<PAGE> 1
[LOGO]
Directors and Officers
Ralph F. Peters, Chairman and Director
Retired Chairman of the Executive Committee,
formerly Chairman of the Board, Discount
Corporation of New York
Norman Jaskol, President
Vice President and Managing Director -
Investments, The Variable Annuity Life
Insurance Company, Chairman and Director,
USLIFE Advisers, Inc.
Dr. Kalman J. Cohen, Director
Distinguished Bank Research Professor
Emeritus, The Fuqua School of Business
Duke University
Richard L. Ellis, Director
President and Director,
Richard L. Ellis Associates, Ltd.
John M. Kingsley, Jr., Director
Executive Vice President and Director
Sturm, Ruger & Company, Inc.
William M.R. Mapel, Director
Retired Senior Vice President, Citibank, N.A.
Leon A.Olver, Vice President & Investment
Officer
Portfolio Manager - Investments, The Variable
Annuity Life Insurance Company
Vice President, USLIFE Advisers, Inc.
Cynthia A. Toles, Secretary
Secretary, USLIFE Advisers, Inc.
Linda Miller, Treasurer
Treasurer, USLIFE Advisers, Inc.
Erica Goldenberg, Assistant Secretary
Second Vice President and Assistant Secretary,
USLIFE Corporation
Mark T. Manzo, Assistant Treasurer
Assistant Treasurer, USLIFE Advisers, Inc.
Gregory R. Seward, Assistant Treasurer
Assistant Treasurer, USLIFE Advisers, Inc.
Director of Fund Operations,
The Variable Annuity Life Insurance Company
Auditors
KPMG Peat Marwick LLP
Counsel
Putney, Twombly, Hall & Hirson
Transfer Agent and Registrar
ChaseMellon Shareholders Services, LLP
450 W. 33 St., New York, NY 10001
Investment Adviser
USLIFE Advisers, Inc.
1997
ANNUAL
REPORT
JUNE 30, 1997
<PAGE> 2
DEAR SHAREHOLDER:
USLIFE Income Fund reported net investment income of $4,141,554 or 73 cents per
share for the fiscal year ended June 30, 1997 versus $4,264,140 or 76 cents per
share for the prior fiscal year. Net assets of the fund were $57,417,327 or
$10.17 per share at fiscal year end, versus $54,287,002 or $9.62 per share on
June 30, 1996. Cash dividends totaling 80 cents per share were paid to
shareholders during the 1997 fiscal year.
Your fund's return of 15.19% for the year ended June 30, 1997 assuming
reinvestment of dividends, compared favorably with its relevant environment. The
Merrill Lynch Corporate Government Index returned 7.78% while the Merrill Lynch
High Yield Bond Index returned 14.30%.
On June 17, 1997, American General Corporation completed the acquisition of
USLIFE Corporation. On June 18, 1997, Gordon E. Crosby, Jr. resigned his
position as Chairman of the Board and Director, and Richard J. Chouinard and
Greer F. Henderson resigned their positions as Directors of the Fund. Richard J.
Chouinard resigned his position as President and Chief Executive Officer, and
Charles P. Baker resigned his position as Executive Vice President of the Fund.
Subsequently, Norman Jaskol and Leon A. Olver were elected as officers of the
Fund's adviser, USLIFE Advisers, Inc., now an indirect wholly-owned subsidiary
of American General. At a meeting of the Fund's board of directors held on June
18, 1997, Messrs. Jaskol and Olver were elected as President and Vice President
- - Investment Officer, respectively, of the Fund. They are both employees of The
Variable Annuity Life Insurance Company ("VALIC"), another wholly- owned
subsidiary of American General. Mr. Jaskol has been the managing director of
investments at VALIC for the past nine years. Mr. Olver has been an investment
officer with VALIC for 2 years prior to which he was treasurer at First Heights
Bank, Houston.
At the 1997 annual meeting, you will be asked to approve an advisory agreement
with VALIC for a two year period commencing on September 24, 1997, based upon
the same terms and conditions as the prior advisory agreement with USLIFE
Advisers, Inc. VALIC is a leading provider of tax deferred annuities to the
education, health care and governmental markets with assets exceeding $30
billion and management responsibility for mutual funds with an aggregate value
of $6.5 billion. The three bond portfolios that VALIC manages have combined
assets in excess of $200 million. The investment strategy of the Fund will
continue to seek above average returns consistent with an appropriate mix of
investment grade and below investment grade bonds. In addition, you will be
asked to approve a fundamental policy to invest in foreign securities up to 20%
of assets.
The outlook for the current fiscal year is positive for bond investors. Real
gross domestic product is expected to slow from the 5.9% pace in the first
quarter to 2.4% in the second half of the calendar year. With continued
moderation in the first half of 1998 the forecast is growth of 2.2%. Inflation
appears to be well contained with forecasts of 3.1% in the first half of 1998.
Interest rates, as measured by the 30 year U.S. Treasury bond, are expected to
stay in the recent range of 6.3% to 7.2%
Sincerely,
/s/Norman Jaskol
Norman Jaskol
President
<PAGE> 3
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of USLIFE Income Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of USLIFE
Income Fund, Inc., including the schedule of investments, as of June 30, 1997,
and the related statement of operations for the year then ended, the statement
of changes in net assets for each of the years in the two-year period then
ended, and the financial highlights for each of the years in the five-year
period then ended. These financial statements and financial highlights are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1997, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of USLIFE
Income Fund, Inc. as of June 30, 1997, the results of its operations for the
year then ended, the changes in its net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the five-year period then ended, in conformity with generally accepted
accounting principles.
New York, New York /s/ KPMG Peat Marwick LLP
July 25, 1997
2
<PAGE> 4
SCHEDULE OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT IN VALUE
$1,000 ISSUE RATING COST (NOTE 1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE OBLIGATIONS: 97.7%
AEROSPACE - 4.4%
$ 500 Raytheon Co. 7 3/8% Debs., 7/15/25 Baa $ 480,745 $ 480,000
2,000 Rohr Industries, Inc. 9 1/4% Debs., 3/1/17 B 1,948,700 2,020,000
---------- ----------
2,429,445 2,500,000
---------- ----------
CABLE - 4.5%
2,500 Telecommunications, Inc. 9 1/4% Debs., 1/15/23 BBB 2,440,000 2,600,000
---------- ----------
COMMUNICATIONS - 4.4%
2,600 Turner Broadcasting 8.40% Debs., 2/1/24 BBB 2,545,660 2,548,000
---------- ----------
CONGLOMERATES - 3.2%
2,000 Loews Corp. 7% Sr. Notes, 10/15/23 AA 1,865,520 1,845,000
---------- ----------
ELECTRONICS/TECHNOLOGY - .8%
500 Loral Corp. 7% Debs., 9/15/23 A 483,005 465,625
---------- ----------
ENTERTAINMENT - 3.9%
2,500 Paramount Communications Inc. 7 1/2% Debs 7/15/23 BBB 2,180,125 2,246,875
---------- ----------
FOOD - 8.7%
2,500 Borden Co., Inc. 7 7/8% Debs., 2/15/23 BB 2,518,325 2,296,875
2,600 RJR Nabisco, Inc. 9 1/4% Notes, 8/15/13 Baa 2,591,000 2,704,000
---------- ----------
5,109,325 5,000,875
---------- ----------
FOREST PRODUCTS - 4.5%
2,000 Georgia Pacific Corp. 8 1/4% Debs., 3/1/23 BBB 2,056,180 2,025,000
500 Georgia Pacific Corp. 9 5/8% Debs., 3/15/22 BBB 561,715 553,750
---------- ----------
2,617,895 2,578,750
---------- ----------
HEALTH INDUSTRY - 2.8%
2,150 Continental Health Affiliates 6% Notes, 8/31/03 Caa 2,085,500 1,591,000
---------- ----------
HOME IMPROVEMENTS - 3.4%
2,500 Hechinger Co. 9.45%, Sr. Debs., 11/15/12 Ba 2,534,195 1,937,500
---------- ----------
LEISURE - 4.7%
2,550 Toro Co. 11% SF Debs., 8/1/17 BBB 2,553,125 2,690,097
---------- ----------
MINING - 3.6%
1,850 INCO, Ltd. 9.60% Debs., 6/15/22 BBB 1,951,750 2,088,188
---------- ----------
PAPER - 8.3%
2,300 Boise Cascade Corp. 7.99% Med. Term Notes, 9/13/13 Baa 2,300,000 2,334,500
2,600 Scott Paper 7% Debs., 8/15/23 AA 2,549,298 2,424,500
---------- ----------
4,849,298 4,759,000
---------- ----------
</TABLE>
3
<PAGE> 5
SCHEDULE OF INVESTMENTS
JUNE 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT IN VALUE
$1,000 ISSUE RATING COST (NOTE 1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REAL ESTATE - 2.2%
$ 1,918 Olympia & York Corp. 10 3/8% Euro Notes, 12/31/95* CCC $ 1,682,622 $ 1,251,495
----------- -----------
RETAIL - 13.3%
2,500 K-Mart Funding 9.44% Notes, 7/1/18 BB 2,561,170 2,450,000
2,700 Limited, Inc. 7 1/2% Debs., 3/15/23 BBB 2,303,660 2,490,750
2,500 Shopko, Inc. 9 1/4% Sr. Notes, 3/15/22 BBB 2,411,597 2,700,000
----------- -----------
7,276,427 7,640,750
STEEL - .4% ----------- -----------
200 USX Corporation 9 1/8% Debs., 1/15/13 BBB 212,456 227,250
----------- -----------
TEXTILES - 4.9%
2,950 Phillips Van Heusen 7 3/4% Debs., 11/15/23 BB 2,482,430 2,787,750
----------- -----------
UTILITIES - 19.8%
500 Boston Edison 9 3/8% Debs., 8/15/21 BBB 531,800 542,500
900 Boston Edison 8 1/4% Debs., 9/15/22 BBB 922,473 916,875
2,600 Cleveland Elec. Illum. 9 3/8% 1st Mtg. Bonds, 3/1/17 BB 2,724,675 2,749,500
865 Commonwealth Edison Co. 8 3/8%
1st Mtg. Bonds, 9/15/22 Baa 872,647 873,650
2,600 Niagara Mohawk Power Corp. 9 1/2%
1st Mtg. Bonds, 3/1/21 BB 2,560,147 2,743,000
180 Southern California Edison Co. 8 3/8%
1st Mtg. Insd. Bonds, 12/1/17 AAA 184,050 187,425
573 Southern California Edison Co. 8 3/8%
1st Mtg. Bonds, 12/1/17 A 585,176 596,636
2,600 Toledo Edison Co. 9.22% 1st Mtg. Bonds, 12/15/21 BB 2,662,172 2,749,500
----------- -----------
11,043,140 11,359,086
----------- -----------
TOTAL CORPORATE OBLIGATIONS $56,341,918 $56,117,241
----------- -----------
COMMERCIAL PAPER - .2%
$ 100 Associates Corp. of North America 5% 7/1/97 P-1 100,000 100,000
----------- -----------
TOTAL INVESTMENTS: 97.9% $56,441,918 $56,217,241
=========== ===========
</TABLE>
Ratings: All ratings are Moody's Investors Service, Inc., Standard & Poor's
Corp., or Fitch Investor Service, Inc.
Note: Percentage values are based on market value categorically to net assets.
Realized gains and losses from securities transactions are reported on
an identified cost basis for both financial reporting and Federal income
tax purposes. For Federal income tax purposes, the cost of investments
owned at June 30, 1997 was $57,406,014. The net unrealized loss for
Federal income tax purposes at June 30, 1997 was $1,188,773.
* In default as to principal and interest. (See Note 1F to financial
statements.)
See accompanying notes to financial statements.
4
<PAGE> 6
STATEMENT OF ASSETS AND LIABILITIES AS OF JUNE 30, 1997
<TABLE>
<S> <C>
ASSETS
Investments at market (Note 1)
Bonds (cost $56,341,918) $ 56,117,241
Commercial Paper (cost $100,000) 100,000
Cash 41,392
Interest receivable 1,482,235
Prepaid expenses 21,061
------------
57,761,929
LIABILITIES
Accounts payable and accrued expenses 85,728
Directors' deferred compensation (Note 2) 258,874
------------
NET ASSETS $ 57,417,327
============
Net Assets are represented by:
Common stock, par value $1.00 per share; authorized 10,000,000 shares;
issued and outstanding 5,643,768 $ 5,643,768
Capital in excess of par value 54,203,461
Accumulated undistributed net investment income 481,053
Accumulated net realized loss from security transactions (2,686,278)
Net unrealized loss on investment securities (224,677)
------------
NET ASSETS $ 57,417,327
============
NET ASSET VALUE PER SHARE $ 10.17
============
STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1997
INVESTMENT INCOME
Interest $ 4,804,256
============
EXPENSES
Investment advisory fee (Note 2) 385,982
Transfer agent fees and expenses 47,750
Custodian fee 12,000
Proxy solicitation fees 15,547
Treasury and secretarial personnel and services (Note 2) 50,000
Interest on directors' deferred compensation (Note 2) 14,694
Directors' fees (Note 2) 43,650
Printing, stationery and supplies 4,804
New York Stock Exchange listing fees 16,182
Legal and audit fees 33,249
Insurance expense 23,546
Other 15,298
------------
Total Expenses 662,702
------------
NET INVESTMENT INCOME $ 4,141,554
------------
</TABLE>
See accompanying notes to financial statements. (Continued)
5
<PAGE> 7
STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1997 (CONTINUED)
<TABLE>
<S> <C> <C>
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
NET REALIZED GAIN (LOSS) FROM SECURITY TRANSACTIONS (Note 3)
(Excluding short-term securities held to maturity)
Proceeds from sales $ 14,315,482
Cost of securities sold 14,062,240
------------
NET REALIZED GAIN ON INVESTMENTS SOLD $ 253,242
NET UNREALIZED APPRECIATION ON INVESTMENT SECURITIES
Unrealized depreciation at beginning of year (3,475,220)
Unrealized depreciation at end of year (224,677)
------------
NET DECREASE IN UNREALIZED DEPRECIATION ON
INVESTMENT SECURITIES 3,250,543
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 3,503,785
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 7,645,339
============
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income $ 4,141,554 $ 4,264,140
Net realized gain (loss) from security transactions 253,242 523,855
Net decrease (increase) in unrealized depreciation on investment securities 3,250,543 (2,819,774)
------------ -------------
7,645,339 1,968,221
------------ -------------
FROM SHAREHOLDER ACTIVITY
Dividends to shareholders from net investment income (4,515,014) (4,515,014)
------------ -------------
(4,515,014) (4,515,014)
------------ -------------
NET ASSETS AT BEGINNING OF PERIOD 54,287,002 56,833,795
------------ -------------
NET ASSETS AT END OF PERIOD $ 57,417,327 $ 54,287,002
(Including undistributed net investment income of ============ ============
$481,053 and $854,514, respectively)
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 8
FINANCIAL HIGHLIGHTS
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the financial
statements and market price data.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE (a) 1997 1996 1995 1994 1993
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.62 $10.07 $ 9.39 $10.28 $ 9.67
------ ------ ------ ------ ---------
Net investment income .73 .76 .76 .75 .91
Net realized and unrealized gain (loss) on investments .62 (.41) .72 (.77) .60
------ ------ ------ ------ ---------
Total from investment operations 1.35 .35 1.48 (.02) 1.51
------ ------ ------ ------ ---------
Less dividends from net investment income (.80) (.80) (.80) (.87) (.90)
------ ------ ------ ------ ---------
Net asset value, end of period $10.17 $ 9.62 $10.07 $ 9.39 $ 10.28
====== ====== ====== ====== =========
Market value, end of period $ 9.13 $ 9.00 $ 9.25 $ 9.38 $ 10.75
====== ====== ====== ====== =========
Total Investment return
Per share market value 10.48% 5.56% 7.72% (5.10%) 20.69%
Per share net asset value (b) 15.19% 3.64% 17.08% (0.60%) 16.36%
Ratios and Supplemental data
Net assets, end of period (millions) $ 57 $ 54 $ 57 $ 53 $ 56
Ratio of operating expenses to average net assets 1.19% 1.17% 1.22% 1.16% 1.23%
Ratio of net investment income to average net assets 7.43% 7.49% 7.99% 7.38% 9.13%
Portfolio turnover rate 25.77% 29.55% 29.93% 46.72% 45.01%
</TABLE>
(a) Based upon the weighted average number of shares outstanding during the
period.
(b) Total investment return based on per share net asset value reflects the
effect of changes in net asset value on the performance of the Fund
during each period, and assumes that dividends and capital gains
distributions, if any, were reinvested. These percentages are not an
indication of the performance of a shareholder's investment in the Fund
based on market value due to differences between the market price of
the stock and the net asset value of the Fund during each period.
7
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
USLIFE Income Fund, Inc. (the "Company") is registered under the Investment
Company Act of 1940, as amended, as a closed-end diversified management
investment company. The following is a summary of significant accounting
policies followed by the Company in the preparation of its financial statements.
The policies are in conformity with generally accepted accounting principles.
A. Security Valuation - Listed securities generally are valued on the basis of
the last sale price on the principal exchange on which traded or at the quoted
bid price for securities in which there were no transactions on the valuation
date, except in cases where USLIFE Advisers, Inc. ("Advisers"), investment
adviser to the Company, determines that the last sale price is not realistic in
view of current trading activity, in which event the arithmetic average of two
or more independent dealer quotes will be used. Securities traded in the
over-the-counter market, including listed debt securities whose primary market
is believed to be over-the-counter, generally are valued at the arithmetic
average of the bid prices obtained from dealers making a market in the security.
When there is only one market maker, management values securities based in part
on the price obtained from the market maker.
B. Federal Income Taxes - It is the Company's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no Federal income tax provision has been made. At June
30, 1997, the Company had a net capital loss carryforward of approximately $2.6
million, expiring $1.5 million in 1998 and $1.1 million in 2000. In order for
the Company to pay a future capital gain distribution it will be necessary for
it to realize net capital gains in excess of those amounts.
C. Discounts and Premiums on Bond Purchases - It is not the present intention of
Advisers to hold the Company's investments to maturity. Premiums on securities
are not being amortized and discounts are not being accrued, except for original
issue discounts which are being accrued for tax purposes.
D. Distribution of Income and Capital Gains - The distribution of net investment
income is made quarterly. Distribution of net realized gains from investment
transactions in excess of available capital loss carryforwards, if any, which
would be taxable to the Company if not distributed, will be distributed to
shareholders annually. An additional distribution may be made to the extent
necessary to avoid the payment of Federal excise taxes.
E. Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
F. Other - As is common in the industry, securities transactions are accounted
for on the date securities are purchased or sold. Interest income is accrued
from the settlement date for purchases, to the settlement date for sales.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date. Realized gains from the sale of securities are calculated on
the identified cost method.
Undistributed net investment income on the financial statements is $659,628
lower than for Federal income tax purposes relating to the Olympia & York
security. For accounting purposes, interest accrual has ceased, and payments
received from the issuer are applied as a reduction of principal in accordance
with
8
<PAGE> 10
instructions from the trustee, after accretion of discount on principal
reduction. For tax purposes, payments received from the issuer are applied first
to interest receivable then to reduction of principal, after accretion of
discount on principal reduction. Interest accrual for tax purposes ceased at
June 30, 1996. Subsequent to June 30, 1997, the Fund's entire Olympia & York
security position was sold for $1,278,750.
Pursuant to AICPA Statement of Position 93-2 (Determination, Disclosure and
Financial Statement Presentation of Income, Capital Gain and Return of Capital
Distributions by Investment Companies), book and tax differences amounting to
$3,066 have been reclassified from accumulated net realized loss on security
transactions to accumulated undistributed net investment income.
2. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS
Advisers charged the Fund $385,982 for the twelve months ended June 30, 1997 for
investment management and advisory services. The computation of the fee is on a
dual fee basis. The portion of those fees based upon net assets ($279,785) is
calculated at the rate of .04167% of the net asset value of the Company less net
investment income at the close of business on the last business day of each
month. The income portion of the fee ($106,197) is calculated at the rate of 2
1/2% of the Company's net investment income.
Other than the $43,650 that was paid in fees to the Company's non-employee
directors during the twelve-month period ended June 30, 1997 the Company paid no
additional fees or other compensation to any of its officers or directors for
such period. Payment of the compensation of certain directors has been deferred
at the directors' election and these outstanding deferred amounts accrue an
interest equivalent payable by the Company.
In addition, in accordance with the investment advisory agreement with Advisers,
the Company reimbursed Advisers $50,000 for expenses attributable to the
services performed on behalf of the Company by the Secretary and Treasurer and
personnel operating under their direction, none of whom are employees of the
Company.
Advisers' parent, USLIFE Corporation, owned 8,400 shares of common stock of the
Company at June 30, 1997.
3. PURCHASE AND SALE OF INVESTMENT SECURITIES
Purchases and sales of investment securities during the period July 1, 1996
through June 30, 1997 were as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
--------- -----
<S> <C> <C>
Short-Term Obligations $14,540,000 $14,865,000
Other Securities 14,217,182 14,062,240
----------- -----------
$28,757,182 $28,927,240
=========== ===========
</TABLE>
4. BANK LINE OF CREDIT
The Fund participates in a $250 thousand unsecured line of credit primarily to
be utilized for temporary or emergency purposes, including the financing of
redemptions. Interest is charged to the Fund at rates which are related to the
Federal Funds rate in effect at the time of borrowings. At June 30, 1997, there
were no outstanding borrowings under the line of credit.
The average daily amount of borrowings outstanding during the period ended June
30, 1997 was approximately $3,256, with a related weighted average annualized
interest rate of 8.75%. The maximum amount borrowed at any time during the
period ended June 30, 1997 was $95,000.
9
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. THE MERGER
USLIFE Advisers, Inc. ("Adviser") served as the Fund's investment adviser from
August 4, 1976 through June 17, 1997 pursuant to an investment advisory
agreement ("Advisory Agreement") dated August 4, 1976. On June 17, 1997, USLIFE
Corporation ("USLIFE"), the parent company of the Adviser, merged with and into
a wholly-owned subsidiary of American General Corporation ("American General")
and the Adviser became an indirect, wholly-owned subsidiary of American General.
For purposes of the Investment Company Act of 1940 ("1940 Act"), this merger
("Merger") caused a change of control of the Adviser that constituted an
assignment and thereby effected an automatic termination of the Advisory
Agreement on June 17, 1997.
6. QUARTERLY RESULTS OF OPERATIONS - (UNAUDITED)
For the two fiscal years ended June 30, 1997 and 1996 (000's omitted except for
per share data):
<TABLE>
<CAPTION>
1997 1996
THREE MONTHS ENDED THREE MONTHS ENDED
--------------------------------------------------------------------------------
SEPT. DEC. MARCH JUNE SEPT. DEC. MARCH JUNE
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income $1,195 $1,208 $1,201 $1,200 $1,259 $1,274 $ 1,194 $ 1,203
Net Investment Income 1,032 1,041 1,037 1,032 1,090 1,104 1,025 1,045
Net realized and unrealized
gain (loss) on investments 1,005 1,573 (976) 1,902 682 747 (1,161) (2,564)
Per share of Common Stock:
Net investment income .18 .19 .18 .18 .19 .20 .18 .19
Net realized and unrealized
gain (loss) on investments .18 .27 (.17) .34 .12 .13 (.20) (.46)
Net asset value at end of quarter $ 9.78 $10.02 $ 9.84 $10.17 $10.18 $10.31 $ 10.09 $ 9.62
</TABLE>
10
<PAGE> 12
SUPPLEMENTARY INFORMATION (UNAUDITED)
ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders was held on October 9, 1996. The results of
all matters voted on by shareholders were as follows:
A proposal to approve and ratify the appointment of KPMG Peat Marwick LLP as
independent auditor for the fiscal year ending June 30, 1997, was approved with
4,543,603 votes for, 9,868 votes against and 60,583 votes abstaining.
Shareholders elected seven directors, as follows:
<TABLE>
<CAPTION>
Nominee For Withheld
- ------- --- --------
<S> <C> <C>
Gordon E. Crosby, Jr. 4,533,270 80,784
Richard J. Chouinard 4,539,284 74,770
Dr. Kalman J. Cohen 4,534,446 79,608
Richard L. Ellis 4,538,284 75,770
Greer F. Henderson 4,538,247 75,807
John M. Kingsley, Jr. 4,532,846 81,208
William M.R. Mapel 4,538,384 75,670
Ralph F. Peters 4,539,283 74,771
</TABLE>
THE MERGER
USLIFE Advisers, Inc. ("Adviser") served as the Fund's investment adviser from
August 4, 1976 through June 17, 1997 pursuant to an investment advisory
agreement ("Advisory Agreement") dated August 4, 1976. On June 17, 1997, USLIFE
Corporation ("USLIFE"), the parent company of the Adviser, merged with and into
a wholly-owned subsidiary of American General Corporation ("American General")
and the Adviser became an indirect, wholly-owned subsidiary of American General.
For purposes of the Investment Company Act of 1940 ("1940 Act"), this merger
("Merger") caused a change of control of the Adviser that constituted an
assignment and thereby effected an automatic termination of the Advisory
Agreement on June 17, 1997.
SEC EXEMPTIVE ORDER
The 1940 Act requires that the shareholders of an investment company approve an
investment advisory agreement prior to its effectiveness. Upon announcement of
the Merger agreement between USLIFE and American General, the Fund's management
(with Board approval) requested the Securities and Exchange Commission ("SEC")
to grant exemptive relief from this requirement for shareholder approval, to
allow the Fund to enter into an interim investment advisory agreement between
the Fund and the Adviser ("Interim Advisory Agreement"), subject to subsequent
shareholder ratification and approval. This relief was necessary because of (i)
the uncertainty regarding the closing date of the Merger; (ii) the time required
to solicit proxies of Fund shareholders; and (iii) the desire for continuity in
management of the Fund. The Fund filed its application for exemptive relief on
May 12, 1997, the SEC published notice of the requested relief on May 16, 1997,
and the SEC granted the requested relief by order on June 11, 1997.
THE INTERIM ADVISORY AGREEMENT
Pursuant to the exemptive order and to provide for continuity in connection with
the provision of investment advisory services to the Fund, the Board of
Directors of the Fund ("Board") has approved the Interim Advisory Agreement,
subject to shareholder approval. Under the Interim Advisory Agreement, the
Adviser will provide investment advisory services to the Fund from the date of
the Merger, June 17, 1997 until the date of the annual meeting of shareholders
("Meeting"), September 24, 1997, when shareholders will vote on the Interim
Advisory Agreement. The terms and conditions of the Interim Advisory Agreement
are identical to the terms and conditions of the Advisory Agreement, except as
to effective and termination dates and with the addition of certain escrow
provisions concerning the payment of advisory fees, as follows.
Fees will not be paid to the Adviser under the Interim Advisory Agreement unless
that Agreement is approved by shareholders at the Meeting. The escrow provisions
of the Interim Advisory Agreement provide for the Fund to pay advisory fees to
an escrow agent pending shareholder approval of the Interim Advisory
11
<PAGE> 13
SUPPLEMENTARY INFORMATION (UNAUDITED) (CONTINUED)
Agreement. If approved by shareholders, the advisory fees held in the escrow
account (including interest earned on such paid-in fees) will be paid to the
Adviser. In the absence of shareholder approval, amounts in the escrow account
will be paid to the Fund. The Fund has entered into an escrow arrangement with
The Chase Manhattan Bank, as escrow agent, to implement the escrow provisions of
the Interim Advisory Agreement.
On July 2, 1997, the Board, consisting only of Directors who were not interested
persons of the Fund or the Adviser within the meaning of the 1940 Act
("Independent Directors"), determined that there would be no diminution in the
scope or quality of the services provided by the Adviser under the Interim
Advisory Agreement in connection with the change in advisory personnel resulting
from the change in the ownership of the Adviser. Among other things, the Board
considered the experience of the new officers and directors of the Adviser and
recognized that the principal investment manager for the Fund would be retained
as consultant under the Interim Advisory Agreement, until September 24, 1997.
THE NEW ADVISORY AGREEMENT
The Board also has approved, subject to shareholder approval, a new investment
advisory agreement ("New Advisory Agreement") with The Variable Annuity Life
Insurance Company ("VALIC"), an indirect, wholly-owned subsidiary of American
General. The New Advisory Agreement provides for VALIC to provide investment
advice to the Fund for a two-year period commencing upon shareholder approval of
the New Advisory Agreement, at the Meeting on September 24, 1997, and thereafter
so long as its continuance is specifically approved at least annually by the
Board or by majority vote of the Fund's shareholders. Under the New Advisory
Agreement, VALIC would provide the same investment advisory services provided by
the Adviser under the Advisory Agreement with the same advisory fee structure.
The New Advisory Agreement contains certain additional provisions not contained
in the Advisory Agreement or the Interim Advisory Agreement. Under the terms of
the New Advisory Agreement, VALIC will maintain a trading desk to place all
orders for the purchase and sale of the Fund's portfolio investments with
brokers or dealers selected by VALIC. Under the New Advisory Agreement, VALIC
also is required to use its best efforts to obtain any tender and exchange offer
solicitation fees, other fees and similar payments in connection with the
portfolio transactions of the Fund. VALIC is also required to remit promptly to
the Fund any commissions, tender and exchange offer solicitation fees, other
fees or similar payments received by VALIC, or any affiliated person of VALIC in
connection with any of the Fund's portfolio transactions, less the amount of any
direct expenses incurred by VALIC or any affiliated person of VALIC in obtaining
such commissions, fees or payments. In addition, under the New Advisory
Agreement, VALIC may, when appropriate, aggregate orders for its other customers
together with any securities of the same type to be sold or purchased for the
Fund in order to obtain best execution and lower brokerage commissions, provided
that VALIC allocates the shares and expenses in an equitable manner.
The New Advisory Agreement differs from the Advisory Agreement and the Interim
Advisory Agreement in certain other respects as well. Subject to prior
authorization by the Fund's Board of appropriate policies and procedures, the
New Advisory Agreement permits VALIC to pay a broker a commission for effecting
a portfolio transaction in excess of the commission another broker would have
charged for effecting the same transaction, if the first broker provided
brokerage and/or research services, including statistical data, to VALIC. In
connection with purchases and sales of portfolio securities, the New Advisory
Agreement prohibits VALIC, its officers and its employees from acting as
principal or agent for any party other than the Fund or receiving any
12
<PAGE> 14
commissions. In addition, the New Advisory Agreement would authorize VALIC to
make use of its affiliated companies and their employees in connection with the
rendering of investment advisory services to the Fund. The New Advisory
Agreement also contains certain nonmaterial conforming changes.
BOARD OF DIRECTORS
On June 18, 1997, Gordon E. Crosby, Jr. resigned his position as Chairman of the
Board and Director, and Richard J. Chouinard and Greer F. Henderson resigned
their positions as Directors of the Fund. The Fund currently has five directors,
all of whom have indicated that they will resign effective September 24, 1997
and will not stand for reelection. They are: (i) Dr. Kalman J. Cohen; (ii)
Richard L. Ellis; (iii) John M. Kingsley, Jr.; (iv) William M.R. Mapel; and (v)
Ralph F. Peters. They all currently serve on the Audit Committee of the Board.
Six other individuals have been approved by the Board to stand for election to
the Board at the Meeting and to hold office until their successors are elected
and qualified. They are: (i) Dr. Norman Hackerman; (ii) Dr. John W. Lancaster;
(iii) Dr. F. Robert Paulsen; (iv) Dr. R. Miller Upton; (v) Ben H. Love; and (vi)
Craig R. Rodby, all of whom, other than Craig R. Rodby, are not "interested
persons" of the Adviser or American General or their affiliates, as that term is
defined in the 1940 Act. None of these nominees currently serves as a director
of the Fund; however, each, except Craig R. Rodby, has served as Director of the
American General Series Portfolio Company, an open-end management investment
company.
OFFICERS AND EMPLOYEES
On June 18, 1997, Richard J. Chouinard resigned his position as President and
Chief Executive Officer, and Charles P. Baker resigned his position as Executive
Vice President of the Fund. Accordingly, on June 18, 1997, the Board elected
Norman Jaskol President and Leon A. Olver Vice President-Investment Officer of
the Fund. They are both employees of VALIC. Mr. Jaskol has been the managing
director of investments at VALIC for the past nine years. Mr. Olver has been an
investment officer with VALIC for two years and previously served as treasurer
at First Heights Bank in Houston. As of July 28, 1997, the other executive
officers are Cynthia A. Toles, who serves as the Fund's Secretary, and Linda
Miller, who serves as the Fund's Treasurer. Erica Goldenberg serves as Assistant
Secretary and Mark T. Manzo and Gregory R. Seward each serve as an Assistant
Treasurer of the Fund. The Fund has no employees.
CUSTODIAN, REGISTRAR AND TRANSFER AGENT
The Chase Manhattan Bank ("CMB") serves as custodian for the Fund's portfolio,
and ChaseMellon Shareholder Services ("CSS") acts as transfer agent, dividend
paying agent and registrar for the Fund's shares. The principal address of CMB
is Four New York Plaza, 4th Floor, New York, New York 10004, and of CSS is 450
West 33rd Street, New York, NY 10001.
EXECUTIVE OFFICES
As of June 17, 1997, the Fund's executive offices are located at 2929 Allen
Parkway, Houston, Texas 77019.
SHAREHOLDERS
As of July 25, 1997, there were 2,794 Fund shareholders.
AUTOMATIC DIVIDEND INVESTMENT PLAN
Shareholders may elect to enroll in the Fund's Automatic Dividend Investment
Plan ("Plan"). All distributions of the Fund's net investment income and net
realized short-term and long-term capital gains, if any, will automatically be
received or invested in shares of the Fund's common stock at their net asset
value or market price plus the cost of brokerage commissions, whichever is
13
<PAGE> 15
SUPPLEMENTARY INFORMATION (UNAUDITED) (CONTINUED)
lower. Shares will be held by Chase Manhattan Bank, the Plan agent, in an
account for each participant in non-certificated form. Participation in the Plan
will not relieve participants of any capital gains or income tax payable on
dividends or distributions reinvested under the Plan. Participation in the Plan
can be terminated at any time up to the next dividend record date by writing to
Chase Manhattan Bank. Upon termination, stock certificates for full shares will
be issued to the participant or, at the participant's direction, sold at the
current market price. Any fractional shares at the time of termination will be
converted to cash at the current market price. A check for the proceeds, less
brokerage commissions and any other costs of sale, will be sent to the
participant. For additional information on the Plan, please write Chase
Manhattan Bank, c/o Shareholder Investment Services, P.O. Box 750, Pittsburgh,
PA 15230-0750 or call 1-800-279-1248.
14
