x 10. Maintain records of account. x 11. Maintain and keep a current and accurate control book for each issue of securities. x 12. mail proxies. x 13. Mail Shareholder reports. x 14. Mail prospectuses to current Shareholders. x 15. Withhold taxes on U.S. resident and non-resident alien accounts. x 16. Prepare and file U.S. Treasury Department forms. x 17. Prepare and mail account and confirmation statements for Shareholders. x Service Performed Responsibility Bank Fund/Agent 18. Provide Shareholder account x information. 19. Blue sky reporting. x * Such services are more fully described in Article 1.02 (a), (b) and (c) of the Agreement. SUNAMERICA INCOME FUNDS BY: /s/ Peter A. Harbeck ATTEST: /s/ Robert M. Zakem STATE STREET BANK COMPANY BY: /s/ Executive Vice President ATTEST: /s/ EX-99.10 17 OPINION OF COUNSEL EXHIBIT 99.10 SUNAMERICA ASSET MANAGEMENT CORP. The SunAmerica Center 733 Third Avenue, Third Floor New York, NY 10017-3204 800.858.8850 July 18, 1996 SunAmerica Income Funds The SunAmerica Center 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. 21 to the Registration Statement on Form N-1A (the "Amendment") which definitely registers 73,069,933 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-99.11 18 OPINION OF INDEPENDENT AUDITORS Exhibit 99.11 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Statement of Additional Information constituting part of this Post-effective Amendment No. 21 to the registration statement on Form N-1A (the "Registration Statement") of our report dated May 13, 1996, relating to the financial statements and financial highlights of Sun- America 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. PRICE WATERHOUSE LLP 1177 Avenue of the Americas New York, New York July 18, 1996 EX-99.15 19 12B-1 PLAN - CLASS A&B SHARES EXHIBIT 99.15 PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1 (CLASS A SHARES AND CLASS B SHARES) PLAN OF DISTRIBUTION adopted as of the 23 day of September, 1993, by SunAmerica Income Funds, a Massachusetts business trust (the "Trust"), on behalf of the Class A shares of its separately designated series, SunAmerica Diversified Income Fund (the "Fund"). 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 WHEREAS, the Fund is a separately designated investment series of the Trust with its own investment objective, policies and purposes offering two separate classes of shares of beneficial interest, par value $.01 per share, of the Trust (the "Shares"); and WHEREAS, the Trust has entered into a Distribution Agreement with SunAmerica Capital Services, Inc. (the "Distributor"), pursuant to which the Distributor acts as the exclusive distributor and representative of the Trust in the offer and sale of the Shares to the public; and WHEREAS, the Trust desires to adopt this Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to which the Fund will pay an account maintenance fee and a distribution fee to the Distributor with respect to Class A shares of the Fund; and WHEREAS, the Board of Trustees of the Trust (the "Trustees") as a whole, and the Trustees who are not interested persons of the Trust and who have no direct or indirect financial interest in the operation of this Plan or in any agreement relating hereto (the "12b-1 Trustees"), having determined, in the exercise of reasonable business judgment and in light of their fiduciary duties under state law and under Sections 36(a) and (b) of the Act, that there is a reasonable likelihood that this Plan will benefit the Fund and its Class A shareholders, have approved this Plan by votes cast in person at a meeting called for the purpose of voting hereon and on any agreements related hereto; NOW THEREFORE, the Trust on behalf of the Fund hereby adopts this Plan on the following terms: 1. Distribution Activities. The Fund shall pay the Distributor a distribution fee under the Plan at the end of each month at the annual rate of 0.10% of average daily net assets attributable to Class A shares of the Fund to compensate the Distributor and certain securities firms ("Securities Firms") for providing sales and promotional activities and services. Such activities and services will relate to the sale, promotion and marketing of the Class A shares. Such expenditures may consist of sales commissions to financial consultants for selling Class A shares, compensation, sales incentives and payments to sales and marketing personnel, and the payment of expenses incurred in its sales and promotional activities, including advertising expenditures related to the Class A shares of the Fund and the costs of preparing and distributing promotional materials with respect to such Class A shares. Payment of the distribution fee described in this Section 1 shall be subject to any limitations set forth in applicable regulations of the National Association of Securities Dealers, Inc. Nothing herein shall prohibit the Distributior from collecting distribution fees in any given year, as provided hereunder, in excess of expenditures made in such year for sales and promotional activities with respect to the Fund. 2. Account Maintenance Activities. The Fund shall pay the Distributor an account maintenance fee under the Plan at the end of each month at the annual rate of up to 0.25% of average daily net assets attributable to Class A shares of the Fund to compensate the Distributor and Securities Firms for account maintenance activities. 3. Payments to Other Parties. The Fund hereby authorizes the Distributor to enter into agreements with Securities Firms to provide compensation to such Securities Firms for activities and services of the type referred to in Sections 1 and 2 hereof. The Distributor may reallocate all or a portion of its account maintenance fee or distribution fee to such Securities Firms as compensation for the above-mentioned activities and services. Such agreements shall provide that the Securities Firms shall deliver to the Distributor such information as is reasonably necessary to permit the Distributor to comply with the reporting requirements set forth in Section 5 hereof. 4. Related Agreements. All agreements with any person relating to implementation of this Plan shall be in writing, and any agreement related to this Plan shall provide: (a) that such agreement may be terminated at any time, without payment of any penalty, by vote of a majority of the 12b-1 Trustees or, by vote of a majority of the outstanding voting securities (as defined in the Act) of Class A shares of the Fund, on not more than 60 days' written notice to any other party to the agreement; and (b) that such agreement shall terminate automatically in the event of its assignment. -2- 5. Quarterly Reports. The Treasurer of the Trust shall provide to the Trustees and the Trustees shall review, at least quarterly, a written report of the amounts expended pursuant to this Plan with respect to Class A shares of the Fund and any related agreement and the purposes for which such expenditures were made. 6. Term and Termination. (a) This Plan shall become effective as of the date hereof, and, unless terminated as herein provided, shall continue from year to year thereafter, so long as such continuance is specifically approved at least annually by votes, cast in person at a meeting called for the purpose of voting on such approval, of a majority of both the (i) the Trustees of the Trust, and (ii) the 12b-1 Trustees. (b) This Plan may be terminated at any time by vote of a majority of the 12b-1 Trustees or by vote of a majority of the outstanding voting securities (as defined in the Act) of Class A shares of the Fund. 7. Amendments. This Plan may not be amended to increase materially the maximum expenditures permitted by Sections 1 and 2 hereof unless such amendment is approved by a vote of a majority of the outstanding voting securities (as defined in the Act) of Class A shares of the Fund, and no material amendment to this Plan shall be made unless approved in the manner provided for the annual renewal of this Plan in Section 6(a) hereof. 8. Selection and Nomination of Trustees. While this Plan is in effect, the selection and nomination of those Trustees of the Trust who are not interested persons of the Trust shall be committed to the discretion of such disinterested Trustees. 9. Recordkeeping. The Trust shall preserve copies of this Plan and any related agreement and all reports made pursuant to Section 5 hereof for a period of not less than six years from the date of this Plan, any such related agreement or such reports, as the case may be, the first two years in an easily accessible place. 10. Definition of Certain Terms. For purposes of this Plan, the terms "assignment," "interested person," "majority of the outstanding voting securities," and "principal underwriter" shall have their respective meanings defined in the Act and the rules and regulations thereunder, subject, however, to such exemptions as may be granted to either the Trust or the principal underwriter of the Shares by the Securities and Exchange Commission, or its staff under the Act. 11. Personal Liability. The Declaration of Trust establishing the Trust dated [Date Trust Established], a copy of -3- 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 "[Name of Trust]" 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, the Fund is a separate series of the Trust, and all debts, liabilities and expenses of Class A shares of the Fund shall be enforceable only against the assets of Class A shares of the Fund and not against the assets of any other fund or class of shares or of the Trust as a whole. IN WITNESS WHEREOF, the Trust has caused this Plan to be executed as of the day and year first written above. SUNAMERICA INCOME FUNDS By:/s/Peter A. Harbeck Peter A. Harbeck Executive Vice President -4- PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1 (CLASS B SHARES) PLAN OF DISTRIBUTION adopted as of the 23 day of September, 1993, by SunAmerica Income Funds, a Massachusetts business trust (the "Trust"), on behalf of the Class B shares of its separately designated series, SunAmerica Diversified Income Fund (the "Fund"). 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 WHEREAS, the Fund is a separately designated investment series of the Trust with its own investment objective, policies and purposes offering two separate classes of shares of beneficial interest, par value $.01 per share, of the Trust (the "Shares"); and WHEREAS, the Trust has entered into a Distribution Agreement with SunAmerica Capital Services, Inc. (the "Distributor"), pursuant to which the Distributor acts as the exclusive distributor and representative of the Trust in the offer and sale of the Shares to the public; and WHEREAS, the Trust desires to adopt this Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to which the Fund will pay an account maintenance fee and a distribution fee to the Distributor with respect to Class B shares of the Fund; and WHEREAS, the Board of Trustees of the Trust (the "Trustees") as a whole, and the Trustees who are not interested persons of the Trust and who have no direct or indirect financial interest in the operation of this Plan or in any agreement relating hereto (the "12b-1 Trustees"), having determined, in the exercise of reasonable business judgment and in light of their fiduciary duties under state law and under Sections 36(a) and (b) of the Act, that there is a reasonable likelihood that this Plan will benefit the Fund and its Class B shareholders, have approved this Plan by votes cast in person at a meeting called for the purpose of voting hereon and on any agreements related hereto; NOW THEREFORE, the Trust on behalf of the Fund hereby adopts this Plan on the following terms: 1. Distribution Activities. The Fund shall pay the Distributor a distribution fee under the Plan at the end of each -5- month at the annual rate of 0.75% of average daily net assets attributable to Class B shares of the Fund to compensate the Distributor and certain securities firms ("Securities Firms") for providing sales and promotional activities and services. Such activities and services will relate to the sale, promotion and marketing of the Class B shares. Such expenditures may consist of sales commissions to financial consultants for selling Class B shares, compensation, sales incentives and payments to sales and marketing personnel, and the payment of expenses incurred in its sales and promotional activities, including advertising expenditures related to the Class B shares of the Fund and the costs of preparing and distributing promotional materials with respect to such Class B shares. Payment of the distribution fee described in this Section 1 shall be subject to any limitations set forth in applicable regulations of the National Association of Securities Dealers, Inc. Nothing herein shall prohibit the Distributior from collecting distribution fees in any given year, as provided hereunder, in excess of expenditures made in such year for sales and promotional activities with respect to the Fund. 2. Account Maintenance Activities. The Fund shall pay the Distributor an account maintenance fee under the Plan at the end of each month at the annual rate of up to 0.25% of average daily net assets attributable to Class B shares of the Fund to compensate the Distributor and Securities Firms for account maintenance activities. 3. Payments to Other Parties. The Fund hereby authorizes the Distributor to enter into agreements with Securities Firms to provide compensation to such Securities Firms for activities and services of the type referred to in Sections 1 and 2 hereof. The Distributor may reallocate all or a portion of its account maintenance fee or distribution fee to such Securities Firms as compensation for the above-mentioned activities and services. Such agreements shall provide that the Securities Firms shall deliver to the Distributor such information as is reasonably necessary to permit the Distributor to comply with the reporting requirements set forth in Section 5 hereof. 4. Related Agreements. All agreements with any person relating to implementation of this Plan shall be in writing, and any agreement related to this Plan shall provide: (a) that such agreement may be terminated at any time, without payment of any penalty, by vote of a majority of the 12b-1 Trustees or, by vote of a majority of the outstanding voting securities (as defined in the Act) of Class B shares of the Fund, on not more than 60 days' written notice to any other party to the agreement; and -6- (b) that such agreement shall terminate automatically in the event of its assignment. 5. Quarterly Reports. The Treasurer of the Trust shall provide to the Trustees and the Trustees shall review, at least quarterly, a written report of the amounts expended pursuant to this Plan with respect to Class B shares of the Fund and any related agreement and the purposes for which such expenditures were made. 6. Term and Termination. (a) This Plan shall become effective as of the date hereof, and, unless terminated as herein provided, shall continue from year to year thereafter, so long as such continuance is specifically approved at least annually by votes, cast in person at a meeting called for the purpose of voting on such approval, of a majority of both the (i) the Trustees of the Trust, and (ii) the 12b-1 Trustees. (b) This Plan may be terminated at any time by vote of a majority of the 12b-1 Trustees or by vote of a majority of the outstanding voting securities (as defined in the Act) of Class B shares of the Fund. 7. Amendments. This Plan may not be amended to increase materially the maximum expenditures permitted by Sections 1 and 2 hereof unless such amendment is approved by a vote of a majority of the outstanding voting securities (as defined in the Act) of Class B shares of the Fund, and no material amendment to this Plan shall be made unless approved in the manner provided for the annual renewal of this Plan in Section 6(a) hereof. 8. Selection and Nomination of Trustees. While this Plan is in effect, the selection and nomination of those Trustees of the Trust who are not interested persons of the Trust shall be committed to the discretion of such disinterested Trustees. 9. Recordkeeping. The Trust shall preserve copies of this Plan and any related agreement and all reports made pursuant to Section 5 hereof for a period of not less than six years from the date of this Plan, any such related agreement or such reports, as the case may be, the first two years in an easily accessible place. 10. Definition of Certain Terms. For purposes of this Plan, the terms "assignment," "interested person," "majority of the outstanding voting securities," and "principal underwriter" shall have their respective meanings defined in the Act and the rules and regulations thereunder, subject, however, to such exemptions as may be granted to either the Trust or the principal underwriter of the Shares by the Securities and Exchange Commission, or its staff under the Act. -7- 11. Personal Liability. The Declaration of Trust establishing the Trust dated [Date Trust Established], 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 "[Name of Trust]" 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, the Fund is a separate series of the Trust, and all debts, liabilities and expenses of Class B shares of the Fund shall be enforceable only against the assets of Class B shares of the Fund and not against the assets of any other fund or class of shares or of the Trust as a whole. IN WITNESS WHEREOF, the Trust has caused this Plan to be executed as of the day and year first written above. SUNAMERICA INCOME FUNDS By:/s/Peter A. Harbeck Peter A. Harbeck Executive Vice President -8- PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1 (CLASS A SHARES) PLAN OF DISTRIBUTION adopted as of the 23 day of September, 1993, by SunAmerica Income Funds, a Massachusetts business trust (the "Trust"), on behalf of the Class A shares of its separately designated series, SunAmerica Federal Securities Fund (the "Fund"). 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 WHEREAS, the Fund is a separately designated investment series of the Trust with its own investment objective, policies and purposes offering two separate classes of shares of beneficial interest, par value $.01 per share, of the Trust (the "Shares"); and WHEREAS, the Trust has entered into a Distribution Agreement with SunAmerica Capital Services, Inc. (the "Distributor"), pursuant to which the Distributor acts as the exclusive distributor and representative of the Trust in the offer and sale of the Shares to the public; and WHEREAS, the Trust desires to adopt this Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to which the Fund will pay an account maintenance fee and a distribution fee to the Distributor with respect to Class A shares of the Fund; and WHEREAS, the Board of Trustees of the Trust (the "Trustees") as a whole, and the Trustees who are not interested persons of the Trust and who have no direct or indirect financial interest in the operation of this Plan or in any agreement relating hereto (the "12b-1 Trustees"), having determined, in the exercise of reasonable business judgment and in light of their fiduciary duties under state law and under Sections 36(a) and (b) of the Act, that there is a reasonable likelihood that this Plan will benefit the Fund and its Class A shareholders, have approved this Plan by votes cast in person at a meeting called for the purpose of voting hereon and on any agreements related hereto; NOW THEREFORE, the Trust on behalf of the Fund hereby adopts this Plan on the following terms: 1. Distribution Activities. The Fund shall pay the Distributor a distribution fee under the Plan at the end of each month at the annual rate of 0.10% of average daily net assets -9- attributable to Class A shares of the Fund to compensate the Distributor and certain securities firms ("Securities Firms") for providing sales and promotional activities and services. Such activities and services will relate to the sale, promotion and marketing of the Class A shares. Such expenditures may consist of sales commissions to financial consultants for selling Class A shares, compensation, sales incentives and payments to sales and marketing personnel, and the payment of expenses incurred in its sales and promotional activities, including advertising expenditures related to the Class A shares of the Fund and the costs of preparing and distributing promotional materials with respect to such Class A shares. Payment of the distribution fee described in this Section 1 shall be subject to any limitations set forth in applicable regulations of the National Association of Securities Dealers, Inc. Nothing herein shall prohibit the Distributior from collecting distribution fees in any given year, as provided hereunder, in excess of expenditures made in such year for sales and promotional activities with respect to the Fund. 2. Account Maintenance Activities. The Fund shall pay the Distributor an account maintenance fee under the Plan at the end of each month at the annual rate of up to 0.25% of average daily net assets attributable to Class A shares of the Fund to compensate the Distributor and Securities Firms for account maintenance activities. 3. Payments to Other Parties. The Fund hereby authorizes the Distributor to enter into agreements with Securities Firms to provide compensation to such Securities Firms for activities and services of the type referred to in Sections 1 and 2 hereof. The Distributor may reallocate all or a portion of its account maintenance fee or distribution fee to such Securities Firms as compensation for the above-mentioned activities and services. Such agreements shall provide that the Securities Firms shall deliver to the Distributor such information as is reasonably necessary to permit the Distributor to comply with the reporting requirements set forth in Section 5 hereof. 4. Related Agreements. All agreements with any person relating to implementation of this Plan shall be in writing, and any agreement related to this Plan shall provide: (a) that such agreement may be terminated at any time, without payment of any penalty, by vote of a majority of the 12b-1 Trustees or, by vote of a majority of the outstanding voting securities (as defined in the Act) of Class A shares of the Fund, on not more than 60 days' written notice to any other party to the agreement; and (b) that such agreement shall terminate automatically in the event of its assignment. -10- 5. Quarterly Reports. The Treasurer of the Trust shall provide to the Trustees and the Trustees shall review, at least quarterly, a written report of the amounts expended pursuant to this Plan with respect to Class A shares of the Fund and any related agreement and the purposes for which such expenditures were made. 6. Term and Termination. (a) This Plan shall become effective as of the date hereof, and, unless terminated as herein provided, shall continue from year to year thereafter, so long as such continuance is specifically approved at least annually by votes, cast in person at a meeting called for the purpose of voting on such approval, of a majority of both the (i) the Trustees of the Trust, and (ii) the 12b-1 Trustees. (b) This Plan may be terminated at any time by vote of a majority of the 12b-1 Trustees or by vote of a majority of the outstanding voting securities (as defined in the Act) of Class A shares of the Fund. 7. Amendments. This Plan may not be amended to increase materially the maximum expenditures permitted by Sections 1 and 2 hereof unless such amendment is approved by a vote of a majority of the outstanding voting securities (as defined in the Act) of Class A shares of the Fund, and no material amendment to this Plan shall be made unless approved in the manner provided for the annual renewal of this Plan in Section 6(a) hereof. 8. Selection and Nomination of Trustees. While this Plan is in effect, the selection and nomination of those Trustees of the Trust who are not interested persons of the Trust shall be committed to the discretion of such disinterested Trustees. 9. Recordkeeping. The Trust shall preserve copies of this Plan and any related agreement and all reports made pursuant to Section 5 hereof for a period of not less than six years from the date of this Plan, any such related agreement or such reports, as the case may be, the first two years in an easily accessible place. 10. Definition of Certain Terms. For purposes of this Plan, the terms "assignment," "interested person," "majority of the outstanding voting securities," and "principal underwriter" shall have their respective meanings defined in the Act and the rules and regulations thereunder, subject, however, to such exemptions as may be granted to either the Trust or the principal underwriter of the Shares by the Securities and Exchange Commission, or its staff under the Act. 11. Personal Liability. The Declaration of Trust establishing the Trust dated [Date Trust Established], a copy of -11- 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 "[Name of Trust]" 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, the Fund is a separate series of the Trust, and all debts, liabilities and expenses of Class A shares of the Fund shall be enforceable only against the assets of Class A shares of the Fund and not against the assets of any other fund or class of shares or of the Trust as a whole. IN WITNESS WHEREOF, the Trust has caused this Plan to be executed as of the day and year first written above. SUNAMERICA INCOME FUNDS By:/s/Peter A. Harbeck Peter A. Harbeck Executive Vice President -12- PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1 (CLASS B SHARES) PLAN OF DISTRIBUTION adopted as of the 23 day of September, 1993, by SunAmerica Income Funds, a Massachusetts business trust (the "Trust"), on behalf of the Class B shares of its separately designated series, SunAmerica Federal Securities Fund (the "Fund"). 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 WHEREAS, the Fund is a separately designated investment series of the Trust with its own investment objective, policies and purposes offering two separate classes of shares of beneficial interest, par value $.01 per share, of the Trust (the "Shares"); and WHEREAS, the Trust has entered into a Distribution Agreement with SunAmerica Capital Services, Inc. (the "Distributor"), pursuant to which the Distributor acts as the exclusive distributor and representative of the Trust in the offer and sale of the Shares to the public; and WHEREAS, the Trust desires to adopt this Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to which the Fund will pay an account maintenance fee and a distribution fee to the Distributor with respect to Class B shares of the Fund; and WHEREAS, the Board of Trustees of the Trust (the "Trustees") as a whole, and the Trustees who are not interested persons of the Trust and who have no direct or indirect financial interest in the operation of this Plan or in any agreement relating hereto (the "12b-1 Trustees"), having determined, in the exercise of reasonable business judgment and in light of their fiduciary duties under state law and under Sections 36(a) and (b) of the Act, that there is a reasonable likelihood that this Plan will benefit the Fund and its Class B shareholders, have approved this Plan by votes cast in person at a meeting called for the purpose of voting hereon and on any agreements related hereto; NOW THEREFORE, the Trust on behalf of the Fund hereby adopts this Plan on the following terms: 1. Distribution Activities. The Fund shall pay the Distributor a distribution fee under the Plan at the end of each -13- month at the annual rate of 0.75% of average daily net assets attributable to Class B shares of the Fund to compensate the Distributor and certain securities firms ("Securities Firms") for providing sales and promotional activities and services. Such activities and services will relate to the sale, promotion and marketing of the Class B shares. Such expenditures may consist of sales commissions to financial consultants for selling Class B shares, compensation, sales incentives and payments to sales and marketing personnel, and the payment of expenses incurred in its sales and promotional activities, including advertising expenditures related to the Class B shares of the Fund and the costs of preparing and distributing promotional materials with respect to such Class B shares. Payment of the distribution fee described in this Section 1 shall be subject to any limitations set forth in applicable regulations of the National Association of Securities Dealers, Inc. Nothing herein shall prohibit the Distributior from collecting distribution fees in any given year, as provided hereunder, in excess of expenditures made in such year for sales and promotional activities with respect to the Fund. 2. Account Maintenance Activities. The Fund shall pay the Distributor an account maintenance fee under the Plan at the end of each month at the annual rate of up to 0.25% of average daily net assets attributable to Class B shares of the Fund to compensate the Distributor and Securities Firms for account maintenance activities. 3. Payments to Other Parties. The Fund hereby authorizes the Distributor to enter into agreements with Securities Firms to provide compensation to such Securities Firms for activities and services of the type referred to in Sections 1 and 2 hereof. The Distributor may reallocate all or a portion of its account maintenance fee or distribution fee to such Securities Firms as compensation for the above-mentioned activities and services. Such agreements shall provide that the Securities Firms shall deliver to the Distributor such information as is reasonably necessary to permit the Distributor to comply with the reporting requirements set forth in Section 5 hereof. 4. Related Agreements. All agreements with any person relating to implementation of this Plan shall be in writing, and any agreement related to this Plan shall provide: (a) that such agreement may be terminated at any time, without payment of any penalty, by vote of a majority of the 12b-1 Trustees or, by vote of a majority of the outstanding voting securities (as defined in the Act) of Class B shares of the Fund, on not more than 60 days' written notice to any other party to the agreement; and -14- (b) that such agreement shall terminate automatically in the event of its assignment. 5. Quarterly Reports. The Treasurer of the Trust shall provide to the Trustees and the Trustees shall review, at least quarterly, a written report of the amounts expended pursuant to this Plan with respect to Class B shares of the Fund and any related agreement and the purposes for which such expenditures were made. 6. Term and Termination. (a) This Plan shall become effective as of the date hereof, and, unless terminated as herein provided, shall continue from year to year thereafter, so long as such continuance is specifically approved at least annually by votes, cast in person at a meeting called for the purpose of voting on such approval, of a majority of both the (i) the Trustees of the Trust, and (ii) the 12b-1 Trustees. (b) This Plan may be terminated at any time by vote of a majority of the 12b-1 Trustees or by vote of a majority of the outstanding voting securities (as defined in the Act) of Class B shares of the Fund. 7. Amendments. This Plan may not be amended to increase materially the maximum expenditures permitted by Sections 1 and 2 hereof unless such amendment is approved by a vote of a majority of the outstanding voting securities (as defined in the Act) of Class B shares of the Fund, and no material amendment to this Plan shall be made unless approved in the manner provided for the annual renewal of this Plan in Section 6(a) hereof. 8. Selection and Nomination of Trustees. While this Plan is in effect, the selection and nomination of those Trustees of the Trust who are not interested persons of the Trust shall be committed to the discretion of such disinterested Trustees. 9. Recordkeeping. The Trust shall preserve copies of this Plan and any related agreement and all reports made pursuant to Section 5 hereof for a period of not less than six years from the date of this Plan, any such related agreement or such reports, as the case may be, the first two years in an easily accessible place. 10. Definition of Certain Terms. For purposes of this Plan, the terms "assignment," "interested person," "majority of the outstanding voting securities," and "principal underwriter" shall have their respective meanings defined in the Act and the rules and regulations thereunder, subject, however, to such exemptions as may be granted to either the Trust or the principal underwriter of the Shares by the Securities and Exchange Commission, or its staff under the Act. -15- 11. Personal Liability. The Declaration of Trust establishing the Trust dated [Date Trust Established], 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 "[Name of Trust]" 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, the Fund is a separate series of the Trust, and all debts, liabilities and expenses of Class B shares of the Fund shall be enforceable only against the assets of Class B shares of the Fund and not against the assets of any other fund or class of shares or of the Trust as a whole. IN WITNESS WHEREOF, the Trust has caused this Plan to be executed as of the day and year first written above. SUNAMERICA INCOME FUNDS By:/s/Peter A. Harbeck Peter A. Harbeck Executive Vice President -16- PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1 (CLASS A SHARES) PLAN OF DISTRIBUTION adopted as of the 23 day of September, 1993, by SunAmerica Income Funds, a Massachusetts business trust (the "Trust"), on behalf of the Class A shares of its separately designated series, SunAmerica High Income Fund (the "Fund"). 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 WHEREAS, the Fund is a separately designated investment series of the Trust with its own investment objective, policies and purposes offering two separate classes of shares of beneficial interest, par value $.01 per share, of the Trust (the "Shares"); and WHEREAS, the Trust has entered into a Distribution Agreement with SunAmerica Capital Services, Inc. (the "Distributor"), pursuant to which the Distributor acts as the exclusive distributor and representative of the Trust in the offer and sale of the Shares to the public; and WHEREAS, the Trust desires to adopt this Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to which the Fund will pay an account maintenance fee and a distribution fee to the Distributor with respect to Class A shares of the Fund; and WHEREAS, the Board of Trustees of the Trust (the "Trustees") as a whole, and the Trustees who are not interested persons of the Trust and who have no direct or indirect financial interest in the operation of this Plan or in any agreement relating hereto (the "12b-1 Trustees"), having determined, in the exercise of reasonable business judgment and in light of their fiduciary duties under state law and under Sections 36(a) and (b) of the Act, that there is a reasonable likelihood that this Plan will benefit the Fund and its Class A shareholders, have approved this Plan by votes cast in person at a meeting called for the purpose of voting hereon and on any agreements related hereto; NOW THEREFORE, the Trust on behalf of the Fund hereby adopts this Plan on the following terms: 1. Distribution Activities. The Fund shall pay the Distributor a distribution fee under the Plan at the end of each month at the annual rate of 0.10% of average daily net assets -17- attributable to Class A shares of the Fund to compensate the Distributor and certain securities firms ("Securities Firms") for providing sales and promotional activities and services. Such activities and services will relate to the sale, promotion and marketing of the Class A shares. Such expenditures may consist of sales commissions to financial consultants for selling Class A shares, compensation, sales incentives and payments to sales and marketing personnel, and the payment of expenses incurred in its sales and promotional activities, including advertising expenditures related to the Class A shares of the Fund and the costs of preparing and distributing promotional materials with respect to such Class A shares. Payment of the distribution fee described in this Section 1 shall be subject to any limitations set forth in applicable regulations of the National Association of Securities Dealers, Inc. Nothing herein shall prohibit the Distributior from collecting distribution fees in any given year, as provided hereunder, in excess of expenditures made in such year for sales and promotional activities with respect to the Fund. 2. Account Maintenance Activities. The Fund shall pay the Distributor an account maintenance fee under the Plan at the end of each month at the annual rate of up to 0.25% of average daily net assets attributable to Class A shares of the Fund to compensate the Distributor and Securities Firms for account maintenance activities. 3. Payments to Other Parties. The Fund hereby authorizes the Distributor to enter into agreements with Securities Firms to provide compensation to such Securities Firms for activities and services of the type referred to in Sections 1 and 2 hereof. The Distributor may reallocate all or a portion of its account maintenance fee or distribution fee to such Securities Firms as compensation for the above-mentioned activities and services. Such agreements shall provide that the Securities Firms shall deliver to the Distributor such information as is reasonably necessary to permit the Distributor to comply with the reporting requirements set forth in Section 5 hereof. 4. Related Agreements. All agreements with any person relating to implementation of this Plan shall be in writing, and any agreement related to this Plan shall provide: (a) that such agreement may be terminated at any time, without payment of any penalty, by vote of a majority of the 12b-1 Trustees or, by vote of a majority of the outstanding voting securities (as defined in the Act) of Class A shares of the Fund, on not more than 60 days' written notice to any other party to the agreement; and (b) that such agreement shall terminate automatically in the event of its assignment. -18- 5. Quarterly Reports. The Treasurer of the Trust shall provide to the Trustees and the Trustees shall review, at least quarterly, a written report of the amounts expended pursuant to this Plan with respect to Class A shares of the Fund and any related agreement and the purposes for which such expenditures were made. 6. Term and Termination. (a) This Plan shall become effective as of the date hereof, and, unless terminated as herein provided, shall continue from year to year thereafter, so long as such continuance is specifically approved at least annually by votes, cast in person at a meeting called for the purpose of voting on such approval, of a majority of both the (i) the Trustees of the Trust, and (ii) the 12b-1 Trustees. (b) This Plan may be terminated at any time by vote of a majority of the 12b-1 Trustees or by vote of a majority of the outstanding voting securities (as defined in the Act) of Class A shares of the Fund. 7. Amendments. This Plan may not be amended to increase materially the maximum expenditures permitted by Sections 1 and 2 hereof unless such amendment is approved by a vote of a majority of the outstanding voting securities (as defined in the Act) of Class A shares of the Fund, and no material amendment to this Plan shall be made unless approved in the manner provided for the annual renewal of this Plan in Section 6(a) hereof. 8. Selection and Nomination of Trustees. While this Plan is in effect, the selection and nomination of those Trustees of the Trust who are not interested persons of the Trust shall be committed to the discretion of such disinterested Trustees. 9. Recordkeeping. The Trust shall preserve copies of this Plan and any related agreement and all reports made pursuant to Section 5 hereof for a period of not less than six years from the date of this Plan, any such related agreement or such reports, as the case may be, the first two years in an easily accessible place. 10. Definition of Certain Terms. For purposes of this Plan, the terms "assignment," "interested person," "majority of the outstanding voting securities," and "principal underwriter" shall have their respective meanings defined in the Act and the rules and regulations thereunder, subject, however, to such exemptions as may be granted to either the Trust or the principal underwriter of the Shares by the Securities and Exchange Commission, or its staff under the Act. 11. Personal Liability. The Declaration of Trust establishing the Trust dated [Date Trust Established], a copy of -19- 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 "[Name of Trust]" 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, the Fund is a separate series of the Trust, and all debts, liabilities and expenses of Class A shares of the Fund shall be enforceable only against the assets of Class A shares of the Fund and not against the assets of any other fund or class of shares or of the Trust as a whole. IN WITNESS WHEREOF, the Trust has caused this Plan to be executed as of the day and year first written above. SUNAMERICA INCOME FUNDS By:/s/Peter A. Harbeck Peter A. Harbeck Executive Vice President -20- PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1 (CLASS B SHARES) PLAN OF DISTRIBUTION adopted as of the 23 day of September, 1993, by SunAmerica Income Funds, a Massachusetts business trust (the "Trust"), on behalf of the Class B shares of its separately designated series, SunAmerica High Income Fund (the "Fund"). 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 WHEREAS, the Fund is a separately designated investment series of the Trust with its own investment objective, policies and purposes offering two separate classes of shares of beneficial interest, par value $.01 per share, of the Trust (the "Shares"); and WHEREAS, the Trust has entered into a Distribution Agreement with SunAmerica Capital Services, Inc. (the "Distributor"), pursuant to which the Distributor acts as the exclusive distributor and representative of the Trust in the offer and sale of the Shares to the public; and WHEREAS, the Trust desires to adopt this Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to which the Fund will pay an account maintenance fee and a distribution fee to the Distributor with respect to Class B shares of the Fund; and WHEREAS, the Board of Trustees of the Trust (the "Trustees") as a whole, and the Trustees who are not interested persons of the Trust and who have no direct or indirect financial interest in the operation of this Plan or in any agreement relating hereto (the "12b-1 Trustees"), having determined, in the exercise of reasonable business judgment and in light of their fiduciary duties under state law and under Sections 36(a) and (b) of the Act, that there is a reasonable likelihood that this Plan will benefit the Fund and its Class B shareholders, have approved this Plan by votes cast in person at a meeting called for the purpose of voting hereon and on any agreements related hereto; NOW THEREFORE, the Trust on behalf of the Fund hereby adopts this Plan on the following terms: 1. Distribution Activities. The Fund shall pay the Distributor a distribution fee under the Plan at the end of each -21- month at the annual rate of 0.75% of average daily net assets attributable to Class B shares of the Fund to compensate the Distributor and certain securities firms ("Securities Firms") for providing sales and promotional activities and services. Such activities and services will relate to the sale, promotion and marketing of the Class B shares. Such expenditures may consist of sales commissions to financial consultants for selling Class B shares, compensation, sales incentives and payments to sales and marketing personnel, and the payment of expenses incurred in its sales and promotional activities, including advertising expenditures related to the Class B shares of the Fund and the costs of preparing and distributing promotional materials with respect to such Class B shares. Payment of the distribution fee described in this Section 1 shall be subject to any limitations set forth in applicable regulations of the National Association of Securities Dealers, Inc. Nothing herein shall prohibit the Distributior from collecting distribution fees in any given year, as provided hereunder, in excess of expenditures made in such year for sales and promotional activities with respect to the Fund. 2. Account Maintenance Activities. The Fund shall pay the Distributor an account maintenance fee under the Plan at the end of each month at the annual rate of up to 0.25% of average daily net assets attributable to Class B shares of the Fund to compensate the Distributor and Securities Firms for account maintenance activities. 3. Payments to Other Parties. The Fund hereby authorizes the Distributor to enter into agreements with Securities Firms to provide compensation to such Securities Firms for activities and services of the type referred to in Sections 1 and 2 hereof. The Distributor may reallocate all or a portion of its account maintenance fee or distribution fee to such Securities Firms as compensation for the above-mentioned activities and services. Such agreements shall provide that the Securities Firms shall deliver to the Distributor such information as is reasonably necessary to permit the Distributor to comply with the reporting requirements set forth in Section 5 hereof. 4. Related Agreements. All agreements with any person relating to implementation of this Plan shall be in writing, and any agreement related to this Plan shall provide: (a) that such agreement may be terminated at any time, without payment of any penalty, by vote of a majority of the 12b-1 Trustees or, by vote of a majority of the outstanding voting securities (as defined in the Act) of Class B shares of the Fund, on not more than 60 days' written notice to any other party to the agreement; and -22- (b) that such agreement shall terminate automatically in the event of its assignment. 5. Quarterly Reports. The Treasurer of the Trust shall provide to the Trustees and the Trustees shall review, at least quarterly, a written report of the amounts expended pursuant to this Plan with respect to Class B shares of the Fund and any related agreement and the purposes for which such expenditures were made. 6. Term and Termination. (a) This Plan shall become effective as of the date hereof, and, unless terminated as herein provided, shall continue from year to year thereafter, so long as such continuance is specifically approved at least annually by votes, cast in person at a meeting called for the purpose of voting on such approval, of a majority of both the (i) the Trustees of the Trust, and (ii) the 12b-1 Trustees. (b) This Plan may be terminated at any time by vote of a majority of the 12b-1 Trustees or by vote of a majority of the outstanding voting securities (as defined in the Act) of Class B shares of the Fund. 7. Amendments. This Plan may not be amended to increase materially the maximum expenditures permitted by Sections 1 and 2 hereof unless such amendment is approved by a vote of a majority of the outstanding voting securities (as defined in the Act) of Class B shares of the Fund, and no material amendment to this Plan shall be made unless approved in the manner provided for the annual renewal of this Plan in Section 6(a) hereof. 8. Selection and Nomination of Trustees. While this Plan is in effect, the selection and nomination of those Trustees of the Trust who are not interested persons of the Trust shall be committed to the discretion of such disinterested Trustees. 9. Recordkeeping. The Trust shall preserve copies of this Plan and any related agreement and all reports made pursuant to Section 5 hereof for a period of not less than six years from the date of this Plan, any such related agreement or such reports, as the case may be, the first two years in an easily accessible place. 10. Definition of Certain Terms. For purposes of this Plan, the terms "assignment," "interested person," "majority of the outstanding voting securities," and "principal underwriter" shall have their respective meanings defined in the Act and the rules and regulations thereunder, subject, however, to such exemptions as may be granted to either the Trust or the principal underwriter of the Shares by the Securities and Exchange Commission, or its staff under the Act. -23- 11. Personal Liability. The Declaration of Trust establishing the Trust dated [Date Trust Established], 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 "[Name of Trust]" 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, the Fund is a separate series of the Trust, and all debts, liabilities and expenses of Class B shares of the Fund shall be enforceable only against the assets of Class B shares of the Fund and not against the assets of any other fund or class of shares or of the Trust as a whole. IN WITNESS WHEREOF, the Trust has caused this Plan to be executed as of the day and year first written above. SUNAMERICA INCOME FUNDS By:/s/Peter A. Harbeck Peter A. Harbeck Executive Vice President -24- PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1 (CLASS A SHARES) PLAN OF DISTRIBUTION adopted as of the 23 day of September, 1993, by SunAmerica Income Funds, a Massachusetts business trust (the "Trust"), on behalf of the Class A shares of its separately designated series, SunAmerica Tax Exempt Insured Fund (the "Fund"). 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 WHEREAS, the Fund is a separately designated investment series of the Trust with its own investment objective, policies and purposes offering two separate classes of shares of beneficial interest, par value $.01 per share, of the Trust (the "Shares"); and WHEREAS, the Trust has entered into a Distribution Agreement with SunAmerica Capital Services, Inc. (the "Distributor"), pursuant to which the Distributor acts as the exclusive distributor and representative of the Trust in the offer and sale of the Shares to the public; and WHEREAS, the Trust desires to adopt this Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to which the Fund will pay an account maintenance fee and a distribution fee to the Distributor with respect to Class A shares of the Fund; and WHEREAS, the Board of Trustees of the Trust (the "Trustees") as a whole, and the Trustees who are not interested persons of the Trust and who have no direct or indirect financial interest in the operation of this Plan or in any agreement relating hereto (the "12b-1 Trustees"), having determined, in the exercise of reasonable business judgment and in light of their fiduciary duties under state law and under Sections 36(a) and (b) of the Act, that there is a reasonable likelihood that this Plan will benefit the Fund and its Class A shareholders, have approved this Plan by votes cast in person at a meeting called for the purpose of voting hereon and on any agreements related hereto; NOW THEREFORE, the Trust on behalf of the Fund hereby adopts this Plan on the following terms: 1. Distribution Activities. The Fund shall pay the Distributor a distribution fee under the Plan at the end of each month at the annual rate of 0.10% of average daily net assets -25- attributable to Class A shares of the Fund to compensate the Distributor and certain securities firms ("Securities Firms") for providing sales and promotional activities and services. Such activities and services will relate to the sale, promotion and marketing of the Class A shares. Such expenditures may consist of sales commissions to financial consultants for selling Class A shares, compensation, sales incentives and payments to sales and marketing personnel, and the payment of expenses incurred in its sales and promotional activities, including advertising expenditures related to the Class A shares of the Fund and the costs of preparing and distributing promotional materials with respect to such Class A shares. Payment of the distribution fee described in this Section 1 shall be subject to any limitations set forth in applicable regulations of the National Association of Securities Dealers, Inc. Nothing herein shall prohibit the Distributior from collecting distribution fees in any given year, as provided hereunder, in excess of expenditures made in such year for sales and promotional activities with respect to the Fund. 2. Account Maintenance Activities. The Fund shall pay the Distributor an account maintenance fee under the Plan at the end of each month at the annual rate of up to 0.25% of average daily net assets attributable to Class A shares of the Fund to compensate the Distributor and Securities Firms for account maintenance activities. 3. Payments to Other Parties. The Fund hereby authorizes the Distributor to enter into agreements with Securities Firms to provide compensation to such Securities Firms for activities and services of the type referred to in Sections 1 and 2 hereof. The Distributor may reallocate all or a portion of its account maintenance fee or distribution fee to such Securities Firms as compensation for the above-mentioned activities and services. Such agreements shall provide that the Securities Firms shall deliver to the Distributor such information as is reasonably necessary to permit the Distributor to comply with the reporting requirements set forth in Section 5 hereof. 4. Related Agreements. All agreements with any person relating to implementation of this Plan shall be in writing, and any agreement related to this Plan shall provide: (a) that such agreement may be terminated at any time, without payment of any penalty, by vote of a majority of the 12b-1 Trustees or, by vote of a majority of the outstanding voting securities (as defined in the Act) of Class A shares of the Fund, on not more than 60 days' written notice to any other party to the agreement; and (b) that such agreement shall terminate automatically in the event of its assignment. -26- 5. Quarterly Reports. The Treasurer of the Trust shall provide to the Trustees and the Trustees shall review, at least quarterly, a written report of the amounts expended pursuant to this Plan with respect to Class A shares of the Fund and any related agreement and the purposes for which such expenditures were made. 6. Term and Termination. (a) This Plan shall become effective as of the date hereof, and, unless terminated as herein provided, shall continue from year to year thereafter, so long as such continuance is specifically approved at least annually by votes, cast in person at a meeting called for the purpose of voting on such approval, of a majority of both the (i) the Trustees of the Trust, and (ii) the 12b-1 Trustees. (b) This Plan may be terminated at any time by vote of a majority of the 12b-1 Trustees or by vote of a majority of the outstanding voting securities (as defined in the Act) of Class A shares of the Fund. 7. Amendments. This Plan may not be amended to increase materially the maximum expenditures permitted by Sections 1 and 2 hereof unless such amendment is approved by a vote of a majority of the outstanding voting securities (as defined in the Act) of Class A shares of the Fund, and no material amendment to this Plan shall be made unless approved in the manner provided for the annual renewal of this Plan in Section 6(a) hereof. 8. Selection and Nomination of Trustees. While this Plan is in effect, the selection and nomination of those Trustees of the Trust who are not interested persons of the Trust shall be committed to the discretion of such disinterested Trustees. 9. Recordkeeping. The Trust shall preserve copies of this Plan and any related agreement and all reports made pursuant to Section 5 hereof for a period of not less than six years from the date of this Plan, any such related agreement or such reports, as the case may be, the first two years in an easily accessible place. 10. Definition of Certain Terms. For purposes of this Plan, the terms "assignment," "interested person," "majority of the outstanding voting securities," and "principal underwriter" shall have their respective meanings defined in the Act and the rules and regulations thereunder, subject, however, to such exemptions as may be granted to either the Trust or the principal underwriter of the Shares by the Securities and Exchange Commission, or its staff under the Act. 11. Personal Liability. The Declaration of Trust establishing the Trust dated [Date Trust Established], a copy of -27- 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 "[Name of Trust]" 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, the Fund is a separate series of the Trust, and all debts, liabilities and expenses of Class A shares of the Fund shall be enforceable only against the assets of Class A shares of the Fund and not against the assets of any other fund or class of shares or of the Trust as a whole. IN WITNESS WHEREOF, the Trust has caused this Plan to be executed as of the day and year first written above. SUNAMERICA INCOME FUNDS By:/s/Peter A. Harbeck Peter A. Harbeck Executive Vice President -28- PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1 (CLASS B SHARES) PLAN OF DISTRIBUTION adopted as of the 23 day of September, 1993, by SunAmerica Income Funds, a Massachusetts business trust (the "Trust"), on behalf of the Class B shares of its separately designated series, SunAmerica Tax Exempt Insured Fund (the "Fund"). 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 WHEREAS, the Fund is a separately designated investment series of the Trust with its own investment objective, policies and purposes offering two separate classes of shares of beneficial interest, par value $.01 per share, of the Trust (the "Shares"); and WHEREAS, the Trust has entered into a Distribution Agreement with SunAmerica Capital Services, Inc. (the "Distributor"), pursuant to which the Distributor acts as the exclusive distributor and representative of the Trust in the offer and sale of the Shares to the public; and WHEREAS, the Trust desires to adopt this Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to which the Fund will pay an account maintenance fee and a distribution fee to the Distributor with respect to Class B shares of the Fund; and WHEREAS, the Board of Trustees of the Trust (the "Trustees") as a whole, and the Trustees who are not interested persons of the Trust and who have no direct or indirect financial interest in the operation of this Plan or in any agreement relating hereto (the "12b-1 Trustees"), having determined, in the exercise of reasonable business judgment and in light of their fiduciary duties under state law and under Sections 36(a) and (b) of the Act, that there is a reasonable likelihood that this Plan will benefit the Fund and its Class B shareholders, have approved this Plan by votes cast in person at a meeting called for the purpose of voting hereon and on any agreements related hereto; NOW THEREFORE, the Trust on behalf of the Fund hereby adopts this Plan on the following terms: 1. Distribution Activities. The Fund shall pay the Distributor a distribution fee under the Plan at the end of each -29- month at the annual rate of 0.75% of average daily net assets attributable to Class B shares of the Fund to compensate the Distributor and certain securities firms ("Securities Firms") for providing sales and promotional activities and services. Such activities and services will relate to the sale, promotion and marketing of the Class B shares. Such expenditures may consist of sales commissions to financial consultants for selling Class B shares, compensation, sales incentives and payments to sales and marketing personnel, and the payment of expenses incurred in its sales and promotional activities, including advertising expenditures related to the Class B shares of the Fund and the costs of preparing and distributing promotional materials with respect to such Class B shares. Payment of the distribution fee described in this Section 1 shall be subject to any limitations set forth in applicable regulations of the National Association of Securities Dealers, Inc. Nothing herein shall prohibit the Distributior from collecting distribution fees in any given year, as provided hereunder, in excess of expenditures made in such year for sales and promotional activities with respect to the Fund. 2. Account Maintenance Activities. The Fund shall pay the Distributor an account maintenance fee under the Plan at the end of each month at the annual rate of up to 0.25% of average daily net assets attributable to Class B shares of the Fund to compensate the Distributor and Securities Firms for account maintenance activities. 3. Payments to Other Parties. The Fund hereby authorizes the Distributor to enter into agreements with Securities Firms to provide compensation to such Securities Firms for activities and services of the type referred to in Sections 1 and 2 hereof. The Distributor may reallocate all or a portion of its account maintenance fee or distribution fee to such Securities Firms as compensation for the above-mentioned activities and services. Such agreements shall provide that the Securities Firms shall deliver to the Distributor such information as is reasonably necessary to permit the Distributor to comply with the reporting requirements set forth in Section 5 hereof. 4. Related Agreements. All agreements with any person relating to implementation of this Plan shall be in writing, and any agreement related to this Plan shall provide: (a) that such agreement may be terminated at any time, without payment of any penalty, by vote of a majority of the 12b-1 Trustees or, by vote of a majority of the outstanding voting securities (as defined in the Act) of Class B shares of the Fund, on not more than 60 days' written notice to any other party to the agreement; and -30- (b) that such agreement shall terminate automatically in the event of its assignment. 5. Quarterly Reports. The Treasurer of the Trust shall provide to the Trustees and the Trustees shall review, at least quarterly, a written report of the amounts expended pursuant to this Plan with respect to Class B shares of the Fund and any related agreement and the purposes for which such expenditures were made. 6. Term and Termination. (a) This Plan shall become effective as of the date hereof, and, unless terminated as herein provided, shall continue from year to year thereafter, so long as such continuance is specifically approved at least annually by votes, cast in person at a meeting called for the purpose of voting on such approval, of a majority of both the (i) the Trustees of the Trust, and (ii) the 12b-1 Trustees. (b) This Plan may be terminated at any time by vote of a majority of the 12b-1 Trustees or by vote of a majority of the outstanding voting securities (as defined in the Act) of Class B shares of the Fund. 7. Amendments. This Plan may not be amended to increase materially the maximum expenditures permitted by Sections 1 and 2 hereof unless such amendment is approved by a vote of a majority of the outstanding voting securities (as defined in the Act) of Class B shares of the Fund, and no material amendment to this Plan shall be made unless approved in the manner provided for the annual renewal of this Plan in Section 6(a) hereof. 8. Selection and Nomination of Trustees. While this Plan is in effect, the selection and nomination of those Trustees of the Trust who are not interested persons of the Trust shall be committed to the discretion of such disinterested Trustees. 9. Recordkeeping. The Trust shall preserve copies of this Plan and any related agreement and all reports made pursuant to Section 5 hereof for a period of not less than six years from the date of this Plan, any such related agreement or such reports, as the case may be, the first two years in an easily accessible place. 10. Definition of Certain Terms. For purposes of this Plan, the terms "assignment," "interested person," "majority of the outstanding voting securities," and "principal underwriter" shall have their respective meanings defined in the Act and the rules and regulations thereunder, subject, however, to such exemptions as may be granted to either the Trust or the principal underwriter of the Shares by the Securities and Exchange Commission, or its staff under the Act. -31- 11. Personal Liability. The Declaration of Trust establishing the Trust dated [Date Trust Established], 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 "[Name of Trust]" 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, the Fund is a separate series of the Trust, and all debts, liabilities and expenses of Class B shares of the Fund shall be enforceable only against the assets of Class B shares of the Fund and not against the assets of any other fund or class of shares or of the Trust as a whole. IN WITNESS WHEREOF, the Trust has caused this Plan to be executed as of the day and year first written above. SUNAMERICA INCOME FUNDS By:/s/Peter A. Harbeck Peter A. Harbeck Executive Vice President -32- PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1 (CLASS A SHARES) PLAN OF DISTRIBUTION adopted as of the 23 day of September, 1993, by SunAmerica Income Funds, a Massachusetts business trust (the "Trust"), on behalf of the Class A shares of its separately designated series, SunAmerica U.S. Government Securities Fund (the "Fund"). 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 WHEREAS, the Fund is a separately designated investment series of the Trust with its own investment objective, policies and purposes offering two separate classes of shares of beneficial interest, par value $.01 per share, of the Trust (the "Shares"); and WHEREAS, the Trust has entered into a Distribution Agreement with SunAmerica Capital Services, Inc. (the "Distributor"), pursuant to which the Distributor acts as the exclusive distributor and representative of the Trust in the offer and sale of the Shares to the public; and WHEREAS, the Trust desires to adopt this Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to which the Fund will pay an account maintenance fee and a distribution fee to the Distributor with respect to Class A shares of the Fund; and WHEREAS, the Board of Trustees of the Trust (the "Trustees") as a whole, and the Trustees who are not interested persons of the Trust and who have no direct or indirect financial interest in the operation of this Plan or in any agreement relating hereto (the "12b-1 Trustees"), having determined, in the exercise of reasonable business judgment and in light of their fiduciary duties under state law and under Sections 36(a) and (b) of the Act, that there is a reasonable likelihood that this Plan will benefit the Fund and its Class A shareholders, have approved this Plan by votes cast in person at a meeting called for the purpose of voting hereon and on any agreements related hereto; NOW THEREFORE, the Trust on behalf of the Fund hereby adopts this Plan on the following terms: 1. Distribution Activities. The Fund shall pay the Distributor a distribution fee under the Plan at the end of each month at the annual rate of 0.10% of average daily net assets -33- attributable to Class A shares of the Fund to compensate the Distributor and certain securities firms ("Securities Firms") for providing sales and promotional activities and services. Such activities and services will relate to the sale, promotion and marketing of the Class A shares. Such expenditures may consist of sales commissions to financial consultants for selling Class A shares, compensation, sales incentives and payments to sales and marketing personnel, and the payment of expenses incurred in its sales and promotional activities, including advertising expenditures related to the Class A shares of the Fund and the costs of preparing and distributing promotional materials with respect to such Class A shares. Payment of the distribution fee described in this Section 1 shall be subject to any limitations set forth in applicable regulations of the National Association of Securities Dealers, Inc. Nothing herein shall prohibit the Distributior from collecting distribution fees in any given year, as provided hereunder, in excess of expenditures made in such year for sales and promotional activities with respect to the Fund. 2. Account Maintenance Activities. The Fund shall pay the Distributor an account maintenance fee under the Plan at the end of each month at the annual rate of up to 0.25% of average daily net assets attributable to Class A shares of the Fund to compensate the Distributor and Securities Firms for account maintenance activities. 3. Payments to Other Parties. The Fund hereby authorizes the Distributor to enter into agreements with Securities Firms to provide compensation to such Securities Firms for activities and services of the type referred to in Sections 1 and 2 hereof. The Distributor may reallocate all or a portion of its account maintenance fee or distribution fee to such Securities Firms as compensation for the above-mentioned activities and services. Such agreements shall provide that the Securities Firms shall deliver to the Distributor such information as is reasonably necessary to permit the Distributor to comply with the reporting requirements set forth in Section 5 hereof. 4. Related Agreements. All agreements with any person relating to implementation of this Plan shall be in writing, and any agreement related to this Plan shall provide: (a) that such agreement may be terminated at any time, without payment of any penalty, by vote of a majority of the 12b-1 Trustees or, by vote of a majority of the outstanding voting securities (as defined in the Act) of Class A shares of the Fund, on not more than 60 days' written notice to any other party to the agreement; and (b) that such agreement shall terminate automatically in the event of its assignment. -34- 5. Quarterly Reports. The Treasurer of the Trust shall provide to the Trustees and the Trustees shall review, at least quarterly, a written report of the amounts expended pursuant to this Plan with respect to Class A shares of the Fund and any related agreement and the purposes for which such expenditures were made. 6. Term and Termination. (a) This Plan shall become effective as of the date hereof, and, unless terminated as herein provided, shall continue from year to year thereafter, so long as such continuance is specifically approved at least annually by votes, cast in person at a meeting called for the purpose of voting on such approval, of a majority of both the (i) the Trustees of the Trust, and (ii) the 12b-1 Trustees. (b) This Plan may be terminated at any time by vote of a majority of the 12b-1 Trustees or by vote of a majority of the outstanding voting securities (as defined in the Act) of Class A shares of the Fund. 7. Amendments. This Plan may not be amended to increase materially the maximum expenditures permitted by Sections 1 and 2 hereof unless such amendment is approved by a vote of a majority of the outstanding voting securities (as defined in the Act) of Class A shares of the Fund, and no material amendment to this Plan shall be made unless approved in the manner provided for the annual renewal of this Plan in Section 6(a) hereof. 8. Selection and Nomination of Trustees. While this Plan is in effect, the selection and nomination of those Trustees of the Trust who are not interested persons of the Trust shall be committed to the discretion of such disinterested Trustees. 9. Recordkeeping. The Trust shall preserve copies of this Plan and any related agreement and all reports made pursuant to Section 5 hereof for a period of not less than six years from the date of this Plan, any such related agreement or such reports, as the case may be, the first two years in an easily accessible place. 10. Definition of Certain Terms. For purposes of this Plan, the terms "assignment," "interested person," "majority of the outstanding voting securities," and "principal underwriter" shall have their respective meanings defined in the Act and the rules and regulations thereunder, subject, however, to such exemptions as may be granted to either the Trust or the principal underwriter of the Shares by the Securities and Exchange Commission, or its staff under the Act. 11. Personal Liability. The Declaration of Trust establishing the Trust dated [Date Trust Established], a copy of -35- 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 "[Name of Trust]" 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, the Fund is a separate series of the Trust, and all debts, liabilities and expenses of Class A shares of the Fund shall be enforceable only against the assets of Class A shares of the Fund and not against the assets of any other fund or class of shares or of the Trust as a whole. IN WITNESS WHEREOF, the Trust has caused this Plan to be executed as of the day and year first written above. SUNAMERICA INCOME FUNDS By:/s/Peter A. Harbeck Peter A. Harbeck Executive Vice President -36- PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1 (CLASS B SHARES) PLAN OF DISTRIBUTION adopted as of the 23 day of September, 1993, by SunAmerica Income Funds, a Massachusetts business trust (the "Trust"), on behalf of the Class B shares of its separately designated series, SunAmerica U.S. Government Securities Fund (the "Fund"). 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 WHEREAS, the Fund is a separately designated investment series of the Trust with its own investment objective, policies and purposes offering two separate classes of shares of beneficial interest, par value $.01 per share, of the Trust (the "Shares"); and WHEREAS, the Trust has entered into a Distribution Agreement with SunAmerica Capital Services, Inc. (the "Distributor"), pursuant to which the Distributor acts as the exclusive distributor and representative of the Trust in the offer and sale of the Shares to the public; and WHEREAS, the Trust desires to adopt this Distribution Plan (the "Plan") pursuant to Rule 12b-1 under the Investment Company Act, pursuant to which the Fund will pay an account maintenance fee and a distribution fee to the Distributor with respect to Class B shares of the Fund; and WHEREAS, the Board of Trustees of the Trust (the "Trustees") as a whole, and the Trustees who are not interested persons of the Trust and who have no direct or indirect financial interest in the operation of this Plan or in any agreement relating hereto (the "12b-1 Trustees"), having determined, in the exercise of reasonable business judgment and in light of their fiduciary duties under state law and under Sections 36(a) and (b) of the Act, that there is a reasonable likelihood that this Plan will benefit the Fund and its Class B shareholders, have approved this Plan by votes cast in person at a meeting called for the purpose of voting hereon and on any agreements related hereto; NOW THEREFORE, the Trust on behalf of the Fund hereby adopts this Plan on the following terms: 1. Distribution Activities. The Fund shall pay the Distributor a distribution fee under the Plan at the end of each -37- month at the annual rate of 0.75% of average daily net assets attributable to Class B shares of the Fund to compensate the Distributor and certain securities firms ("Securities Firms") for providing sales and promotional activities and services. Such activities and services will relate to the sale, promotion and marketing of the Class B shares. Such expenditures may consist of sales commissions to financial consultants for selling Class B shares, compensation, sales incentives and payments to sales and marketing personnel, and the payment of expenses incurred in its sales and promotional activities, including advertising expenditures related to the Class B shares of the Fund and the costs of preparing and distributing promotional materials with respect to such Class B shares. Payment of the distribution fee described in this Section 1 shall be subject to any limitations set forth in applicable regulations of the National Association of Securities Dealers, Inc. Nothing herein shall prohibit the Distributior from collecting distribution fees in any given year, as provided hereunder, in excess of expenditures made in such year for sales and promotional activities with respect to the Fund. 2. Account Maintenance Activities. The Fund shall pay the Distributor an account maintenance fee under the Plan at the end of each month at the annual rate of up to 0.25% of average daily net assets attributable to Class B shares of the Fund to compensate the Distributor and Securities Firms for account maintenance activities. 3. Payments to Other Parties. The Fund hereby authorizes the Distributor to enter into agreements with Securities Firms to provide compensation to such Securities Firms for activities and services of the type referred to in Sections 1 and 2 hereof. The Distributor may reallocate all or a portion of its account maintenance fee or distribution fee to such Securities Firms as compensation for the above-mentioned activities and services. Such agreements shall provide that the Securities Firms shall deliver to the Distributor such information as is reasonably necessary to permit the Distributor to comply with the reporting requirements set forth in Section 5 hereof. 4. Related Agreements. All agreements with any person relating to implementation of this Plan shall be in writing, and any agreement related to this Plan shall provide: (a) that such agreement may be terminated at any time, without payment of any penalty, by vote of a majority of the 12b-1 Trustees or, by vote of a majority of the outstanding voting securities (as defined in the Act) of Class B shares of the Fund, on not more than 60 days' written notice to any other party to the agreement; and -38- (b) that such agreement shall terminate automatically in the event of its assignment. 5. Quarterly Reports. The Treasurer of the Trust shall provide to the Trustees and the Trustees shall review, at least quarterly, a written report of the amounts expended pursuant to this Plan with respect to Class B shares of the Fund and any related agreement and the purposes for which such expenditures were made. 6. Term and Termination. (a) This Plan shall become effective as of the date hereof, and, unless terminated as herein provided, shall continue from year to year thereafter, so long as such continuance is specifically approved at least annually by votes, cast in person at a meeting called for the purpose of voting on such approval, of a majority of both the (i) the Trustees of the Trust, and (ii) the 12b-1 Trustees. (b) This Plan may be terminated at any time by vote of a majority of the 12b-1 Trustees or by vote of a majority of the outstanding voting securities (as defined in the Act) of Class B shares of the Fund. 7. Amendments. This Plan may not be amended to increase materially the maximum expenditures permitted by Sections 1 and 2 hereof unless such amendment is approved by a vote of a majority of the outstanding voting securities (as defined in the Act) of Class B shares of the Fund, and no material amendment to this Plan shall be made unless approved in the manner provided for the annual renewal of this Plan in Section 6(a) hereof. 8. Selection and Nomination of Trustees. While this Plan is in effect, the selection and nomination of those Trustees of the Trust who are not interested persons of the Trust shall be committed to the discretion of such disinterested Trustees. 9. Recordkeeping. The Trust shall preserve copies of this Plan and any related agreement and all reports made pursuant to Section 5 hereof for a period of not less than six years from the date of this Plan, any such related agreement or such reports, as the case may be, the first two years in an easily accessible place. 10. Definition of Certain Terms. For purposes of this Plan, the terms "assignment," "interested person," "majority of the outstanding voting securities," and "principal underwriter" shall have their respective meanings defined in the Act and the rules and regulations thereunder, subject, however, to such exemptions as may be granted to either the Trust or the principal underwriter of the Shares by the Securities and Exchange Commission, or its staff under the Act. -39- 11. Personal Liability. The Declaration of Trust establishing the Trust dated [Date Trust Established], 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 "[Name of Trust]" 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, the Fund is a separate series of the Trust, and all debts, liabilities and expenses of Class B shares of the Fund shall be enforceable only against the assets of Class B shares of the Fund and not against the assets of any other fund or class of shares or of the Trust as a whole. IN WITNESS WHEREOF, the Trust has caused this Plan to be executed as of the day and year first written above. SUNAMERICA INCOME FUNDS By:/s/Peter A. Harbeck Peter A. Harbeck Executive Vice President -40- EX-99.16 20 PERFORMANCE CALCULATIONS FOR THE 5 SERIES Exhibit 99.16 PERFORMANCE CALCULATIONS FOR THE FIVE SERIES OF SUNAMERICA INCOME FUNDS Exhibit (16)(a) SUNAMERICA U.S. GOVERNMENT SECURITIES FUND CLASS A PERFORMANCE CALCULATIONS ------------------------ FOR THE FISCAL PERIOD ENDED MARCH 31, 1996 Average Annual Total Return: P(1 + T)/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 + .0442)/1/ = ERV = 1,044.20 -------- five-year = P(1 + T)/5/ = ERV = N/A --- since inception = P(1 + .0302)/30/\\12\\ = ERV = 1,077.22 -- -------- Yield: YIELD = 2 [{a - b +1 }/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 [{ 775,482.49 - 155,677.41 +1 }/6/ - 1] = 5.71% ----------------------- 14,767,693.807 x 8.92 Exhibit (16)(b) SUNAMERICA U.S. GOVERNMENT SECURITIES FUND CLASS B PERFORMANCE CALCULATIONS ------------------------ FOR THE FISCAL PERIOD ENDED MARCH 31, 1996 Average Annual Total Return: P(1 + T)/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 + .0452)/1/ = ERV = 1,045.20 -------- five-year = P(1 + .0507)/5/ = ERV = 1,280.54 -------- ten-year = P(1 + .0628)/10 /= ERV = 1,838.72 -------- since inception = P(1 + .0628)/121/\\12\\ = ERV = 1,848.08 --- -------- Yield: YIELD = 2 [{a - b +1 }/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 [ 2,670,038.20 - 766,166.37 +1 }/6/ - 1] = 5.33% ------------------------- 50,917,085.181 x 8.51 Exhibit (16)(c) SUNAMERICA FEDERAL SECURITIES FUND CLASS A PERFORMANCE CALCULATIONS ------------------------ FOR THE FISCAL PERIOD ENDED MARCH 31, 1996 Average Annual Total Return: P(1 + T)/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 + .0567)/1/ = ERV = 1,056.70 -------- five-year = P(1 + T)/5/ = ERV = N/A --- since inception = P(1 + .0344)/30/\\12\\ = ERV = 1,088.23 -- -------- Yield: YIELD = 2 [{a - b +1 }/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 [{234,751.94- 44,981.32 +1 }/6/ - 1] = 5.44% --------------------- 3,862,955.798 x 10.95 Exhibit (16)(d) SUNAMERICA FEDERAL SECURITIES FUND CLASS B PERFORMANCE CALCULATIONS ------------------------ FOR THE FISCAL PERIOD ENDED MARCH 31, 1996 Average Annual Total Return: P(1 + T)/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 + .0573)/1/ = ERV = 1,057.30 -------- five-year = P(1 + .0582)/5/ = ERV = 1,326.90 -------- ten-year = P(1 + .0688)/10/ = ERV = 1,945.20 -------- since inception = P(1 + .0829)/155/\\12\\ = ERV = 2,797.48 --- -------- Yield: YIELD = 2 [{a - b +1 }/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 [{153,803.32 - 42,971.44 +1 }/6/ - 1] = 5.09% ---------------------- 2,524,455.328 x 10.45 Exhibit (16)(e) SUNAMERICA DIVERSIFIED INCOME FUND CLASS A PERFORMANCE CALCULATIONS ------------------------ FOR THE FISCAL PERIOD ENDED MARCH 31, 1996 Average Annual Total Return: P(1 + T)/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 + .0838)/1/ = ERV = 1,083.80 -------- five-year = P(1 + T)/5/ = ERV = N/A --- since inception = P(1 + .0054)/30/\\12\\ = ERV = 1,013.55 -------- Yield: YIELD = 2 [{a - b +1 }/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 [{156,306.90 - 21,319.74 +1 }/6/ - 1] = 8.15% ---------------------- 4,489,319.377 x 4.50 Exhibit (16)(f) SUNAMERICA DIVERSIFIED INCOME FUND CLASS B PERFORMANCE CALCULATIONS ------------------------ FOR THE FISCAL PERIOD ENDED MARCH 31, 1996 Average Annual Total Return: P(1 + T)/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 + .0857)/1/ = ERV = 1,085.70 -------- five-year = P(1 + T)/5/ = ERV = N/A --- since inception = P(1 + .0363)/60/\\12\\ = ERV = 1,195.16 -- -------- Yield: YIELD = 2 [{a - b +1 }/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 [{909,622.01 - 184,609.75 +1 }/6/ - 1] = 7.88% ----------------------- 26,092,245.736 x 4.30 Exhibit (16)(g) SUNAMERICA HIGH INCOME FUND CLASS A PERFORMANCE CALCULATIONS ------------------------ FOR THE FISCAL PERIOD ENDED MARCH 31, 1996 Average Annual Total Return: P(1 + T)/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 + .0519)/1/ = ERV = 1,051.90 -------- five-year = P(1 + .1165)/5/ = ERV = 1,734.98 -------- since inception = P(1 + .0773)/114/\\12\\ = ERV = 2,028.61 --- -------- Yield: YIELD = 2 [{a - b +1 }/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 [{343,801.76 - 45,555.95 +1 }/6/ - 1] = 9.02% ---------------------- 5,539,320.545 x 7.30 Exhibit (16)(h) SUNAMERICA HIGH INCOME FUND CLASS B PERFORMANCE CALCULATIONS ------------------------ FOR THE FISCAL PERIOD ENDED MARCH 31, 1996 Average Annual Total Return: P(1 + T)/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 + .0543)/1/ = ERV = 1,054.30 -------- five-year = P(1 + T)/5/ = ERV = N/A --- since inception = P(1 + .0213)/30/\\12\\ = ERV = 1,054.10 -- -------- Yield: YIELD = 2 [{a - b +1 }/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 [{899,220.98 - 164,466.48 +1 }/6/ - 1] = 8.91% ----------------------- 14,474,245.358 x 6.96 Exhibit (16)(i) SUNAMERICA TAX EXEMPT INSURED FUND CLASS A PERFORMANCE CALCULATIONS ------------------------ FOR THE FISCAL PERIOD ENDED MARCH 31, 1996 Average Annual Total Return: P(1 + T)/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 + .0227)/1/ = ERV = 1,022.70 -------- five-year = P(1 + .0500)/5/ = ERV = 1,276.28 -------- ten-year = P(1 + .0575)/10/ = ERV = 1,749.06 -------- since inception = P(1 + .0634)/124/\\12\\ = ERV = 1,887.41 --- -------- Yield: YIELD = 2 [{a - b +1 }/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 [{ 597,618.40 - 118,453.29 +1 }/6/ - 1] = 4.50% ----------------------- 9,898,315.760 x 13.04 Exhibit (16)(j) SUNAMERICA TAX EXEMPT INSURED FUND CLASS B PERFORMANCE CALCULATIONS ------------------------ FOR THE FISCAL PERIOD ENDED MARCH 31, 1996 Average Annual Total Return: P(1 + T)/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 + .0232)/1/ = ERV = 1,023.20 -------- five-year = P(1 + T)/5/ = ERV = N/A --- since inception = P(1 + .0170)/30/\\12\\ = ERV = 1,043.04 -- -------- Yield: YIELD = 2 [{a - b +1 }/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 [{ 142,081.87 - 43,729.47 +1 }/6/ - 1] = 4.08% ---------------------- 2,348,318.090 x 12.42 EX-99.24 21 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned trustee of SunAmerica Income Funds does hereby 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 my names and in the capacity 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 gives 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 ratifies and confirms 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 capacity set forth below. Signature Title Date /s/Peter McMillan III Trustee December 4, 1995 Peter McMillan III -----END PRIVACY-ENHANCED MESSAGE-----