================================================================================
USLIFE INCOME FUND, INC.
2929 Allen Parkway
Houston, TX 77019
Dear Shareholder:
USLIFE Income Fund reported net investment income of $3,764,804 or $0.67 per
share for the fiscal year ended June 30, 2000, versus $4,402,006 or $0.78 per
share for the prior fiscal year. The decrease in net investment income for the
period is attributable in part to increased expenses during the first half of
the fiscal year in connection with a proxy contest and related matters. Net
assets of the Fund were $50,590,925 or $8.96 per share at fiscal year end,
versus $56,841,469 or $10.07 per share on June 30, 1999. Cash dividends totaling
$0.76 per share were paid to shareholders during the 2000 fiscal year.
Your Fund's market price return of negative 6.81% for the year ended June 30,
2000, compared unfavorably with its relevant benchmarks. The Merrill Lynch
Corporate Government Index returned 4.33% while the Merrill Lynch High Yield
Bond Index returned negative 1.37%. The Fund's Net Asset Value (NAV) return for
the year ended June 30, 2000, was a negative 3.70%, assuming reinvestment of
dividends.
The Fund had 55.4% of its assets in investment grade issues and 44.6% of its
assets in below investment grade issues on June 30, 2000. The Fund continues its
investment objective of achieving a high level of current income for its
shareholders.
Your Board of Directors declared a quarterly dividend of $0.18 per share on July
18, 2000 payable on September 1, 2000 to shareholders of record on August 18,
2000. We encourage those shareholders not already participating in USLIFE Income
Fund's Automatic Dividend Investment Plan, described on page 16, to enroll in
the Plan.
The past year was an excellent time for the U.S. economy. Growth was the fastest
in a decade. The past year was an unusually poor year for corporate bonds.
Despite the extremely strong domestic economic growth, default rates on
corporate bonds increased to levels not seen since the last recession. As
default rates increased on corporate bonds, the prices of most of these
securities fell. Lower quality, higher risk securities fell the furthest. The
best performing bonds during this period were those issued by the U.S.
Government. The outlook for the bond markets going forward is uncertain. The
Federal Reserve has increased interest rates six times since last June in an
attempt to slow the economy. It appears at this point that they may have been
successful as growth has declined to a more sustainable sub 4% level. In a
normal environment when economic growth slows, credit problems increase. The
yield levels on high risk corporate bonds are already discounting very high
levels of default risk. With the default risk premium so high, a year of 4%
economic growth should be supportive of much better bond returns.
Sincerely,
/s/Alice T. Kane
Alice T. Kane
President
1
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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, 2000,
and the related statements of operations, changes in net assets, and the
financial highlights for the year then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit. The statement of changes in net assets
for the year ended June 30, 1999, and the financial highlights for each of the
four years then ended, were audited by other auditors whose report dated July
29, 1999, expressed an unqualified opinion on those statements and financial
highlights.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 and financial highlights. Our procedures included
confirmation of securities owned as of June 30, 2000, 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
audit provides 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. at June 30, 2000, the results of its operations, changes in
its net assets, and its financial highlights for the year then ended in
conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Houston, Texas
July 19, 2000
See accompanying notes to financial statements.
2
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USLIFE INCOME FUND, INC.
Schedule of Investments
June 30, 2000
PAR VALUE MARKET VALUE
--------- ------------
CORPORATE BONDS - 94.78%
AEROSPACE/DEFENSE - 1.69%
$ 500,000 Loral Corp., 7.00% due 09/15/23 ..................... $ 431,320
500,000 Raytheon Co., 7.38% due 07/15/25 .................... 426,100
-----------
857,420
-----------
AIRLINES - 2.57%
1,470,187 U.S. Airways Inc., 6.85% due 01/30/18 ............... 1,303,556
-----------
APPAREL & PRODUCTS - 1.22%
500,000 Bell Sports, Inc., 11.00% due 08/15/08 .............. 491,250
275,000 Galey & Lord, Inc., 9.13% due 03/01/08 .............. 124,438
-----------
615,688
-----------
AUTO - CARS - 0.95%
750,000 Prestolite Electric, Inc., 9.63% due 02/01/08 ....... 480,000
-----------
BANKS - REGIONAL - 4.06%
2,500,000 Zions Institutional Capital Trust A,
8.54% due 12/15/26 ................................ 2,053,575
-----------
BROADCASTING - 2.41%
300,000 Coaxial Communications/Phoenix, 10.00% due 08/15/06 . 284,250
250,000 Cumulus Media, Inc., 10.38% due 07/01/08 ............ 211,250
700,000 Echostar DBS Corp., 9.38% due 02/01/09 .............. 675,500
50,000 Spanish Broadcasting System, Inc., 9.63% due 11/01/09 49,750
-----------
1,220,750
-----------
BUILDING MATERIALS - 0.99%
1,000,000 (1) Uniforet Inc., 11.13% due 10/15/06 .................. 500,000
-----------
CHEMICAL - MAJOR - 1.00%
325,000 Koppers Industry, Inc., 9.88% due 12/01/07 .......... 299,813
250,000 Royster-Clark, Inc., 10.25% due 04/01/09 ............ 203,750
-----------
503,563
-----------
CHEMICAL - MISCELLANEOUS - 0.49%
250,000 Lyondell Chemical Co., 9.63% due 05/01/07 ........... 246,250
-----------
CONSUMER FINANCE - 0.57%
300,000 AmeriCredit Corp., 9.25% due 02/01/04 ............... 289,500
-----------
CONTAINERS PAPER - 0.82%
500,000 Packaged Ice, Inc., 9.75% due 02/01/05 .............. 415,000
-----------
DRUGS - 1.27%
650,000 ICN Pharmaceuticals, Inc., 8.75% due 11/15/08 ....... 640,250
-----------
See accompanying notes to financial statements.
3
<PAGE>
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USLIFE INCOME FUND, INC.
Schedule of Investments -- continued
June 30, 2000
PAR VALUE MARKET VALUE
--------- ------------
ELECTRIC PRODUCTS - MISCELLANEOUS - 3.38%
$2,000,000 ITT Industrial, Inc., 7.40% due 11/15/25 .......... $ 1,708,100
-----------
ELECTRIC INSTRUMENTS - 0.50%
250,000 (2) Flextronics International Ltd., 9.88% due 07/01/10 .. 251,875
-----------
ENTERTAINMENT - 3.11%
500,000 Aztar Corp., 8.88% due 05/15/07 ..................... 471,250
500,000 Hollywood Casino Shreveport, 13.00% due 08/01/06 .... 531,250
100,000 MTS, Inc., 9.38% due 05/01/05 ...................... 41,750
500,000 Riviera Black Hawk, Inc., 13.00% due 05/01/05 ...... 535,000
-----------
1,579,250
-----------
FINANCE COMPANIES - 0.76%
500,000 Meditrust Companies, 7.51% due 09/26/03 ............. 386,251
-----------
FINANCIAL SERVICES - 10.73%
1,500,000 (2) Bank of Scotland, 7.00% due 11/29/49 ................ 1,368,732
250,000 Charter Communications Holding, 10.25% due 01/15/10 . 241,875
1,500,000 Doral Financial Corp., 8.50% due 07/08/04 ........... 1,475,085
1,500,000 Ono Finance Plc., 13.00% due 05/01/09 ............... 1,417,500
1,000,000 Paine Webber Group, Inc., 7.94% due 01/27/17 ........ 928,620
-----------
5,431,812
-----------
FOODS - 0.73%
500,000 Bordon, Inc., 7.88% due 02/15/23 .................... 369,355
-----------
HEALTHCARE - 2.30%
250,000 EVENFLO CO INC, 11.75% due 08/15/06 ................. 243,125
250,000 HealthSouth Corp., 9.50% due 04/01/01 ............... 249,295
1,720,000 (1) Kuala Health Affiliates, Inc., 6.00% due 08/31/03 ... 387,000
500,000 Universal Hospital Services, 10.25% due 03/01/08 .... 285,000
-----------
1,164,420
-----------
HOME BUILDERS - 0.18%
100,000 Beazer Homes USA, Inc., 9.00% due 03/01/04 .......... 93,000
-----------
HOSPITAL MANAGEMENT - 0.51%
250,000 Lifepoint Hospitals Holding, 10.75% due 05/15/09 .... 257,500
-----------
See accompanying notes to financial statements.
4
<PAGE>
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USLIFE INCOME FUND, INC.
Schedule of Investments -- continued
June 30, 2000
PAR VALUE MARKET VALUE
--------- ------------
INFORMATION PROCESSING - BUSINESS SOFTWARE - 0.36%
$ 250,000 Northpoint Communication, 12.88% due 02/15/10 ....... $ 180,000
-----------
INFORMATION PROCESSING - COMPUTER SERVICES - 0.45%
275,000 Globix Corp., 12.50% due 02/01/10 ................... 225,500
-----------
INFORMATION PROCESSING - NETWORKING - 1.08%
400,000 (2) Condor Systems, Inc., 11.88% due 05/01/09 ........... 193,000
350,000 (2) Exodus Communications, Inc., 11.63% due 07/15/10 .... 350,875
-----------
543,875
-----------
INSURANCE - MULTILINE - 4.23%
2,300,000 Zurich Capital Trust, 8.38% due 06/01/37 ............ 2,138,333
-----------
LEISURE TIME - 1.90%
500,000 Hollywood Park, Inc., 9.25% due 02/15/07 ............ 497,500
500,000 Speedway Motorsports, Inc., 8.50% due 08/15/07 ...... 465,000
-----------
962,500
-----------
LODGING - 0.92%
250,000 HMH Properties, 7.88% due 08/01/08 .................. 224,375
250,000 Prime Hospitality Corp., 9.75% due 04/01/07 ......... 241,250
-----------
465,625
-----------
MACHINERY - CONSTRUCTION & CONTRACTS - 0.97%
650,000 Grove Worldwide LLC., 9.25% due 05/01/08 ............ 251,875
250,000 (2) Lennar Corp., 9.95% due 05/01/10 .................... 241,250
-----------
493,125
-----------
MERCHANDISING - DEPARTMENT - 0.38%
200,000 True Temper Sports, Inc., 10.88% due 12/01/08 ....... 190,250
-----------
MERCHANDISE - SPECIALTY - 0.72%
250,000 BIG 5 Corp., 10.88% due 11/15/07 .................... 229,688
150,000 Finlay Fine Jewelry Corp., 8.38% due 05/01/08 ....... 133,500
-----------
363,188
-----------
MERCHANDISING - MASS - 4.56%
2,500,000 K Mart Funding Corp., 9.44% due 07/01/18 ............ 2,305,275
-----------
METALS - MISCELLANEOUS - 0.97%
500,000 Inco Limited, 9.60% due 06/15/22 .................... 489,660
-----------
See accompanying notes to financial statements.
5
<PAGE>
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USLIFE INCOME FUND, INC.
Schedule of Investments -- continued
June 30, 2000
PAR VALUE MARKET VALUE
--------- ------------
METALS - STEEL - 0.42%
$ 250,000 Renco Steel Holdings, 10.88% due 02/01/05 ........... $ 215,000
-----------
MISCELLANEOUS - 0.88%
500,000 (2) United Pan-Europe Communications N.V., 11.25%
due 02/01/10 ...................................... 445,000
-----------
OIL - INTEGRATED DOMESTIC - 1.13%
375,000 Tesoro Petroleum Corp., 9.00% due 07/01/08 .......... 356,250
200,000 USX-Marathon Group, 9.13% due 01/15/13 .............. 217,380
-----------
573,630
-----------
OIL - SERVICE - 0.58%
300,000 Pride Petroleum Services, 9.38% due 05/01/07 ........ 294,000
-----------
OIL - SERVICE - PRODUCTS - 0.29%
150,000 Parker Drilling Co., 9.75% due 11/15/06 ............. 145,125
-----------
OIL/GAS PRODUCERS - 1.92%
500,000 Frontier Oil Corp., 11.75% due 11/05/09 ............. 500,000
250,000 HS Resources, Inc., 9.25% due 11/15/06 .............. 243,125
25,000 R & B Falcon Corp., 9.50% due 12/15/08 .............. 25,125
200,000 Swift Energy Co., 10.25% due 08/01/09 ............... 202,500
-----------
970,750
-----------
PAPER/FOREST PRODUCTS - 9.19%
225,000 Bear Island LLC., 10.00% due 12/01/07 ............... 196,875
2,300,000 Boise Cascade Co., 7.99% due 09/13/13 ............... 2,118,829
Georgia-Pacific Corp.:
500,000 9.63% due 03/15/22 ................................ 524,145
2,000,000 8.25% due 03/01/23 ................................ 1,811,000
-----------
4,650,849
-----------
POLLUTION CONTROL - 0.08%
1,000,000 (1) Safety-Kleen Services, 9.25% due 06/01/08 ........... 40,000
-----------
PUBLISHING - NEWS - 4.64%
2,500,000 News America Holdings, 8.15% due 10/17/36 ........... 2,347,324
-----------
PUBLISHING/PRINTING - 0.87%
250,000 Transwestern Publishing Co., 9.63% due 11/15/07 ..... 241,250
200,000 TV Guide, Inc., 8.13% due 03/01/09 .................. 197,500
-----------
438,750
-----------
See accompanying notes to financial statements.
6
<PAGE>
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USLIFE INCOME FUND, INC.
Schedule of Investments -- continued
June 30, 2000
PAR VALUE MARKET VALUE
--------- ------------
RESTAURANTS - 0.62%
$ 150,000 Apple South, Inc., 9.75% due 06/01/06 ............... $ 124,500
100,000 Dominos Inc., 10.38% due 01/15/09 ................... 92,750
100,000 Perkins Family Restaurant, 10.13% due 12/15/07 ...... 95,500
-----------
312,750
-----------
SAVINGS & LOAN - 5.29%
2,700,000 Ahmanson Capital Trust, 8.36% due 12/01/26 .......... 2,455,110
250,000 Western Financial Bank, 8.88% due 08/01/07 .......... 222,500
-----------
2,677,610
-----------
TELECOMMUNICATIONS - 7.40%
300,000 Amphenol Corp., 9.88% due 05/15/07 .................. 302,624
200,000 Covad Communications Group, Inc., 12.00% due 02/15/10 156,000
515,000 Energis, Plc., 9.75% due 06/15/09 ................... 504,700
500,000 GCI, Inc., 9.75% due 08/01/07 ....................... 460,625
100,000 Global Crossing Holding Limited, 9.63% due 05/15/08 . 97,500
500,000 (2) Level 3 Communications, Inc., 11.00% due 03/15/08 ... 495,000
250,000 Netia Holdings B.V., 10.25% due 11/01/07 ............ 207,813
500,000 NEXTLINK Communications, Inc, 10.75% due 06/01/09 ... 492,500
250,000 Orbcomm Global, 14.00% due 08/15/04 ................. 195,000
250,000 Spectrasite Holdings, Inc., 10.75% due 03/15/10 ..... 249,375
300,000 Versatel Telecom International NV - ADR, 13.25%
due 05/15/08 ...................................... 301,500
300,000 (2) WinStar Communications, Inc., 12.75% due 04/15/10 ... 279,750
-----------
3,742,387
-----------
UTILITIES - ELECTRIC - 4.69%
900,000 Boston Edison, 8.25% due 09/15/22 ................... 892,035
865,000 Commonwealth Edison, 8.38% due 09/15/22 ............. 849,707
600,000 Toledo Edison, 9.22% due 12/15/21 ................... 628,770
-----------
2,370,512
-----------
TOTAL CORPORATE BONDS
(Cost $54,474,079) .................................. 47,948,133
-----------
WARRANTS - 0.44%
FINANCIAL SERVICES - 0.44%
1,500 Ono Finance, Plc. ................................... 224,625
-----------
TOTAL WARRANTS
(Cost $0) ........................................... 224,625
-----------
See accompanying notes to financial statements.
7
<PAGE>
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USLIFE INCOME FUND, INC.
Schedule of Investments -- continued
June 30, 2000
PAR VALUE MARKET VALUE
--------- ------------
CORPORATE SHORT TERM - 3.65%
REPURCHASE AGREEMENT - 3.65%
$1,847,000 State Street Bank Repurchase Agreement,
6.35% dated 06/30/00, to be repurchased at
$1,847,977 on 07/03/00, collateralized by U.S.
Treasury Note, 5.38%, 06/30/03, with a par value
of $1,960,000 (Cost $1,847,000) ..................... $ 1,847,000
-----------
TOTAL CORPORATE SHORT TERM -
REPURCHASE AGREEMENT
(Cost $1,847,000) ................................... 1,847,000
-----------
TOTAL INVESTMENTS - 98.87%
(Cost $56,321,079) .................................. $50,019,758
===========
--------------------------
(1) Non-income producing - issuer filed for protection under the
Federal Bankruptcy Code or is in default of interest payments.
(2) Securities exempt from registration under Rule 144A of the
Securities Act of 1933.
These securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At
June 30, 2000, the aggregate value of these securities
was $3,625,482 representing 7.17% of the net assets.
See accompanying notes to financial statements.
8
<PAGE>
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USLIFE INCOME FUND, INC.
Statement of Assets and Liabilities
June 30, 2000
ASSETS
Investments at market
Bonds (Cost $54,474,079) ....................................... $48,172,758
Repurchase agreement (Cost $1,847,000) ......................... 1,847,000
Receivable for investment sold ................................... 114,882
Interest receivable .............................................. 1,262,094
Other assets ..................................................... 393,816
------------
Total Assets ................................................... 51,790,550
------------
LIABILITIES
Payable for investments purchased ................................ 866,422
Director's deferred compensation ................................. 202,940
Payable to affiliates:
Advisory fees .................................................. 27,736
Accounting services ............................................ 12,500
Other liabilities ................................................ 90,027
------------
Total Liabilities .............................................. 1,199,625
------------
NET ASSETS (equivalent to $8.96 per share on 5,643,768
shares outstanding) .......................................... $50,590,925
============
NET ASSETS REPRESENTED BY:
Capital stock, $1.00 par value per share
10,000,000 shares authorized; 5,643,768 shares outstanding ..... $ 5,643,768
Additional paid in capital ....................................... 53,463,303
Accumulated net realized loss on securities ...................... (2,757,146)
Undistributed net investment income .............................. 542,321
Unrealized depreciation of investments ........................... (6,301,321)
------------
NET ASSETS APPLICABLE TO SHARES OUTSTANDING ...................... $50,590,925
============
See accompanying notes to financial statements.
9
<PAGE>
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USLIFE INCOME FUND, INC.
Statement of Operations
For the year ended June 30, 2000
INVESTMENT INCOME:
Interest ......................................................... $ 5,099,471
------------
EXPENSES:
Advisory fees .................................................... 357,889
Legal and audit fees ............................................. 93,799
Directors' fees .................................................. 61,146
Transfer agent fees and expenses ................................. 51,920
Treasury and secretarial services ................................ 50,000
Report to shareholders ........................................... 43,016
New York Stock Exchange listing fees ............................. 16,320
Interest on directors' deferred compensation ..................... 11,096
Custodian fees ................................................... 10,494
Proxy expenses ................................................... 628,631
Miscellaneous .................................................... 10,356
------------
Total expenses ................................................. 1,334,667
------------
NET INVESTMENT INCOME ............................................ 3,764,804
------------
REALIZED AND UNREALIZED LOSS ON SECURITIES:
Net realized loss on securities .................................. (1,071,369)
Net unrealized depreciation on securities during the year ........ (4,654,716)
------------
Net realized and unrealized loss on securities during the year . (5,726,085)
------------
DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ................. $(1,961,281)
============
================================================================================
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
2000 1999
---- ----
OPERATIONS:
<S> <C> <C>
Net investment income ......................................... $ 3,764,804 $ 4,402,006
Net realized loss on securities ............................... (1,071,369) (656,773)
Net unrealized depreciation of securities during the year ..... (4,654,716) (3,284,726)
------------ ------------
Increase (decrease) in net assets resulting from operations . (1,961,281) 460,507
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ......................................... (4,289,263) (4,289,263)
------------ ------------
TOTAL DECREASE IN NET ASSETS .................................. (6,250,544) (3,828,756)
NET ASSETS:
Beginning of year ............................................. 56,841,469 60,670,225
------------ ------------
End of year (including undistributed net investment income
of $542,321 and $1,091,780, respectively). .................. $50,590,925 $56,841,469
============ ============
</TABLE>
10
<PAGE>
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<TABLE>
<CAPTION>
USLIFE INCOME FUND, INC.
Financial Highlights
Per share data is for a share of capital stock outstanding throughout the
period. Total return includes reinvestment of dividends.
Fiscal year ended June 30,
------------------------------------------------
Per share data 2000 1999 1998 1997 1996
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year ................. $10.07 $10.75 $10.17 $ 9.62 $10.07
------------------------------------------------
Income (loss) from investment operations:
Net investment income .............................. .67 .78 .75 .73 .76
Net realized and unrealized gain (loss)
on securities .................................... (1.02) (.70) .59 .62 (.41)
------------------------------------------------
Total income (loss) from investment operations ..... (.35) .08 1.34 1.35 .35
------------------------------------------------
Distributions:
Distributions from net investment income ........... (.76) (.76) (.76) (.80) (.80)
------------------------------------------------
Net asset value, end of year ......................... $ 8.96 $10.07 $10.75 $10.17 $ 9.62
================================================
Market value, end of year ............................ $ 8.25 $ 9.63 $ 9.63 $ 9.13 $ 9.00
================================================
Total investment return*:
Based on market value .............................. (6.81%) 7.85% 14.01% 10.48% 5.56%
Based on net asset value ........................... (3.70%) .64% 13.57% 15.19% 3.64%
Ratios and supplemental data:
Ratio of expenses to average net assets** .......... 2.51% 1.12% 1.12% 1.19% 1.17%
Ratio of net investment income to average net assets 7.08% 7.46% 7.11% 7.43% 7.49%
Portfolio turnover rate ............................ 53% 58% 73% 26% 30%
Number of shares outstanding at end of year (000's) 5,644 5,644 5,644 5,644 5,644
Net assets, end of year (000's) .................... $50,591 $56,841 $60,670 $57,417 $54,279
Average net assets, during the year (000's) ........ $53,144 $58,998 $59,597 $55,764 $56,914
</TABLE>
[FN]
* Total returns reflect the change in net asset value or market value at the
end of each year, assuming that dividends and capital gains distributions,
if any, were reinvested in accordance with the Automatic Dividend
Investment Plan available to shareholders. Total return based on net asset
value may not be representative of a shareholder's actual total return due
to the difference between the net asset value and the current market value
of a share as traded on the exchange.
** For the fiscal year ended June 30, 2000, the ratio of expenses to average
net assets excluding the costs incurred during the first half of the fiscal
year attributable to a proxy contest and related matters was 1.55%.
</FN>
11
<PAGE>
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USLIFE INCOME FUND, INC.
Notes to Financial Statements
Note 1 - Significant Accounting Policies
USLIFE Income Fund, Inc. (the "Fund") is registered under the Investment Company
Act of 1940, as amended, as a closed end diversified management investment
company.The Fund's investment objective is to provide a high level of current
income through a diversified portfolio composed predominantly of marketable
fixed-income securities.
The financial statements have been prepared in accordance with U.S. generally
accepted accounting principles ("GAAP"). GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The following is a summary of significant accounting
policies consistently followed by the Fund in the preparation of its financial
statements.
A. Investment Valuation
Listed securities are valued at the last reported sale price on the
principal exchange on which the security is traded. In the absence of any
sales that day, securities are valued at the last reported bid price, or
based on a matrix system which utilizes information (such as credit
ratings, yields and maturities) from independent sources. Short term debt
securities for which market quotations are readily available are valued at
the last reported bid price. However, short term securities with a
remaining maturity of 60 days or less are valued by the amortized cost
method which approximates fair market value. Investments for which market
quotations are not readily available are valued at fair value as determined
in good faith by, or under authority delegated by, the Fund's Board of
Directors.
B. Repurchase Agreements
The Fund may acquire securities subject to repurchase agreements. Under a
typical repurchase agreement, a fund would acquire a debt security for a
relatively short period (usually for one day and not more than one week)
subject to an obligation of the seller to repurchase and of the fund to
resell the debt security at an agreed-upon higher price, thereby
establishing a fixed investment return during the fund's holding period.
Under each repurchase agreement, the fund receives, as collateral,
securities whose market value is at least equal to the repurchase price.
C. Federal Income Taxes
The Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code and to distribute all of its
taxable net investment income and taxable net realized capital gains, in
excess of any available capital loss carryovers. Therefore, no Federal
income tax provision is required. At June 30, 2000, the Fund had a net
capital loss carry forward of approximately $1.5 million expiring through
June 30, 2008.
D. Investment Transactions and Related Investment Income
Investment transactions are accounted for on the trade date. Realized gains
and losses are determined on the basis of identified cost. Dividend income,
if any, is recorded on the ex-dividend date. Coupon interest income on
investments is accrued daily. Market 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.
E. Distribution to Shareholders
Distributions to shareholders are recorded on the record date. The Fund
declares distributions from net investment income quarterly. Capital gains
distributions in excess of any existing capital loss carry forwards, are
declared annually. Investment income and capital gains and losses are
recognized in accordance with generally accepted accounting principles
("book"). Distributions from net investment income and realized capital
gains are based on earnings as determined inaccordance with Federal tax
regulations ("tax") which may differ from book basis earnings. These
differences are primarily due to differing treatments for capital loss
carryforwards, deferral of wash sales and post-October capital losses. At
the end of the year, offsetting adjustments to undistributed net investment
income and undistributed net realized gains (losses) are made to eliminate
permanent book/tax differences arising in the current year.
12
<PAGE>
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USLIFE INCOME FUND, INC. Notes to Financial Statements -- continued
Note 2 - Advisory Fees and Other Transactions with Affiliates
On September 24, 1997, the shareholders of the Fund approved an investment
advisory agreement with The Variable Annuity Life Insurance Company ("VALIC" or
the "Adviser"). VALIC is an indirect wholly-owned subsidiary of American General
Corporation, Houston, Texas. The Adviser receives a monthly fee equal to the sum
of: a) 0.04167% of the Fund's adjusted net assets (month end net assets, less
net investment income for the month) and b) 2.50% of the Fund's net investment
income, minus interest on borrowed funds during the month. For the year ended
June 30, 2000, the Fund paid VALIC $357,889 for providing advisory services.
In accordance with the investment advisory agreement, the Fund reimburses the
Adviser for services performed on behalf of the Fund by the Secretary and the
Treasurer and personnel operating under their direction. For the year ended June
30, 2000, the Fund paid VALIC $50,000 for providing these services.
At June 30, 2000, the Fund had a deferred compensation liability to a former
Director of the Fund which totaled $202,940 including accrued interest payable
by the Fund.
Certain officers and directors of the Fund are officers and directors of VALIC
or affiliates of VALIC.
Note 3 - Investment Activity
At June 30, 2000, the identified cost of investments for Federal income tax
purposes was $56,324,954 resulting in gross unrealized appreciation of $470,123,
gross unrealized depreciation of $6,771,444, and net unrealized appreciation of
$6,301,321.
For the year ended June 30, 2000, purchases and sales of investments, other than
short-term investments, aggregated $27,417,715 and $28,038,570, respectively.
Note 4 - Change of Auditors (unaudited)
On April 18, 2000, KPMG LLP resigned as the Fund's independent auditors. Based
on the recommendation of the Audit Committee of the Board of Directors of the
Fund, the Board of Directors engaged Ernst & Young LLP as the independent
auditors to audit the Fund's financial statements for the fiscal year ended June
30, 2000. During the two most recent fiscal years, KPMG's audit reports
contained no adverse opinion or disclaimer of opinion; nor were the reports
qualified or modified as to uncertainty, audit scope, or accounting principles.
Further, there were no disagreements between the Fund and KPMG LLP on accounting
principles, financial statement disclosure or audit scope, which if not resolved
to the satisfaction of KPMG would have caused it to make reference to the
disagreements in connection with its report.
Note 5 - Subsequent Event
On July 18, 2000, the Board of Directors declared a quarterly dividend of $0.18
per share. The dividend will be payable on September 1, 2000 to shareholders of
record on August 18, 2000.
In addition, on July 18, 2000, the Board of Directors elected Timothy T. Janszen
as Vice President and portfolio manager of the Fund. Mr. Janszen, Vice
President, Public High Yield Portfolio Manager, joined American General
Investment Management, L.P. in April 1999. Prior to that, Mr. Janszen was Senior
Vice President at Pacholder Associates, Inc. (1996-1999) and Senior Investment
Manager of American General Corporation (1995-1996).
13
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USLIFE INCOME FUND, INC.
Notes to Financial Statements -- continued
Note 6 - Quarterly Results of Operations (Unaudited)
For the fiscal years ended June 30, 2000, and 1999 (000's omitted except for per
share data):
<TABLE>
<CAPTION>
2000 1999
Three Months Ended Three Months Ended
------------------------------------ ------------------------------------
Sept. Dec. Mar. Jun. Sept. Dec. Mar. Jun.
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income ................... $1,277 $1,223 $1,343 $1,256 $1,240 $1,275 $1,268 $1,280
Net investment income ............... 1,115 575 1,171 904 1,069 1,108 1,110 1,115
Net realized and unrealized
gain (loss) on securities ....... (1,760) (1,523) (714) (1,729) (1,091) 148 (1,034) (1,965)
Per share of common stock:
Net investment income ............. .20 .10 .21 .16 .19 .20 .19 .20
Net realized and unrealized
gain (loss) on securities ....... (.31) (.27) (.13) (.31) (.20) .03 (.19) (.34)
Net asset value at
end of quarter .................. $9.77 $9.41 $9.30 $8.96 $10.56 $10.59 $10.41 $10.07
</TABLE>
14
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USLIFE INCOME FUND, INC.
Supplementary Information
Other Information
On January 18, 2000, by resolution of the Fund's Board of Directors in
accordance with the provisions of Subtitle 8 of Title 3 of the Maryland General
Corporation Law ("Subtitle 8"), the Fund elected to be subject to Sections 3-804
and 3-805 of the Maryland General Corporation Law. Subtitle 8 was enacted by the
State of Maryland effective June 1, 1999. Sections 3-804 and 3-805 provide,
among other things, that (i) any permitted removal of directors from office
requires the affirmative vote of the holders of two-thirds of all outstanding
shares, (ii) only the board of directors may set the size of the board and
vacancies on the board of directors may be filled only by the remaining
directors and (iii) special meetings of stockholders may be called by the
holders of a majority of all outstanding shares.
Also, on January 18, 2000, the Fund's Board of Directors adopted certain
amendments to the Fund's Amended and Restated Bylaws. These amendments, among
other things, (i) consistent with Section 3-804(a) of the Maryland General
Corporation Law, increase the vote required to remove directors from office for
cause, from the holders of a majority to the holders of two-thirds of all
outstanding shares, (ii) consistent with Section 16(a) of the Investment Company
Act, as amended, require that, if at any time less than a majority of the Board
is comprised of directors elected by stockholders, a special meeting of
stockholders be called to fill existing vacancies on the Board (and not for the
purpose of electing the entire Board), (iii) consistent with Section 3-805 of
the Maryland General Corporation Law, increase the percentage of outstanding
shares required to cause the Fund to call a special meeting of stockholders from
the holders of 25% to the holders of a majority of all outstanding shares, (iv)
require 90 to 120 days advance notice of stockholder nominations for directors
and presentation of new business by stockholders and (v) consistent with Section
2-109(b) of the Maryland General Corporation Law, increase the percentage of
outstanding shares required for the stockholders to amend the Fund's Amended and
Restated Bylaws from the holders of a majority to the holders of two-thirds of
all outstanding shares.
15
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USLIFE INCOME FUND, INC.
Supplementary Information -- continued
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
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
ChaseMellon Shareholder Services, L.L.C. 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:
ChaseMellon Shareholder Services, L.L.C.
85 Challenger Road, Overpeck Center
Ridgefield Park, NJ 07660
or call 1-800-526-0801.
16
<PAGE>
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BOARD OF DIRECTORS
Kent E. Barrett
Judith L. Craven
Timothy J. Ebner
Gustavo E. Gonzales, Jr.
Norman Hackerman
Alice T. Kane
John W. Lancaster
Ben H. Love
John E. Maupin, Jr.
F. Robert Paulsen
OFFICERS
Alice T. Kane, Chairman and President
Kent E. Barrett, Executive Vice President
Peter V. Tuters, Vice President and Senior Investment Officer
Charles H. Clines, Vice President and Tax Officer
Leon A. Olver, Vice President
Pauletta P. Cohn, Vice President
Nori L. Gabert, Vice President and Secretary
Gregory R. Seward, Treasurer
Todd L. Spillane, Chief Compliance Officer
Gregory R. Kingston, Assistant Treasurer
Kathryn A. Pearce, Assistant Treasurer
Jaime M. Sepulveda, Assistant Treasurer
Heriberto Valdez, Assistant Treasurer
INVESTMENT ADVISER
The Variable Annuity Life Insurance Company (VALIC)
2929 Allen Parkway
Houston, TX 77019
SHAREHOLDER SERVICE AGENT
ChaseMellon Shareholders Services, L.L.C.
85 Challenger Road
Overpeck Center
Ridgefield Park, NJ 07660
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
INDEPENDENT AUDITORS
Ernst & Young LLP
1221 McKinney Street
Houston, TX 77010
<PAGE>
USLIFE INCOME
FUND, INC.
ANNUAL REPORT
JUNE 30, 2000
[AMERICAN GENERAL FINANCIAL GROUP LOGO]
The Variable Annuity Life Insurance Company (VALIC)
2929 Allen Parkway * Houston, TX 77019
