As filed with the Securities and Exchange Commission on April 29, 1996
REGISTRATION NO. 2-91369
REGISTRATION NO. 811-4041
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 16
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 17
LIFE OF VIRGINIA SERIES FUND, INC.
6610 West Broad Street
Richmond, Virginia 23230
(Address of Principal Executive Offices)
Registrant's Telephone Number
(804) 281-6000
John J. Palmer
President
Life of Virginia Series Fund, Inc.
6610 West Broad Street
Richmond, Virginia 23230
(Name and Address of Agent for Service)
Copy to:
Stephen E. Roth
Sutherland, Asbill & Brennan
1275 Pennsylvania Avenue, NW
Washington, DC 20004-2404
------------------------------
It is proposed that this filing will become effective:
___ immediately upon filing pursuant to paragraph (b)
X on May 1, 1996 pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)
___ on pursuant to paragraph (a) of Rule 485
___ 75 days after filing pursuant to paragraph (a)(2) of Rule 485
___ on Date pursuant to paragraph (a)(2) of Rule 485
- ---------------------------------
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the Registrant
has registered an indefinite amount of securities. The Registrant filed the
24f-2 Notice for the period ended December 31, 1995 on February 28, 1996.
<PAGE>
CROSS REFERENCE SHEET
ITEM NO. OF CAPTION
FORM N1-A
Part A Prospectus
1.................Cover Page
2.................Fee Table
3.................Financial Highlights
4.................Life of Virginia Series Fund, Inc.; Investment Objectives and
Policies; Investment Practices
5.................Management of the Fund
6.................Life of Virginia Series Fund, Inc., Dividends, Distributions
and Taxes; Additional Information
7.................Purchase and Redemption of Fund Shares
8.................Purchase and Redemption of Fund Shares
9.................Not Applicable
Part B Statement of Additional Information
10................Cover Page
11................Table of Contents
12................Not Applicable
13................General Information; Investment Practices and Restrictions;
Appendix A; Appendix B
14................Management of the Fund
15................General Information; Management of the Fund Additional
Information
16................Management of the Fund; Additional Information
17................Portfolio Transactions and Brokerage
18................Dividends and Distributions; Additional Information
19................Determination of Net Asset Value; Purchase and Redemption of
Fund Shares
20................Taxes
21................Not Applicable
22................Yield Quotation for Money Market Portfolios
23................Financial Statements
<PAGE>
PART A
PROSPECTUS
<PAGE>
LIFE OF VIRGINIA SERIES FUND, INC.
6610 W. Broad Street
Richmond, Virginia 23230
(804) 281-6000
Life of Virginia Series Fund, Inc. ("Fund") is an open-end, diversified
management investment company (commonly known as a mutual fund). The Fund
currently has six investment portfolios.
The Common Stock Index Portfolio has the investment objective of
providing capital appreciation and accumulation of income that
corresponds to the investment return of the Standard & Poor's 500
Composite Stock Price Index through investment in common stocks traded
on the New York Stock Exchange and the American Stock Exchange and, to
a limited extent, in the over-the-counter markets.
The Government Securities Portfolio has the investment objective of
seeking high current income and protection of capital through
investments in intermediate and long-term debt instruments issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
The Money Market Portfolio has the investment objective of providing
the highest level of current income as is consistent with high
liquidity and safety of principal by investing in good quality money
market securities. An investment in the Money Market Portfolio is
neither insured nor guaranteed by the U.S. Government.
The Total Return Portfolio has the investment objective of providing
the highest total return, composed of current income and capital
appreciation, as is consistent with prudent investment risk by
investing in common stocks, bonds and money market instruments, the
proportion of each being continuously determined by the Investment
Advisor.
The International Equity Portfolio has the investment objective of
providing long-term capital appreciation. The Portfolio seeks to
achieve its objective by investing primarily in equity and
equity-related securities of companies that are organized outside of
the U.S. or whose securities are principally traded outside of the U.S.
The Real Estate Securities Portfolio has the investment objective of
providing maximum total return through current income and capital
appreciation. The Portfolio seeks to achieve this objective by
investing primarily in securities of U.S. issuers that are principally
engaged in or related to the real estate industry including those that
own significant real estate assets. The Portfolio will not invest
directly in real estate.
At the current time, shares of the Fund are offered only to certain Separate
Accounts of The Life Insurance Company of Virginia and to the Aon Savings Plan.
This Prospectus concisely sets forth information about the Fund that a
prospective investor ought to know before investing. Please read the Prospectus
thoroughly and retain it for future reference. A Statement of Additional
Information, dated May 1, 1996, containing additional information about the
Fund, has been filed with the Securities and Exchange Commission. The Statement
may be obtained without charge by sending a written request to the Fund at the
above address or calling the telephone number shown. The Statement of Additional
Information is incorporated into this Prospectus by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Date of This Prospectus is May 1, 1996
1
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
Life of Virginia Series Fund, Inc................................................................................................. 3
Fee Table....................................................................................................................... 3-A
Financial Highlights...............................................................................................................4
Investment Objectives and Policies................................................................................................13
Common Stock Index Portfolio................................................................................................13
Government Securities Portfolio.............................................................................................15
Money Market Portfolio......................................................................................................15
Total Return Portfolio......................................................................................................17
International Equity Portfolio..............................................................................................17
Real Estate Securities Portfolio............................................................................................18
Investment Practices..............................................................................................................19
Loans of Portfolio Securities...............................................................................................19
Short-Term Money Market Instruments.........................................................................................20
Foreign Investments and Currency............................................................................................20
Writing Covered Call and Put Options and Purchasing Call and Put Options....................................................23
Financial Futures Contracts and Options on Such Contracts...................................................................24
Restricted Securities and Other Illiquid Investments........................................................................25
Lower-Rated Securities......................................................................................................25
Borrowing...................................................................................................................26
Real Estate Investment Trusts...............................................................................................26
Determination of Net Asset Value..................................................................................................26
Purchase and Redemption of Fund Shares............................................................................................26
Dividends, Distributions and Taxes................................................................................................27
Dividends and Distributions.................................................................................................27
Taxes.......................................................................................................................27
Management of the Fund............................................................................................................28
Board of Directors..........................................................................................................28
Investment Adviser..........................................................................................................28
Investment Sub-Advisers................................................................................................... .30
Portfolio Managers..........................................................................................................30
Additional Information............................................................................................................32
Capital Stock...............................................................................................................32
Contract Owner Voting Rights................................................................................................32
Plan Participant Voting Rights..............................................................................................32
Unaffiliated Plan Participant Voting Rights.................................................................................32
Annual Reports..............................................................................................................32
Inquiries...................................................................................................................32
Custodian, Transfer and Dividend Paying Agent...............................................................................32
Legal Matters...............................................................................................................32
</TABLE>
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH
OFFERING MAY NOT LAWFULLY BE MADE.
2
<PAGE>
LIFE OF VIRGINIA SERIES FUND, INC.
Life of Virginia Series Fund, Inc. (the "Fund") is an open-end management
investment company incorporated under the laws of the Commonwealth of Virginia
on May 14, 1984. The Fund consists of six separate investment portfolios (the
"Portfolios" or a "Portfolio"), each of which is, in effect, a separate mutual
fund. The Fund issues a separate class of capital stock for each Portfolio
representing fractional undivided interests in that Portfolio. An investor, by
investing in a Portfolio, becomes entitled to a pro-rata share of all dividends
and distributions arising from the net income and capital gains on the
investments of that Portfolio. Likewise, an investor shares pro-rata in any
losses of that Portfolio.
Pursuant to investment advisory agreements and subject to the authority of the
Fund's board of directors, Aon Advisors, Inc. ("AAI") serves as the Fund's
investment adviser and conducts the business and affairs of the Fund. AAI has
engaged Perpetual Portfolio Management, Limited ("Perpetual") as the investment
sub-adviser to provide day-to-day portfolio management for the International
Equity Portfolio and has engaged Genesis Merchant Group/Seneca Capital
Management, L.L.C. ("Genesis"), as the investment sub-adviser to provide
day-to-day portfolio management for the Real Estate Securities Portfolio. (As
used herein, "Adviser" shall refer to AAI and, where applicable, either
Perpetual or Genesis in their respective roles.)
The Fund currently offers each class of its capital stock to certain separate
accounts (the "Accounts") of The Life Insurance Company of Virginia ("Life of
Virginia") as funding vehicles for certain variable annuity contracts and
variable life insurance contracts ("variable contracts") issued by Life of
Virginia through the Accounts. The Fund also currently offers its capital stock
to the Aon Savings Plan (the "Plan"). The Fund does not offer its stock directly
to the general public. Each Account, like the Fund, is registered as an
investment company with the Securities and Exchange Commission ("SEC") and a
separate prospectus describing the particular Account and variable contract
being offered will accompany this prospectus when shares of the Fund are offered
as a funding vehicle for such contracts. The Fund may, in the future, offer any
class of its capital stock to other registered and unregistered separate
accounts of Life of Virginia (or Life of Virginia's affiliates) supporting other
variable annuity contracts or variable life insurance contracts and to qualified
pension and retirement plans other than the Plan ("unaffiliated plans").
A potential for certain conflicts exists between the interests of variable
annuity contract owners, variable life insurance contract owners, and Plan
participants. A potential for certain conflicts of interest would also exist
between the interests of any of these investors and participants in a qualified
pension and retirement plan other than the Plan that might invest in the Fund.
To the extent that such classes of investors are invested in the same Portfolio
when a conflict of interest arises that might involve the Portfolio, one or more
such classes of investors could be disadvantaged. The Fund does not currently
foresee any such disadvantage to owners of variable contracts or to Plan
participants. Nonetheless, the board of directors of the Fund will monitor the
Fund for the existence of any irreconcilable material conflicts of interest. If
such a conflict affecting owners of variable contracts is determined to exist,
Life of Virginia will, to the extent reasonably practicable, take such action as
is necessary to remedy or eliminate the conflict. If such a conflict were to
occur, one or more of the Accounts might be required to withdraw its investments
in one or more Portfolios or it may substitute shares of one Portfolio for
another. This might force a Portfolio to sell its securities at a
disadvantageous price.
3
<PAGE>
FEE TABLE
<TABLE>
<CAPTION>
Common Real
Money Government Stock Total International Estate
Market Securities Index Return Equity Securities
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES None None None None None None
ANNUAL PORTFOLIO OPERATING EXPENSES
Investment Advisory Fees (after waivers) .10% .50% .35% .50% 1.00% .85%
Other Expenses (after reimbursement) .13% .24% .31% .15% .50% .40%
---- ---- ---- ---- ---- ----
Total Operating Expenses (after waivers and
reimbursements) .23% .74% .66% .65% 1.50% 1.25%
==== ==== ==== ==== ===== =====
</TABLE>
EXAMPLE. The table below shows the amount of expenses that a shareholder would
pay on a $1,000 investment, assuming a 5% annual return and redemption at the
end of each time period. Expenses would remain the same if shares were not
redeemed at the end of the time periods:
<TABLE>
<CAPTION>
Common Real
Money Government Stock Total International Estate
Market Securities Index Return Equity Securities
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C> <C> <C>
1 Year $ 2.35 $ 7.56 $ 6.74 $ 6.64 $ 15.26 $ 12.73
3 Years 7.41 23.65 21.12 20.80 47.41 39.65
5 Years 12.95 41.15 36.77 36.22 81.84 68.63
10 Years 29.30 91.84 82.25 81.04 179.05 151.13
</TABLE>
The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that they will bear. All expenses are borne directly
or indirectly by shareholders. For more information about expenses, see
"Investment Adviser" herein. The table does not, however, show all of the
expenses that an owner of a variable life insurance or annuity contract (a
"variable contract") or a participant in the Plan or in an unaffiliated plan
would bear if a portfolio of the Fund is selected as an investment option under
a variable contract or plan. For more information about expenses under variable
contracts, see the prospectus for such contracts. For more information about the
expenses under the Plan or an unaffiliated plan, see plan disclosure documents.
Pursuant to investment advisory agreements between Aon Advisors, Inc. ("AAI")
and Life of Virginia Series Fund, Inc. (the "Fund"), AAI has agreed to reimburse
each of the portfolios for any operating expenses in excess of certain limits
established for that portfolio. In 1995, AAI reimbursed the International Equity
and Real Estate Securities Portfolios. Absent this reimbursement, the total
annual expenses for these portfolios would have been 2.17% and 1.61%
respectively. Also, AAI waived a portion of its advisory fee for the Money
Market Portfolio and the fee and the total expenses for the Money Market
Portfolio shown above reflect this waiver. Absent this waiver, total annual
expenses for the Money Market Portfolio would have been 0.63%. See "Investment
Adviser" herein for a discussion of reimbursement obligations and fee waivers.
PROSPECTIVE INVESTORS SHOULD NOT CONSIDER THE EXAMPLES TO REPRESENT PAST OR
FUTURE EXPENSES AND ACTUAL EXPENSES PAID MAY BE GREATER OR LESS THAN THOSE
SHOWN. THE ASSUMED 5% ANNUAL RETURN IS HYPOTHETICAL; PAST OR FUTURE ANNUAL
RETURNS MAY BE GREATER OR LESS THAN THE ASSUMED AMOUNT.
3-A
<PAGE>
LIFE OF VIRGINIA SERIES FUND, INC.
FINANCIAL HIGHLIGHTS
Selected data for each share of capital stock outstanding for the periods
indicated. The data for the most recent five years has been audited.
<TABLE>
<CAPTION>
COMMON STOCK INDEX
PORTFOLIO+
1/1 to 1/1 to 1/1 to 1/1 to 1/1 to
12/31/95 12/31/94 12/31/93 12/31/92 12/31/91
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 15.72 $ 15.99 $ 17.04 $ 16.21 $ 12.75
Net investment income .27 .22 .31 .35 .30
Net realized and unrealized gain (loss) on investments 5.41 (.23) 2.16 1.01 4.08
------- -------- ------- ------- -------
Income (loss) from operations 5.68 (.01) 2.47 1.36 4.38
Distributions to shareholders from:
Net investment income (.27) (.22) (.31) (.35) (.30)
Net realized gain (.14) (.04) (3.21) (.17) (.61)
Tax return of capital .-- .-- .-- (.01) (.01)
-------- -------- -------- -------- --------
(.41) (.26) (3.52) (.53) (.92)
-------- -------- -------- -------- --------
Increase (decrease) in net asset value 5.27 (.27) (1.05) .83 3.46
-------- -------- -------- -------- -------
Net asset value at end of period $ 20.99 $ 15.72 $ 15.99 $ 17.04 $ 16.21
=================================================================
Total Return 36.14% (0.06%) 14.52% 8.39% 34.43%
==================================================================
RATIOS:
Ratio of operating expenses to average net assets .66% .75% .87% 1.03% 1.08%
Ratio of net investment income to average net assets 1.98% 2.22% 2.00% 2.24% 2.28%
Portfolio turnover 14.58% 4.31% 73.43% 9.72% 35.87%
NET ASSETS AT END OF PERIOD $66,016,840 $23,929,572 $8,276,765 $5,178,316 $4,429,044
</TABLE>
+ Prior to May 1, 1993, this portfolio was titled Common Stock Portfolio
In 1994, the Common Stock Index Portfolio received an expense reimbursement from
the investment advisor. Absent this reimbursement, the ratio of expenses to
average net assets and the ratio of net investment income to average net assets
would have been 1.10% and 1.90%, respectively, for 1994.
Due to the significant increase in Fund shares related to the Aon Savings Plan,
the net changes in the 1994 Net Asset Value per share as calculated in
accordance with the requirements of Form N-1A are not commensurate with the
Statement of Changes in Net Assets.
4
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK INDEX
PORTFOLIO+
1/1 to 1/1 to 1/1 to 1/1 to 1/1 to 4/15 @ to
12/31/90 12/31/89 12/31/88 12/31/87 12/31/86 12/31/85
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 14.67 $ 12.33 $ 10.28 $ 12.66 $ 13.58 $ 11.41
Net investment income .41 .34 .32 .24 .39 .29
Net realized and unrealized gain (loss) on
investments (1.91) 2.81 2.05 (1.04) 1.56 2.21
-------- ------- ------- -------- ------- -------
Income (loss) from operations (1.50) 3.15 2.37 (.80) 1.95 2.50
Distributions to shareholders from:
Net investment income (.41) (.34) (.32) (.78) (.83) (.31)
Net realized gain .-- (.46) .-- (.80) (2.03) (.02)
Tax return of capital (.01) (.01) .-- .-- (.01) .--
-------- -------- -------- -------- -------- -------
(.42) (.81) (.32) (1.58) (2.87) (.33)
-------- -------- -------- -------- -------- -------
Increase (decrease) in net asset value (1.92) 2.34 2.05 (2.38) (.92) 2.17
-------- -------- -------- -------- -------- -------
Net asset value at end of period $ 12.75 $ 14.67 $ 12.33 $ 10.28 $ 12.66 $ 13.58
===============================================================================
Total Return (10.22%) 25.72% 23.05% (6.32%) 14.36% 32.07%*
===============================================================================
RATIOS:
Ratio of operating expenses to average
net assets 1.06% 1.20% 1.35% 1.42% 1.50% 1.50%*
Ratio of net investment income to average
net assets 2.99% 2.67% 2.53% 2.03% 2.25% 2.80%*
Portfolio turnover 57.06% 36.94% 186.43% 105.43% 141.31% 78.61%
NET ASSETS AT END OF PERIOD $3,154,412 $3,430,460 $2,126,551 $1,839,227 $1,658,777 $880,327
</TABLE>
* Annualized
@ Initial effective date of Series Fund offering
+ Prior to May 1, 1993, this portfolio was titled Common Stock Portfolio
5
<PAGE>
LIFE OF VIRGINIA SERIES FUND, INC.
FINANCIAL HIGHLIGHTS, CONTINUED
Selected data for each share of capital stock outstanding for the periods
indicated. The data for the most recent five years has been audited.
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES
PORTFOLIO+
1/1 to 1/1 to 1/1 to 1/1 to 1/1 to
12/31/95 12/31/94 12/31/93 12/31/92 12/31/91
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 9.51 $ 10.49 $ 10.54 $ 10.54 $ 9.60
Net investment income .49 .42 .45 .69 .75
Net realized and unrealized gain (loss) on investments 1.13 (.98) .50 .06 .99
------- -------- ------- ------- -------
Income from investment operations 1.62 (.56) .95 .75 1.74
Distributions to shareholders from:
Net investment income (.49) (.42) (.45) (.69) (.75)
Net realized gain (.16) .-- (.54) (.05) (.04)
Tax return of capital .-- .-- (.01) (.01) (.01)
-------- -------- -------- -------- --------
(.65) (.42) (1.00) (.75) (.80)
-------- -------- -------- -------- --------
Increase (decrease) in net asset value .97 (.98) (.05) .-- .94
-------- -------- -------- -------- -------
Net asset value at end of period $ 10.48 $ 9.51 $ 10.49 $ 10.54 $ 10.54
==================================================================
Total Return 17.08% (5.34%) 8.96% 7.13% 18.16%
===================================================================
RATIOS:
Ratio of expenses to average net assets .74% .81% .86% .99% .97%
Ratio of net investment income to average net assets 5.92% 5.44% 5.41% 6.69% 7.73%
Portfolio turnover 130.64% 565.65% 112.86% 14.43% 23.24%
NET ASSETS AT END OF PERIOD $23,708,181 $12,598,072 $7,884,928 $5,053,246 $4,444,984
</TABLE>
+ Prior to May 1, 1993, this portfolio was titled Bond Portfolio
Due to the significant increase in Fund shares related to the Aon Savings Plan,
the net changes in the 1994 Net Asset Value per share as calculated in
accordance with the requirements of Form N-1A are not commensurate with the
Statement of Changes in Net Assets.
6
<PAGE>
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES
PORTFOLIO+
1/1 to 1/1 to 1/1 to 1/1 to 1/1 to 7/1 @ to
12/31/90 12/31/89 12/31/88 12/31/87 12/31/86 12/31/85
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 9.76 $ 9.58 $ 10.09 $ 11.50 $ 11.08 $ 10.00
Net investment income .64 .74 .90 .66 .79 .38
Net realized and unrealized gain (loss) on
investments (.15) .31 (.15) (.53) .48 .70
-------- ------- -------- -------- ------- -------
Income from investment operations .49 1.05 .75 .13 1.27 1.08
Distributions to shareholders from:
Net investment income (.64) (.74) (1.26) (1.43) (.44) .--
Net realized gain .-- (.12) .-- (.11) (.40) .--
Tax return of capital (.01) (.01) .-- .-- (.01) .--
-------- -------- -------- -------- -------- -------
(.65) (.87) (1.26) (1.54) (.85) .--
-------- -------- -------- -------- -------- -------
Increase (decrease) in net asset value (.16) .18 (.51) (1.41) .42 1.08
-------- -------- -------- -------- -------- -------
Net asset value at end of period $ 9.60 $ 9.76 $ 9.58 $ 10.09 $ 11.50 $ 11.08
==================================================================================
Total Return 5.05% 10.85% 7.83% 1.13% 11.46% 22.77%*
===================================================================================
RATIOS:
Ratio of expenses to average net assets .96% 1.13% 1.07% 1.08% 1.50% 1.50%*
Ratio of net investment income to average
net assets 7.78% 7.95% 7.67% 7.51% 6.70% 7.35%*
Portfolio turnover 56.62% 80.30% 177.76% 10.79% 66.77% 40.21%
NET ASSETS AT END OF PERIOD $3,701,835 $3,463,916 $2,933,506 $3,175,326 $2,514,610 $2,216,905
</TABLE>
* Annualized
@ Initial effective date of Series Fund offering
+ Prior to May 1, 1993, this portfolio was titled Bond Portfolio
7
<PAGE>
LIFE OF VIRGINIA SERIES FUND, INC.
FINANCIAL HIGHLIGHTS, CONTINUED
Selected data for each share of capital stock outstanding for the periods
indicated. The data for the most recent five years has been audited.
<TABLE>
<CAPTION>
MONEY MARKET
PORTFOLIO
1/1 to 1/1 to 1/1 to 1/1 to 1/1 to
12/31/95 12/31/94 12/31/93 12/31/92 12/31/91
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 10.17 $ 10.08 $ 10.04 $ 10.00 $ 9.96
Net investment income .60 .29 .25 .31 .53
Net realized and unrealized gain (loss) on investments .-- .09 (.01) .-- .--
-------- ------- -------- -------- -------
Income from operations .60 .38 .24 .31 .53
Distributions to shareholders from:
Net investment income (.41) (.29) (.20) (.26) (.49)
Net realized gain .-- .-- .-- .-- .--
Tax return of capital .-- .-- .-- (.01) .00
-------- -------- -------- -------- -------
(.41) (.29) (.20) (.27) (.49)
-------- -------- -------- -------- --------
Increase (decrease) in net asset value .19 .09 .04 .04 .04
-------- -------- -------- -------- -------
Net asset value at end of period $ 10.36 $ 10.17 $ 10.08 $ 10.04 $ 10.00
==================================================================
Total Return 5.90% 3.77% 2.39% 3.10% 5.32%
===================================================================
RATIOS:
Ratio of expenses to average net assets* .23% .42% .75% .75% .75%
Ratio of net investment income to average net assets 5.74% 4.04% 2.53% 3.06% 5.43%
Portfolio turnover N/A N/A N/A N/A N/A
NET ASSETS AT END OF PERIOD $63,083,360 $33,528,739 $9,904,184 $5,845,136 $4,092,986
</TABLE>
* Effective July 1, 1994, the investment advisor agreed to waive a portion of
the advisory fee for the Money Market Portfolio. Absent this waiver, the ratio
of expenses to average net assets and the ratio of net investment income to
average net assets would have been .70% and 3.76%, respectively, for 1994, and
.63% and 5.34%, respectively, for 1995.
Due to the significant increase in Fund shares related to the Aon Savings Plan,
the net changes in the 1994 Net Asset Value per share as calculated in
accordance with the requirements of Form N-1A are not commensurate with the
Statement of Changes in Net Assets.
8
<PAGE>
<TABLE>
<CAPTION>
MONEY MARKET
PORTFOLIO
1/1 to 1/1 to 1/1 to 1/1 to 1/1 to 7/1 @ to
12/31/90 12/31/89 12/31/88 12/31/87 12/31/86 12/31/85
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 10.18 $ 9.94 $ 10.20 $ 10.55 $ 10.29 $ 10.00
Net investment income .73 .86 .68 .57 .54 .29
Net realized and unrealized gain (loss)
on investments .01 .-- .01 .-- .-- .--
------- -------- -------- -------- -------- -------
Income from operations .74 .86 .69 .57 .54 .29
Distributions to shareholders from:
Net investment income (.94) (.62) (.94) (.92) (.27) .--
Net realized gain (.01) .-- (.01) .-- .-- .--
Tax return of capital (.01) .-- .-- .-- (.01) .--
-------- -------- -------- -------- -------- -------
(.96) (.62) (.95) (.92) (.28) .--
-------- -------- -------- -------- -------- -------
Increase (decrease) in net asset value (.22) .24 (.26) (.35) .26 .29
-------- -------- -------- -------- -------- -------
Net asset value at end of period $ 9.96 $ 10.18 $ 9.94 $ 10.20 $ 10.55 $ 10.29
==================================================================================
Total Return 7.28% 8.67% 6.76% 5.40% 5.25% 5.88%*
==================================================================================
RATIOS:
Ratio of expenses to average net assets* .75% .75% .75% .87% 1.50% 1.50%*
Ratio of net investment income to average
net assets 7.02% 8.43% 6.68% 5.78% 5.21% 5.86%*
Portfolio turnover N/A N/A N/A N/A N/A N/A
NET ASSETS AT END OF PERIOD $3,464,661 $3,686,068 $2,376,022 $4,141,864 $665,994 $608,842
</TABLE>
* Annualized
@ Initial effective date of Series Fund offering
9
<PAGE>
LIFE OF VIRGINIA SERIES FUND, INC.
FINANCIAL HIGHLIGHTS, CONTINUED
Selected data for each share of capital stock outstanding for the periods
indicated. The data for the most recent five years has been audited.
<TABLE>
<CAPTION>
TOTAL RETURN
PORTFOLIO
1/1 to 1/1 to 1/1 to 1/1 to 1/1 to
12/31/95 12/31/94 12/31/93 12/31/92 12/31/91
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 13.40 $ 13.59 $ 13.00 $ 12.62 $ 10.59
Net investment income .41 .35 .42 .44 .43
Net realized and unrealized gain (loss) on investments 3.34 (.01) 1.35 .51 2.47
------- -------- ------- ------- -------
Income (loss) from investment operations 3.75 .34 1.77 .95 2.90
Distributions to shareholders from:
Net investment income (.42) (.35) (.41) (.44) (.43)
Net realized gain (.80) (.18) (.76) (.12) (.43)
Tax return of capital .-- .-- (.01) (.01) (.01)
-------- -------- -------- -------- --------
(1.22) (.53) (1.18) (.57) (.87)
-------- -------- -------- -------- --------
Increase (decrease) in net asset value 2.53 (.19) .59 .38 2.03
-------- -------- -------- -------- -------
Net asset value at end of period $ 15.93 $ 13.40 $ 13.59 $ 13.00 $ 12.62
===================================================================
Total Return 28.07% 2.54% 13.67% 7.53% 27.45%
====================================================================
RATIOS:
Ratio of expenses to average net assets .65% .77% .85% .98% 1.11%
Ratio of net investment income to average net assets 3.42% 4.00% 3.80% 4.13% 4.39%
Portfolio turnover 105.56% 66.92% 48.12% 12.46% 32.58%
NET ASSETS AT END OF PERIOD $70,507,093 $34,708,256 $12,609,407 $7,247,897 $4,608,823
</TABLE>
Due to the significant increase in Fund shares related to the Aon Savings Plan,
the net changes in the 1994 Net Asset Value per share as calculated in
accordance with the requirements of Form N-1A are not commensurate with the
Statement of Changes in Net Assets.
10
<PAGE>
<TABLE>
<CAPTION>
TOTAL RETURN
PORTFOLIO
1/1 to 1/1 to 1/1 to 1/1 to 1/1 to 7/1 @ to
12/31/90 12/31/89 12/31/88 12/31/87 12/31/86 12/31/85
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 11.60 $ 10.42 $ 9.29 $ 11.19 $ 11.03 $ 10.00
Net investment income .55 .51 .39 .31 .48 .27
Net realized and unrealized gain (loss)
on investments (1.00) 1.51 1.28 (.90) 1.09 .76
-------- ------- ------- -------- ------- -------
Income (loss) from investment operations (.45) 2.02 1.67 (.59) 1.57 1.03
Distributions to shareholders from:
Net investment income (.56) (.51) (.39) (.94) (.40) .--
Net realized gain .-- (.32) (.15) (.37) (1.00) .--
Tax return of capital .-- (.01) .-- .-- (.01) .--
-------- ------- -------- -------- -------- -------
(.56) (.84) (.54) (1.31) (1.41) .--
-------- ------- -------- -------- -------- -------
Increase (decrease) in net asset value (1.01) 1.18 1.13 (1.90) .16 1.03
-------- ------- -------- -------- -------- -------
Net asset value at end of period $ 10.59 $ 11.60 $ 10.42 $ 9.29 $ 11.19 $ 11.03
===================================================================================
Total Return (3.85%) 19.51% 17.98% (5.27%) 14.23% 21.66%*
==================================================================================
RATIOS:
Ratio of expenses to average net assets 1.10% 1.28% 1.35% 1.50% 1.50% 1.50%*
Ratio of net investment income to average
net assets 4.81% 4.54% 3.97% 3.04% 3.92% 5.30%*
Portfolio turnover 41.80% 48.94% 96.15% 81.80% 111.82% 31.45%
NET ASSETS AT END OF PERIOD $2,937,613 $3,065,217 $2,301,744 $1,569,825 $1,397,316 $1,108,972
</TABLE>
* Annualized
@ Initial effective date of Series Fund offering
11
<PAGE>
LIFE OF VIRGINIA SERIES FUND, INC.
FINANCIAL HIGHLIGHTS, CONTINUED
Selected data for each share of capital stock outstanding for the periods
indicated. The data for the most recent five years has been audited.
<TABLE>
<CAPTION>
INTERNATIONAL EQUITY REAL ESTATE SECURITIES
PORTFOLIO PORTFOLIO
5/1 to 5/1 to
12/31/95 12/31/95
<S> <C> <C>
Net asset value at beginning of period $ 10.00 $ 10.00
Net investment income .20 .46
Net realized and unrealized gain on investments .47 1.23
------- -------
Income from investment operations .67 1.69
Distributions to shareholders from:
Net investment income (.20) (.46)
Net realized gain .-- (.18)
(.20) (.64)
-------- -------
Increase in net asset value .47 1.05
-------- -------
Net asset value at end of period $ 10.47 $ 11.05
===============================================
Total Return* 6.70% 17.00%
================================================
RATIOS*:
Ratio of expenses to average net assets** 1.54% 1.31%
Ratio of net investment income to average net assets .44% 6.85%
Portfolio turnover 58.11% 54.43%
NET ASSETS AT END OF PERIOD $15,347,782 $13,428,877
</TABLE>
* Amounts have been determined on an annualized basis.
** In 1995, the International Equity Portfolio received an expense reimbursement
from the investment advisor. Absent this reimbursement, the ratio of expenses
to average net assets and the ratio of net investment income to average net
assets would have been 2.17% and (.18%), respectively.
** In 1995, the Real Estate Securities Portfolio received an expense
reimbursement from the investment advisor. Absent this reimbursement, the
ratio of expenses to average net assets and the ratio of net investment
income to average net assets would have been 1.61% and 6.55%, respectively.
12
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Portfolio has one or more investment objectives and related investment
policies and uses various investment practices to pursue these objectives and
policies. THERE CAN BE NO ASSURANCE THAT ANY OF THE PORTFOLIOS WILL ACHIEVE ITS
INVESTMENT OBJECTIVE OR OBJECTIVES. Investors should not consider any one
Portfolio alone to be a complete investment program. All of the Portfolios are
subject to the risk of changing economic conditions, as well as the risk
inherent in the ability of the Adviser to make changes in the composition of the
Portfolio in anticipation of changes in economic, business, and financial
conditions. As with any security, a risk of loss is inherent in an investment in
the shares of any of the Portfolios.
The different types of securities, investments, and investment practices used
by each Portfolio all have attendant risks of varying degrees. For example, with
respect to equity securities, there can be no assurance of capital appreciation
and there is a substantial risk of decline. With respect to debt securities,
there exists the risk that the issuer of a security may not be able to meet its
obligations on interest or principal payments at the time required by the
instrument. In addition, the value of debt instruments generally rises and falls
inversely with prevailing current interest rates. As described below, an
investment in certain of the Portfolios entails special additional risks as a
result of their ability to invest a substantial portion of their assets in
either foreign investments or real estate securities.
Certain types of investments and investment practices common to one or more
Portfolios are described in greater detail, including the risks of each, under
"Investment Practices" both in this prospectus and in the statement of
additional information ("SAI"). The Portfolios are also subject to certain
investment restrictions that are described herein and under the caption
"Investment Restrictions" in the SAI.
The investment objective or objectives of each Portfolio are fundamental and
may not be changed without the approval of a majority of the outstanding voting
shares of capital stock of the class related to that Portfolio. A majority means
the lesser of (1) 67% of the Portfolio's outstanding shares present at a meeting
of shareholders if more than 50% of the outstanding shares are present in person
or by proxy, or (2) more than 50% of the Portfolio's outstanding shares. Certain
investment restrictions described in the SAI also are fundamental and cannot be
changed without shareholder approval. In contrast, certain other investment
restrictions, also described in the SAI, as well as the investment policies of
each Portfolio are not fundamental and may be changed by the Fund's board of
directors without shareholder approval.
Common Stock Index Portfolio
The Common Stock Index Portfolio has the investment objective of providing
capital appreciation and accumulation of income that corresponds to the
investment return of the Standard & Poor's 500 Composite Stock Price Index (the
"S&P 500 Index"), through investment in common stocks traded on the New York
Stock Exchange and the American Stock Exchange and, to a limited extent, in the
over-the-counter markets. Prior to May 1, 1993, this Portfolio was titled the
Common Stock Portfolio. See "General Information" in the SAI for details.
Standard and Poor's Corporation ("Standard & Poor's" or "S&P"/1/) chooses the
500 common stocks comprising the S&P 500 Index on the basis of market values,
industry diversification and other factors. Most of the common stocks in the S&P
500 Index are issued by the 500 largest companies, in terms of the aggregate
market value of their outstanding stock, and such companies are generally listed
on the New York Stock Exchange. Additional common stocks that are not among the
500 largest market value stocks are included in the S&P 500 Index for
diversification purposes. S&P may, from time to time, add common stocks to or
delete common stocks from the S&P 500 Index.
The Common Stock Index Portfolio will attempt to achieve its objective by
replicating the total return of the S&P 500 Index. To the extent that it can do
so consistent with the pursuit of its investment objective, it will attempt to
keep transaction costs low and minimize portfolio turnover. To achieve its
investment objective, the Common Stock Index Portfolio purchases equity
securities that will reflect, as a group, the total investment return of the S&P
500 Index. Like the S&P 500 Index, the Common Stock Index Portfolio will hold
both dividend paying and non-dividend paying common stocks comprising the S&P
500 Index.
/1/ "Standard and Poor's", "S&P", and "S&P 500" are trademarks of Standard
and Poor's Corporation and have been licensed for use. The Common Stock
Index Portfolio is not sponsored, endorsed, sold or promoted by S&P,
and S&P makes no representation or warranty, express or implied, to the
investors in this Portfolio or any member of the public regarding the
advisability of investing in this Portfolio or in securities generally
or the ability of the S&P 500 Index to track general stock market
performance.
13
<PAGE>
Active Portfolio management strategies are not used in making investment
decisions for the Common Stock Index Portfolio. Rather, the Common Stock Index
Portfolio utilizes a passive investment management approach. From time to time
it also may supplement this passive approach by using statistical selection
techniques to determine which securities it should purchase or sell in order to
best replicate the investment return of the S&P 500 Index over a period of time.
The Common Stock Index Portfolio may choose not to invest in all the stocks
that comprise the S&P 500 Index, and its holdings may be invested differently by
industry segment than the S&P 500 Index. The Common Stock Index Portfolio may
compensate for the omission from its portfolio of stocks that are included in
the S&P 500 Index, or for purchasing stocks included in the S&P 500 Index in
proportions that are different from their weightings in that Index, by
purchasing stocks that may or may not be included in the S&P 500 Index but which
have characteristics similar to omitted stocks (such as stocks from the same or
similar industry groups having similar market capitalizations and other
investment characteristics). In addition, from time to time adjustments may be
made in the Common Stock Index Portfolio's holdings due to changes in the
composition or weighting of issues comprising the S&P 500 Index.
The Common Stock Index Portfolio will attempt to achieve a correlation between
its total return and that of the S&P 500 Index of at least 0.95, without taking
expenses into account. A correlation of 1.00 would indicate perfect correlation,
which would be achieved when the Common Stock Index Portfolio's net asset value,
including the value of its dividends and capital gains distributions, increases
or decreases in exact proportion to changes in the S&P 500 Index. Management
will monitor the Common Stock Index Portfolio's correlation to the S&P 500 Index
and attempt to minimize any "tracking error" (i.e., the statistical measure of
the difference between the investment results of the Common Stock Index
Portfolio and that of the S&P 500 Index) in its investment decisions for the
Portfolio. However, brokerage and other transaction costs, as well as other
Common Stock Index Portfolio expenses, in addition to potential tracking error,
will tend to cause the Common Stock Index Portfolio's return to be lower than
the return of the S&P 500 Index. There can be no assurance as to how closely the
Common Stock Index Portfolio's performance will correspond to the performance of
the S&P 500 Index.
The Common Stock Index Portfolio will not invest more than 35% of its total
assets in stocks and other securities not included in the S&P 500 Index. In this
regard, the Common Stock Index Portfolio may temporarily invest cash balances,
pending withdrawals or investments, in high quality money market instruments.
Nevertheless, the Common Stock Index Portfolio will not adopt a temporary
defensive investment posture in times of generally declining stock prices, and,
therefore, investors will bear the risk of such general stock market declines.
The Common Stock Index Portfolio may write covered call and put options on
individual securities and stock indices which correlate with the Common Stock
Index Portfolio's investments and may purchase call and put options on such
securities and stock indices, provided such options written or purchased are
listed on a national securities exchange. In addition, the Common Stock Index
Portfolio may purchase and sell exchange-traded stock index futures contracts
and may write covered call and put options and purchase call and put options on
stock index futures contracts provided such options written or purchased are
listed on an exchange.
Consistent with its investment objective, the Common Stock Index Portfolio
will primarily use call and put options and futures contracts, as described
above, to rapidly invest cash balances and to hedge exposure to the S&P 500
Index in anticipation of investing cash balances or expected cash flow into the
Portfolio in appropriate common stocks or in anticipation of liquidating
appropriate common stocks to meet expected redemption requests. See "Writing
Covered Call and Put Options and Purchasing Call and Put Options" and "Financial
Futures Contracts and Options Thereon" in this Prospectus for more information
about these practices and their risks.
S&P's only relationship to the Fund is the licensing of certain trademarks and
trade names of S&P and of the S&P 500 Index which is determined, composed and
calculated by S&P without regard to the Fund. S&P has no obligation to take the
needs of the Fund or the investors in the Fund into consideration in
determining, composing or calculating the S&P 500 Index. S&P is not responsible
for and has not participated in the determination of the prices or composition
of the Common Stock Index Portfolio or the timing of the issuance or sale of the
shares of that Portfolio.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500
Index or any data included therein and S&P shall have no liability for any
errors, omissions, or interruptions therein. S&P makes no warranty, express or
implied, as to results to be obtained by the Fund, or by investors in the Fund,
or any other person or entity from the use of the S&P 500 Index or any data
included therein. S&P makes no express or implied warranties, and expressly
disclaims all warranties of merchantability or fitness for a particular purpose
or use with respect to the S&P 500 Index or any data included therein. Without
limiting any of the foregoing, in no event shall S&P have any liability for any
special, punitive, indirect or consequential damages (including lost profits),
even if notified of the possibility of such damages.
14
<PAGE>
Government Securities Portfolio
The Government Securities Portfolio has the investment objective of seeking
high current income and protection of capital through investment in intermediate
and long-term debt instruments issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. The Government Securities Portfolio may also
invest in U.S. Government debt instruments having maturities of less than one
year and in other high quality money market instruments. The Government
Securities Portfolio will invest at least 80% of its total assets, valued at the
time of purchase, in U.S. Government securities of various maturities. Prior to
May 1, 1993, this Portfolio was titled the Bond Portfolio. See "General
Information" in the SAI for details.
U.S. Government securities in which the Government Securities Portfolio may
invest include: (1) U.S. Treasury bills, notes, and bonds; and (2) obligations
issued or guaranteed by U.S. Government agencies and instrumentalities which are
supported by any of the following: (a) the full faith and credit of the U.S.
Government (e.g., Government National Mortgage Association ("GNMA")
Certificates); (b) the right of the issuer to borrow an amount limited to a
specific line of credit from the U.S. Treasury (e.g., debt of each of the
Federal Home Loan Banks); (c) the discretionary authority of the U.S. Government
or GNMA to purchase certain financial obligations of the agency or
instrumentality (e.g., Federal National Mortgage Association); or (d) the credit
of the issuing agency or instrumentality (e.g., Federal Land Banks, Farmers Home
Administration or Student Loan Marketing Association). No assurance can be given
that the U.S. Government will provide support to such U.S. Government sponsored
agencies or instrumentalities in the future, since it is not required to do so
by law.
The Government Securities Portfolio may invest up to 50% of its net assets in
GNMA securities. Such securities are (along with certain Federal National
Mortgage Association and Federal Home Loan Corporation securities in which the
Government Securities Portfolio may invest) securities whose scheduled monthly
interest and principal payments relating to mortgages in the pool are "passed
through" to investors. GNMA and other similar pass-through securities differ
from conventional bonds in that principal is paid back to the certificate
holders over the life of the loan rather than at maturity. As a result, the
Government Securities Portfolio will receive scheduled monthly payments of
principal and interest on its GNMA and other similar securities. In addition,
the Government Securities Portfolio may receive unscheduled principal payments
representing prepayments on the underlying mortgages. All payments and
unscheduled prepayments of principal will be reinvested in the Government
Securities Portfolio in instruments consistent with the Government Securities
Portfolio's investment objectives and investment program. GNMA and other similar
securities may not be an effective means of "locking in" long-term interest
rates due to the need for the Government Securities Portfolio to reinvest
scheduled and unscheduled principal payments. At the time principal payments or
prepayments are received by the Government Securities Portfolio, prevailing
interest rates may be higher or lower than the current yield of GNMA and other
similar pass-through securities held by the Government Securities Portfolio.
The Government Securities Portfolio may write covered call and put options on
debt securities, including obligations of the U.S. Government, its agencies and
instrumentalities, whether or not listed on a national securities exchange and
may purchase call and put options on such debt securities whether or not listed
on an exchange. In addition, the Government Securities Portfolio may purchase
and sell exchange-traded interest rate futures contracts and may write covered
call options and purchase call and put options on interest rate futures
contracts whether or not listed on an exchange. See "Writing Covered Call and
Put Options and Purchasing Call and Put Options" and "Financial Futures
Contracts and Options Thereon" in this Prospectus for more information about
these practices and their risks.
The value of U.S. Government securities owned by the Government Securities
Portfolio will fluctuate in response to various market forces and will vary
inversely with prevailing interest rate levels. Therefore, the value of an
investment in the Government Securities Portfolio also will fluctuate. In this
regard, any government or agency guarantee of securities held in the Government
Securities Portfolio does not guarantee the value of an investment in the
Portfolio.
Money Market Portfolio
The Money Market Portfolio has the investment objective of providing the highest
level of current income as is consistent with high liquidity and safety of
principal by investing in various types of good quality money market securities.
Such securities include:
1. obligations issued by or guaranteed as to interest and principal by the
government of the United States or any agency or instrumentality
thereof. These obligations may include instruments that are supported
by the full faith and credit of the United States, such as Treasury
Bills, Notes and Bonds; instruments that are supported by the right of
the issuer to borrow from the Treasury, such as Home Loan Bank
securities; and securities that are supported only by the credit of the
instrumentality, such as Federal National Mortgage Association bonds.
15
<PAGE>
2. obligations (including certificates of deposit, time deposits, and
bankers' acceptances) of: (a) U. S. Banks and other U. S. financial
institutions that are members of the Federal Reserve System or the
Federal Deposit Insurance Corporation when either (i) the principal
amount of the obligation is insured in full by the FDIC, or (ii) the
issuer of the obligation has capital, surplus and undivided profits in
excess of $100 million or total assets of $1 billion; and (b) U. S.
branches of foreign banks having total assets in excess of $10 billion
at the then current exchange rate.
3. Repurchase agreements with (i) banks or (ii) government securities
dealers recognized as primary dealers by the Federal Reserve System,
provided that:
(a) at the time the repurchase agreement is entered into, and
throughout the duration of the repurchase agreement, the
collateral has a market value at least equal to the value of
the repurchase agreement;
(b) the collateral consists of government securities or
instruments rated in the highest rating category by at least
two nationally recognized statistical rating organizations;
and
(c) the maturity of the repurchase agreement does not exceed 30
days.
4. Commercial paper, which consists of unsecured promissory notes issued
by corporations to finance short-term credit needs.
The Money Market Portfolio will only invest in instruments denominated in
U.S. dollars that the Adviser, under the supervision of the board of directors
of the Fund, determines present minimal credit risks and are, at the time of
acquisition, either:
(1) rated in the two highest rating categories by at least two nationally
recognized statistical rating organizations as defined under Rule 2a-7,
as amended, under the Investment Company Act of 1940 (an "NRSRO"), or
by only one NRSRO if only one NRSRO has issued a rating with respect to
the instrument; or
(2) in the case of an unrated instrument, determined by the Adviser under
the supervision of the board of directors to be of comparable quality
to the above; or
(3) issued by an issuer that has received a rating of the type described in
1. above on other securities that are comparable in priority and
security to the instrument.
All of the Money Market Portfolio money market instruments will mature in 13
months or less. The average maturity of the Portfolio's portfolio securities
based on their dollar value will not exceed 90 days at the time of each
investment. If the disposition of a portfolio security results in a
dollar-weighted average portfolio maturity in excess of 90 days, the Portfolio
will invest its available cash in such a manner as to reduce its dollar-weighted
average portfolio maturity to 90 days or less as soon as reasonably practicable.
From time to time the Money Market Portfolio may also invest in short-term
corporate obligations which at the date of investment are rated A or better by
Standard & Poor's or A or better by Moody's.
At such time or times as the Board of Directors deems appropriate and in the
best interests of the Money Market Portfolio, assets of the Money Market
Portfolio may be substantially invested in certificates of deposit of federally
insured banks and/or U. S. Government and agency obligations.
Although the Money Market Portfolio usually holds securities purchased until
maturity, at which time they are redeemable at their full principal value plus
accrued interest, it may, at times, engage in short-term trading to attempt to
take advantage of yield variations in the short-term market. The Money Market
Portfolio may also sell portfolio securities prior to maturity based on a
revised evaluation of the issuer or to meet redemptions. In the event there are
unusually heavy redemption requests due to changes in interest rates or
otherwise, the Money Market Portfolio may have to sell a portion of its
investment portfolio at a time when it may be disadvantageous to do so. However,
AAI believes that the Money Market Portfolio's ability to borrow funds to
accommodate redemption requests may mitigate the necessity for such portfolio
sales during these periods. This Portfolio should be subject to relatively
little market or financial risk because it invests in debt obligations that have
a short time period until maturity. The rate of return to shareholders will vary
with the general levels of interest rates applicable to the short-term debt
instruments in which the Money Market Portfolio invests. The rate will also be
affected by changes in the Money Market Portfolio's operating expenses.
16
<PAGE>
Total Return Portfolio
The Total Return Portfolio has the investment objective of providing the
highest total return, composed of current income and capital appreciation, as is
consistent with prudent investment risk. It will attempt to achieve this
objective by investing in common stocks, bonds and money market instruments, the
proportion of each being continuously determined by the Adviser. Total return
consists of current income, including dividends, interest and discount accruals
and capital appreciation. This Portfolio will invest in common stocks and other
equity securities or securities convertible into or with rights to purchase
Common Stocks, securities that are permissible investments for the Government
Securities Portfolio and the Money Market Portfolio. This Portfolio will also
invest in fixed-income obligations described below:
1. marketable straight corporate or government debt securities rated at
the time of purchase within the three highest investment grade ratings
(A or better) assigned by Moody's Investors Service, Inc., ("Moody's")
or Standard & Poor's Corporation ("Standard & Poor's") or which,
although not rated by either of the foregoing organizations, are deemed
by the Adviser as being of investment quality equivalent to securities
rated A or better. See the SAI for a description of such ratings.
2. securities issued or guaranteed by the Canadian Government or its
Provinces, or their respective agencies or instrumentalities.
3. other fixed-income debt obligations. Debt securities purchased with
lower ratings generally provide higher yields but carry a greater risk
of default and generally are subject to greater market fluctuations.
There are no percentage limitations on the types of securities in which the
Total Return Portfolio may invest, so from time to time it may invest entirely
in stocks, entirely in bonds, entirely in money market instruments, or in any
combination of these types of securities in accordance with the sole discretion
of the Adviser and the board of directors of the Fund. At least 60% of the value
of any bonds held by this Portfolio will be rated within the four highest grades
by a nationally recognized rating service such as Standard and Poor's
Corporation or Moody's Investors Service, Inc. The balance of the value of any
bonds held by this Portfolio may be rated below those four highest grades, and
if these lower-rated bonds were held in the Portfolio in significant amounts
they would increase financial risk and income volatility. At the current time,
the Fund has adopted a non-fundamental investment restriction limiting this
Portfolio's investment in these lower-rated fixed-income debt securities (i.e.,
rated less than Baa or BBB) to no more than 30% of the Portfolio's total assets
measured at the time of purchase. Lower- rated debt securities and their
attendant risks are described in "Investment Practices" in this prospectus and
in the SAI.
The Total Return Portfolio will be subject to varying levels of market and
financial risk and current income volatility, and may at times be subject to
high levels of market and financial risk and current income volatility. The
market value of non-convertible fixed-income securities usually reflects yields
generally available on securities of similar quality and type. When such yields
decline, the market value of a portfolio already invested at higher yields can
be expected to rise, if such securities are protected against early call.
Similarly, when such yields increase, the market value of a portfolio already
invested at lower yields can be expected to decline. It is likely that the
portfolio turnover rate for this portfolio will be higher than for other
portfolios due to the frequent fund transactions aimed at maximizing total
return. This higher portfolio turnover rate generates higher brokerage expenses;
however, it is expected that the gain in total return will more than offset the
brokerage expense. It is not anticipated that higher portfolio turnover will
have any adverse tax consequences.
International Equity Portfolio
The International Equity Portfolio has the investment objective of providing
long-term capital appreciation. The Portfolio seeks to achieve its objective by
investing primarily in equity and equity-related securities of companies that
are organized outside the United States or of companies whose securities are
principally traded outside the United States ("foreign issuers") and which the
Adviser believes have long-term potential for capital appreciation. The
Portfolio also may invest in securities (1) of companies organized in the United
States but having their principal activities and interests outside the United
States, (2) denominated or quoted in foreign currency ("non-dollar securities"),
and (3) issued by foreign governments or agencies or instrumentalities of
foreign governments (also "foreign issuers").
The International Equity Portfolio is intended for investors who can accept
the risks involved in investments in equity and equity-related securities of
foreign issuers and in non-dollar securities. See "Foreign Investments and
Currency."
17
<PAGE>
Under normal market conditions, the Portfolio invests at least 65% of its
total assets in the securities of foreign issuers located (or, in the case of
the securities, traded) in at least 5 different countries other than the United
States. Nonetheless, under certain economic and business conditions the
Portfolio may invest up to 35% of its total assets in the securities of issuers
located (or, in the case of the securities, traded) in any one of the following
countries: Australia, Canada, France, Japan, the United Kingdom or Germany.
The equity and equity-related securities in which the International Equity
Portfolio invests are common stock, preferred stock, convertible debt
obligations, convertible preferred stock and warrants or other rights to acquire
stock. The Portfolio also may invest in securities of foreign issuers in the
form of sponsored and unsponsored American depository receipts ("ADRs"),
European depository receipts ("EDRs"), and global depository receipts ("GDRs"").
ADRs are receipts typically issued by a U.S. bank or trust company which
evidence ownership of underlying securities of foreign corporate issuers. EDRs
and GDRs are receipts issued by non-U.S. financial institutions evidencing
arrangements similar to ADRs. Generally, ADRs are in registered form and are
designed for trading in U.S. markets while EDRs are in bearer form and are
designed for trading in European securities markets. GDRs are issued in either
registered or bearer form and are designed for trading on a global basis. See
"Foreign Investments and Currency."
Notwithstanding the foregoing, the International Equity Portfolio may on
occasion, for temporary defensive purposes to preserve capital, hold part or all
of its assets in cash, other money market instruments of the type in which the
Money Market Portfolio may invest, or, subject to certain tax restrictions,
foreign currencies. The International Equity Portfolio also may, under normal
market conditions, invest up to 35% of its total assets in dollar denominated
and non-dollar denominated debt securities of foreign issuers and may on
occasion, for temporary purposes to preserve capital, hold part or all of its
assets in foreign currency or in non-dollar short-term debt securities.
The International Equity Portfolio may invest in the securities of issuers
located in countries with emerging economies or securities markets. Investment
in such countries involves certain risks that are not present in investments in
more developed countries. See "Foreign Investments and Currency." The
International Equity Portfolio may make investments or engage in investment
practices that involve special risks. These include: convertible securities,
when-issued securities, delayed-delivery securities, options on securities and
securities indices, futures contracts and options thereon, illiquid or
restricted securities, repurchase agreements, lending portfolio securities and
borrowing money for investment purposes. These investment practices and
attendant risks are described in "Investment Practices" in this prospectus or in
the SAI.
The International Equity Portfolio may employ certain currency management
techniques to hedge against currency exchange rate fluctuations and to seek to
increase total return. When used to attempt to increase total return, these
management techniques are speculative. Such currency management techniques
involve risks different from those associated with investing in
dollar-denominated securities of U.S. issuers. These techniques are transactions
in options, futures contracts, option contracts on futures contracts, forward
foreign currency exchange contracts and currency swaps. To the extent that the
Portfolio is fully invested in securities of foreign issuers or non-dollar
securities while also maintaining currency positions, it may be exposed to
greater combined risk. The Portfolio's net currency positions may expose it to
risks independent of its securities positions. See "Foreign Investments and
Currency."
Real Estate Securities Portfolio
The Real Estate Securities Portfolio has the investment objective of providing
maximum total return through current income and capital appreciation. The
Portfolio seeks to achieve this objective by investing primarily in securities
of U.S. issuers that are principally engaged in or related to the real estate
industry including those that own significant real estate assets. The Portfolio
does not invest directly in real estate.
The Real Estate Securities Portfolio is intended for investors who can accept
the risks, described below, entailed by indirect investments in real estate.
Under normal conditions, the Real Estate Securities Portfolio has at least 65%
of its total assets invested in equity or debt securities of issuers that are
principally engaged in or related to the real estate industry. An issuer is
principally "engaged in" or principally "related to" the real estate industry if
at least 50% of its assets (marked-to-market), gross income, or net profits are
attributable to ownership, construction, management or sale of residential,
commercial or industrial real estate, or to products or services related to the
real estate industry. Issuers engaged in the real estate industry include equity
real estate investment trusts (which directly own real estate), mortgage real
estate investment trusts (which make short-term construction or real estate
development loans or invest in long-term mortgages or mortgage pools), real
estate brokers and developers, companies that manage real estate, and companies
that own substantial amounts of real estate. Issuers in businesses related to
the real estate industry include manufacturers and distributors of building
supplies and financial institutions that issue or service mortgages.
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The Real Estate Equity Portfolio generally invests in common stocks but may
also, without limitation, invest in preferred stock, convertible securities,
warrants and debt securities of the foregoing issuers as well as publicly traded
limited partnerships. In addition to these securities, the Portfolio may invest
up to 35% of its total assets in (1) equity and debt securities of issuers
outside the real estate industry, including all securities that the Total Return
Portfolio may invest in, and (2) debt securities and convertible preferred stock
and convertible bonds rated less than BBB by Standard and Poor's Corporation or
Baa by Moody's Investors Service, Inc. or that are unrated. If held in the
Portfolio in significant amounts, lower-rated debt securities would increase
financial risk and income volatility. Lower-rated debt securities and their
attendant risks are described in "Investment Practices" in this prospectus and
in the SAI.
The Real Estate Securities Portfolio may make investments or engage in
investment practices that involve special risks. These include: convertible
securities, when-issued securities, delayed-delivery securities, options on
securities and securities indices, futures contracts and options thereon,
illiquid or restricted securities, repurchase agreements and lending portfolio
securities. These investment practices and attendant risks are described in
"Investment Practices" in this prospectus or in the SAI.
There are significant risks inherent in the investment objective and policies
of the Real Estate Securities Portfolio. Because of its objective of investing
in, among other things, the securities of issuers that own, construct, manage,
or sell residential, commercial, or industrial real estate, it is subject to all
of the risks associated with the ownership of real estate. These risks include:
declines in the value of real estate, adverse changes in the climate for real
estate, risks related to general and local economic conditions, over-building
and increased competition, increases in property taxes and operating expenses,
changes in zoning laws, casualty or condemnation losses, limitations on rents,
changes in neighborhood values, the appeal of properties to tenants, leveraging
of interests in real estate, increases in prevailing interest rates and costs
resulting from clean-up of environmental problems or liability to third parties
for damages arising from environmental problems. Likewise, because of its
objective of investing in the securities of issuers whose products and services
are related to the real estate industry, it is subject to the risk that the
value of such securities will be adversely affected by one or more of the
foregoing risks.
Because the Portfolio may acquire debt securities of issuers primarily engaged
in or related to the real estate industry, it also could conceivably own real
estate directly as a result of a default on such securities. Any rental income
or income from the disposition of such real estate could adversely affect its
ability to retain its tax status as a regulated investment company. See "Taxes."
In addition to the risks discussed above, equity real estate investment trusts
may be affected by any changes in the value of the underlying property owned by
the trusts, while mortgage real estate investment trusts may be affected by the
quality of any credit extended. Further, equity and mortgage real estate
investment trusts are dependent upon management skill, are not diversified, and
are therefore subject to the risk of financing single or a limited number of
projects. Such trusts are also subject to heavy cash flow dependency, defaults
by borrowers, self liquidation, and the possibility of failing to qualify for
special tax treatment under Subchapter M of the Internal Revenue Code and to
maintain an exemption under the Investment Company Act of 1940. Finally, certain
real estate investment trusts may be self-liquidating in that a specific term of
existence is provided for in the trust document. Such trusts run the risk of
liquidating at an economically inopportune time. See "Investment Practices."
INVESTMENT PRACTICES
In pursuing their investment objectives, the Portfolios may engage in the
following investment practices.
Loans of Portfolio Securities
Each Portfolio may from time to time lend securities it holds to brokers,
dealers, and financial institutions, up to a maximum of 20% of the total value
of that Portfolio's assets. Such loans will be secured by collateral in the form
of cash or U.S. Treasury securities, which will be maintained in an amount at
least equal to the current market value of the loaned securities. Each Portfolio
will continue to receive interest and dividends on the loaned securities during
the term of its loans, and, in addition, will receive either a fee from the
borrower or interest earned from the investment of cash collateral in short-term
securities. Each Portfolio also will receive any gain or loss in the market
value of its loaned securities and of securities in which cash collateral is
invested during the term of the loan. The primary risk involved in lending
securities is that the borrower will fail financially and not return the loaned
securities at a time when the collateral is insufficient to replace the full
amount of the loaned securities. In order to minimize this risk, the Portfolios
will make loans of securities only to firms determined by the Adviser (under the
supervision of the board of directors) to be creditworthy.
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Short-Term Money Market Instruments
All of the Portfolios may, to varying degrees, also invest in short-term money
market instruments, including repurchase agreements, and when-issued and
delayed-delivery securities. A repurchase agreement is a transaction in which a
Portfolio buys a security at one price and simultaneously agrees to sell that
same security back to the original owner at a higher price. The Adviser (under
the supervision of the board of directors) reviews the creditworthiness of the
other party to the agreement and must find it satisfactory before engaging in a
repurchase agreement. In the event of the bankruptcy of the other party, the
Portfolio could experience delays in recovering its money, may realize only a
partial recovery or even no recovery, and may also incur disposition costs.
When-issued and delayed delivery securities are discussed in "Investment
Practices" in the SAI.
Foreign Investments and Currency
The Common Stock Index Portfolio, Government Securities Portfolio and Total
Return Portfolio may each invest up to 10% of their total assets, taken at
market value at the time of acquisition, in securities of foreign issuers and in
non-dollar securities. In addition, each of these Portfolios may invest up to
25% of their total assets in securities of foreign issuers and in non-dollar
securities if certain guarantees exist. Foreign investments will qualify as
"guaranteed" if they are issued, assumed or guaranteed by either: (1) a foreign
government or political subdivision or instrumentality thereof; or (2) a foreign
issuer having a class of securities listed for trading on the New York Stock
Exchange; or, in the alternative, if they are assumed or guaranteed by domestic
issuers. These Portfolios will not concentrate their investments in any
particular foreign country. The International Equity Portfolio may, as described
above, invest all of its assets in the securities of foreign issuers and in
non-dollar securities.
Foreign Investments Generally. Investments in the securities of foreign
issuers or investments in non-dollar securities may offer potential benefits not
available from investments solely in securities of domestic issuers or dollar
denominated securities. Such benefits may include the opportunity to invest in
foreign issuers that appear to offer better opportunity for long-term capital
appreciation or current earnings than investments in domestic issuers, the
opportunity to invest in foreign countries with economic policies or business
cycles different from those of the United States and the opportunity to reduce
fluctuations in portfolio value by taking advantage of foreign securities
markets that do not necessarily move in a manner parallel to U.S. markets.
Investing in non-dollar securities or in the securities of foreign issuers
involves significant risks that are not typically associated with investing in
U.S. dollar denominated securities or in securities of domestic issuers. Such
investments may be affected by changes in currency rates, changes in foreign or
U.S. laws or restrictions applicable to such investments and in exchange control
regulations. For example, a decline in the currency exchange rate would reduce
the value of certain portfolio investments. In addition, if the exchange rate
for the currency in which a Portfolio receives interest payments declines
against the U.S. dollar before such interest is paid as dividends to
shareholders, the Portfolio may have to sell portfolio securities to obtain
sufficient cash to pay such dividends. As discussed below, the International
Equity Portfolio may employ certain investment techniques to hedge its foreign
currency exposure; however, such techniques also entail certain risks. Some
foreign stock markets may have substantially less volume than, for example, the
New York Stock Exchange and securities of some foreign issuers may be less
liquid than securities of comparable domestic issuers. Commissions and dealer
mark-ups on transactions in foreign investments may be higher than for similar
transactions in the United States. In addition, clearance and settlement
procedures may be different in foreign countries and, in certain markets, on
certain occasions, such procedures have been unable to keep pace with the volume
of securities transactions, thus making it difficult to conduct such
transactions. For example, delays in settlement could result in temporary
periods when a portion of the assets of a Portfolio are uninvested and no return
is earned thereon. The inability of a Portfolio to make intended investments due
to settlement problems could cause it to miss attractive investment
opportunities. Inability to dispose of portfolio securities or other investments
due to settlement problems could result either in losses to a Portfolio due to
subsequent declines in value of the portfolio investment or, if the Portfolio
has entered into a contract to sell the investment, could result in possible
liability to the purchaser.
Foreign issuers are not generally subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. There may be less publicly available information about a foreign
issuer than about a domestic one. In addition, there is generally less
government regulation of stock exchanges, brokers, and listed and unlisted
issuers in foreign countries than in the United States. Furthermore, with
respect to certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, imposition of withholding taxes on dividend or interest
payments, limitations on the removal of funds or other assets of the Portfolio,
or political or social instability or diplomatic developments which could affect
investments in those countries. Individual foreign economies also may differ
favorably or unfavorably from the United States economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position.
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Investments in ADRs, EDRs and GDRs. Many securities of foreign issuers are
represented by ADRs, EDRs and GDRs. The Common Stock Index Portfolio, Government
Securities Portfolio, Total Return Portfolio and International Equity Portfolio
may all invest in ADRs, EDRs and GDRs. ADRs represent the right to receive
securities of foreign issuers deposited in a domestic bank or a foreign
correspondent bank. Prices of ADRs are quoted in U.S. dollars, and ADRs are
traded in the United States on exchanges or over-the- counter and are sponsored
and issued by domestic banks. ADRs do not eliminate all the risk inherent in
investing in the securities of foreign issuers. To the extent that a Portfolio
acquires ADRs through banks which do not have a contractual relationship with
the foreign issuer of the security underlying the ADR to issue and service such
ADRs, there may be an increased possibility that the Portfolio would not become
aware of and be able to respond to corporate actions such as stock splits or
rights offerings involving the foreign issuer in a timely manner. In addition,
the lack of information may result in inefficiencies in the valuation of such
instruments. However, by investing in ADRs rather than directly in the stock of
foreign issuers, a Portfolio will avoid currency risks during the settlement
period for either purchases or sales. In general, there is a large, liquid
market in the United States for ADRs quoted on a national securities exchange or
the NASD's national market system. The information available for ADRs is subject
to the accounting, auditing and financial reporting standards of the domestic
market or exchange on which they are traded, which standards are more uniform
and more exacting than those to which many foreign issuers may be subject.
EDRs and GDRs are receipts evidencing an arrangement with a non-U.S. bank
similar to that for ADRs and are designed for use in non-U.S. securities
markets. EDRs and GDRs are not necessarily quoted in the same currency as the
underlying security.
Investments in Emerging Markets. The International Equity Portfolio may invest
in securities of issuers located in countries with emerging economies and or
securities markets. These countries are located in the Asia-Pacific region,
Eastern Europe, Central and South America and Africa. Political and economic
structures in many of these countries may be undergoing significant evolution
and rapid development, and such countries may lack the social, political and
economic stability characteristic of more developed countries. Certain of these
countries may have in the past failed to recognize private property rights and
have at times nationalized or expropriated the assets of private companies. As a
result, the risks of foreign investment generally including the risks of
nationalization or expropriation of assets, may be heightened. In addition,
unanticipated political or social developments may affect the values of the
International Equity Portfolio's investments in those countries and the
availability to the Portfolio of additional investments in those countries.
The small size and inexperience of the securities markets in certain of these
countries and the limited volume of trading in securities in those countries may
also make the International Equity Portfolio's investments in such countries
illiquid and more volatile than investments in Japan or most Western European
countries, and the Portfolio may be required to establish special custody or
other arrangements before making certain investments in those countries. There
may be little financial or accounting information available with respect to
issuers located in certain of such countries, and it may be difficult as a
result to assess the value or prospects of an investment in such issuers. The
laws of some foreign countries may limit the ability of the Portfolio to invest
in securities of certain issuers located in those countries.
Foreign Currency Transactions. Because investment in foreign issuers will
usually involve currencies of foreign countries, and because the Common Stock
Index Portfolio, Government Securities Portfolio, Total Return Portfolio and
International Equity Portfolio may have currency exposure independent of their
securities positions, the value of the assets of these Portfolios as measured in
U.S. dollars may be affected by changes in foreign currency exchange rates. To
the extent that a Portfolio's assets consist of investments quoted or
denominated in a particular currency, the Portfolio's exposure to adverse
developments affecting the value of such currency will increase. The
International Equity Portfolio often has substantial currency exposure both from
investments quoted or denominated in foreign currencies and from its currency
positions.
Currency exchange rates may fluctuate significantly over short periods of time
causing, along with other factors, a Portfolio's net asset value to fluctuate as
well. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or anticipated changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates also
can be affected unpredictably by intervention by U.S. or foreign governments or
central banks, or the failure to intervene, or by currency controls or political
developments in the U.S. or abroad. To the extent that a substantial portion of
a Portfolio's total assets, adjusted to reflect the Portfolio's net position
after giving effect to currency transactions, is denominated or quoted in the
currencies of foreign countries, the Portfolio will be more susceptible to the
risk of adverse economic and political developments within those countries.
In addition to investing in securities denominated or quoted in a foreign
currency, the International Equity Portfolio may engage in a variety of foreign
currency management practices described below. It also may hold foreign currency
received in connection with investments in foreign securities when, in the
judgment of the Adviser, it would be beneficial to convert such currency into
U.S. dollars at a later date, based on anticipated changes in the relevant
exchange rate. The Portfolio will incur costs in connection with conversions
between various currencies.
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Forward Foreign Currency Exchange Contracts. The International Portfolio may
purchase or sell forward foreign currency exchange contracts for hedging
purposes and to seek to increase total return. When purchased or sold for the
purpose of seeking to increase total return, forward foreign currency exchange
contracts are considered speculative. In addition, the Portfolio may enter into
forward foreign currency exchange contracts in order to protect against
anticipated changes in future foreign currency exchange rates. The International
Equity Portfolio also may engage in cross-hedging by using forward contracts in
a currency different from that in which the hedged security is denominated or
quoted if the Adviser determines that there is a pattern of correlation between
the two currencies.
The International Equity Portfolio may enter into contracts to purchase
foreign currencies to protect against an anticipated rise in the U.S. dollar
price of securities it intends to purchase. It may enter into contracts to sell
foreign currencies to protect against the decline in value of its foreign
currency denominated or quoted portfolio securities, or a decline in the value
of anticipated dividends from such securities, due to a decline in the value of
foreign currencies against the U.S. dollar. Contracts to sell foreign currency
could limit any potential gain that might be realized by the Portfolio if the
value of the hedged currency increased. If the International Equity Portfolio
enters into a forward foreign currency exchange contract to sell foreign
currency to seek to increase total return or to buy foreign currency for any
reason, the Portfolio will be required to place cash, U.S. Government Securities
or high grade liquid debt securities in a segregated account with the Fund's
custodian in an amount equal to the value of the Portfolio's total assets
committed to the consummation of the forward contract. If the value of the
securities placed in the segregated account declines, additional cash or
securities will be placed in the segregated account so that the value of the
account will equal the amount of the Portfolio's commitment with respect to the
contract.
Forward contracts are subject to the risk that the counterparty to such
contract will default on its obligations. Since a forward foreign currency
exchange contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive the Portfolio of unrealized profits, transaction
costs or the benefits of a currency edge or force the Portfolio to cover its
purchase or sale commitments, if any, at the current market price.
Options on Currencies. The International Equity Portfolio may purchase and
sell (write) put and call options on foreign currencies for the purpose of
protecting against declines in the U.S. dollar value of foreign portfolio
securities and anticipated dividends on such securities and against increases in
the U.S. dollar cost of foreign securities to be acquired. The International
Equity Portfolio may use options on currency to cross-hedge, which involves
writing or purchasing options on one currency to hedge against changes in
exchange rates for a different currency, if there is a pattern of correlation
between the two currencies. As with other kinds of option transactions, however,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received. The Portfolio could be required
to purchase or sell foreign currencies at disadvantageous exchange rates,
thereby incurring losses. The purchase of an option on foreign currency may
constitute an effective hedge against exchange rate fluctuations; however, in
the event of exchange rate movements adverse to the Portfolio's position, the
Portfolio may forfeit the entire amount of the premium plus related transaction
costs. In addition, the Portfolio may purchase call or put options on currency
to seek to increase total return when the Adviser anticipates that the currency
will appreciate or depreciate in value, but the securities quoted or denominated
in that currency do not present attractive investment opportunities and are not
being held in the Portfolio. When purchased or sold to increase total return,
options on currencies are considered speculative. Options on foreign currencies
to be written or purchased by the Portfolio will be traded on U.S. and foreign
exchanges or over-the- counter. See "Writing Covered Call and Put Options and
Purchasing Call and Put Options" below for a discussion of the liquidity risks
associated with options transactions.
Currency Swaps. The International Equity Portfolio may enter into currency
swaps for both hedging purposes and to seek to increase total return. Currency
swaps involve the exchange by the Portfolio with another party of their
respective rights to make or receive payments in specified currencies. Since
currency swaps are individually negotiated, the Portfolio is expected to achieve
an acceptable degree of correlation between its portfolio investments and its
currency swap positions entered into for hedging purposes. Currency swaps
usually involve the delivery of the entire principal value of one designated
currency in exchange for the other designated currency. Therefore, the entire
principal value of a currency swap is subject to the risk that the other party
to the swap will default on its contractual delivery obligations. The Fund will
maintain in a segregated account with its custodian cash and liquid high-grade
debt securities equal to the net amount, if any, of the excess of the
Portfolio's obligations over its entitlements with respect to swap transactions.
To the extent that the net amount of a swap is held in a segregated account
consisting of cash and high-grade liquid debt securities, the Fund believes that
swaps do not constitute senior securities under the Investment Company Act of
1940 and, accordingly, will not treat them as being subject to the Portfolio's
borrowing restriction.
The use of currency swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Adviser is incorrect in its forecasts
of market values and currency exchange rates, the investment performance of the
International Equity Portfolio would be less favorable than it would have been
if swaps were not used.
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Writing Covered Call and Put Options and Purchasing Call and Put Options
The Common Stock Index Portfolio, Government Securities Portfolio,
International Equity Portfolio and the Real Estate Securities Portfolio may
write exchange-traded covered call and put options on or relating to specific
securities in order to earn additional income or, in the case of a call written,
to minimize or hedge against anticipated declines in the value of its portfolio
securities. The Total Return Portfolio may write covered call options on its
portfolio securities in amounts up to 10% of its total assets in order to earn
additional income or to minimize or hedge against anticipated declines in the
value of those securities. All call options written by these Portfolios are
covered, which means that the Portfolio will own the securities subject to the
option as long as the option is outstanding. All put options written by these
Portfolios are covered, which means that the Portfolio has deposited with its
custodian cash, U.S. Government securities or other high-grade liquid debt
securities with a value at least equal to the exercise price of the option. Call
and put options written by a Portfolio may also be covered to the extent that
the Portfolio's liabilities under such options are offset by its rights under
call or put options purchased by the Portfolio and call options written by a
Portfolio may also be covered by depositing cash or securities with its
custodian in the same manner as written puts are covered.
Through the writing of a covered call option a Portfolio receives premium
income but obligates itself to sell to the purchaser of such an option the
particular security underlying the option at a specified price at any time prior
to the expiration of the option period, regardless of the market value of the
security during this period. Through the writing of a covered put option, a
Portfolio receives premium income but obligates itself to purchase a particular
security underlying the option at a specified price at any time prior to the
expiration of the option period, regardless of market value during the option
period.
The Common Stock Index Portfolio, International Equity Portfolio and Real
Estate Securities Portfolio may each, in accordance with its investment
objective and investment program, also write exchange-traded covered call and
put options on stock indices. These Portfolios may write such options for the
same purposes as each may engage in such transactions with respect to individual
portfolio securities, that is, to generate additional income or as a hedging
technique to minimize anticipated declines in the value of the Portfolio's
securities. In economic effect, a stock index call or put option is similar to
an option on a particular security, except that the value of the option depends
on the weighted value of the group of securities comprising the index, rather
than a particular security, and settlements are made in cash rather than by
delivery of a particular security.
The Common Stock Index Portfolio, Government Securities Portfolio,
International Equity Portfolio and Real Estate Securities Portfolio may each
also purchase exchange-traded call and put options with respect to securities
and, except for the Government Securities Portfolio, with respect also to stock
indices that correlate with its particular portfolio securities. All four
Portfolios may purchase put options for defensive purposes in order to protect
against an anticipated decline in the value of their portfolio securities. As
the holder of a put option with respect to individual securities, each has the
right to sell the securities underlying the options and to receive a cash
payment at the exercise price at any time during the option period. As the
holder of a put option on an index, a Portfolio has the right to receive, upon
exercise of the option, a cash payment equal to a multiple of any excess of the
strike price specified by the option over the value of the index.
These four Portfolios may purchase call options on individual securities (or,
except for the Government Securities Portfolio, on stock indices) in order to
take advantage of anticipated increases in the price of those securities by
purchasing the right to acquire the securities underlying the option (or, with
respect to options on indices, to receive income equal to the value of such
index over the strike price). As the holder of a call option with respect to
individual securities, the Portfolios obtain the right to purchase the
underlying securities at the exercise price at any time during the option
period. As the holder of a call option on a stock index, a Portfolio obtains the
right to receive, upon exercise of the option, a cash payment equal to the
multiple of any excess of the value of the index on the exercise date over the
strike price specified in the option.
The Government Securities Portfolio and the International Equity Portfolio may
also write and purchase unlisted covered call and put options. Such options are
not traded on an exchange and may not be as actively traded as listed
securities, making the valuation of these securities more difficult. In
addition, an unlisted option entails a risk not found in connection with listed
options -- that the party on the other side of the option transaction will
default. This may make it impossible to close out an unlisted option position in
some cases, and profits may be lost thereby. Except as described below, such
unlisted over-the-counter options will generally be considered illiquid
securities. The Government Securities Portfolio and International Equity
Portfolio will engage in such transactions only with firms of sufficient credit
to minimize these risks. Where one of these Portfolios has entered into
agreements with primary dealers with respect to the unlisted options it has
written, and such agreements would enable the Portfolio to have an absolute
right to repurchase, at a pre-established formula price, the over-the-counter
options written by it, the Portfolio will treat as illiquid only the amount
equal to the formula price described above less the amount by which the option
is "in-the-money."
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Option-related investment practices involve certain risks that are different
in some respects from investment risks associated with similar funds which do
not engage in such activities. These risks include the following: writing
covered call options -- the inability to effect closing transactions at
favorable prices and the inability to participate in the appreciation of the
underlying securities above an amount equal to the exercise price plus the
premium; writing covered put options -- the inability to effect closing
transactions at favorable prices and the obligation to purchase the specified
securities or to make a cash settlement on a stock index at prices that may not
reflect current market values; and purchasing put and call options -- possible
loss of the entire premium paid.
In addition, the effectiveness of hedging the Common Stock Index Portfolio,
International Equity Portfolio and Real Estate Securities Portfolio through the
purchase or sale (writing) of stock index options will depend upon the extent to
which price movements in the Portfolio's holdings being hedged correlate with
price movements in the selected stock index. Perfect correlation may not be
possible because the securities held or to be acquired by the Portfolio may not
exactly match the composition of the stock index on which options are purchased
or written.
As to all options, if the Advisers' forecasts regarding movements in
securities prices or interest rates are incorrect, a Portfolio's investment
results might have been more favorable without the hedge. Because of these
risks, the use of "options" related investment practices requires special skills
in addition to those needed to select portfolio securities. A more detailed
description of these investment practices and their associated risks is
contained in the SAI.
Financial Futures Contracts and Options on Such Contracts
The Common Stock Index Portfolio, Government Securities Portfolio,
International Equity Portfolio, and Real Estate Securities Portfolio may
purchase and sell exchange-traded financial futures contracts and may write
covered call options and purchase put and call options on financial futures
contracts as a hedge to protect against anticipated changes in prevailing
interest rates, currency exchange rates, overall prices of securities in which
each may invest, or to earn additional income. The Common Stock Index Portfolio
may write covered put options on financial futures contracts for the same
purposes.
Financial futures contracts consist of interest rate futures contracts, stock
index futures contracts and currency futures contracts. An interest rate futures
contract is a contract to buy or sell specified debt securities at a future time
for a fixed price. A stock index futures contract is similar in economic effect,
except that rather than being based on specified debt securities, it is based on
a specified index of stocks and not the stocks themselves. A currency futures
contract is a contract to purchase or sell a specific amount of foreign currency
at a future time at a fixed price.
To hedge against the possibility that increases in interest rates or other
factors may result in a general decline in prices of securities owned by it, the
Government Securities Portfolio and Real Estate Securities Portfolio may sell
interest rate futures contracts. To hedge against the possibility of a general
decline in the prices of securities owned by it, the Common Stock Index
Portfolio, International Equity Portfolio and Real Estate Securities Portfolio
may sell stock index futures contracts. To hedge against the possibility of an
adverse change in currency exchange rates, the International Equity Portfolio
may sell currency futures contracts. Assuming that any decline in the securities
or currency being hedged is accompanied by a decline in the debt instrument or
stock index or currency chosen as a hedge, the sale of a futures contract on
that debt instrument, stock index or currency may generate gains that can wholly
or partially offset any decline in the value of the Portfolio's securities or
currency exposure which have been hedged.
To hedge against the possibility of lower long-term interest rates and likely
concomitant increase in prices of securities owned by it, the Government
Securities Portfolio and Real Estate Securities Portfolio may purchase interest
rate futures contracts. Likewise, to hedge against increases in equity prices,
the Common Stock Index Portfolio, International Equity Portfolio and Real Estate
Securities Portfolio may purchase stock index futures contracts. To hedge
against the possibility of an adverse change in currency exchange rates, the
International Equity Portfolio may purchase currency futures contracts. For
these Portfolios, such a strategy is intended to secure a position in the
futures market intended to approximate the economic equivalent of a position in
the securities market. When used as hedges, the Portfolios will purchase
appropriate financial futures contracts only when each intends to purchase the
underlying securities that may be affected by such increases in equity prices or
decreases in interest rates (as the case may be) and will purchase such
financial futures contracts in approximately the amount being hedged. When used
as hedges, the Advisers expect that purchases of the underlying securities will,
in fact, be made a substantial majority of the time.
All four Portfolios may purchase and sell exchange-traded financial futures
contracts for non-hedging purposes such as seeking additional income or
otherwise seeking to increase total return.
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All four Portfolios may write covered call options and may purchase put and
call options on futures contracts of the type which that Portfolio is permitted
to purchase and sell in accordance with its investment objective and investment
program, and may enter into closing transactions with respect to such options on
futures contracts written or purchased. Likewise, the Common Stock Index
Portfolio may write covered put options on stock index futures contracts. An
option to acquire a financial futures contract gives the purchaser thereof the
right to assume a position in the underlying futures contract, and, therefore,
can serve the same hedging function as owning the futures contract directly.
The Common Stock Index Portfolio may seek to close out (at its market price in
the secondary market) a put option it has written before the option has expired.
If the secondary market is not liquid for that option, however, the Portfolio
must continue to be prepared to pay the strike price while the option remains
outstanding, regardless of price changes, and must continue to set aside liquid
assets to cover this position.
None of the Portfolios will enter into any financial futures contract or
purchase any option thereon, if, immediately thereafter, the total amount of its
assets required to be on deposit as margin to secure its obligations under open
futures contracts, plus the amount of premiums paid by the Portfolio for
outstanding options to purchase futures contracts, would exceed 5% of the market
value of the Portfolio's total assets.
The use of futures contracts by these Portfolios entails certain risks,
including but not limited to the following: no assurance that futures contract
transactions can be offset at favorable prices; possible reduction of a
Portfolio's income due to the use of hedging; possible reduction in value of
both the securities hedged and the hedging instrument; possible lack of
liquidity due to daily limits on price fluctuations; imperfect correlation
between the futures contract and the securities being hedged; and potential
losses in excess of the amount initially invested in the futures contracts
themselves. If expectations regarding movements in securities prices or interest
rates are incorrect, a Portfolio might have experienced better investment
results without hedging. The use of futures contracts and options on futures
contracts requires special skills in addition to those needed to select
portfolio securities. A further discussion of futures contracts and their
associated risks is contained in the SAI.
Restricted Securities and Other Illiquid Investments
The Adviser is responsible for determining the value and liquidity of
investments held by each Portfolio. Investments may be illiquid because of the
absence of a trading market, making it difficult to value them or dispose of
them promptly at an acceptable price. The Common Stock Index Portfolio,
Government Securities Portfolio, Money Market Portfolio and Total Return
Portfolio will each not purchase or otherwise acquire any investment, if as a
result, more than 10% of its net assets (taken at current value) would be
invested instruments that are illiquid by virtue of the absence of a readily
available market. The International Equity Portfolio and the Real Estate
Securities Portfolio will each not purchase or otherwise acquire any investment,
if as a result, more than 15% of its net assets (taken at current value) would
be invested instruments that are illiquid by virtue of the absence of a readily
available market or because they are "restricted securities".
Illiquid investments include most repurchase agreements maturing in more than
seven days, currency swaps, time deposits with a notice or demand period of more
than seven days, certain over-the-counter option contracts (and segregated
assets used to cover such options), participation interests in loans, and
restricted securities. A restricted Security is one that has a contractual
restriction on resale or cannot be resold publicly until it is registered under
the Securities Act of 1933.
The foregoing illiquid investment restrictions do not apply to purchases of
restricted securities by the International Equity or Real Estate Securities
Portfolios eligible for sale to qualified institutional purchasers in reliance
upon Rule 144A under the Securities Act of 1933 that are determined to be liquid
by the Fund's board of directors or by the Adviser under board-approved
procedures. Such guidelines would take into account trading activity for such
securities and the availability of reliable pricing information, among other
factors. To the extent that qualified institutional buyers become for a time
uninterested in purchasing these restricted securities, a Portfolio's holdings
of those securities may become illiquid. The foregoing investment restrictions
also do not apply to purchases by the International Equity Portfolio of
securities of foreign issuers offered and sold outside the United States in
reliance upon the exemption from registration provided by Regulation S under the
Securities Act of 1933.
Lower-Rated Securities
The Total Return Portfolio and the Real Estate Securities Portfolio may invest
in debt securities (and the Real Estate Securities Portfolio in convertible
securities) with lower ratings which generally carry greater risk of default and
are generally subject to greater market value fluctuations. If held by either
Portfolio in significant amounts, such securities would increase financial risk
and income
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fluctuation. Lower-rated debt and convertible securities have speculative
characteristics and changes in economic conditions and other circumstances are
more likely to weaken the capacity of issuers of such securities to make
principal and interest payments than would be the case as to issuers of higher
rated (i.e., investment grade) debt securities. In some cases, lower-rated debt
and convertible securities may be highly speculative, have poor prospects of
reaching investment grade standing or even be in default. See the SAI for a
description of securities ratings and of lower-rated securities, including
further discussion of the risks of investing in such instruments.
Borrowing
From time to time, the International Equity Portfolio may increase its
ownership of various investments by borrowing from banks and investing the
borrowed funds (on which the Portfolio pays interest). The Portfolio may borrow
only up to 10% of the value of its total assets, subject to the 300% asset
coverage requirement under the Investment Company Act of 1940. Purchasing
investments with borrowed funds is a speculative investment method known as
"leverage," that may subject the Portfolio to relatively greater risks and costs
(which may include commitment fees and/or the cost of maintaining minimum
average balances with the lender) than would otherwise be the case, including
possible reduction of income and increased fluctuation of net asset value per
share. A further discussion of borrowing is contained in the SAI.
Real Estate Investment Trusts
The Real Estate Securities Portfolio may invest in shares of real estate
investment trusts ("REITs"). REITs are pooled investment vehicles that invest
primarily in income producing real estate or real estate related loans or
interests therein. REITs are generally classified as equity REITs, mortgage
REITs or a combination of equity and mortgage REITs. Equity REITs invest the
majority of their assets directly in real property and derive income primarily
from the collection of rents. Equity REITs can also realize capital gains by
selling properties that have appreciated in value. Mortgage REITs invest the
majority of their assets in real estate mortgages and derive income from the
collection of interest payments. REITs are not taxed on income distributed to
shareholders provided they comply with several requirements of the Code.
DETERMINATION OF NET ASSET VALUE
The net asset value of each Portfolio is determined as of the time of the
close of trading on the New York Stock Exchange, (currently at 4:00 PM, New York
City time) on each day when the New York Stock Exchange is open except as noted
below. The New York Stock Exchange is scheduled to be open Monday through Friday
throughout the year, except for certain federal and other holidays. The net
asset value of each Portfolio will not be calculated on the Friday following
Thanksgiving or on December 31 when December 31 falls on a weekday. The net
asset value of a Portfolio is determined by adding the values of all securities,
cash and other assets (including accrued but uncollected interest and dividends)
of that Portfolio and subtracting all liabilities (including accrued expenses
but excluding capital and surplus). The net asset value of a share is determined
by dividing the net asset value of a Portfolio by the number of outstanding
shares of that Portfolio. Except for debt instruments with remaining maturities
of 60 days or less, portfolio securities generally will be valued based upon
their market value. Debt instruments with remaining maturities of 60 days or
less will be valued, generally, on an amortized cost basis. Expenses, including
the investment advisory fee payable to AAI, are accrued daily.
PURCHASE AND REDEMPTION OF FUND SHARES
Pursuant to a distribution agreement dated April 2, 1996, Forth Financial
Securities Corporation ("FFSC") acts without remuneration as the Fund's
distributor in the distribution of the shares of each Portfolio. FFSC is a
wholly-owned subsidiary of Forth Financial Resources, Ltd., which is in turn a
wholly-owned subsidiary of GNA Corporation. FFSC is located at 6610 West Broad
Street, Richmond, Virginia 23230. Mr. John J. Palmer, President of the Fund, and
Mr. Scott Reeks, Treasurer of the Fund, are both affiliated with FFSC. FFSC has
no obligation under the distribution agreement to sell any stated number of
shares.
Shares of the Portfolios are sold in a continuous offering and are authorized
to be offered to the Accounts to support the variable contracts and to the Plan
and to unaffiliated plans for the benefit of Plan and unaffiliated plan
participants. Net purchase payments under the variable contracts are placed in
one or more subaccounts of the Accounts and the assets of each such subaccount
are invested in the shares of the Portfolio corresponding to that subaccount.
The Accounts purchase and redeem shares of the Portfolios for their subaccounts
at net asset value without sales or redemption charges. Likewise, the Plan
purchases and redeems shares of the Portfolios for its participants at net asset
value without sales or redemption charges. In the future, unaffiliated plans may
purchase and redeem shares of the Portfolios on a basis to be negotiated between
the Fund or FFSC or both and such plans.
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For each day on which a Portfolio's net asset value is calculated, the
Accounts transmit to the Fund any orders to purchase or redeem shares of the
Portfolio(s) based on the net purchase payments, redemption (surrender)
requests, and transfer requests from variable contract owners, annuitants and
beneficiaries that have been processed on that day. Similarly, the Plan
transmits to the Fund any orders to purchase or redeem shares of the
Portfolio(s) based on the instructions of Plan participants. The Accounts and
the Plan purchase and redeem shares of each Portfolio at the Portfolio's net
asset value per share calculated as of the day the Fund receives the order,
although such purchases and redemptions may be executed the next morning. Money
received by the Fund from the Accounts or the Plan for the purchase of shares of
International Equity Portfolio may not be invested by the Portfolio until the
day following the execution of such purchases. Payment for shares redeemed will
be made within seven days after receipt of a proper notice of redemption, except
that the right of redemption may be suspended or payments postponed when
permitted by applicable laws and regulations.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Distributions
It is the Fund's intention to distribute, as dividends, substantially all of
the net investment income, if any, from each of the Portfolios. All dividends of
a Portfolio are subsequently reinvested in additional shares of that Portfolio
at net asset value. For dividend purposes, net investment income of a Portfolio
consists of all payments of dividends or interest received by that Portfolio
less realized investment losses, if any, and estimated expenses (including the
investment advisory fee). All net realized investment gains, if any, of a
Portfolio are expected to be declared and distributed annually.
Taxes
The Fund believes that each of the Portfolios will qualify as a regulated
investment company under Subchapter M of Chapter 1 of the Internal Revenue Code
of 1986 (the "Code"). Since the Fund intends to annually distribute
substantially all of its net income and gains to its shareholders, then under
the provisions of Subchapter M, the Fund should have little or no income taxable
to it under the Code. Distributions will be made, however, consistent with the
Code's rules defining a regulated investment company.
Each Portfolio of the Fund must meet several requirements to maintain its
status as a regulated investment company. These requirements include the
following: (1) at least 90% of the portfolio's gross income must be derived from
dividends, interest, payments with respect to securities loaned, and gains from
the sale or disposition of securities; (2) the portfolio's gains (without
reduction for losses) derived from sales of securities held for less than three
months must account for less than 30% of the Portfolio's gross income; and (3)
at the close of each quarter of the portfolio's taxable year, (a) at least 50%
of the value of the portfolio's assets must consist of cash, United States
Government securities and other securities (no more than 5% of the value of the
portfolio may consist of such other securities of any one issuer, and the
portfolio must not hold more than 10% of the outstanding voting stock of any
issuer), and (b) the portfolio must not invest more than 25% of the value of its
assets in the securities of any one issuer (other than United States Government
securities).
The Internal Revenue Service (the "Service") has ruled publicly that, for
purposes of various of the requirements described above, an exchange-traded call
option is a security and its issuer is the issuer of the underlying security,
not the writer of the option. Also, the Service has ruled privately (at the
request of a taxpayer other than the Fund) that, for purposes of the various
requirements described above (1) certain instruments on stock indices (including
exchange-traded options on a stock index, stock index futures, and options on
stock index futures) are treated as securities, the issuers of which are the
issuers of the stock underlying each index in proportion to the weighting of the
stocks in the computation of the index, and (2) certain instruments on United
States Government securities (including exchange-traded futures contracts,
options, and options on futures contracts) are treated as securities, the issuer
of which is the United States Government. In addition, with respect to certain
instruments, the Service has ruled privately (at the request of a taxpayer other
than the Fund) that gains includable in income solely by reason of
mark-to-market rules in the Code will be treated as gains derived from
securities held for at least three months for purposes of the 30% test described
above.
Since taxpayers other than the taxpayer requesting a private ruling from the
Service are not entitled to rely on the ruling, the Fund may, in its business
judgment, restrict a Portfolio's ability to enter into options or futures
transactions or engage in short-term trading and transactions in securities
(including options and futures contracts). For the same reason, the Fund may, in
its business judgment, require a Portfolio to defer the closing out of a
contract beyond the time when it might otherwise be advantageous to do so.
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Each of the Portfolios also intends to comply with section 817(h) of the Code
and the regulations issued thereunder, which impose certain investment
diversification requirements on life insurance companies' separate accounts
(such as the Accounts) that are used to fund benefits under variable life
insurance and variable annuity contracts. These requirements are in addition to
the requirements of subchapter M and of the Investment Company Act of 1940, and
may affect the securities in which a Portfolio may invest. In order to comply
with the current or future requirements of section 817(h) (or related provisions
of the Code), the Fund may be required, e.g., to alter the investment objectives
of one or more of the Portfolios. No such change of investment objectives will
take place without notice to the shareholders of an affected Portfolio, the
approval of a majority of the outstanding voting shares, and the approval of the
Securities and Exchange Commission, to the extent legally required.
Foreign Investments. Portfolios investing in foreign securities or currencies
may be required to pay withholding or other taxes to foreign governments.
Foreign tax withholding from dividends and interest, if any, is generally at a
rate between 10% and 35%. The investment yield of any Portfolio that invests in
foreign securities or currencies will be reduced by these foreign taxes.
Shareholders will bear the cost of any foreign tax withholding, but may not be
able to claim a foreign tax credit or deduction for these foreign taxes.
Portfolios investing in securities of passive foreign investment companies may
be subject to U.S. Federal income taxes and interest charges, and the investment
yield of a Portfolio making such investments will be reduced by these taxes and
interest charges. Shareholders will bear the cost of these taxes and interest
charges, but will not be able to claim a deduction for these amounts.
Additional Tax Considerations. If a Portfolio failed to qualify as a regulated
investment company, owners of variable life insurance and annuity contracts
based on the Portfolio (1) might be taxed currently on the investment earnings
under their contracts and thereby lose the benefit of tax deferral, and (2) the
Portfolio might incur additional taxes. In addition, if a Portfolio failed to
comply with the diversification requirements of the regulations under Subchapter
L of the Code, owners of variable life insurance and annuity contracts based on
the Portfolio would be taxed on the investment earnings under their contracts
and thereby lose the benefit of tax deferral. Accordingly, compliance with the
above rules is carefully monitored by the Advisers and it is intended that each
Portfolio will comply with these rules as they exist or as they may be modified
from time to time. Compliance with the tax requirements described above may
result in a reduction in the return under a Portfolio, since, to comply with the
above rules, the investments utilized (and the time at which such investments
are entered into and closed out) may be different from what the Advisers might
otherwise believe to be desirable.
It is not feasible to comment on all of the federal tax consequences
concerning the Portfolios. Since the shareholders of the Portfolios are
currently limited to the Accounts and the Plan, no further discussion of those
consequences is included herein. For information concerning the federal income
tax consequences to the owners of variable life insurance and annuity contracts,
see the prospectuses for the contracts.
MANAGEMENT OF THE FUND
Board of Directors
The Fund has a board of directors, the members of which are elected by the
shareholders. A majority of the directors are not associated with Life of
Virginia or an affiliated company. The Directors are responsible for the overall
management of the Fund and their duties include reviewing the results of the
Fund, monitoring investment activities and practices, and receiving and acting
upon future plans for the Fund.
Investment Adviser
Aon Advisors, Inc. ("AAI"), a wholly-owned subsidiary of Aon Corporation
("Aon"), is the investment adviser for the Fund. It is registered under the
Investment Advisers Act of 1940 and its principal office is located at 123 N.
Wacker Drive, Chicago, Illinois 60606. As of December 31, 1995, Mr. Patrick G.
Ryan, President and Chief Executive Officer of Aon, 123 North Wacker Drive,
Chicago, Illinois, 60606, owned directly and beneficially 13,464,000 shares
(12.46%) of the common stock of Aon.
In addition to the Fund, AAI provides investment advice and management to
other investment companies, pension plans, corporations, and other
organizations. As of December 31, 1995, the aggregated assets under management
were approximately $12 billion.
AAI manages the investments of the Common Stock Index Portfolio, Government
Securities Portfolio, Money Market Portfolio and Total Return Portfolio,
determining which securities to buy and sell for each, selecting the brokers and
dealers to effect the transactions, and negotiating commissions. In placing
orders for securities transactions, AAI's policy is to attempt to obtain the
most favorable price and efficient execution available. Subject to this policy,
AAI may also allocate brokerage to broker/dealers based upon their sale of Life
of Virginia variable life insurance and variable annuity contracts. AAI has
engaged investment sub-advisers to provide the day-to-day portfolio management
of the International Equity and Real Estate Securities Portfolios.
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AAI provides administrative services to the Fund and manages its business
affairs. In addition, AAI provides all executive, administrative, clerical and
other personnel necessary to operate the Fund and pays the salaries and other
costs of employing all these persons. AAI furnishes the Fund with office space,
facilities, and equipment and pays the day-to-day expenses related to the
operating and maintenance of such office space, facilities and equipment. Legal,
accounting and all other expenses incurred in registering securities of the Fund
under federal and state securities laws, and of organizing any new Portfolios of
the Fund are also paid by AAI.
The Fund is responsible for payment of all expenses it may incur in its
operation and all of its general administrative expenses except those expressly
assumed by AAI as described in the preceding paragraph. These include (by way of
description and not of limitation), any share redemption expenses, expenses of
portfolio transactions, shareholder servicing costs, pricing costs (including
the daily calculation of net asset value), interest on borrowings by the Fund,
charges of the custodian and transfer agent, if any, cost of auditing services,
non-interested directors' fees, legal expenses, state franchise taxes, certain
other taxes, investment advisory fees, certain insurance premiums, cost of
maintenance of corporate existence, investor services (including allocable
personnel and telephone expenses), costs of printing and mailing updated Fund
prospectuses to shareholders, proxy statements and shareholder reports, the cost
of paying dividends and capital gains distribution, capital stock certificates,
costs of directors and shareholder meetings, and any extraordinary expenses
including litigation costs in legal actions involving the Fund, or costs related
to indemnification of directors, officers and employees of the Fund.
AAI has agreed to reimburse the Fund for any amount by which the total
operating expenses of the Common Stock Index and Money Market Portfolios in any
fiscal year exceed .75% of the aggregate average daily net assets of those
Portfolios. AAI also has agreed to reimburse the Fund for any amount by which
the total operating expenses of the International Equity Portfolio in any fiscal
year exceeds 1.75% of the first $30 million of the aggregate average daily net
assets of that Portfolio and 1% of the aggregate average daily net assets in
excess of $30 million. With respect to Portfolios other than the foregoing three
Portfolios, AAI has agreed to reimburse the Fund for any amount by which the
total operating expenses of such Portfolios exceeds 1.5% of the first $30
million of the average daily net assets of those Portfolios and 1% of the amount
by which the average daily net assets of each of these Portfolios exceed $30
million. Effective July 1, 1995, on a voluntary basis, the Investment Adviser
has agreed to reimburse the International Equity and Real Estate Securities
Portfolios for expenses in excess of the following amounts: International Equity
Portfolio, 1.50% of the first $30 million of average daily net assets; Real
Estate Securities Portfolio, 1.25% of the first $30 million of average daily net
assets. For purposes of this reimbursement formula, "operating expenses" do not
include attorney's fees, court judgments or other litigation expenses or certain
costs relating to indemnification. Reimbursement of excess operating expenses,
as described above, cannot be changed without shareholder approval.
During the Fund's fiscal year ended December 31, 1995, the total operating
expenses incurred by the Fund's Portfolios (including the advisory fees paid to
AAI), before reimbursement, represented 0.66% of the average net assets of the
Common Stock Index Portfolio (formerly Common Stock Portfolio), 0.74% of the
average net assets of the Government Securities Portfolio (formerly Bond
Portfolio), 0.23% of the average net assets of the Money Market Portfolio, 0.69%
of the average net assets of the Total Return Portfolio, 2.17% of the average
net assets of the International Equity Portfolio, and 1.61% of the Real Estate
Securities Portfolio. During the Fund's fiscal year ended December 31, 1995, AAI
reimbursed the Fund for expenses in an amount representing 0.63% of the average
net assets of the International Equity Portfolio and 0.30% of the average net
assets of the Real Estate Securities Portfolio.
The Fund pays AAI monthly compensation in the form of an investment advisory
fee. The fee is accrued daily but paid to AAI monthly. The investment advisory
fee for each portfolio is based upon the average daily net assets of the
portfolio (see "Determination of Net Asset Value"), at the following annual
rates:
Common Stock Index Portfolio: .35%
Government Securities Portfolio, Money Market Portfolio and Total
Return Portfolio: .50% of the first $100,000,000; .45% of the next
$100,000,000; .40% of the next $100,000,000; .35% of the next
$100,000,000 and .30% of amounts in excess of $400,000,000.
International Equity Portfolio: 1.00% of the first $100,000,000; .95%
of the next $100,000,000; and .90% of amounts in excess of
$200,000,000.
Real Estate Securities Portfolio: .85% of the first $100,000,000; .80%
of the next $100,000,000; and .75% of amounts in excess of
$200,000,000.
During the Fund's fiscal year ended December 31, 1995, the Fund paid AAI
investment advisory fees in an amount representing .35% of the average net
assets of the Common Stock Index Portfolio (formerly Common Stock Portfolio),
.50% of the average net assets of the Government Securities Portfolio (formerly
Bond Portfolio), Money Market Portfolio and the Total Return Portfolio, 0.85% of
the average net assets of the Real Estate Securities Portfolio, and 1.0% of the
average net assets of the International Equity Portfolio.
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Investment Sub-Advisers
Perpetual Portfolio Management, Limited ("Perpetual"), a wholly-owned
subsidiary of Perpetual plc, is the investment sub-adviser for the International
Equity Portfolio. It is registered under the Investment Advisers Act of 1940 as
an investment adviser and has its principal offices at 48 Hart Street,
Henley-on-Thames, Oxfordshire, England RG9 2AZ. In addition to the International
Equity Portfolio, Perpetual provides investment advice and management to pension
plans, corporations and other institutional and individual clients. Although
Perpetual has no prior experience advising a U.S. mutual fund, it and its
affiliates currently manage over 29 unit trusts (the British term for mutual
funds) in the United Kingdom and overseas. As of December 31, 1995, Perpetual
and its affiliates managed approximately $7.5 billion in assets. As of December
31, 1995, Mr. Martyn Abib, Chairman of Perpetual plc, owned directly and
beneficially approximately 7,375,000 (26.57%) of the ordinary shares (i.e.,
common stock) of Perpetual plc. Perpetual plc has the same address as Perpetual.
Genesis Merchant Group/Seneca Capital Management, L.L.C., a limited liability
company, is the investment sub-adviser for the Real Estate Securities Portfolio.
Genesis is registered under the Investment Advisers Act of 1940 as an investment
adviser and has offices at 909 Montgomery Street, San Francisco, CA 94133.
Genesis has four principal stockholders. They are Will K. Weinstein, Gail P.
Seneca, Richard D. Little, and two corporations controlled by the Blank family
(J.B. Capital, Inc., and Stellar Capital, Inc.).
Perpetual and Genesis manage the investments of the International Equity
Portfolio and the Real Estate Securities Portfolio, respectively, determining
which securities or other investments to buy and sell for each, selecting the
brokers and dealers to effect the transactions, and negotiating commissions. In
placing orders for securities transactions, both Perpetual and Genesis follow
the AAI's policy of seeking to obtain the most favorable price and efficient
execution available.
For their services, AAI pays Perpetual and Genesis monthly compensation in the
form of an investment sub-advisory fee. The fee is paid by AAI monthly and is
based upon the average daily net assets (see "Purchase and Redemption of Fund
Shares") of the Portfolio that each sub-adviser manages, at the following annual
rates:
International Equity Portfolio: .50% of the first $100,000,000; .475%
of the next $100,000,000; and .45% of amounts in excess of
$200,000,000.
Real Estate Securities Portfolio: .425% of the first $100,000,000;
.40% of the next $100,000,000; and .375% of amounts in excess of
$200,000,000.
The Portfolio Managers
Michael A. Conway has been President of AAI since 1990. In that capacity he
oversees the investment management of all portfolios of the Fund. From
1985-1990 Mr. Conway was president of Manhattan National Corporation. Mr.
Conway holds a B.A. degree from the University of Illinois. He is a Chartered
Financial Analyst and a charter member of the International Society of Financial
Analysts.
Anthony A. Rettino, Jr., Portfolio Manager of the Government Securities
Portfolio and the Common Stock Index Portfolio, has been employed as a Senior
Portfolio Manager of AAI since 1992. Mr. Rettino holds a B.A. degree from the
University of Notre Dame and an M.B.A. degree from the University of Chicago.
Prior to joining AAI, Mr. Rettino was employed as a Project Manager for Morgan
Stanley and Company Inc. (from 1989-1991) and as a Senior Accountant for Price
Waterhouse (from 1986-1989).
Keith C. Lemmer, Portfolio Manager of the Money Market Portfolio, has been
employed as Senior Portfolio Manager of AAI since 1992. Mr. Lemmer holds a B.A.
degree from Western Illinois University and an M.B.A. degree from DePaul
University. He is a Certified Public Accountant and a Chartered Financial
Analyst. He is a member of the Association for Investment Management and
Research and the Investment Analysts Society of Chicago. Prior to 1992, Mr.
Lemmer was employed by AAI as a Portfolio Manager (from 1991-1992) and a Fixed
Income Analyst (from 1987-1991).
30
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John G. Lagedrost, Portfolio Manager of the Total Return Portfolio, has been
employed as a Senior Portfolio Manager of AAI since April 1995. Prior to joining
AAI, Mr. Lagedrost was employed by The First National Bank of Chicago ("First
Chicago") from 1979 to 1995. His final position at First Chicago was that of
Vice President in the Asset Management Group (from 1991-1995) where he was
responsible for the management of a portfolio of loans, leases and certain
private equity securities. Prior to that position, he was Vice President in
First Chicago's Mezzanine Finance Group (1987-1990) and managed privately-placed
subordinated debt investments which contained equity features. Mr. Lagedrost
holds a B.S. degree from Marquette University and a Masters of Management degree
from Northwestern University.
David Alan Shapiro is Portfolio Manager of the Real Estate Securities
Portfolio. In addition to his duties as Portfolio Manager of Genesis, Mr.
Shapiro is also a principal of Asset Holdings Group, a firm that engages in real
estate financing. Mr. Shapiro was employed as a portfolio manager of Genesis in
August 1995. Mr. Shapiro has been a principal of Asset Holdings Group since
February 1992. From February 1982 to February 1992 Mr. Shapiro was employed as
a Managing Director of The Adco Group, a real estate development and finance
company. Mr. Shapiro holds a B.A. degree from Columbia University and a J.D.
degree from the University of Arizona.
No single person or persons acts as portfolio manager(s) for the International
Equity Portfolio. All investment decisions for the International Equity
Portfolio are made by an investment committee at Perpetual.
31
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ADDITIONAL INFORMATION
Capital Stock
The Fund is currently issuing six classes of capital stock, representing
interests in the Common Stock Index Portfolio, the Government Securities
Portfolio, the Money Market Portfolio, the Total Return Portfolio, the
International Equity Portfolio and the Real Estate Securities Portfolio. All
shares of capital stock (including fractional shares) have equal rights with
regard to voting, redemptions, dividends, distributions, and liquidations with
respect to the portfolio in which they represent an interest. When issued,
shares are fully paid and nonassessable and do not have preemptive or conversion
rights or cumulative voting rights.
Contract Owner Voting Rights
With regard to matters for which the Investment Company Act of 1940 requires a
shareholder vote, Life of Virginia votes Fund shares held in an Account in
accordance with instructions received from owners of variable life insurance and
variable annuity contracts (or annuitants or beneficiaries thereunder) having a
voting interest in that Account. Each share has one vote and votes are counted
on an aggregate basis except as to matters where the interests of Portfolios
differ (such as approval of an investment advisory agreement or a change in the
fundamental investment policies). In such a case, the voting is on a
Portfolio-by-Portfolio basis. Fractional shares are counted. Shares held by the
Accounts for which no instructions are received are voted by Life of Virginia
for or against any proposition, or in abstention, in the same proportion as the
shares for which instructions have been received.
Plan Participant Voting Rights
With regard to matters for which the Investment Company Act of 1940 requires a
shareholder vote, Plan Trustees vote Fund shares held in the Plan in accordance
with instructions received from Plan participants having a voting interest in
the Plan. Each share has one vote and votes are counted on an aggregate basis
except as to matters where the interests of Portfolios differ (such as approval
of an investment advisory agreement or a change in the fundamental investment
policies). In such a case, the voting is on a Portfolio-by-Portfolio basis.
Fractional shares are counted. Shares for which no instructions are received are
voted by the Plan Trustees for or against any proposition, or in abstention, in
the same proportion as the shares for which instructions have been received.
Unaffiliated Plan Participant Voting Rights
With regard to matters for which the Investment Company Act of 1940 requires a
shareholder vote, trustees of unaffiliated plans are expected to vote Fund
shares held by their plans either in their own discretion or in accordance with
instructions received from participants in such plans if such participants have
a voting interest in such plans.
Annual Reports
The Fund's annual report to shareholders contains additional performance
information that will be made available upon request and without charge.
Inquiries
Contract owner and Plan participant inquiries should be sent to Life of
Virginia Series Fund, Inc. 6610 W. Broad Street, Richmond, Virginia 23230.
Custodian, Transfer and Dividend Paying Agent
Crestar Bank acts as Custodian of the Fund's (other than those of the
International Equity Portfolio) assets and also acts as its Transfer and
Dividend agent. The principal office of Crestar Bank is located at 919 East Main
Street, Richmond, Virginia 23219. Firstar Trust Company, 777 E. Wisconsin
Avenue, Milwaukee, Wisconsin 53202, is the Fund's custodian for the
International Equity Portfolio. Pursuant to a sub-custody agreement with Firstar
Trust Company, Chase Manhattan Bank, N.A., 1211 6th Avenue, New York, N.Y.
10036, serves as custodian for the overseas assets of the International Equity
Portfolio.
Legal Matters
Sutherland, Asbill & Brennan of Washington, D.C. is Counsel for the Fund. There
are no material legal proceedings in which the Fund is a party.
32
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PART B
STATEMENT OF ADDITIONAL INFORMATION
33
<PAGE>
LIFE OF VIRGINIA SERIES FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1996
This Statement of Additional Information is not a prospectus. Much of the
information contained in this Statement expands upon matters discussed in the
prospectus and should, therefore, be read in conjunction with the prospectus. To
obtain a copy of a prospectus with the same date as this Statement of Additional
Information, send a written request to Life of Virginia Series Fund, Inc., 6610
W. Broad Street, Richmond, Virginia 23230, or call (804)281-6000.
1
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
General Information
Prior History............................................................................................................. 3
The Portfolios............................................................................................................ 3
Portfolio Turnover Rate Calculation....................................................................................... 4
Investment Practices and Restrictions
Investment Practices...................................................................................................... 4
Investment Restrictions...................................................................................................14
Management of the Fund......................................................................................................17
Directors and Officers....................................................................................................17
AAI.......................................................................................................................18
Investment Advisory Agreement.............................................................................................19
Investment Advisory Fee...................................................................................................20
Investment Sub-Advisers...................................................................................................21
Investment Sub-Advisory Agreements........................................................................................21
Investment Sub-Advisory Fees..............................................................................................21
Reimbursement of Excess Operating Expenses................................................................................22
Securities Activities of the Adviser......................................................................................22
Portfolio Transactions and Brokerage........................................................................................23
Determination of Net Asset Value............................................................................................23
Dividends and Distributions.................................................................................................24
Redemption of Fund Shares...................................................................................................24
Additional Information
Life of Virginia..........................................................................................................25
Custodian, Dividend and Transfer Agent....................................................................................25
Independent Auditors......................................................................................................25
Legal Counsel.............................................................................................................25
Capital Stock.............................................................................................................25
Voting Rights.............................................................................................................26
Other Information.........................................................................................................26
Audited Financial Statements................................................................................................27
Appendix A..................................................................................................................
Appendix B..................................................................................................................
</TABLE>
2
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GENERAL INFORMATION
Life of Virginia Series Fund, Inc. (the "Fund") is an open-end management
investment company incorporated under the laws of the Commonwealth of Virginia
on May 14, 1984. The Fund consists of six separate investment portfolios (the
"Portfolios" or a "Portfolio"), each of which is, in effect, a separate mutual
fund. The Fund issues a separate class of capital stock for each Portfolio
representing fractional undivided interests in that Portfolio. An investor, by
investing in a Portfolio, becomes entitled to a pro-rata share of all dividends
and distributions arising from the net income and capital gains on the
investments of that Portfolio. Likewise, an investor shares pro-rata in any
losses of that Portfolio.
Pursuant to investment advisory agreements and subject to the authority of the
Fund's board of directors, Aon Advisors, Inc. ("AAI") serves as the Fund's
investment adviser and conducts the business and affairs of the Fund. AAI has
engaged Perpetual Portfolio Management, Limited ("Perpetual") as the investment
sub-adviser to provide day-to-day portfolio management for the International
Equity Portfolio and has engaged Genesis Merchant Group/Seneca Capital
Management, L.L.C. ("Genesis"), as the investment sub-adviser to provide day-
to-day portfolio management for the Real Estate Securities Portfolio. (As used
herein, "Adviser" shall refer to AAI and, where applicable, either Perpetual or
Genesis, or both, in their respective roles.)
PRIOR HISTORY
On May 1, 1993, pursuant to shareholder approval obtained on April 20, 1993,
the names and the investment objectives, policies and fundamental restrictions
of the Common Stock Index Portfolio, (formerly the Common Stock Portfolio), and
the Government Securities Portfolio, (formerly the Bond Portfolio) were changed.
The investment objective of the Common Stock Portfolio was intermediate and
long-term growth of capital, with reasonable income a consideration. The Common
Stock Portfolio sought to achieve this objective by investing principally in
common stocks and securities convertible into or with rights to purchase common
stocks. The investment objective of the Bond Portfolio was providing as high a
level of income as is consistent with the preservation of capital. It sought to
achieve this objective by investing primarily in corporate bonds and government
obligations.
THE PORTFOLIOS
The Common Stock Index Portfolio has the investment objective of providing
capital appreciation and accumulation of income that corresponds to the
investment return of the Standard & Poor's 500 Composite Stock Price Index (the
"S&P 500 Index"), through investment in common stocks traded on the New York
Stock Exchange and the American Stock Exchange and, to a limited extent, in the
over-the-counter markets. The Common Stock Index Portfolio will attempt to
achieve its objective by replicating the total return of the S&P 500 Index. To
the extent that it can do so consistent with the pursuit of its investment
objective, it will attempt to keep transaction costs low and minimize portfolio
turnover. To achieve its investment objective, the Common Stock Index Portfolio
purchases equity securities that will reflect, as a group, the total investment
return of the S&P 500 Index. Like the S&P 500 Index, the Common Stock Index
Portfolio will hold both dividend paying and non-dividend paying common stocks
comprising the S&P 500 Index. From time to time, adjustments will be made in the
Common Stock Index Portfolio's holdings due to changes in the composition or
weightings of issues comprising the S&P 500 Index. For the year ended December
31, 1994, the portfolio turnover rate for the Common Stock Index Portfolio was
4.31%. The reinvestment of assets occasioned by the change of this Portfolio's
investment objective (described above) during the year increased portfolio
turnover over what it otherwise would have been. For the year ended December 31,
1995, the portfolio turnover rate for the Common Stock Index Portfolio was
14.58%.
The Government Securities Portfolio has the investment objective of seeking
high current income and protection of capital through investment in intermediate
and long-term debt instruments issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. The Government Securities Portfolio may also
invest in U.S. Government debt instruments having maturities of less than one
year and in other high quality money market instruments. The Government
Securities Portfolio will invest at least 80% of its total assets, valued at the
time of purchase, in U.S. Government securities of various maturities. For the
year ended December 31, 1994, the portfolio turnover rate for the Government
Securities Portfolio was 565.65%. For the year ended December 31, 1995, the
portfolio turnover rate for the Government Securities Portfolio was 130.64%.
The Money Market Portfolio has the investment objective of providing the
highest level of current income as is consistent with high liquidity and safety
of principal by investing in good quality money market securities. Such
securities include U.S. Treasury bills, notes and bonds; obligations of agencies
and instrumentalities of the U.S. Government; bank certificates of deposit;
commercial paper; bankers' acceptances; and repurchase agreements. From time to
time the Money Market Portfolio may also invest in short-term corporate
obligations.
3
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The Total Return Portfolio has the investment objective of providing the
highest total return, composed of current income and capital appreciation, as is
consistent with prudent investment risk. It will attempt to achieve this
objective by investing in common stocks, bonds and money market instruments, the
proportion of each being continuously determined by the Adviser (under the
supervision of the Board of Directors). Total return consists of current income,
including dividends, interest and discount accruals and capital appreciation.
This Portfolio will invest in common stocks and other equity securities or
securities convertible into or with rights to purchase common stocks, securities
that are permissible investments for the Government Securities Portfolio and the
Money Market Portfolio. This Portfolio will also invest in fixed-income
obligations.
There are no percentage limitations on the types of securities in which the
Total Return Portfolio may invest, so from time to time it may invest entirely
in stocks, entirely in bonds, entirely in money market instruments, or in any
combination of these types of securities in accordance with the sole discretion
of the Adviser and the Board of Directors of the Fund. At least 60% of the value
of any bonds held by this Portfolio will be rated within the four highest grades
by a nationally recognized rating service such as Standard and Poor's
Corporation or Moody's Investors Service, Inc. The portfolio turnover rate for
the year ended December 31, 1994, was 66.92%. Stocks in the Portfolio had a
turnover ratio of 65.37%. Bonds in the portfolio had a turnover ratio of 56.74%.
The portfolio turnover rate for the year ended December 31, 1995, was 105.56%.
Stocks in the Portfolio had a turnover ratio of 154.74%. Bonds in the portfolio
had a turnover ratio of 51.62%.
PORTFOLIO TURNOVER RATE CALCULATION
The turnover rate for each Portfolio is calculated by dividing the lesser of
purchases or sales of portfolio securities during the fiscal year by the monthly
average of the value of the Portfolio's securities (excluding from the
computation all securities, including options, with maturities at the time of
acquisition of one year or less). For example, a portfolio turnover rate of 100%
would mean that all of a Portfolio's securities (except those excluded from the
calculation) were replaced once in a period of one year. A high rate of
portfolio turnover generally involves correspondingly greater brokerage
commission expenses. Turnover rates may vary greatly from year to year as well
as within a particular year and may also be affected by cash requirements for
redemptions of a Portfolio's shares and by requirements, the satisfaction of
which enable the Fund to receive certain favorable tax treatment. Because the
rate of portfolio turnover is not a limiting factor, however, particular
holdings may be sold at any time, if investment judgment or Portfolio operations
make a sale advisable. As a result, the annual portfolio turnover rates in
future years may exceed the percentages shown above. Since short term
instruments are excluded from the calculation of a portfolio turnover rate, no
meaningful portfolio turnover rate can be estimated or calculated for the Money
Market Portfolio.
INVESTMENT PRACTICES AND RESTRICTIONS
INVESTMENT PRACTICES
The policies by which the Portfolios will pursue their objectives are
generally set forth in the prospectus. This section is intended to augment the
explanation found in the prospectus.
When-Issued and Delayed Delivery Securities. From time to time, in the
ordinary course of business, each Portfolio may purchase securities on a
when-issued basis or delayed-delivery basis, i.e., delivery and payment can take
place a month or more after the date of the transaction. The securities so
purchased are subject to market fluctuation, and no interest accrues to the
purchaser during this period. At the time a Portfolio makes the commitment to
purchase securities on a when-issued or delayed-delivery basis, the Fund will
record the transaction and thereafter reflect the value, each day, of such
security in determining the net asset value of that Portfolio. At the time of
delivery of the securities, the value may be more or less than the purchase
price. Each Portfolio will also establish a segregated account with the Fund's
custodian bank in which it will maintain cash or cash equivalents or other
liquid portfolio securities equal in value, marked to market on a daily basis,
to commitments for such when-issued or delayed-delivery securities. As a general
matter each Portfolio will hold less than 5% of its assets in commitments to
purchase securities on a delayed-delivery or when-issued basis and will not,
under any circumstances, purchase securities on a when-issued or
delayed-delivery basis if, as a result, more than 10% of the net assets of the
Portfolio would be so invested.
Loans of Portfolio Securities. The Portfolios may from time to time lend
securities each Portfolio holds to brokers, dealers and financial institutions,
up to a maximum of 20% of the total value of each Portfolio's assets. This
percentage may not be increased without approval of a majority of the
outstanding voting securities of the respective Portfolios. (See "Fundamental
Restrictions" on page 18.) Such loans will be secured by collateral in the form
of cash or United States Treasury securities, which at all times while the loan
is outstanding, will be maintained in an amount at least equal to the current
market value of the loaned securities. The Portfolios will continue to receive
interest and dividends on the loaned securities during the term of the loans,
and, in addition, will receive a fee from the borrower or interest earned from
the investment of cash collateral in short-term securities. The Portfolio will
also receive any gain or loss in the market value of loaned securities and of
securities in which cash collateral is invested during the term of the loan.
4
<PAGE>
The right to terminate a loan of securities, subject to appropriate notice,
will be given to either party. When a loan is terminated, the borrower will
return the loaned securities to the Fund. The Fund will not have the right to
vote securities on loan, but would terminate the loan and regain the right to
vote if that were important with respect to the investment.
For tax purposes, the dividends, interest and other distributions which the
Fund receives on loaned securities may be treated as other than qualified income
for the 90% test discussed under "Taxes" in the prospectus. The Fund intends to
lend portfolio securities only to the extent that this activity does not
jeopardize the Fund's status as a regulated investment company under the
Internal Revenue Code of 1986 (the "Code").
The primary risk involved in lending securities is that the borrower will fail
financially and not return the loaned securities at a time when the collateral
is insufficient to replace the full amount of the loaned securities. The
borrower would be liable for the shortage, but the Fund would be an unsecured
creditor with respect to such shortage and might not be able to recover all or
any of it. In order to minimize this risk, the Fund will make loans of
securities only to firms the Adviser (under the supervision of the board of
directors) deems creditworthy.
Convertible Securities. The Total Return Portfolio, International Equity
Portfolio and Real Estate Securities Portfolio may each invest in convertible
securities. Convertible securities may include corporate notes or preferred
stock but are ordinarily a long-term debt obligation of the issuer convertible
at a stated exchange rate into common stock of the issuer. As with all debt
securities, the market value of convertible securities tends to decline as
interest rates increase and, conversely, to increase as interest rates decline.
Convertible securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality. However, when the market price of
the common stock underlying a convertible security exceeds the conversion price,
the price of the convertible security tends to reflect the value of the
underlying common stock. As the market price of the underlying common stock
declines, the convertible security tends to trade increasingly on a yield basis,
and thus may not depreciate to the same extent as the underlying common stock.
Convertible securities generally rank senior to common stocks in an issuer's
capital structure and are consequently of higher quality and entail less risk of
declines in market value than the issuer's common stock. However, the extent to
which such risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as a fixed-income security. In
evaluating a convertible security, an Adviser usually gives primary emphasis to
the attractiveness of the underlying common stock. The convertible debt
securities in which these Portfolios may invest are subject to the same rating
criteria as each portfolio's investment in non- convertible debt securities.
Warrants. The International Equity Portfolio and Real Estate Securities
Portfolio may each invest up to 5% of its total assets, calculated at the time
of purchase, in warrants or rights (other than those acquired in units or
attached to other securities) which entitle the holder to buy equity securities
at a specific price for a specific period of time. The Portfolios will not
invest more than 2% of their total assets, calculated at the time of purchase,
in warrants or rights which are not listed on the New York or American Stock
Exchanges. Warrants and rights have no voting rights, receive no dividends and
have no rights with respect to the assets of the issuer.
Risks of Foreign Investments. Investing in the securities of companies
organized outside the United States or of companies whose securities are
principally traded outside the United States ("foreign issuers") or investments
in securities denominated or quoted in foreign currency ("non-dollar
securities") involves certain special considerations, including those set forth
below, which are not typically associated with investing in securities of
domestic issuers or U.S. dollar denominated securities.
Since investments in foreign issuers may involve currencies of foreign
countries and since a Portfolio may temporarily hold funds in bank deposits in
foreign currencies during completion of investment programs and since a
Portfolio may be subject to currency exposure independent of its securities
positions, the Portfolio may be affected favorably or unfavorably by changes in
currency rates and in exchange control regulations and may incur costs in
connection with conversions between various currencies.
Since foreign issuers are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. issuers, there may be less publicly available information
about a foreign issuer than about a domestic issuer. Volume and liquidity in
most foreign securities markets are less than in the United States and
securities of many foreign issuers are less liquid and more volatile than
securities of comparable domestic issuers. Fixed commissions on foreign
securities exchanges are generally higher than negotiated commissions on U.S.
exchanges, although a Portfolio may endeavor to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of securities exchanges, brokers, dealers and listed
and unlisted issuers than in the United States. Mail service between the United
States and foreign countries may be slower or less reliable than within the
United States, thus increasing the risk of delayed settlements of portfolio
transactions or loss of certificates for portfolio securities.
5
<PAGE>
Foreign investment markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when a portion of the assets of a Portfolio are uninvested and no return
is earned on such assets. The inability of a Portfolio to make intended security
purchases due to settlement problems could cause the Portfolio to miss
attractive investment opportunities. Inability to dispose of portfolio
investments due to settlement problems could result either in losses to a
Portfolio due to subsequent declines in value of the portfolio securities or, if
the Portfolio has entered into a contract to sell the securities, could result
in possible liability to the purchaser. In addition, with respect to certain
foreign countries, there is the possibility of expropriation or confiscatory
taxation, political or social instability, or diplomatic developments which
could affect a Portfolio's investments in those countries. Moreover, individual
foreign economies may differ favorably or unfavorably from the U.S. economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Forward Foreign Currency Exchange Contracts. The International Equity
Portfolio may enter into forward foreign currency exchange contracts. A forward
foreign currency exchange contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. A forward contract generally has no deposit requirement, and no
commissions are generally charged at any stage for trades. At the maturity of a
forward contract, the Portfolio may either accept or make delivery of the
currency specified in the contract or, at or prior to maturity, enter into a
closing purchase transaction involving the purchase or sale of an offsetting
contract. Closing purchase transactions with respect to forward contracts are
usually effected with the currency trader who is a party to the original forward
contract.
The International Equity Portfolio may enter into forward foreign currency
exchange contracts in several circumstances. First, when it enters into a
contract for the purchase or sale of a security denominated or quoted in a
foreign currency, or when it anticipates the receipt in a foreign currency of
dividend or interest payments on such a security which it holds, the Portfolio
may desire to "lock in" the U.S. dollar price of the security or the U.S. dollar
equivalent of such dividend or interest payment, as the case may be. By entering
into a forward contract for the purchase or sale, for a fixed amount of dollars,
of the amount of foreign currency involved in the underlying transactions, the
Portfolio will attempt to protect itself against an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the
period between the date on which the security is purchased or sold, or on which
the dividend or interest payment is declared, and the date on which such
payments are made or received.
Additionally, when the Portfolio's Adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the Portfolio's portfolio securities denominated in such foreign currency.
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 those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of the Portfolio's portfolio securities against a decline in
the value of a currency does not eliminate fluctuations in the underlying prices
of the securities. It simply establishes a rate of exchange which the Portfolio
can achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the dollar value of only a portion of the Portfolio's foreign
assets.
The International Equity Portfolio may engage in cross-hedging by using
forward contracts in one currency to hedge against fluctuations in the value of
securities quoted or denominated in a different currency if the Adviser
determines that there is a pattern of correlation between the two currencies.
The Portfolio also may purchase and sell forward contracts to seek to increase
total return when the Adviser anticipates that the foreign currency will
appreciate or depreciate in value, but securities denominated or quoted in that
currency do not present attractive investment opportunities and are not held by
the Portfolio.
The Fund's custodian will place cash or high grade liquid debt securities
(i.e., securities rated in one of the top three ratings categories by S&P or by
Moody's or, if unrated, deemed by the Adviser to be of comparable credit
quality) into a segregated account of the Portfolio in an amount equal to the
value of the Portfolio's total assets committed to the consummation of forward
foreign currency exchange contracts requiring the Portfolio to purchase foreign
currencies or forward contracts entered into to seek to increase total return.
If the value of the securities placed in the segregated 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 Portfolio's
commitments with respect to such contracts. The segregated account will be
marked-to-market on a daily basis. Although the contracts are not presently
regulated by the CFTC, the CFTC may in the future assert authority to regulate
these contracts. In such event, the Portfolio's ability to utilize forward
foreign currency exchange contracts may be restricted.
6
<PAGE>
While the International Equity Portfolio will enter into forward contracts to
reduce currency exchange rate risks, transactions in such contracts involve
certain other risks. Therefore, while the Portfolio may benefit from such
transactions, unanticipated changes in currency prices may result in a poorer
overall performance for the Portfolio than if it had not engaged in any such
transactions. Moreover, there may be imperfect correlation between the
Portfolio's portfolio holdings of securities quoted or denominated in a
particular currency and forward contracts entered into by the Portfolio. Such
imperfect correlation may cause the Portfolio to sustain losses which will
prevent the Portfolio from achieving a complete hedge or expose the Portfolio to
risk of foreign exchange loss.
Writing and Purchasing Currency Call and Put Options. The International Equity
Portfolio may write covered put and call options and purchase put and call
options on foreign currencies for the purpose of protecting against declines in
the U.S. dollar value of portfolio securities and against increases in the
dollar cost of securities to be acquired. The International Equity Portfolio
also may use options on currency to cross-hedge, which involves writing or
purchasing options on one currency to hedge against changes in exchange rates
for a different currency if a pattern of correlation exists between the values
of the currencies. In addition, the Portfolio may purchase call options on
currency when the Adviser anticipates that the foreign currency will appreciate
in value, but securities denominated or quoted in that currency do not present
attractive investment opportunities and are not held by the Portfolio. A call
option written by the International Equity Portfolio obligates the Portfolio to
sell specified currency to the holder of the option at a specified price at any
time before the expiration date. A put option written by a Portfolio would
obligate the Portfolio to purchase specified currency from the option holder at
a specified price at any time before the expiration date. The writing of
currency options involves a risk that a Portfolio will, upon exercise of the
option, be required to sell currency subject to a call at a price that is less
than the currency's market value or be required to purchase currency subject to
a put at a price that exceeds the currency's market value.
The International Equity Portfolio may terminate its obligations under a call
or put option by purchasing an option identical to the one it has written. Such
purchases are referred to as "closing purchase transactions." The Portfolio
would also be able to enter into closing sale transactions in order to realize
gains or minimize losses on options purchased by it.
The International Equity Portfolio would normally purchase call options in
anticipation of an increase in the U.S. dollar value of currency in which
securities to be acquired by the Portfolio are quoted or denominated. The
purchase of a call option would entitle the Portfolio, in return for the premium
paid, to purchase specified currency at a specified price during the option
period. The Portfolio would ordinarily realize a gain if, during the option
period, the value of such currency exceeded the sum of the exercise price, the
premium paid and transaction costs; otherwise the Portfolio would realize either
no gain or a loss on the purchase of the call option.
The International Equity Portfolio would normally purchase put options in
anticipation of a decline in the dollar value of currency in which securities in
its portfolio are quoted or denominated ("protective puts"). The purchase of a
put option would entitle the Portfolio, in exchange for the premium paid, to
sell specified currency at a specified price during the option period. The
purchase of protective puts is designed merely to offset or hedge against a
decline in the dollar value of the Portfolio's portfolio securities due to
currency exchange rate fluctuations. The Portfolio would ordinarily realize a
gain if, during the option period, the value of the underlying currency
decreased below the exercise price sufficiently to more than cover the premium
and transaction costs; otherwise the Portfolio would realize either no gain or a
loss on the purchase of the put option. Gains and losses on the purchase of
protective put options would tend to be offset by countervailing changes in the
value of underlying currency.
In addition to using options for the hedging purposes described above, the
International Equity Portfolio may use options on currency to seek to increase
total return. It may write (sell) covered put and call options on any currency
in order to realize greater income than would be realized on portfolio
securities transactions alone. However, in writing covered call options for
additional income, the Portfolio may forgo the opportunity to profit from an
increase in the market value of the underlying currency. Also, when writing put
options, the Portfolio accepts, in return for the option premium, the risk that
it may be required to purchase the underlying currency at a price in excess of
the currency's market value at the time of purchase.
The International Equity Portfolio would normally purchase call options to
seek to increase total return in anticipation of an increase in the market value
of a currency. It would ordinarily realize a gain if, during the option period,
the value of such currency exceeded the sum of the exercise price, the premium
paid and transaction costs. Otherwise the Portfolio would realize either no gain
or a loss on the purchase of the call option. Put options may be purchased by
the Portfolio for the purpose of benefiting from a decline in the value of
currencies which it does not own. It would ordinarily realize a gain if, during
the option period, the value of the underlying currency decreased below the
exercise price sufficiently to more than cover the premium and transaction
costs. Otherwise it would realize either no gain or a loss on the purchase of
the put option.
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Special Risks Associated With Options on Currency. An exchange traded options
position may be closed out only on an options exchange which provides a
secondary market for an option of the same series. Although the International
Equity Portfolio will generally purchase or write only those options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange will exist for any particular option, or
at any particular time. For some options no secondary market on an exchange may
exist. In such event, it might not be possible to effect closing transactions in
particular options, with the result that a Portfolio would have to exercise its
options in order to realize any profit and would incur transaction costs upon
the sale of underlying securities pursuant to the exercise of put options. If a
Portfolio as a covered call option writer is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
currency (or security quoted or denominated in that currency) until the option
expires or it delivers the underlying currency upon exercise.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of the
Options Clearing Corporation inadequate, and thereby result in the institution
by an exchange of special procedures which may interfere with the timely
execution of customers' orders.
The International Equity Portfolio may purchase and write over-the-counter
options to the extent consistent with its limitation on investments in illiquid
investments. See "Investment Restrictions." Trading in over-the-counter options
is subject to the risk that the other party will be unable or unwilling to
close-out options purchased or written by the Portfolio. See "Investment
Practices" in the Prospectus.
Currency Swaps. The International Equity Portfolio may enter into currency
swaps for hedging purposes. Inasmuch as swaps are entered into for good faith
hedging purposes (or are offset by a segregated account as described below), the
Fund and the Adviser believe that swaps do not constitute senior securities as
defined in the Investment Company Act of 1940 and, accordingly, will not treat
them as being subject to the Portfolio's borrowing restrictions. The net amount
of the excess, if any, of the Portfolio's obligations over its entitlement with
respect to each currency swap will be accrued on a daily basis and an amount of
cash or liquid high grade debt securities (i.e., securities rated in one of the
top three ratings categories by Moody's or S&P, or, if unrated, deemed by the
Investment Adviser to be of comparable credit quality) having an aggregate net
asset value at least equal to such accrued excess will be maintained in a
segregated account by the Fund's custodian. The Portfolio will not enter into
any currency swap unless the credit quality of the unsecured senior debt or the
claims-paying ability of the other party thereto is considered to be investment
grade by the Adviser. If there is a default by the other party to such a
transaction, the 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 in comparison with the markets for
other similar instruments which are traded in the interbank market.
Nevertheless, the SEC staff takes the position that currency swaps are illiquid
investments subject to the Portfolio's limitation on such investments. See
"Investment Practices" in the prospectus.
Options on Securities and Securities Indices. The Common Stock Index Portfolio,
Government Securities Portfolio, International Equity Portfolio and the Real
Estate Securities Portfolio may write exchange-traded covered call and put
options on or relating to specific securities in order to earn additional income
or, in the case of a call written, to minimize or hedge against anticipated
declines in the value of its portfolio securities. The Total Return Portfolio
may write covered call options on its portfolio securities in amounts up to 10%
of its total assets in order to earn additional income or to minimize or hedge
against anticipated declines in the value of those securities. All call options
written by these Portfolios are covered, which means that the Portfolio will own
the securities subject to the option as long as the option is outstanding. All
put options written by these Portfolios are covered, which means that the
Portfolio has deposited with its custodian cash, U.S. Government securities or
other high-grade liquid debt securities with a value at least equal to the
exercise price of the option. Call and put options written by a Portfolio may
also be covered to the extent that the Portfolio's liabilities under such
options are offset by its rights under call or put options purchased by the
Portfolio and call options written by a Portfolio may also be covered by
depositing cash or securities with its custodian in the same manner as written
puts are covered.
Through the writing of a covered call option a Portfolio receives premium
income but obligates itself to sell to the purchaser of such an option the
particular security underlying the option at a specified price at any time prior
to the expiration of the option period, regardless of the market value of the
security during this period. Through the writing of a covered put option, a
Portfolio receives premium income but obligates itself to purchase a particular
security underlying the option at a specified price at any time prior to the
expiration of the option period, regardless of market value during the option
period.
The Common Stock Index Portfolio, International Equity Portfolio and Real
Estate Securities Portfolio may each, in accordance with its investment
objective and investment program, also write exchange-traded covered call and
put options on stock indices. These Portfolios may write such options for the
same purposes as each may engage in such transactions with respect to individual
portfolio
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securities, that is, to generate additional income or as a hedging technique to
minimize anticipated declines in the value of the Portfolio's securities. In
economic effect, a stock index call or put option is similar to an option on a
particular security, except that the value of the option depends on the weighted
value of the group of securities comprising the index, rather than a particular
security, and settlements are made in cash rather than by delivery of a
particular security.
If a Portfolio writes an option which expires unexercised or is closed out by
the Portfolio at a profit, it will retain the premium received for the option,
which will represent a capital gain to the Portfolio. If the price of the
underlying security moves adversely to the Portfolio's position, the option may
be exercised and the Portfolio, as the writer of the option, will be required to
sell or purchase the underlying security at a disadvantageous price, which may
only be partially offset by the amount of premium received.
When a Portfolio writes an option on an index, and the underlying index moves
adversely to its position, the option may be exercised. Upon such exercise, the
Portfolio, as the writer of the option, will be required to pay in cash an
amount equal to the difference between the exercise settlement value of the
underlying index and the exercise price of the option, multiplied by a specified
index "multiplier."
Call or put options on a stock index may be written at an exercise or "strike"
price which is either below or above the current value of the index. If the
exercise price at the time of writing the option is below the current value of
the index for a call option or above the current value of the index for a put
option, the option is considered to be "in the money." In such a case, the
Portfolio will cover such options written by segregating with its custodian or
pledging to its FCM as collateral, cash, U.S. Government or other high-grade,
short-term debt obligations equal in value to the amount by which the option
written is in the money, times the multiplier, times the number of contracts.
Stock indices for which options are currently traded include the S&P 500
Index, Value Line Index, National OTC Index, Major Market Index, and NYSE Beta
Index. The Portfolios may also use options on such other indices as may now or
in the future be available. The three Portfolios may also purchase put or call
options on securities indices in order to (i) hedge against anticipated changes
in stock prices that may adversely affect the prices of securities that they
intend to purchase at a later date, (ii) hedge their investments against an
anticipated decline in value, or (iii) attempt to reduce the risk of missing a
general market advance. In the event that the anticipated changes in stock
prices occur, these Portfolios may be able to offset the resulting adverse
effect, in whole or in part, through the options purchased.
The premium paid for a put or call option plus any transaction costs will
reduce the benefit, if any, realized by a Portfolio upon exercise or liquidation
of the option, and, unless the price of the underlying securities index changes
sufficiently, the option may expire without value to the Portfolio. To close
option positions purchased by it, the Common Stock Index Portfolio may sell put
or call options identical to options previously purchased, which could result in
a net gain or loss depending on whether the amount received on the sale is more
or less than the premium and other transaction costs paid on the put or call
option purchased.
All five Portfolios (other than the Money Market Portfolio) may use options
traded on a national securities exchange. Only the Government Securities
Portfolio and the International Equities Portfolio, however, may use
over-the-counter (i.e., unlisted) options. Options traded in the
over-the-counter market may not be as actively traded as those on an exchange.
Accordingly, it may be more difficult to value such options. In addition, it may
be more difficult to enter into closing transactions with respect to options
traded over-the-counter. In this regard, the Government Securities Portfolio may
enter into contracts with the primary dealers with whom they write
over-the-counter options. The contracts will provide that the Government
Securities Portfolio has the absolute right to repurchase an option it writes at
any time at a repurchase price which represents the fair market value of such
option, as determined in good faith through negotiations between the parties,
but which in no event will exceed a price determined pursuant to a formula
contained in the contract. Although the specific details of the formula may vary
between contracts with different primary dealers, the formula will generally be
based on a multiple of the premium received by the Government Securities
Portfolio, plus the amount, if any, of the option's intrinsic value (i.e., the
amount the option is "in-the-money"). The formula will also include a factor to
account for the difference between the price of the security and the strike
price of the option if the option is written "out-of-the-money." Although the
specific details of the formula may vary with different primary dealers, each
contract will provide a formula to determine the maximum price at which the
Government Securities Portfolio can repurchase the option at any time. The
Government Securities Portfolio has established standards of creditworthiness
for these primary dealers.
Financial Futures Contracts. The Common Stock Index Portfolio, Government
Securities Portfolio, International Equity Portfolio and Real Estate Securities
Portfolio, each in accordance with its investment objective, investment program,
policies, and restrictions may purchase and sell exchange-traded financial
futures contracts as a hedge to protect against anticipated changes in
prevailing interest rates or overall stock prices, or to efficiently and in a
less costly manner implement either increases or decreases in exposure to the
equity or government bond markets. Likewise, the International Equity Portfolio
may purchase and sell exchange-traded currency futures contracts as a hedge to
protect against anticipated adverse changes in currency exchange rates. All four
Portfolios also may purchase and sell exchange-traded financial futures
contracts to earn additional income or otherwise seek to increase total return.
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Financial futures contracts consist of interest rate futures contracts, stock
index futures contracts and currency futures contracts. An interest rate futures
contract is a contract to buy or sell specified debt securities at a future time
for a fixed price. A stock index futures contract is similar in economic effect,
except that rather than being based on specific securities, it is based on a
specified index of stocks and not the stocks themselves. A currency futures
contract is a contract to purchase or sell a specific amount of foreign currency
at a future time for a fixed price.
An interest rate futures contract binds the seller to deliver to the purchaser
on a specified future date a specified quantity of one of several listed
financial instruments, against payment of a settlement price specified in the
contract. A public market currently exists for futures contracts on GNMA
Certificates, long-term U.S. Treasury Bonds, three-month U.S. Treasury Bills,
short-term U.S. Treasury Notes, and bank certificates of deposit.
Stock index futures contracts bind purchaser and seller to deliver, at a
future date specified in the contract, a cash amount equal to a multiple of the
difference between the value of a specified stock index on that date and the
settlement price specified by the contract. That is, the seller of the futures
contract must pay and the purchaser would receive a multiple of any excess of
the value of the index over the settlement price, and conversely, the purchaser
must pay and the seller would receive a multiple of any excess of the settlement
price over the value of the index. A public market currently exists for stock
index futures contracts based on the S&P 500 Index, the New York Stock Exchange
Composite Index, the Value Line Stock Index, and the Major Market Index. It is
expected that financial instruments related to broad-based indices, in addition
to those for which futures contracts are currently traded, will in the future be
the subject of publicly-traded futures contracts. Each Portfolio may use those
indices which are appropriate to its hedging strategies.
A financial futures contract is an agreement to buy or sell a security or
currency (or deliver a final cash settlement price, in the case of a contract
relating to an index or otherwise not calling for physical delivery of a
specified security) for a set price in the future. Exchange-traded futures
contracts are designated by boards of trade which have been designated
"contracts markets" by the Commodity Futures Trading Commission ("CFTC").
Positions taken in the futures markets are not normally held until delivery or
cash settlement is required, but instead are liquidated through offsetting
transactions which may result in a gain or a loss. While futures positions taken
by a Portfolio are usually liquidated in this manner, a Portfolio may instead
make or take delivery of underlying securities whenever it appears economically
advantageous to do so. A clearing organization associated with the relevant
exchange assumes responsibility for closing out transactions and guarantees
that, as between the clearing members of the exchange, the sale and purchase
obligations will be performed with regard to all positions that remain open at
the termination of the contract.
When financial futures contracts are entered into by a Portfolio, either as
the purchaser or the seller of such contracts, the Portfolio is required to
deposit with its custodian in a segregated account in the name of the FCM an
initial margin of cash or U.S. Treasury bills equalling as much as 5% to 10% or
more of the contract settlement price. The nature of initial margin requirements
in futures transactions differs from traditional margin payments made in
securities transactions in that initial margins for financial futures contracts
do not involve the borrowing of funds by the customer to finance the
transaction. Instead, a customer's initial margin on a financial futures
contract represents a good faith deposit securing the customer's contractual
obligations under the financial futures contract. The initial margin deposit is
returned, assuming these obligations have been met, when the financial futures
contract is terminated. In addition, subsequent payments to and from the FCM,
called "variation margin," are made on a daily basis as the price of the
underlying security or stock index fluctuates reflecting the change in value in
the long (purchase) or short (sale) positions in the financial futures contract,
a process known as "marking to market."
Financial future contracts generally are not entered into to acquire the
underlying asset and generally are not held to term. Prior to the contract
settlement date, a Portfolio will normally close all futures positions by
entering into an off-setting transaction which operates to cancel the position
held, and which usually results in a profit or loss.
Options on Financial Futures Contracts
The Common Stock Index Portfolio, Government Securities Portfolio,
International Equity Portfolio and Real Estate Securities Portfolio may also
purchase call and put options on financial futures contracts and write covered
call options on financial futures contracts of the type which the particular
Portfolio is authorized to enter into. The Common Stock Index Portfolio also may
write covered put options on stock index futures contracts. Covered put and call
options on futures contracts will be covered in the same manner as covered
options on securities and securities indices. The Portfolios may invest in such
options for the same hedging purposes as they may each purchase or sell
financial futures contracts or in order to earn additional income or otherwise
seek to increase total return.
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Options on financial futures contracts are traded on exchanges that are
licensed and regulated by the CFTC. A call option on a financial futures
contract gives the purchaser the right in return for the premium paid, to
purchase a financial futures contract (assume a "long" position) at a specified
exercise price at any time before the option expires. A put option gives the
purchaser the right, in return for the premium paid, to sell a financial futures
contract (assume a "short" position), for a specified exercise price, at any
time before the option expires.
Unlike entering into a financial futures contract itself, purchasing options
on financial futures contracts allows a buyer to decline to exercise the option,
thereby avoiding any loss beyond forgoing the purchase price (or "premium") paid
for the options. Therefore, the purchase of options on financial futures
contracts may be a preferable hedging strategy when the Portfolio desires
maximum flexibility. Whether, in order to achieve a particular objective, the
Portfolio enters into a financial futures contract, on the one hand, or an
option contract on a financial futures contract, on the other, will depend on
all the circumstances, including the relative costs, liquidity, availability and
capital requirements of such financial futures and options contracts. Each
Portfolio will consider the relative risks involved, which may be quite
different. These factors, among others, will be considered in light of market
conditions and the particular objective to be achieved.
Certain Additional Risks of Options and Financial Futures Contracts
In addition to the risks described in the Prospectus, the use of options and
financial futures contracts may entail the following risks. First, although such
instruments when used by a Portfolio are intended to correlate with the
Portfolio's portfolio securities, in many cases the options or financial futures
contracts used may be based on securities or currencies which, or stock indices
the components of which, are not identical to the portfolio securities owned or
intended to be acquired by the Portfolio. Second, due to supply and demand
imbalances and other market factors, the price movements of financial futures
contracts, options thereon, and stock index options may not necessarily
correspond exactly to the price movements of the securities, currencies or stock
indices on which such instruments are based. Accordingly, there is a risk that a
Portfolio's transactions in those instruments will not in fact offset the impact
on the Portfolio of adverse market developments in the manner or to the extent
contemplated or that such transactions will result in losses to the Portfolio
which are not offset by gains with respect to corresponding portfolio securities
owned or to be purchased by that Portfolio.
To some extent, these risks can be minimized by careful management of hedging
activities. For example, where price movements in a financial futures or option
contract are expected to be less volatile than price movements in the related
portfolio securities owned or intended to be acquired by a Portfolio, it may, in
order to compensate for this difference, use an amount of financial futures or
option contracts which is greater than the amount of such portfolio securities.
Similarly, where the price movement of a financial futures or option contract is
anticipated to be more volatile, a Portfolio may use an amount of such contract
which is smaller than the amount of portfolio securities to which such contracts
relate.
The risk that the hedging technique used will not actually or entirely offset
an adverse change in the value of a Portfolio's securities is particularly
relevant to financial futures contracts and options written on stock indices. A
Portfolio in entering into a futures purchase contract, potentially could lose
any or all of the contract's settlement price. In entering into a futures sale
contract, a Portfolio could potentially lose a sum equal to the excess of the
contract's value (marked to market daily) over the contract's settlement price.
In writing options on stock indices, a Portfolio could potentially lose a sum
equal to the excess of the value of the index (marked to market daily) over the
exercise price. In addition, because financial futures contracts require
delivery at a future date of either a specified security or an amount of cash
equal to a multiple of the difference between the value of a specified stock
index on that date and the settlement price, an algebraic relationship exists
between any price movement in the underlying security or index and the potential
cost of settlement to a Portfolio. A small increase or decrease in the value of
the underlying security or stock index can, therefore, result in a much greater
increase or decrease in the cost to the Portfolio.
Stock index call options written also pose another risk as hedging tools.
Because exercises of stock index options are settled in cash, there is an
inherent timing risk that the value of a Portfolio's securities "covering" a
stock index call option written by it may decline during the time between
exercise of the option by the option holder and notice to the Portfolio of such
exercise (usually one day or more) thereby requiring the Portfolio to use
additional assets to settle the transaction. This risk is not present in the
case of covered call options on individual securities, which are settled by
delivery of the actual securities.
Although the Portfolios intend to establish positions in these instruments
only when there appears to be an active market, there is no assurance that a
liquid market for such instruments will exist when they seek to "close out"
(i.e. terminate) a particular financial futures contract or option position.
This is particularly relevant for over-the-counter options. Trading in such
instruments could be
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interrupted, for example, because of a lack of either buyers or sellers. In
addition, the futures and options exchanges may suspend trading after the price
of such instruments has risen or fallen more than the maximum amount specified
by the exchange. Exercise of options could also be restricted or delayed because
of regulatory restrictions or other factors. A Portfolio may be able, by
adjusting investment strategy in the cash or other contract markets, to offset
to some extent any adverse effects of being unable to liquidate a hedge
position. Nevertheless, in some cases, a Portfolio may experience losses as a
result of such inability. Therefore it may have to liquidate other more
advantageous investments to meet its cash needs.
In addition, FCMs or brokers in certain circumstances will have access to the
Portfolios' assets posted as margin in connection with these transactions as
permitted under the Investment Company Act of 1940. See "Custodian, Dividend and
Transfer Agent," in this Statement of Additional Information. The Portfolios
will use only FCMs or brokers in whose reliability and financial soundness they
have full confidence and have adopted certain other procedures and limitations
to reduce the risk of loss with respect to any assets which brokers hold or to
which they may have access. Nevertheless, in the event of a broker's insolvency
or bankruptcy, it is possible that a Portfolio could experience a delay or incur
costs in recovering such assets or might recover less than the full amount due.
Also the value of such assets could decline by the time the Portfolio could
effect such recovery.
The success of any Portfolio in using hedging techniques depends, among other
things, on the Adviser's ability to predict the direction and volatility of
price movements in both the futures and options markets as well as the
securities markets and on its ability to select the proper type, time, and
duration of hedges. There can be no assurance that these techniques will produce
their intended results. In any event, the Adviser will use financial futures
contracts, options thereon, and stock index options only when it believes the
overall effect is to reduce, rather than increase, the risks to which the
Portfolio is exposed. Hedging transactions also, of course, may be more, rather
than less, favorable to a Portfolio than originally anticipated.
GNMA Certificates
The Government Securities Portfolio may invest up to 50% of its net assets in
Government National Mortgage Association ("GNMA") Certificates. GNMA
Certificates are securities representing part ownership of a pool of mortgage
loans. These loans, issued by lenders such as mortgage bankers, commercial banks
and savings and loan associations, are insured either by the Federal Housing
Administration or by the Veterans Administration. Each pool of mortgage loans is
assembled and, after being approved by GNMA, is sold to investors through
broker-dealers in the form of certificates representing participations in the
pool. GNMA guarantees the timely payment of principal and interest of each
mortgage in the pool and its guarantee is backed by the full faith and credit of
the U.S. Government. GNMA Certificates differ from bonds in that a borrower pays
the principal over the term of the loan rather than in a lump sum at maturity.
GNMA Certificates are called "pass-through" certificates because both principal
and interest payments on the mortgages (including prepayments) are passed
through to the holder of the certificate.
The average life of GNMA Certificates varies with the maturities of the
underlying mortgages. The Government Securities Portfolio may use principal
payments it receives to purchase additional GNMA Certificates or other
investments permitted to it. Prepayments of any mortgages in the pool will
usually result in the return of the greatest part of principal invested well
before the maturity of the mortgages in the pool. The volume of such prepayments
of principal in a given pool of mortgages will influence the actual yield of the
GNMA Certificate. Also, the Government Securities Portfolio may reinvest
principal repaid to it in instruments whose yield may be higher or lower than
that of the GNMA Certificate had such prepayments not been made.
Borrowing
From time to time the International Equity Portfolio may increase its
ownership of investments by borrowing from banks on an unsecured basis and
investing the borrowed funds, subject to the restrictions stated in the
prospectus. The Portfolio may not borrow more than 10% of the value of its
assets for this purpose and may not borrow unless the value of its assets, less
its liabilities other than borrowing, is equal to at least 300% of all
borrowings, including any additional proposed borrowings. If the value of the
Portfolio's assets so computed should fail to meet the 300% asset coverage
requirement, the Portfolio must, within three days, reduce its borrowing to the
extent necessary to meet the coverage requirement and may have to sell a portion
of its investments at an inopportune time. Borrowing for investment increases
both investment opportunity and risk. Interest on borrowed money is an expense
that the Portfolio would not otherwise incur, so that it may have little or no
net investment income during periods of borrowing. Since substantially all of
the Portfolio's assets fluctuate in value whereas borrowing obligations are
fixed, when the Portfolio has outstanding borrowings, its net asset value tends
to increase and decrease more when portfolio investments increase and decrease
than would otherwise be the case.
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Lower-Rated, Lower Quality Debt Instruments
Up to 30% of the total assets of the Total Return Portfolio and 35% of the
assets of the Real Estate Securities Portfolio may be invested in debt
instruments that are unrated or are rated lower than the four highest rating
categories assigned by Moody's Investors Service, Inc. ("Moody's") or Standard &
Poor's Corporation ("Standard & Poor's"). Furthermore, debt instruments that are
rated in the four highest categories assigned by Moody's or Standard & Poor's
(i.e. investment grade debt instruments), and especially those which are
investment grade but are not high quality (i.e. rated Baa by Moody's or BBB by
Standard & Poor's) may, after purchase by the Portfolio, have their ratings
lowered due to the deterioration of the issuer's financial position.
Risks of Lower-Rated, Lower Quality Debt Instruments
Lower-rated fixed income securities (i.e. those rated Ba or lower by Moody's
or BB or lower by Standard & Poor's) are considered, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation and will generally
involve more credit risk than securities in the higher rated categories.
Reliance on credit ratings entails greater risks with regard to lower-rated
securities than it does with regard to higher-rated securities and the Adviser's
success is more dependent upon its own credit analysis with regard to
lower-rated securities than is the case with regard to higher-rated securities.
The market values of such securities tend to reflect individual corporate
developments to a greater extent than do higher-rated securities, which react
primarily to fluctuations in the general level of interest rates. Such
lower-rated securities also tend to be more sensitive to economic conditions
than are higher-rated securities. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, regarding lower-rated bonds may
depress prices and liquidity for such securities. To the extent the Total Return
or Real Estate Securities Portfolios invest in these securities, factors
adversely affecting the market value of high-yielding securities will adversely
affect the Portfolios' net asset value. In addition, the Portfolios may incur
additional expenses to the extent it is required to seek recovery upon a default
in the payment of principal or interest on its portfolio holdings. Although some
risk is inherent in all securities ownership, holders of fixed-income securities
have a claim on the assets of the issuer prior to the holders of common stock.
Therefore, an investment in fixed-income securities generally entails less risk
than an investment in common stock of the same issuer.
High yielding securities may be issued by corporations in the growth stage of
their development. They may also be issued in connection with corporate
reorganization or as a part of a corporate takeover. Companies that issue such
high-yielding securities are often highly leveraged and may not have available
to them more traditional methods of financing. Therefore, the risk associated
with acquiring the securities of such issuers generally is greater than is the
case with higher rated securities. For example, during an economic downturn or a
sustained period of rising interest rates, highly leveraged issuers of
high-yielding securities may experience financial stress. During such periods,
such issuers may not have sufficient revenues to meet their interest payment
obligations. The issuer's ability to service its debt obligations may also be
adversely affected by specific corporate developments or the issuer's inability
to meet specific projected business forecasts, or the unavailability of
additional financing. The risk of loss due to default by the issuer is
significantly greater for the holders of high-yielding securities because such
securities are generally unsecured and are often subordinated to other creditors
of the issuer.
High yielding securities frequently have call or buy-back features that would
permit an issuer to call or repurchase the security from either Portfolio. If a
call were exercised by the issuer during a period of declining interest rates,
the Portfolio would likely have to replace such called security with a lower
yielding security, thus decreasing the net investment income to the Portfolio.
The Total Return or Real Estate Securities Portfolio may have difficulty
disposing of certain high-yielding securities for which there is a thin trading
market. Because not all dealers maintain markets in all high-yielding
securities, there is no established retail secondary market for many of these
securities, and the Fund anticipates that they could be sold only to a limited
number of dealers or institutional investors. To the extent there is a secondary
trading market for high-yielding securities, it is generally not as liquid as
that for higher-rated securities. The lack of a liquid secondary market for
certain securities may make it more difficult for the Fund to obtain accurate
market quotations for purposes of valuing a Portfolio's assets. Market
quotations are generally available on many high-yield issues only from a limited
number of dealers and may not necessarily represent firm bids of such dealers or
prices for actual sales. When market quotations are not readily available,
lower-rated securities must be valued by (or under the direction of) the Fund's
board of directors. This valuation is more difficult and judgement plays a
greater role in such valuation when there is less reliable objective data
available.
The market for high-yielding securities has not weathered a major economic
recession, and it is not known how one might affect that market. It is likely,
however, that any such recession could severely affect the market for and the
values of such securities, as well as the ability of the issuers of such
securities to repay principal and pay interest thereon.
13
<PAGE>
The Total Return or Real Estate Securities Portfolio may acquire high-yielding
securities that are sold without registration under the federal securities laws
and therefore carry restrictions on resale. These Portfolios may incur special
costs in disposing of such securities, but will generally incur no costs when
the issuer is responsible for registering the securities. The Portfolios also
may acquire high-yielding securities during an initial underwriting. Such
securities involve special risks because they are new issues. The Fund has no
arrangement with any person concerning the acquisition of such securities, and
the Adviser will carefully review the credit and other characteristics pertinent
to such new issues.
From time to time, there have been proposals for legislation designed to limit
the use of certain high-yielding securities in connection with leveraged
buy-outs, mergers and acquisitions, or to limit the deductibility of interest
payments on such securities. Such proposals if enacted into law could reduce the
market for such securities generally, could negatively affect the financial
condition of issuers of high-yield securities by removing or reducing a source
of future financing, and could negatively affect the value of specific
high-yield issues. However, the likelihood of any such legislation or the effect
thereof is uncertain.
INVESTMENT RESTRICTIONS
Fundamental Restrictions. Each class of capital stock of the Fund represents
interests in separate Investment Portfolios of the Fund. The Portfolios are
subject to certain fundamental restrictions on their investments. These
restrictions may not be changed without the approval of the holders of a
majority of the outstanding voting shares of the Portfolios affected by the
change. Except where otherwise noted, each Portfolio may not:
1. Issue senior securities except: (a) to the extent that borrowings under
paragraph (10) below exceeding 5% may be deemed to be senior securities
under the Investment Company Act of 1940, or (b) in connection with
investments of certain Portfolios in options and futures contracts.
2. As to 75% of its total assets, invest more than 5% of its total assets
taken at market value at the time of each investment in the securities
(other than United States government or government agency securities)
of any one issuer (including repurchase agreements with any one bank).
3. Purchase more than either: (i) 10% in principal amount of the
outstanding debt securities of an issuer; or (ii) 10% of the
outstanding voting securities of an issuer, except that such
restriction shall not apply to securities issued or guaranteed by the
United States Government or its agencies, bank money market instruments
or bank repurchase agreements.
4. Invest more than 25% of its total assets (taken at market value at the
time of each investment) in the securities of issuers primarily engaged
in the same industry; utilities will be divided according to their
services; for example, gas, gas transmission, electric and telephone
each will be considered a separate industry for purposes of this
restriction. This restriction does not apply to the Real Estate
Securities Portfolio.
5. Purchase real estate or any interest therein, except through the
purchase of corporate or certain government securities including
securities secured by a mortgage or a leasehold interest or other
interest in real estate). A security issued by a real estate or
mortgage investment trust is not treated as an interest in real estate.
6. Purchase securities which are subject to legal or contractual delays in
or restrictions on resale. This restriction does not apply to the
International Equity Portfolio or the Real Estate Securities Portfolio.
7. Purchase any securities on margin except: (a) that a Portfolio may
obtain such short-term credit as may be necessary for the clearance of
purchases and sales of Portfolio securities, or (b) that in connection
with investments of the Common Stock Index Portfolio and the Government
Securities Portfolio in options and futures contracts.
8. Make loans, except as provided in (9) below and except through the
purchase of obligations in private placements (the purchase of
publicly-traded obligations not being considered the making of a loan).
9. Lend its portfolio securities in excess of 20% of its total assets,
taken at market value at the time of the loan, and provided that such
loan shall be made in accordance with the Portfolio's guidelines.
14
<PAGE>
10. Borrow amounts in excess of 10% (20% in the case of the Common Stock
Index Portfolio) of its total assets, taken at market value at the time
of the borrowing, and then only from banks as a temporary measure for
extraordinary or emergency purposes or to meet redemption requests that
might otherwise require the untimely disposition of securities, and not
for investment or leveraging. The International Equity Portfolio,
however, may borrow amounts up to an additional 10% of its net asset
value from banks to increase its holdings of portfolio investments.
11. Mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by such Portfolio
except: (a) as may be necessary in connection with borrowings mentioned
in (10) above, and then such mortgaging, pledging or hypothecating may
not exceed 10% of the Portfolio's total assets, taken at market value
at the time thereof, or (b) in connection with investments of certain
Portfolios in options and futures contracts. In order to comply with
certain state statutes, the Portfolios will not, as a matter of
operating policy, mortgage, pledge or hypothecate their portfolio
securities to the extent that at any time the percentage of the value
of pledged securities plus the maximum sales charge will exceed 10% of
the value of such Portfolio's shares at the maximum offering price.
12. Underwrite securities of other issuers except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities.
13. Invest more than 10% of its net assets (15% for the International
Equity Portfolio and Real Estate Securities Portfolio) in repurchase
agreements maturing in more than seven days and other illiquid
investments.
Nonfundamental Restrictions. The Fund has also adopted the following
additional investment restrictions applicable (except as noted) to all
Portfolios. These are not fundamental and may be changed by the board of
directors without shareholder approval. Under these restrictions, each Portfolio
may not:
1. Invest in securities of foreign issuers if at the time of acquisition
more than 10% of its total assets, taken at market value,would be
invested in such securities. However, up to 25% of the total assets of
the Portfolio may be invested in securities (i) issued, assumed or
guaranteed by foreign governments, or political subdivisions or
instrumentalities thereof, (ii) assumed or guaranteed by domestic
issuers, including Eurodollar securities, or (iii) issued, assumed or
guaranteed by foreign issuers having a class of securities listed for
trading on the New York Stock Exchange. This restriction is not
applicable to the International Equity Portfolio.
2. Participate on a joint (or a joint and several) basis in any trading
account in securities (but this does not include the "bunching" of
orders for the sale or purchase of portfolio securities with other
Portfolios or with individually managed accounts advised or sponsored
by the Adviser or any of its affiliates to reduce brokerage commissions
or otherwise to achieve best overall execution).
3. The Portfolios other than the Real Estate Securities Portfolio may not
purchase or retain the securities of any issuer if the individual
officers and directors of the Fund, AAI, or any of its affiliates own
beneficially more than 1/2 of 1% of the securities of such issuer or
together own in the aggregate more than 5% of the securities of such
issuer.
4. Alone, or together with any other portfolio or portfolios, make
investments for the purpose of exercising control over, or management
of any issuer.
5. Purchase securities of other investment companies if, as a result
thereof, the Portfolio would own more than 3% of the total outstanding
voting stock of any one investment company, or more than 5% of the
Portfolio's assets would be invested in any one investment company, or
more than a total of 10% of the Portfolio's assets would be invested in
investment company securities. These limitations do not apply to
securities acquired in connection with a merger, consolidation,
acquisition or reorganization, or by purchase in the open market of
securities of closed-end investment companies where no underwriter or
dealer's commission or profit, other than customary broker's
commission, is involved, and so long as immediately thereafter not more
than 10% of such Portfolio's total assets, taken at market value, would
be invested in such securities.
6. Purchase or sell interests in oil, gas, or other mineral exploration or
development programs, commodities, or commodity contracts, except that
certain Portfolios may invest in financial futures contracts and
related options.
7. Invest more than 30% (35% for the Real Estate Securities Portfolio) of
its assets, measured at time of purchase, in debt securities (other
than U.S. Government securities) that are unrated by Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's Corporation ("Standard &
Poor's") or are rated lower than the four highest rating categories
assigned by Moody's or Standard & Poor's.
15
<PAGE>
8. The Total Return Portfolio may not write, purchase or sell puts, calls
(other than covered call options on individual securities) or
combinations thereof.
9. The Money Market Portfolio may not invest more than 5% of its total
assets taken at market value at the time of each investment in the
securities (other than United States government or government agency
securities) of any one issuer (including repurchase agreements with any
one bank).
10. The Common Stock Index Portfolio, Government Securities Portfolio,
International Equity Portfolio and Real Estate Securities Portfolio may
not enter into a financial futures contract (by exercise of any option
or otherwise) or acquire any options thereon, if, immediately
thereafter, the total of the initial margin deposits required with
respect to all open futures positions, at the time such positions were
established, plus the sum of the premiums paid for all unexpired
options on futures contracts would exceed 5% of the value of its total
assets.
11. The International Equity Portfolio will not invest in the securities of
foreign issuers unless after such investment issuers in at least the
following number of different countries are represented in the
Portfolio: if up to 40% of the Portfolio's total assets are invested in
foreign issuers, two foreign countries; if between 40% and 60% of the
Portfolio's total assets are invested in foreign issuers, three foreign
countries; if between 60% and 80% of the Portfolio's total assets are
invested in foreign issuers, four foreign countries; and if over 80% of
the Portfolio's total assets are invested in foreign issuers, five
foreign countries.
16
<PAGE>
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The directors and officers of the Fund and their principal occupations for the
last five years are set forth below. Unless otherwise noted, the address of each
director and officer is 6610 W. Broad Street, Richmond, VA 23230.
Names, Positions, and Addresses of Directors and Officers of the Fund
Occupation During the Past 5 Years
Wallace L. Chandler, Director
Hamilton & Broad Street
Richmond, VA 23260
Retired Vice Chairman, Universal Corporation. Director Universal
Corporation, since 1986. Director, Lawyers Title Corporation, since
1991. Director, Regency Financial Shares, Inc., since 1987 and
Chairman, since 1992. (Director, Regency Bank since 1987 and Chairman,
since 1992).
John E. Leard, Director
6207 Monument Ave.
Richmond, VA
Retired-Vice President, Richmond Newspapers, Inc. Retired Executive
Editor, Richmond Times Dispatch and the Richmond News Leader.
J. Clifford Miller, III, Director
7103 Glen Parkway
Richmond, VA 23229
Account Executive, Davenport & Co. of Virginia, Inc., since 1992; Self
Employed Consultant from 1988 to 1992; Head--Upper School, Collegiate
Schools until 1988; Director, Miller Manufacturing Co., Inc., from 1977
to 1990; General Partner, Miller Land Company, since 1981.
John J. Palmer */, President & Director
Director, Life of Virginia, since 1986; Senior Vice President--Life of
Virginia, since 1980; President, Life of Virginia Series Fund, Inc.,
since 1986; Director, Forth Financial Securities Corporation, since
1986; President, Forth Financial Securities Corporation, since February
10, 1992.
Lee A. Putney, Director
4208 Sulgrave Road
Richmond, VA
Director, Regency Financial Shares, Inc., since 1989; Chairman of Board
of Directors, Regency Bank, since 1987.
Robert P. Martin, Jr., Director
115 Granite Avenue
Richmond, VA 23226
Self-employed investment consultant, since 1985.
J. Garnett Nelson, Director
Route 1, Box 195
Montpelier, VA 23192
President, Mid-Atlantic Holdings, L.L.C. since 1995, Senior Vice
President 1988-1995 and Director 1989-1995, The Life Insurance Company
of Virginia; Director, 1986-1995, Executive Director 1987-1990, and
Senior Executive Director, 1990-1995, Aon Advisors, Inc.; Director,
Combined Insurance Company of America, 1990-1995; Director RAC Income
Fund, Inc. since 1991; Director, Lawyers Title Corporation, 1991-1996.
Jerry G. Overman */, Vice President
Treasurer and Director of Investment Services of Aon Advisors, Inc.,
1985-1995; Treasurer, Life of Virginia, since 1988.
17
<PAGE>
Scott R. Reeks */, Treasurer
Director - Marketing Administration and Equity Operations, Life of
Virginia, since 1991; Manager-Equity Operations, Life of Virginia, from
1986 to 1991; Treasurer, Vice President and Manager of Operations,
Forth Financial Securities Corporation, since 1985.
Linda L. Lanam */, Secretary
Corporate Secretary for Life of Virginia and for a number of Life of
Virginia affiliates, since 1992. Vice President and Senior Counsel of
Life of Virginia, since 1989. Vice President and Senior Counsel, Union
Fidelity Life Insurance Company from 1986 to 1989.
- -------------------------------------------------------------------------------
*/ Directors and officers identified with an asterisk are considered "interested
persons" of the Fund as that term is defined in the Investment Company Act of
1940 because of their employment or other affiliation with Life of Virginia
and/or Aon Advisors, Inc.
Directors or officers who are interested persons of the Fund do not receive
any compensation from the Fund for their services to the Fund. The directors who
are not interested persons of the Fund receive compensation from the Fund at a
rate of $2,000 annually, plus $250 per meeting attended. In addition, directors
who are not interested persons of the Fund are reimbursed for any out-of-pocket
expenses incurred in connection with affairs of the Fund. During 1995 the Fund
paid directors' fees of $14,750 to the directors who were not interested persons
of the Fund.
TABLE OF DIRECTORS COMPENSATION
Aggregate Compensation Total Compensation From the Fund
Name of Director From the Fund and AAMF
Mr. Chandler $2,750 $7,500
Mr. Leard $3,000 $8,000
Mr. Martin $3,000 $8,000
Mr. C. Miller $3,000 $8,000
Mr. G. Nelson 0 0
Mr. J. Palmer 0 0
Mr. L. Putney $3,000 $8,000
Directors and officers of the Fund do not receive any benefits from the Fund
upon retirement nor does the Fund accrue any expenses for pension or retirement
benefits.
AAI
The investment adviser for the Fund is Aon Advisors, Inc. ("AAI"), a
wholly-owned subsidiary of Aon Corporation ("Aon"). The officers of AAI have
extensive experience in managing investment assets. In addition to the Fund, AAI
provides investment advice and management to pension plans, corporations, and
other organizations. The amount of aggregate assets under management is
approximately $12 billion. Aon, a publicly owned Delaware corporation, is an
insurance holding company organization principally engaged through subsidiaries
in the insurance and insurance brokerage business. As of December 31, 1995, Mr.
Patrick G. Ryan, President and Chief Executive Officer of Aon, 123 North Wacker
Drive, Chicago, Illinois 60606, owned directly and beneficially 13,464,000
shares (12.46%) of the common stock of Aon.
18
<PAGE>
AAI has been retained to manage the Fund's assets. AAI is at all times subject
to the direction and supervision of the board of directors of the Fund. The
principal officers of AAI are:
<TABLE>
<CAPTION>
Position with the Position with
Name AAI the Fund
<S> <C> <C>
Michael A. Conway President* None
Lawrence R. Miller Senior Executive Director* None
Pendleton M. Shiflett, III Executive Director None
Mark B. Burka Executive Director None
Ivan P. Burke Executive Director None
</TABLE>
*Messrs. Conway and Miller are also directors of AAI.
INVESTMENT ADVISORY AGREEMENT
The duties and responsibilities of AAI are specified in the Investment
Advisory Agreement ("Agreement") between the Fund and AAI. The Agreement was
first approved for each Portfolio by the board of directors of the Fund
(including a majority of directors who are not parties to the Agreement or
interested persons, as defined by the Investment Company Act of 1940, of any
such party) at a meeting held for that purpose on January 27, 1993. It was also
approved by the shareholders of each Portfolio at a meeting held on April 20,
1993. Likewise, the board of directors approved substantially identical
additional agreements ("Additional Agreements") covering the International
Equity Portfolio and the Real Estate Securities Portfolio at a meeting held for
that purpose on January 25, 1995. The Additional Agreements were approved by the
shareholders of these Portfolios on May 24, 1995. The Agreement and the
Additional Agreements are not assignable and may be terminated without penalty
upon 60 days written notice at the option of either the Fund or AAI or by a vote
of shareholders. The Agreement provides that it can be continued for each
Portfolio from year to year so long as such continuance is specifically approved
annually (a) by the board of directors of the Fund or by a majority of the
outstanding shares of the Portfolio and (b) by a majority vote of the Directors
who are not parties to the Agreement, or interested persons of any such party,
cast in person at a meeting held for that purpose. Each Additional Agreement
provides that it can be continued from year to year so long as such continuance
is specifically approved annually (a) by the board of directors of the Fund or
by a majority of the outstanding shares of the Portfolio and (b) by a majority
vote of the Directors who are not parties to the Agreement, or interested
persons of any such party, cast in person at a meeting held for that purpose.
AAI (under the supervision of the board of directors) continuously furnishes
an investment program for the Portfolios other than the International Equity
Portfolio and the Real Estate Securities Portfolio, is responsible for the
actual managing of the investments of such Portfolios and has responsibility for
making decisions governing whether to buy, sell or hold any particular security.
In carrying out its obligations to manage the investment and reinvestment of the
assets of these Portfolios, AAI performs research and obtains and evaluates
pertinent economic, statistical and financial data relevant to the investment
policies of these Portfolios.
As described below, AAI has engaged Perpetual as the investment sub-adviser to
provide day-to-day portfolio management for the International Equity Portfolio
and has engaged Genesis, as the investment sub-adviser to provide day-to-day
portfolio management for the Real Estate Securities Portfolio.
In addition to performing management duties and providing the investment
advice described above, AAI is responsible for the administrative services in
connection with the management of the Fund and the portfolios, including
financial reporting.
AAI is responsible for payment of all expenses it may incur in performing the
services described. These expenses include costs incurred in providing
investment advisory services, compensating and furnishing office space for
officers and employees of AAI connected with investment and economic research,
trading and investment management of the Fund and the payment of any fees to
interested directors of the Fund. AAI provides all executive, administrative,
clerical and other personnel necessary to operate the Fund and pays the salaries
and other employment related costs of employing those persons. AAI furnishes the
Fund with office space, facilities and equipment and pays the day-to-day
expenses related to the operation and maintenance of such office space
facilities and equipment. Legal, accounting and all other expenses incurred in
the organization of the Fund or of new Portfolios of the Fund, including costs
of registering under federal and state securities laws, are also paid by AAI.
AAI has entered into an indemnity agreement with Life of Virginia, whereby Life
of Virginia has agreed to reimburse it if certain expenses it bears during any
month exceed the investment advisory fee paid by the Fund during that period.
19
<PAGE>
The Fund is responsible for payment of all expenses it may incur in its
operation and all of its general administrative expenses except those expressly
assumed by the advisor as described in the preceding paragraph. These include
(by way of description and not of limitation), any share redemption expenses,
expenses of portfolio transactions, shareholder servicing costs, pricing costs
(including the daily calculation of net asset value), interest on borrowings by
the Fund, charges of the custodian and transfer agent, if any, cost of auditing
services, non-interested directors' fees, legal expenses, state franchise taxes,
certain other taxes, investment advisory fees, certain insurance premiums, cost
of maintenance of corporate existence, investor services (including allocable
personnel and telephone expenses), costs of printing and mailing updated Fund
prospectuses to shareholders, proxy statements and shareholder reports, the cost
of paying dividends and capital gains distribution, capital stock certificates,
costs of directors and shareholder meetings, and any extraordinary expenses,
including litigation costs in legal actions involving the Fund, or costs related
to indemnification of directors, officers and employees of the Fund.
The board of directors of the Fund determines the manner in which expenses are
allocated among the Portfolios of the Fund.
The Agreement and the Additional Agreements also provide that AAI shall not be
liable to the Fund or to any shareholder or policyowner for any error of
judgment or mistake of law or for any loss suffered by the Fund or by any
shareholder in connection with matters to which the such Agreements relate,
except for a breach of fiduciary duty or a loss resulting from willful
misfeasance, bad faith, gross negligence, or reckless disregard on the part of
AAI in the performance of its duties thereunder.
INVESTMENT ADVISORY FEE
AAI receives investment advisory fees as compensation for its services. The
fees are accrued by each Portfolio of the Fund daily but paid to AAI monthly.
The investment advisory fee for each portfolio is based upon the average daily
net assets of the portfolio (as computed in accordance with the description in
the Fund prospectus) at the following annual rates:
Common Stock Index Portfolio: .35%
Government Securities Portfolio: .50% of the first $100,000,000; .45%
of the next $100,000,000; .40% of the next $100,000,000; .35% of the
next $100,000,000; and .30% of amounts in excess of $400,000,000.
Money Market Portfolio: .50% of the first $100,000,000; .45% of the
next $100,000,000; .40% of the next $100,000,000; .35% of the next
$100,000,000; and .30% of amounts in excess of $400,000,000.
Total Return Portfolio: .50% of the first $100,000,000; .45% of the
next $100,000,000; .40% of the next $100,000,000; .35% of the next
$100,000,000; and .30% of amounts in excess of $400,000,000.
International Equity Portfolio: 1.00% of the first $100,000,000; .95%
of the next $100,000,000; and .90% of amounts in excess of
$200,000,000.
Real Estate Securities Portfolio: .85% of the first $100,000,000; .80%
of the next $100,000,000; and .75% of amounts in excess of
$200,000,000.
For the year ended December 31, 1993, the total advisory fees paid by the Fund
under the previous Investment Advisory Agreement (in effect until May 1,
1993)(see below) and the current Investment Advisory Agreement (in effect since
May 1, 1993) were $136,623 of which $26,183 was paid by the Common Stock Index
Portfolio (Common Stock Portfolio prior to May 1, 1993), $27,905 was paid by the
Government Securities Portfolio (Bond Portfolio prior to May 1, 1993), $35,848
was paid by the Money Market Portfolio, and $46,687 was paid by the Total Return
Portfolio. For the fiscal year ended December 31, 1994, the total advisory fee
paid was $326,133 of which $51,712 was paid by the Common Stock Index Portfolio,
$49,571 was paid by the Government Securities Portfolio, $114,126 was paid by
the Money Market Portfolio, and $110,724 was paid by the Total Return Portfolio.
For the fiscal year ended December 31, 1995, the total advisory fee paid was
$834,124 of which $148,409 was paid by the Common Stock Index Portfolio, $88,566
was paid by the Government Securities Portfolio, $201,711 was paid by the Money
Market Portfolio, $250,070 was paid by the Total Return Portfolio, $79,321 was
paid by the International Equity Portfolio, and $66,047 was paid by the Real
Estate Securities Portfolio.
20
<PAGE>
Under the previous Investment Advisory Agreement, the fee was deducted daily
and was equal to an annual rate of .50% on the first $250 million of the
aggregate average daily net assets of the Fund; .45% on the next $50 million of
the aggregate average daily net assets of the Fund; .40% on the next $100
million of the aggregate average daily net assets of the Fund; .35% on the next
$400 million of the aggregate average daily net assets of the Fund; and .30% on
the aggregate average daily net assets of the Fund in excess of $800 million.
During the period between January 1, 1993 and May 1, 1993 the previous
Investment Advisory Agreement was in effect, and AAI received investment
advisory fees in an amount representing .50% of the average net assets of the
Common Stock Portfolio (currently Common Stock Index Portfolio), the Bond
Portfolio (currently Government Securities Portfolio), the Money Market
Portfolio, and the Total Return Portfolio.
INVESTMENT SUB-ADVISERS
Pursuant to separate sub-advisory agreements described below, AAI has engaged
Perpetual as the investment sub-adviser to provide day-to-day portfolio
management for the International Equity Portfolio and has engaged Genesis as the
investment sub-adviser to provide day-to-day portfolio management for the Real
Estate Securities Portfolio.
Perpetual, a wholly-owned subsidiary of Perpetual plc, is the investment
sub-adviser for the International Equity Portfolio. It is registered under the
Investment Advisers Act of 1940 as an investment adviser and has its principal
offices at 48 Hart Street, Henley-on-Thames, Oxfordshire, England RG9 2AZ. In
addition to the International Equity Portfolio, Perpetual provides investment
advice and management to [pension plans, corporations and other institutional
and individual clients]. Although Perpetual has no prior experience advising a
U.S. mutual fund, it and its affiliates currently manage over 29 unit trusts
(the British term for mutual funds) in the United Kingdom and overseas. As of
December 31, 1995, Perpetual and its affiliates managed approximately $7.5
billion in assets. As of December 31, 1995, Mr. Martyn Abib, Chairman of
Perpetual plc, owned directly and beneficially approximately 7,375,000 (26.57%)
of the ordinary shares (i.e., common stock) of Perpetual plc. Perpetual plc has
the same address as Perpetual.
Genesis, a recently formed limited liability company, is the investment
sub-adviser for the Real Estate Securities Portfolio. Genesis is registered
under the Investment Advisers Act of 1940 as an investment adviser and has
offices at 909 Montgomery Street, San Francisco, CA 94133. Genesis has four
principal stockholders. They are Will K. Weinstein, Gail P. Seneca, Richard D.
Little, and two corporations controlled by the Blank family (J.B. Capital, Inc.
and Stellar Capital, Inc.).
INVESTMENT SUB-ADVISORY AGREEMENTS
AAI has entered into a separate sub-advisory agreement (the "Sub-advisory
Agreements") with Perpetual and with Genesis for the day-to-day portfolio
management of the International Equity Portfolio and the Real Estate Securities
Portfolio. The Sub-Advisory Agreement for the International Equity Portfolio was
approved by the board of directors of the Fund (including a majority of
directors who are not parties to such Agreement or interested persons, as
defined by the Investment Company Act of 1940, of any such party) at a meeting
held for that purpose on January 25, 1995. The Sub-Advisory Agreement for the
Real Estate Securities Portfolio was approved by the board of directors of the
Fund (including a majority of directors who are not parties to such agreement
for interested persons, as defined by the Investment Company Act of 1940, of any
such party) at a meeting held for that purpose on April 24, 1996. The
International Equity Portfolio Sub-advisory Agreement was also approved by the
initial shareholder of that Portfolio on May 24, 1995. The Sub-advisory
Agreements are not assignable and may be each be terminated without penalty upon
60 days written notice at the option of AAI or either Perpetual or Genesis, as
the case may be, or by the board of directors of the Fund or by a vote of a
majority of the outstanding shares of the class of stock representing an
interest in the appropriate Portfolio. Each Sub-advisory Agreement provides that
it shall continue in effect for two years and can than thereafter be continued
for its Portfolio from year to year so long as such continuance is specifically
approved annually (a) by the board of directors of the Fund or by a majority of
the outstanding shares of the Portfolio and (b) by a majority vote of the
Directors who are not parties to the Agreement, or interested persons of any
such party, cast in person at a meeting held for that purpose.
INVESTMENT SUB-ADVISORY FEES
Perpetual and Genesis manage the investments of the International Equity
Portfolio and the Real Estate Securities Portfolio, respectively, determining
which securities or other investments to buy and sell for each, selecting the
brokers and dealers to effect the transactions, and negotiating commissions. In
placing orders for securities transactions, both Perpetual and Genesis follow
the AAI's policy of seeking to obtain the most favorable price and efficient
execution available.
21
<PAGE>
For their services, AAI pays Perpetual and Genesis monthly compensation in the
form of an investment sub-advisory fee. The fee is paid by AAI monthly and is
based upon the average daily net assets (see "Purchase and Redemption of Fund
Shares") of the Portfolio that each sub-adviser manages, at the following annual
rates:
International Equity Portfolio: .50% of the first $100,000,000; .475%
of the next $100,000,000; and .45% of amounts in excess of
$200,000,000.
Real Estate Securities Portfolio: .425% of the first $100,000,000;
.40% of the next $100,000,000; and .375% of amounts in excess of
$200,000,000.
REIMBURSEMENT OF EXCESS OPERATING EXPENSES
If the operating expenses allocable to the following Portfolios of the Fund
for any fiscal year should exceed the amounts indicated below, AAI will
reimburse the Fund for the excess:
(1) With respect to the Government Securities Portfolio, the Total Return
Portfolio and the Real Estate Securities Portfolio, 1.5% of the first
$30,000,000 of the average daily net assets of each of those portfolios
and 1% of the amount by which the average daily net assets of each of
those Portfolios exceed $30,000,000.
(2) With respect to the Money Market Portfolio and the Common Stock Index
Portfolio, 0.75% of the average daily net assets of each of those
Portfolios.
(3) With respect to the International Equity Portfolio, 1.75% of the first
$30,000,000 of the average daily net assets of the portfolio and 1% of
the amount by which the average daily net assets of the Portfolio
exceeds $30,000,000.
Effective July 1, 1995, on a voluntary basis, the Investment Adviser has
agreed to reimburse the International Equity and Real Estate Securities
Portfolios for expenses in excess of the following amounts: International Equity
Portfolio, 1.50% of the first $30 million of average daily net assets; Real
Estate Securities Portfolio, 1.25% of the first $30 million of average daily net
assets.
For purposes of this reimbursement formula, "operating expenses" do not
include attorneys' fees, court judgements, decrees or awards, or any other
litigation costs in legal actions involving the Fund, or costs related to
indemnification of directors, officers or employees of the Fund where such costs
are not covered by director and officer liability insurance.
Expenses that are reimbursable as described above, if any, will be calculated
daily and credited to the Fund on a monthly basis.
Reimbursement of operating expenses paid to the Fund by AAI for the fiscal
year ended December 31, 1992, amounted to $14,308 which pertains exclusively to
the Money Market Portfolio. For the fiscal year ended December 31, 1993, total
reimbursements paid to the Fund by AAI amounted to $41,400. Of this amount,
$34,066 pertains to the Common Stock Index Portfolio and $7,334 pertains to the
Money Market Portfolio. For the fiscal year ended December 31, 1994, total
reimbursements paid to the Fund by AAI amounted to $53,529, all of which
pertains to the Common Stock Index Portfolio. For the fiscal year ended December
31, 1995, total reimbursements paid to the Fund amounted to $72,688. Of this
amount, $49,516 pertains to the International Equity Portfolio and $23,172
pertains to the Real Estate Securities Portfolio.
SECURITIES ACTIVITIES OF THE ADVISERS
Securities held by the Fund may also be held by Life of Virginia, or by
separate accounts or mutual funds for which AAI acts as an adviser. Because of
different investment objectives or other factors, a particular security may be
bought by Life of Virginia or by AAI or for one or more of its clients, when one
or more other clients are selling the same security. If purchases or sales of
securities for a Portfolio or other client of AAI or Life of Virginia arise for
consideration at or about the same time, transactions in such securities will be
made, insofar as feasible, for the Portfolio, Life of Virginia, and other
clients in a manner deemed equitable to all. To the extent that transactions on
behalf of more than one client of AAI during the same period may increase the
demand for securities being purchased or the supply of securities being sold,
there may be an adverse effect on price.
On occasions when AAI (under the supervision of the board of directors) deems
the purchase or sale of a security to be in the best interests of the Fund as
well as other accounts or companies, it may, to the extent permitted by
applicable laws and regulations, but will not be obligated to, aggregate the
securities to be sold or purchased for the Fund with those to be sold or
purchased for other accounts or companies in order to obtain favorable execution
and low brokerage commissions. In that event, allocation of the securities
purchased or sold, as well as the expenses incurred in the transaction, will be
made by AAI in the manner it considers to be most equitable and consistent with
its fiduciary obligations to the Fund and to such other accounts or companies.
In some cases this
22
<PAGE>
procedure may adversely affect the size of the position obtainable for a
Portfolio. Likewise, Perpetual or Genesis may, to the extent permitted by
applicable laws and regulations, but will not be obligated to, aggregate the
securities to be sold or purchased for the Fund with those to be sold or
purchased for other accounts or companies in order to obtain favorable execution
and low brokerage commissions. Like AAI, Perpetual or Genesis allocates the
securities purchased or sold, as well as the expenses incurred in the
transaction, in the manner that each considers to be most equitable and
consistent with its fiduciary obligations to the Fund and to such other accounts
or companies.
In performing their functions, AAI, Perpetual, and Genesis will not execute
private sales of securities among the Portfolios or between a Portfolio and any
other investment account it manages.
PORTFOLIO TRANSACTIONS AND BROKERAGE
As described above, AAI, Perpetual or Genesis determines which securities to
buy and sell for the Portfolios, selects brokers and dealers to effect the
transactions, and negotiates commissions. Transactions in equity securities will
usually be executed through brokers who will receive a commission paid by the
Portfolio. Fixed income securities are generally traded with dealers acting as
principals for their own accounts without a stated commission. The dealer's
margin is reflected in the price of the security. Money market obligations may
be traded directly with the issuer. Underwritten offerings of stock may be
purchased at a fixed price including an amount of compensation to the
underwriter.
In placing orders for securities transactions, AAI's policy (followed by
Perpetual and Genesis) is to attempt to obtain the most favorable price and
efficient execution available. These entities, subject to the review of the
Fund's board of directors, may pay higher than the lowest possible commission in
order to obtain better than average execution of transactions and/or valuable
investment research information described below, if, in their opinion, improved
execution and investment research information will benefit the performance of
each of the Portfolios.
When selecting broker-dealers to execute portfolio transactions, the Adviser
considers factors including the rate of commission or size of the
broker-dealer's "spread", the size and difficulty of the order, the nature of
the market for the security, the willingness of the broker-dealer to position,
the reliability, financial condition and general execution and operational
capabilities of the broker-dealer, and the research, statistical and economic
data furnished by the broker-dealer to the Adviser. In some cases, the Adviser
may use such information to advise other investment accounts that it advises.
Brokers or dealers which supply research may be selected for execution of
transactions for such other accounts, while the data may be used by the Adviser
in providing investment advisory services to the Fund. In addition, the Adviser
may select broker-dealers to execute portfolio transactions based upon sales by
that broker-dealer of Life of Virginia variable life insurance or annuity
contracts and may select broker-dealers who are affiliated with the Fund or AAI.
However, all such directed brokerage will be subject to AAI's policy to attempt
to obtain the most favorable price and efficient execution possible.
During the year ended December 31, 1995, the Fund paid brokerage commissions of
$315,311, based on $175,411,650 of transactions. During the year ended December
31, 1994, the Fund paid brokerage commissions of $48,969, based on $34,724,499
of transactions. During the year ended December 31, 1993, the Fund paid
brokerage commissions of $27,259, based on $21,057,044 of transactions.
DETERMINATION OF NET ASSET VALUE
The net asset value of each Portfolio is determined as of the time of the
close of trading on the New York Stock Exchange, (currently at 4:00 PM, New York
City time) on each day when the New York Stock Exchange is open except as noted
below. The New York Stock Exchange is scheduled to be open Monday through Friday
throughout the year, except for certain federal and other holidays. The net
asset value of each Portfolio will not be calculated on the Friday following
Thanksgiving or on December 31 when December 31 falls on a weekday. The net
asset value of a Portfolio is determined by adding the values of all securities,
cash and other assets (including accrued but uncollected interest and dividends)
of that Portfolio and subtracting all liabilities (including accrued expenses
but excluding capital and surplus). The net asset value of a share is determined
by dividing the net asset value of a Portfolio by the number of outstanding
shares of that Portfolio.
Equity securities (including common stocks, preferred stocks, convertible
securities and warrants) and call options written on all portfolio securities,
listed or traded on a national exchange are valued at their last sale price on
that exchange prior to the time when assets are valued. In the absence of any
exchange sales on that day and for unlisted equity securities, such securities
are valued at the last sale price on the NASDAQ (National Association of
Securities Dealers Automated Quotations) National Market System. In the absence
of any National Market System sales on that day, equity securities are valued at
the last reported bid price.
23
<PAGE>
Debt securities traded on a national exchange are valued at their last sale
price on that exchange prior to the time when assets are valued, or, lacking any
sales, at the last reported bid price. Debt securities other than money market
instruments traded in the over-the-counter market are valued at the last
reported bid price or at yield equivalent as obtained from one or more dealers
that make markets in the securities. Debt securities traded in both the
over-the-counter market and on a national exchange are valued according to the
broadest and most representative market, and it is expected that this ordinarily
will be the over-the-counter market.
Securities that are primarily traded on foreign securities exchanges are
generally valued at the last sale price on the exchange where they are primarily
traded. All foreign securities traded on the over-the-counter market are valued
at the last sale quote, if market quotes are available, or the last reported bid
price if there is no active trading in a particular security on a given day.
Quotations of foreign securities in foreign currencies are converted, at current
exchange rates, to their U. S. dollar equivalents in order to determine their
current value. In addition, because of the need to value foreign securities
(other than ADRs) as of the close of trading on various exchanges and
over-the-counter markets throughout the world, the calculation of the net asset
value of Portfolios investing in foreign securities may not take place
contemporaneously with the valuation of such foreign securities in such
Portfolios.
Securities for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the board of
directors of the Fund, including valuations provided by a pricing service
retained for this purpose.
Debt instruments held with a remaining maturity of 60 days or less are
generally valued on an amortized cost basis. Under the amortized cost basis
method of valuation, the security is initially valued at its purchase price (or
in the case of securities purchased with more than 60 days remaining to
maturity, the market value on the 61st day prior to maturity), and thereafter by
amortizing any premium or discount uniformly to maturity. If for any reason the
Fund Directors believe the amortized cost method of valuation does not fairly
reflect the fair value of any security, fair value will be determined in good
faith by or under the direction of the board of directors of the Fund as in the
case of securities having a maturity of more than 60 days.
Exchange listed put options written and options purchased are valued on the
primary exchange on which they are traded. Over-the-counter options written or
purchased by a Portfolio are valued based upon prices provided by market-makers
in such securities. Exchange-traded financial futures contracts are valued at
their settlement price established each day by the board of trade or exchange on
which they are traded.
DIVIDENDS AND DISTRIBUTIONS
It is the Fund's intention to distribute substantially all the net investment
income, if any, of a Portfolio. For dividend purposes, net investment income of
a Portfolio will consist of all payments of dividends or interest received by
that Portfolio less realized investment losses, if any, and the estimated
expenses of that Portfolio (including fees payable to AAI). Dividends from net
investment income of a Portfolio will be paid at least semi-annually and are
expected to be reinvested in additional full and fractional shares of that
Portfolio. Shares will begin accruing dividends on the day following the date on
which the shares are issued, the date of issuance customarily being the
"settlement" date. All net realized investment gains of the Fund, if any, are
declared and distributed annually after the close of the Fund's fiscal year to
the shareholders of the Fund and are expected to be reinvested in additional
full and fractional shares of the Fund.
REDEMPTION OF FUND SHARES
The Fund is required to redeem all full and fractional shares of the Fund for
cash. The redemption price is the net asset value per share next determined
after the receipt of proper notice of redemption. Payment for redeemed shares
will generally occur within seven days of receipt of a proper notice of
redemption.
The right to redeem shares or to receive payment with respect to any
redemption may be suspended for any period during which trading on the New York
Stock Exchange is restricted as determined by the Securities and Exchange
Commission or when such Exchange is closed (other than customary weekend and
holiday closings) for any period during which an emergency exists, as defined by
the Securities and Exchange Commission, which makes disposal of a Portfolio's
securities or determination of the net asset value of a Portfolio not reasonably
practicable, and for any other periods as the Securities and Exchange Commission
may by order permit for the protection of shareholders of the Portfolio.
24
<PAGE>
ADDITIONAL INFORMATION
LIFE OF VIRGINIA
Life of Virginia contributed the initial capital necessary for the Fund to
commence operations. Life of Virginia is a stock life insurance company
operating under a charter granted by the Commonwealth of Virginia on March 21,
1871. Effective April 1, 1996, Life of Virginia, is an indirectly, wholly-owned
subsidiary of GNA Corporation. GNA Corporation is a wholly-owned subsidiary of
General Electric Capital Corporation. Previously, Life of Virginia was an
indirectly wholly-owned subsidiary of Aon Corporation, an affiliate of Aon
Advisors, Inc. Life of Virginia ranks among the 25 largest stock life insurance
companies in the United States in terms of assets and business in force. The
principal offices of Life of Virginia are at 6610 W. Broad Street, Richmond,
Virginia 23230.
CUSTODIAN, DIVIDEND AND TRANSFER AGENT
For the Portfolios other than the International Equity Portfolio, the Fund's
Custodian, Dividend and Transfer Agent is Crestar Bank, 919 East Main Street,
Richmond, Virginia 23219. Under its Custodian Agreement with the Fund, Crestar
Bank maintains the portfolio securities acquired by the Fund, administers the
purchases and sales of portfolio securities, collects interest and dividends and
other distributions made on the securities held in the portfolios of the Fund,
and performs such other ministerial duties as are included in the Custody
Agreement, a copy of which is on file with the Securities and Exchange
Commission. Firstar Trust Company, 777 E. Wisconsin Avenue, Milwaukee, Wisconsin
53202, is the Fund's custodian for the International Equity Portfolio and
performs the same duties as Crestar Bank. Pursuant to a sub-custody agreement
with Firstar Trust Company, Chase Manhattan Bank, N.A., 1211 6th Avenue, New
York, N.Y. 10036, serves as custodian for the overseas assets of the
International Equity Portfolio.
Crestar Bank and Firstar Trust Company may hold securities of the Portfolios
on which call options are written and cash or liquid assets in amounts
sufficient to cover put options written on securities, in a segregated account
by transferring (upon the Fund's instructions) assets from a Portfolio's general
(regular) custody account. Likewise, such segregated accounts may be used in
connection with the covering of put and call options written on futures
contracts. The Custodians also will hold certain assets of certain of the
Portfolios constituting margin deposits with respect to financial futures
contracts at the disposal of FCMs through which such transactions are effected.
These Portfolios may also be required to post margin deposits with respect to
covered call and put options written on stock indices and for this purpose
certain assets of the Portfolio may be held by the Custodians pursuant to
similar arrangements with the brokers involved.
INDEPENDENT AUDITORS
Ernst & Young LLP acts as independent auditors for the Fund. Its offices are
at One James Center, Suite 1000, Richmond, Virginia 23219. Ernst & Young LLP
performs an audit of the financial statements of the Fund annually.
LEGAL COUNSEL
Sutherland, Asbill & Brennan, 1275 Pennsylvania Avenue, NW, Washington, DC
20004-2404, is counsel for the Fund.
CAPITAL STOCK
The Fund was incorporated in the Commonwealth of Virginia on May 14, 1984. The
authorized capital stock of the Fund consists of 2.75 billion shares of capital
stock, par value one cent ($0.01) per share. All of the shares of the authorized
capital stock have been divided into and may be issued in a designated class as
follows: 250 million shares have been designated as Class A shares, representing
interests in the Common Stock Index Portfolio; 250 million shares have been
designated as Class B shares, representing interests in the Government
Securities Portfolio; 250 million shares have been designated as Class C shares
representing interests in the Money Market Portfolio; 250 million shares have
been designated as Class D shares, representing interests in the Total Return
Portfolio; 250 million shares have been designated as Class E shares,
representing interests in the International Equity Portfolio; and 250 million
shares have been designated as Class F shares, representing interests in the
Real Estate Securities Portfolio. Classes G through K have also been designated
with 250 million shares each. These shares, however, do not yet represent
interests in any Portfolio.
Each issued and outstanding share of a class is entitled to participate
equally in dividends and distributions declared by the respective class and,
upon liquidation or dissolution, in net assets allocated to such class remaining
after satisfaction of outstanding liabilities. The shares of each class are
fully paid and non-assessable and have no preemptive or conversion rights. As of
March 31, 1996, Life of Virginia owned 95,496 Class B shares (having a market
value of $971,194) representing interests in the Government Securities
Portfolio, 161,586 Class C shares (with a market value of $1,696,653)
representing interests in the Money Market Portfolio, 1,019,175 Class E shares
(with a market value of $11,323,034) representing interests in the International
Equity Portfolio and 1,058,824 Class
25
<PAGE>
F shares (with a market value of $12,102,358) representing interests in the Real
Estate Securities Portfolio.
Life of Virginia, the Accounts and the Plan currently are the only
shareholders of record. As of December 31, 1995, there were no contract owners
or Plan participants who beneficially owned a 5% or greater voting interest in
any Portfolio. As of December 31, 1995, officers and directors of the Fund
beneficially owned, as owners of variable annuity or variable life insurance
contracts or as Plan participants, 0.07% of the Common Stock Index Portfolio and
0.02% of the Money Market Portfolio.
VOTING RIGHTS
All shares of capital stock have equal voting rights, except that only shares
representing interests in a particular Portfolio will be entitled to vote on
matters affecting only that Portfolio. The shares do not have cumulative voting
rights. Accordingly, owners of variable annuity or variable life insurance
contracts or Plan participants having voting interests in more than 50% of the
shares of the Fund voting for the election of directors could elect all of the
directors of the Fund if they choose to do so, and in such event, contract
owners or Plan participants having voting interests in the remaining shares
would not be able to elect any directors. Life of Virginia (directly or through
the Accounts) or the Plan owns all shares of the Fund. Life of Virginia or the
Plan will vote all shares of the Fund (or a Portfolio) as described in the
prospectus.
Matters requiring separate shareholder voting by Portfolio shall have been
effectively acted upon with respect to any Portfolio if a majority of the
outstanding voting interests of that Portfolio vote for approval of the matter,
notwithstanding that: (1) the matter has not been approved by a majority of the
outstanding voting interests of any other Portfolio; or (2) the matter has not
been approved by a majority of the outstanding voting interests of the Fund.
OTHER INFORMATION
This Statement of Additional Information and the prospectus for the Fund do
not contain all the information set forth in the registration statement and
exhibits relating thereto, which the Fund has filed with the Securities and
Exchange Commission, Washington, D.C. under the Securities Act of 1933 and the
Investment Company Act of 1940, to which reference is hereby made.
26
<PAGE>
AUDITED FINANCIAL STATEMENTS
The financial statements of the Fund appearing in this Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing in the registration statement, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
27
<PAGE>
Financial Statements
Life of Virginia Series Fund, Inc.
December 31, 1995
with Report of Independent Auditors
<PAGE>
Life of Virginia Series Fund, Inc.
Financial Statements
December 31, 1995
TABLE OF CONTENTS
Report of Independent Auditors...............................................1
Audited Financial Statements
Statements of Assets and Liabilities.........................................2
Statements of Operations.....................................................4
Statements of Changes in Net Assets..........................................6
Portfolio of Investments.....................................................8
Notes to Financial Statements...............................................55
Financial Highlights........................................................66
<PAGE>
[Ernst & Young LLP letterhead]
Report of Independent Auditors
Board of Directors
Life of Virginia Series Fund, Inc.
We have audited the statements of assets and liabilities, including the
portfolio of investments, of Life of Virginia Series Fund, Inc. (comprising, the
Common Stock Index, Government Securities, Money Market, Total Return,
International Equity and Real Estate Securities portfolios) as of December 31,
1995, and the related statements of operations for the year then ended (Common
Stock Index, Government Securities, Money Market, and Total Return portfolios),
and for the period from May 1, 1995 (Inception) to December 31, 1995
(International Equity and Real Estate Securities portfolios), the statements of
changes in net assets for each of the two years in the period then ended (Common
Stock Index, Government Securities, Money Market, and Total Return portfolios),
and for the period from May 1, 1995 to December 31, 1995 (International Equity
and Real Estate Securities portfolios) and the financial highlights for each of
the periods since 1991. 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 at December
31, 1995, 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 each
of the respective portfolios constituting the Life of Virginia Series Fund, Inc.
at December 31, 1995, the results of their operations for the year then ended
(Common Stock Index, Government Securities, Money Market, and Total Return
portfolios), and for the period from May 1, 1995 to December 31, 1995
(International Equity and Real Estate Securities portfolios), the changes in
their net assets for each of the two years in the period then ended (Common
Stock Index, Government Securities, Money Market, and Total Return portfolios),
and for the period from May 1, 1995 to December 31, 1995 (International Equity
and Real Estate Securities portfolios) and the financial highlights for each of
the periods since 1991, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Richmond, Virginia February 8, 1996
<PAGE>
Life of Virginia Series Fund, Inc.
Statements of Assets and Liabilities
December 31, 1995
<TABLE>
<CAPTION>
COMMON STOCK GOVERNMENT INTERNATIONAL REAL ESTATE
INDEX SECURITIES MONEY MARKET TOTAL RETURN EQUITY SECURITIES
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in securities at
fair value:
Common Stock Index Portfolio $65,949,667
(cost - $54,122,551)
Government Securities Portfolio
(cost- $21,972,616) $23,268,658
Money Market Portfolio
(cost- $62,953,237) $62,953,237
Total Return Portfolio
(cost- $61,929,100) $69,744,724
International Equity Portfolio
(cost- $14,031,009) $14,967,503
Real Estate Securities Portfolio
(cost- $12,365,592) $13,465,534
Cash 19,186 34,237 11,754 60,195 506,518 22,599
Dividends receivable 124,116 - - 37,623 25,979 131,430
Interest receivable 845 405,286 118,369 559,330 - 3,664
Receivable for securities sold 4,263 - - 105,221 92,159 -
Receivable from affiliate - - - - 49,516 -
---------------------------------------------------------------------------------------------
66,098,077 23,708,181 63,083,360 70,507,093 15,641,675 13,623,227
LIABILITIES
Payable to security dealers 81,237 - - - 133,901 194,350
Payable to affiliate - - - - 113,998 -
Short foreign currencies at fair
value (cost basis-$46,165) - - - - 45,994 -
---------------------------------------------------------------------------------------------
81,237 - - - 293,893 194,350
---------------------------------------------------------------------------------------------
Net assets $66,016,840 $23,708,181 $63,083,360 $70,507,093 $15,347,782 $13,428,877
=============================================================================================
Outstanding shares 3,144,987.490 2,261,878.202 6,087,248.487 4,426,343.852 1,466,562.513 1,214,781.237
=============================================================================================
Net asset value per share $ 20.99 $ 10.48 $ 10.36 $ 15.93 $ 10.47 $ 11.05
=============================================================================================
</TABLE>
See accompanying notes.
2/3
<PAGE>
Life of Virginia Series Fund, Inc.
Statements of Operations
<TABLE>
<CAPTION>
COMMON STOCK GOVERNMENT
INDEX SECURITIES MONEY MARKET TOTAL RETURN
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1995 DECEMBER 31, 1995 DECEMBER 31, 1995
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Interest $ 75,089 $1,108,611 $ 783,624 $ 1,513,370
Dividends 1,028,563 - - 329,186
Less foreign taxes withheld - - - -
Accretion of discounts on investments 16,114 71,114 1,622,235 196,701
---------------------------------------------------------------------
1,119,766 1,179,725 2,405,859 2,039,257
EXPENSES
Investment advisory fee 148,409 88,566 201,711 250,070
Directors' fees 2,875 2,874 2,875 2,875
Accounting fees 7,067 7,067 7,067 7,067
Legal 6,415 6,415 6,415 6,415
Custodian fees 100,748 17,018 26,069 48,196
Registration fees 5,807 5,807 5,807 5,807
Miscellaneous 9,981 3,461 3,459 6,040
---------------------------------------------------------------------
281,302 131,208 253,403 326,470
Less expense reimbursement - - - -
Less expense waiver - - 161,369 -
---------------------------------------------------------------------
281,302 131,208 92,034 326,470
---------------------------------------------------------------------
NET INVESTMENT INCOME 838,464 1,048,517 2,313,825 1,712,787
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investments 435,855 330,315 235 3,340,591
Change in net unrealized gain
on investments 11,238,587 1,399,196 - 7,153,511
---------------------------------------------------------------------
Net realized and unrealized gain
on investments 11,674,442 1,729,511 235 10,494,102
---------------------------------------------------------------------
Increase in net assets from operations $ 12,512,906 $2,778,028 $ 2,314,060 $12,206,889
=====================================================================
</TABLE>
4
<PAGE>
Life of Virginia Series Fund, Inc.
Statements of Operations -- continued
<TABLE>
<CAPTION>
INTERNATIONAL REAL ESTATE
EQUITY SECURITIES
PORTFOLIO PORTFOLIO
-------------------------------------
PERIOD FROM MAY PERIOD FROM MAY 1,
1, 1995 TO 1995 TO DECEMBER
DECEMBER 31, 1995 31, 1995
-------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest $ 25,424 $ 34,061
Dividends 158,986 562,704
Less foreign taxes withheld (26,662) -
Accretion of discounts on investments - 37,543
-------------------------------------
157,748 634,308
EXPENSES
Investment advisory fee 79,321 66,047
Directors' fees 1,625 1,625
Accounting fees 7,500 7,097
Legal 33,471 33,471
Custodian fees 41,119 14,801
Registration fees 6,971 -
Miscellaneous 1,989 1,989
-----------------------------------
171,996 125,030
Less expense reimbursement (49,516) (23,172)
Less expense waiver - -
------------------------------------
122,480 101,858
------------------------------------
NET INVESTMENT INCOME 35,268 532,450
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investments (120,856) 204,852
Change in net unrealized gain 936,494 1,099,942
on investments -----------------------------------
Net realized and unrealized gain 815,638 1,304,794
on investments -----------------------------------
Increase in net assets from operations $ 850,906 $ 1,837,244
===================================
</TABLE>
See accompanying notes.
5
<PAGE>
Life of Virginia Series Fund, Inc.
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
COMMON STOCK INDEX PORTFOLIO GOVERNMENT SECURITIES PORTFOLIO
------------------------------------ ------------------------------------
YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31
1995 1994 1995 1994
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income $ 838,464 $ 327,666 $ 1,048,517 $ 539,591
Net realized gain (loss) on investments 435,855 62,321 330,315 (843,165)
Change in unrealized gain (loss) on investments 11,238,587 30,617 1,399,196 (182,328)
------------------------------------ ------------------------------------
Increase (decrease) in net assets from operations 12,512,906 420,604 2,778,028 (485,902)
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (824,967) (326,881) (1,046,426) (533,755)
Net realized gain on investments (435,855) (62,321) (330,315) -
Tax return of capital - - - -
------------------------------------ ------------------------------------
(1,260,822) (389,202) (1,376,741) (533,755)
CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares 32,495,984 18,236,292 11,410,213 8,356,373
Net asset value of shares issued
upon reinvestment of dividends 1,260,822 389,202 1,376,741 533,755
Cost of redemption of shares (2,921,622) (3,004,089) (3,078,132) (3,157,327)
------------------------------------ ------------------------------------
Increase in net assets from capital transations 30,835,184 15,621,405 9,708,822 5,732,801
------------------------------------ ------------------------------------
Increase in net assets 42,087,268 15,652,807 11,110,109 4,713,144
Net assets at beginning of period 23,929,572 8,276,765 12,598,072 7,884,928
------------------------------------ ------------------------------------
Net assets at end of period $66,016,840 $23,929,572 $23,708,181 $ 12,598,072
==================================== ====================================
Undistributed net investment income $ 14,504 $ 1,007 $ 7,927 $ 5,836
==================================== ====================================
</TABLE>
6
<PAGE>
Life of Virginia Series Fund, Inc.
Statements of Changes in Net Assets -- continued
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO TOTAL RETURN PORTFOLIO
------------------------------------ -----------------------------------
YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31
1995 1994 1995 1994
------------------------------------ -----------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income $ 2,313,825 $ 923,116 $ 1,712,787 $ 884,983
Net realized gain (loss) on investments 235 1,405 3,340,591 453,394
Change in unrealized gain (loss) on investments - 5,684 7,153,511 (300,482)
------------------------------------ -----------------------------------
Increase (decrease) in net assets from operations 2,314,060 930,205 12,206,889 1,037,895
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (2,313,825) (923,116) (1,716,214) (866,448)
Net realized gain on investments (235) (1,405) (3,280,876) (453,394)
Tax return of capital (1,464) (6,627) - -
------------------------------------ -----------------------------------
(2,315,524) (931,148) (4,997,090) (1,319,842)
CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares 52,457,301 89,250,596 25,726,933 25,726,933
Net asset value of shares issued
upon reinvestment of dividends 2,315,524 931,148 4,997,090 1,319,842
Cost of redemption of shares (25,216,740) (66,556,246) (2,134,985) (4,292,141)
------------------------------------ -----------------------------------
Increase in net assets from capital transations 29,556,085 23,625,498 28,589,038 22,380,796
------------------------------------ -----------------------------------
Increase in net assets 29,554,621 23,624,555 35,798,837 22,098,849
Net assets at beginning of period 33,528,739 9,904,184 34,708,256 12,609,407
------------------------------------ -----------------------------------
Net assets at end of period $63,083,360 $33,528,739 $70,507,093 $ 34,708,256
==================================== ===================================
Undistributed net investment income $ - $ - $ 15,108 $ 18,535
==================================== ===================================
</TABLE>
7
<PAGE>
Life of Virginia Series Fund, Inc.
Statements of Changes in Net Assets -- continued
<TABLE>
<CAPTION>
INTERNATIONAL REAL ESTATE
EQUITY SECURITIES
PORTFOLIO PORTFOLIO
------------------ ---------------
PERIOD FROM PERIOD FROM
MAY 1, 1995 TO MAY 1, 1995 TO
DECEMBER 31, DECEMBER 31,
1995 1995
------------------ ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS
Net investment income $ 35,268 $ 532,450
Net realized gain (loss) on investments (120,856) 204,852
Change in unrealized gain (loss) on investments 936,494 1,099,942
------------ ------------
Increase (decrease) in net assets from operations 850,906 1,834,244
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (35,268) (523,184)
Net realized gain on investments (247,059) (204,724)
Tax return of capital (4,496) -
------------ ------------
(286,823) (727,908)
CAPITAL SHARE TRANSACTIONS
Proceeds from sale of shares 14,558,413 11,839,141
Net asset value of shares issued
upon reinvestment of dividends 286,823 727,908
Cost of redemption of shares (61,537) (247,508)
------------ ------------
Increase in net assets from capital transations 14,783,699 12,319,541
------------ ------------
Increase in net assets 15,347,782 13,428,877
Net assets at beginning of period - -
------------ ------------
Net assets at end of period $15,347,782 $13,428,877
============ ============
Undistributed net investment income $ - $ 9,266
============ ============
</TABLE>
See accompanying notes.
7
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments
December 31, 1995
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- ------------------- -------------------------
<S> <C> <C> <C>
COMMON STOCK INDEX PORTFOLIO
COMMON STOCKS
Aerospace/Defense 2.21%
Boeing Co. 4,700 $ 368,362
EG & G Inc. 700 16,975
General Dynamics Corp. 800 47,300
Lockheed Martin Corp. 2,815 222,385
Loral Corp. 2,400 84,900
McDonnell Douglas Corp 1,600 147,200
Northrop Grumman Corp. 650 41,600
Raytheon Co 3,400 160,650
Rockwell Int'l Corp. 3,000 158,625
TRW Inc. 800 62,000
United Technologies Corp. 1,600 151,800
--------------------------
1,461,797
Airlines 0.27%
AMR Corp. (A) 1,000 74,250
Delta Air Lines Inc. Del 600 44,325
Southwest Airlines Co. 2,000 46,500
USAir Group Inc. (A) 800 10,600
--------------------------
175,675
Automobiles 1.88%
Chrysler Corp. 4,389 243,041
Ford Motor Co. Del 14,800 429,200
General Motors Corp. 10,300 544,612
Paccar Inc. 500 21,062
--------------------------
1,237,915
Auto Parts After Market 0.50%
Cooper Tire & Rubber Co. 1,100 27,088
Dana Corp. 1,300 38,025
Eaton Corp. 1,000 53,625
Echlin Inc. 800 29,200
Genuine Parts Co. 1,600 65,600
Goodyear Tire & Rubber Co. 2,100 95,288
Snap-on Tools Inc. 500 22,625
--------------------------
331,451
</TABLE>
8
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- ------------------- -------------------------
<S> <C> <C> <C>
COMMON STOCK INDEX PORTFOLIO - Continued
COMMON STOCKS-Continued
Banking 6.27%
Banc One Corp. 5,400 $ 203,850
Bank of Boston Corp. 1,600 74,000
Bank of New York 2,700 131,625
Bankamerica Corp. 5,200 336,700
Bankers Trust NY Corp. 1,000 66,500
Barnett Banks Inc. 1,400 82,600
Boatmans Bancshares Inc. 1,800 73,575
Chase Manhattan Corp. 2,400 145,500
Chemical Banking Corp. 3,500 205,625
Citicorp 5,900 396,775
Comerica 1,600 64,200
Corestates Financial Corp. 1,900 71,962
First Bank System 1,800 89,325
First Chicago NBD 5,191 205,044
First Fidelity Bancorp New 1,100 82,912
First Interstate Bancorp 1,100 150,150
First Union Corp. 2,400 133,500
Fleet Financial Group New 3,427 139,650
J P Morgan & Co. 2,600 208,650
Keycorp 3,100 112,375
Mellon Bank Corp. 2,000 107,500
National City Corp. 2,000 66,250
NationsBank Corp. 3,700 257,612
Norwest Corp. 4,900 161,700
PNC Financial Corp. 3,200 103,200
Republic New York 700 43,488
Suntrust Banks 1,600 109,600
US Bancorp 2,200 73,975
Wachovia Corp. 2,400 109,800
Wells Fargo & Co. 600 129,600
-------------------------
4,137,243
</TABLE>
9
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- ------------------- -------------------------
<S> <C> <C> <C>
COMMON STOCK INDEX PORTFOLIO - Continued
COMMON STOCKS-Continued
Beverages-Alcoholic 0.69%
Anheuser Busch Cos Inc. 3,500 $ 234,062
Brown Forman Corp. 900 32,850
Coors Adolph Co. Class B 500 11,062
Seagrams Ltd. 5,100 176,588
-------------------------
454,562
Beverages-Soft Drinks 2.87%
Coca-Cola Co. 17,400 1,291,950
Pepsico Inc. 10,800 603,450
-------------------------
1,895,400
Broadcast Media/Cable TV 0.76%
Cox Communications Inc. 61 1,190
Telecommunications Inc. (A) 9,000 178,875
Time Warner Inc. 5,300 200,738
US West Media Group (A) 6,500 123,500
-------------------------
504,303
Broker-Dealers 0.12%
Morgan Stanley Group 1,000 80,625
Building Materials 0.04%
Owens Corning Fiberglass Corp. (A) 600 26,925
Business Services 0.54%
Alco Standard Corp. 1,600 73,000
Beneficial Corp. 700 32,638
Block H & R Inc. 1,500 60,750
CUC International (A) 2,400 81,900
Interpublic Group Cos. 1,000 43,375
Service Corp. International 1,400 61,600
-------------------------
353,263
Chemicals 1.56%
Eastman Chemical Co. 1,100 68,888
FMC Corp. New (A) 500 33,812
</TABLE>
10
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- ------------------- -------------------------
<S> <C> <C> <C>
COMMON STOCK INDEX PORTFOLIO - Continued
COMMON STOCKS-Continued
Chemicals - continued
Goodrich B F Co. 300 $ 20,438
Grace W R & Co. 1,300 76,862
Great Lakes Chemical Corp. 800 57,600
Hercules Inc. 1,525 85,972
Mallinckrodt Group Inc. 1,100 40,012
Monsanto Co. 1,500 183,750
Morton International Inc. 2,100 75,338
Nalco Chemical Co. 900 27,112
PPG Industries Inc. 2,800 128,100
Praxair Inc. 1,900 63,888
Rohm & Haas Co. 900 57,938
Sigma Aldrich Corp. 750 37,125
Union Carbide Corp. 1,900 71,250
-------------------------
1,028,085
Chemicals-Other 1.37%
Air Products & Chems Inc. 1,600 84,400
Dow Chemical Co. 3,700 260,388
Du Pont E I DE Nemours & Co. 7,700 538,038
Ecolab Inc. 800 24,000
-------------------------
906,826
Chemicals-Specialty 0.18%
Avery Dennison Corp. 800 40,100
Engelhard Corp. 1,950 42,412
Raychem Corp. 600 34,125
-------------------------
116,637
Coal 0.46%
Coastal Corp. 1,500 55,875
Eastern Enterprises 250 8,812
Enron Corp. 3,500 133,438
Ensearch Corp. 1,000 16,250
</TABLE>
11
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- ------------------- -------------------------
<S> <C> <C> <C>
COMMON STOCK INDEX PORTFOLIO - Continued
COMMON STOCKS-Continued
Coal - continued
Nacco Industries Inc. Class A 75 $ 4,162
Panhandle Eastern Corp. 2,100 58,538
Pittston Services Group 500 15,688
Santa Fe Energy Resources 1,300 12,512
-------------------------
305,275
Communication Equipment - Manufacturing 0.11%
---------------------------------------
Andrew Corp. 462 17,672
Silicon Graphics 2,100 57,750
-------------------------
75,422
Computer Software & Services 3.44%
Autodesk Inc. 550 18,838
Automatic Data Processing 1,900 141,075
Bay Networks, Inc. (A) 1,300 53,462
Cisco Systems Inc. (A) 3,800 283,575
Compaq Computer Corp. (A) 3,700 177,600
Computer Assoc Int'l. Inc. 3,300 187,688
Computer Sciences Corp. (A) 750 52,688
First Data Corp. 3,000 200,625
Microsoft Corp. (A) 8,100 710,775
Novell Inc. (A) 5,100 72,675
Oracle Systems Corp. (A) 5,950 252,131
Shared Medical System Corp. 275 14,953
3 Com Corp. (A) 2,200 102,575
-------------------------
2,268,660
Computer Systems 2.67%
Apple Computer Inc. 1,800 57,375
Cabletron Systems (A) 1,000 81,000
Ceridian Corp. (A) 600 24,750
Cray Research Inc. 300 7,425
Data Gen. Corp. (A) 500 6,875
</TABLE>
12
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- ------------------- -------------------------
<S> <C> <C> <C>
COMMON STOCK INDEX PORTFOLIO - Continued
COMMON STOCKS-Continued
Computer Systems - continued
Digital Equipment Corp. (A) 2,000 $ 128,250
Hewlett Packard Co. 7,100 594,625
IBM Corp. 7,800 715,650
Sun Microsystems Inc. (A) 2,600 118,625
Tandem Computers (A) 1,500 15,938
Unisys Corp. (A) 2,400 13,500
-------------------------
1,764,013
Conglomerates 0.89%
ITT Corp. (A) 1,500 79,500
ITT Hartford Group (A) 1,500 72,562
ITT Industries 1,500 36,000
Minnesota Mining & Manufacturing Co. 5,800 384,250
Ogden Corp. 600 12,825
-------------------------
585,137
Containers-Metal & Glass 0.17%
Ball Corp. 400 11,000
Bemis Inc. 700 17,937
Crown Cork & Seal Inc. (A) 1,200 50,100
Whitman Corp. 1,500 34,875
-------------------------
113,912
Cosmetics 2.69%
Alberto Culver Co. Class B 350 12,031
Avon Products Inc. 1,000 75,375
Clorox Co. Del 700 50,138
Colgate Palmolive Co. 2,000 140,500
Gillette Co. 6,100 317,962
International Flavors & Fragrances Inc. 1,500 72,000
Kimberley Clark Corp. 3,838 317,594
Procter & Gamble Co. 9,500 788,500
-------------------------
1,774,100
</TABLE>
13
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- ------------------- -------------------------
<S> <C> <C> <C>
COMMON STOCK INDEX PORTFOLIO - Continued
COMMON STOCKS-Continued
Drugs 6.25%
Alza Corp. Del 1,200 $ 29,700
American Home Products Corp. 4,300 417,100
Amgen Inc. (A) 3,700 219,688
Bristol Myers Squibb Inc. 7,000 601,125
Eli Lilly & Co. 7,600 427,500
Merck & Co. Inc. 17,000 1,117,750
Pfizer Inc. 8,700 548,100
Pharmacia/Upjohn 7,790 301,862
Schering Plough Corp. 5,100 279,225
Warner Lambert Co. 1,900 184,538
-------------------------
4,126,588
Electric Companies 3.54%
American Electric Power Inc. 2,600 105,300
Baltimore Gas & Electric Co. 2,000 57,000
Carolina Power & Light Co. 2,200 75,900
Central & Southwest Corp. 2,700 75,262
Cinergy Corp. 2,209 67,651
Consolidated Edison Co. 3,200 102,400
Detroit Edison Co. 2,000 69,000
Dominion Resources Inc. VA 2,400 99,000
Duke Power Co. 2,000 94,750
Entergy Corp. 3,100 90,675
FPL Group Inc. 2,600 120,575
General Public Utilities 1,600 54,400
Houston Industries Inc. 3,600 87,300
Niagara Mohawk Power Corp. 2,000 19,250
Northern States Power Co. 900 44,212
Ohio Edison Co. 2,100 49,350
Pacific Gas & Electric Co. 5,900 167,412
Pacificorp 3,900 82,875
Peco Energy 3,100 93,388
</TABLE>
14
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- ------------------- -------------------------
<S> <C> <C> <C>
COMMON STOCK INDEX PORTFOLIO - Continued
COMMON STOCKS-Continued
Electric Companies - continued
PP&L Resources 2,200 $ 55,000
Public Service Enterprise Group 3,400 104,125
SCE Corp Holding Corp. 6,200 110,050
Southern Company 9,200 226,550
Texas Utilities Co. 3,100 127,488
Unicom Corp. 3,000 98,250
Union Electric Co. 1,400 58,450
-------------------------
2,335,613
Electrical Equipment 3.29%
Emerson Electric Co. 3,100 253,425
General Electric Co. 23,300 1,677,600
Grainger W W Inc. 650 43,062
Honeywell Inc. 1,800 87,525
Thomas & Betts Corp. 250 18,438
Westinghouse Electric Corp. 5,400 89,100
-------------------------
2,169,150
Electronics 2.60%
Advanced Micro Devices Inc. (A) 1,400 23,100
AMP Inc. 3,063 117,543
Harris Corp. DEL 500 27,312
Intel Corp. 11,300 641,275
Intergraph Corp. 700 11,025
LSI Logic, Inc. (A) 1,700 55,675
Micron Technology Inc. 2,900 114,912
Motorola Inc. 8,100 461,700
National Semi-Conductor Co. (A) 1,700 37,825
Perkin Elmer Corp. 500 18,875
Tektronix Inc. 450 22,106
Teledyne 700 17,938
Texas Instruments Inc. 2,600 134,550
</TABLE>
15
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- ------------------- -------------------------
<S> <C> <C> <C>
COMMON STOCK INDEX PORTFOLIO - Continued
COMMON STOCKS-Continued
Electronics - continued
Western Atlas Inc. (A) 700 $ 35,350
-------------------------
1,719,186
Engineering and Construction 0.14%
Centex Corp. 300 10,425
Crane Co. 350 12,906
Masco Corp. 2,200 69,025
-------------------------
92,356
Financial Services 6.76%
Alexander & Alexander Svcs Inc. 600 11,400
American Express Co. 6,700 277,212
Dean Witter Discover & Co. 2,300 108,100
Federal Home Loan Mortgage 2,500 208,750
Federal National Mortgage Assoc. 3,800 471,675
Household International Inc. 1,400 82,775
MBNA Corp. 2,100 77,438
Merrill Lynch & Co. Inc. 2,400 122,400
Marsh & McLennan Cos. Inc. 900 79,875
S&P 500 Dep Receipts 43,800 2,693,012
Salomon, Inc. 1,500 53,250
Travelers 4,400 276,650
-------------------------
4,462,537
Food-Grain & Agricultural 0.82%
Campbell Soup Co. 3,400 204,000
Conagra Inc. 3,400 140,250
CPC International Inc. 2,000 137,250
Pioneer Hybred Intl. 1,100 61,188
-------------------------
542,688
Food Processing 2.11%
Archer Daniels Midland Co. 7,432 133,776
General Mills Inc. 2,200 127,050
Heinz H J Co. 5,050 167,281
</TABLE>
16
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- ------------------- -------------------------
<S> <C> <C> <C>
COMMON STOCK INDEX PORTFOLIO - Continued
COMMON STOCKS-Continued
Food Processing - continued
Hershey Foods Corp. 1,000 $ 65,000
Kellogg Corp. 3,000 231,750
Quaker Oats Co. 1,800 62,100
Ralston Purina Group 1,400 87,325
Sara Lee Corp. 6,600 210,375
Unilever 2,200 309,650
-------------------------
1,394,307
Food Wholesalers 0.46%
Albertsons Inc. 3,550 116,706
Fleming Companies 500 10,312
Giant Food Inc. Class A 800 25,200
Great Atlantic & Pacific Tea Co. 500 11,500
Kroger Co. (A) 1,700 63,750
Wrigley Wm. Jr. Co. 1,500 78,750
-------------------------
306,218
Healthcare-Diversified 1.48%
Humana (A) 2,200 60,225
Johnson & Johnson 8,900 762,062
United Healthcare Corp. 2,400 157,200
-------------------------
979,487
Healthcare-Miscellaneous 0.13%
Manor Care Inc. 800 28,000
Tenet Healthcare 2,800 58,100
-------------------------
86,100
Homebuilding 0.20%
Fluor Corp. 1,100 72,600
Kaufman & Broad Home Corp. 400 5,950
Pulte Corporation 300 10,088
Sherwin-Williams 1,100 44,825
-------------------------
133,463
</TABLE>
17
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- ------------------- -------------------------
<S> <C> <C> <C>
COMMON STOCK INDEX PORTFOLIO - Continued
COMMON STOCKS-Continued
Hotels/Motels 0.12%
Hilton Hotels Corp. 750 $ 46,125
Harrah's Entertainment (A) 1,400 33,950
-------------------------
80,075
Household Furnishings 0.51%
Armstrong World Industries 500 31,000
Black & Decker Corp. 1,100 38,775
Maytag Corp. 1,400 28,350
Newell Co. 2,150 55,631
Premark International 800 40,500
Rubbermaid Corp. 2,200 56,100
Stanley Works 600 30,900
Whirlpool Corp. 1,000 53,250
-------------------------
334,506
Insurance-Life 3.11%
Aetna Life & Casualty Co. 1,600 110,800
Allstate 6,200 254,975
American General Corp. (A) 2,800 97,650
American International Group Inc. 6,500 601,250
Chubb Corp. 1,100 106,425
Cigna Corp. 900 92,925
General RE Corp. (A) 1,100 170,500
Jefferson Pilot 975 45,334
Lincoln National Corp. Ind. 1,400 75,250
Loews Corp. 1,600 125,400
Providian Corp. 1,300 52,975
Safeco Corp. (A) 1,600 55,200
St. Paul Companies Inc. 1,100 61,188
Transamerica Co. 1,000 72,875
Torchmark Corp. 1,000 45,250
U S F & G Corp. 1,500 25,312
UNUM Corp. 900 49,500
US Life Corp. 412 12,308
-------------------------
2,055,117
</TABLE>
18
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- ------------------- -------------------------
<S> <C> <C> <C>
COMMON STOCK INDEX PORTFOLIO - Continued
COMMON STOCKS-Continued
Leisure/Entertainment 0.59%
Bally Entertainment Corp. (A) 600 $ 8,400
Brunswick Corp. 1,300 31,200
Capital Cities / ABC Inc. 2,100 259,088
Mattel Inc. 2,925 89,944
-------------------------
388,632
Leisure Time 1.21%
Comcast Corp. (A) 3,300 60,019
Disney Walt Co. DEL 7,200 424,800
Fleetwood Enterprises 600 15,450
Handleman Co. Del (A) 400 2,300
Hasbro Inc. 1,200 37,200
King World Productions (A) 500 19,438
Outboard Marine Corp. 250 5,094
Viacom Class B (A) 4,900 232,166
-------------------------
796,467
Machine Tools 0.02%
Cincinnati Milacron Inc. 400 10,500
Machinery-Diversified 1.17%
Briggs & Stratton Corp. 350 15,181
Caterpillar Inc. DEL 2,800 164,520
Cooper Industries Inc. 1,500 55,125
Cummins Engine Inc. 500 18,500
Deere & Co. 3,600 126,900
Dover Corp. 1,400 51,615
Foster Wheeler Corp. 600 25,500
General Signal Corp. 600 19,415
Giddings & Lewis Inc. Wisc 400 6,600
Harnischfeger Ind. Inc. 650 21,612
Illinois Tool Works 1,600 94,400
Ingersoll Rand Co. 1,500 52,688
</TABLE>
19
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- ------------------- -------------------------
<S> <C> <C> <C>
COMMON STOCK INDEX PORTFOLIO - Continued
COMMON STOCKS-Continued
Machinery-Diversified - continued
Pall Corp. 1,600 $ 43,000
Parker Hannifin Corp. 1,000 34,250
Timken Inc. 350 13,388
Trinova Corp. 350 10,019
Varity Corp. (A) 500 18,562
-------------------------
771,275
Manufacturing-Diversified 0.14%
Applied Materials 2,400 94,500
Medical Products 2.36%
Abbott Labs 10,900 455,075
Allergan Inc. 800 26,000
Bard CR Inc. 700 22,575
Bausch & Lomb Inc. 700 27,738
Baxter International Inc. 3,800 159,125
Becton Dickinson & Co. 900 67,500
Beverly Enterprises Inc. (A) 1,400 14,875
Biomet Inc. (A) 1,500 26,812
Boston Scientific Corp. 2,200 107,800
Columbia / HCA Healthcare Corp. 6,100 309,575
Community Psychiatric Center 600 7,350
Medtronic Inc. 3,200 178,800
St. Jude Medical Inc. (A) 975 41,925
United States Surg. 700 14,962
US Healthcare Inc. 2,100 97,650
-------------------------
1,557,762
Metals/Mining 1.01%
Alcan Aluminum LTD. NEW 3,100 96,488
Alcoa 2,500 132,188
</TABLE>
20
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- ------------------- -------------------------
<S> <C> <C> <C>
COMMON STOCK INDEX PORTFOLIO - Continued
COMMON STOCKS-Continued
Metals/Mining - continued
Asarco Inc. 650 $ 20,800
Barrick Gold 4,900 129,238
Homestake Mining Co. 2,100 32,812
Newmont Mining Corp. 1,100 49,775
Phelps Dodge Corp. 900 56,025
Placer Dome Inc. 3,300 79,612
Reynolds Metals Co. 800 45,300
Santa Fe Pacific Gold Corp. 1,773 21,498
-------------------------
663,736
Metals - Miscellaneous 0.14%
----------------------
Echo Bay Mines Ltd. 1,600 16,600
Freeport McMoran 2,800 78,750
-------------------------
95,350
Mining - United States 0.05%
----------------------
Cyprus-Amax Minerals Co. 1,200 31,350
Miscellaneous 0.87%
Allied Signal Inc. 3,900 185,250
Corning Inc. 3,300 105,600
Dial Corp. Del. 1,200 35,540
Laidlaw, Inc. 4,100 42,025
Schweitzer-Mauduit (A) 200 4,625
Tenneco Inc. 2,500 124,062
Textron Inc. 1,100 74,250
Transport Holdings (A) 20 815
-------------------------
572,167
Natural Gas 0.39%
Columbia Gas System Inc. (A) 650 28,519
Consolidated National Gas Co. 1,200 54,450
Nicor Inc. 600 16,500
Oneok Inc. 350 8,006
</TABLE>
21
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- ------------------- -------------------------
<S> <C> <C> <C>
COMMON STOCK INDEX PORTFOLIO - Continued
COMMON STOCKS-Continued
Natural Gas - continued
Pacific Enterprises 1,200 $ 33,900
Peoples Energy Corp. 450 14,288
Sonat Inc. 1,100 39,188
Williams Companies (A) 1,400 61,425
-------------------------
256,276
Natural Gas-Transporters 0.02%
Noram Energy Corp. 1,700 15,088
Office Equipment & Supplies 0.50%
Amdahl Corp. (A) 1,600 13,600
Moore Ltd. 1,400 26,075
Pitney Bowes, Inc. 2,100 98,700
Xerox Corp. (A) 1,400 191,800
-------------------------
330,175
Oil-Integrated Domestic 4.42%
Amerada Hess 1,200 63,600
Amoco Corp. 6,900 495,938
Ashland Oil Inc. 800 28,100
Atlantic Richfield Co. 2,200 243,650
Exxon Corp. 17,100 1,370,138
Kerr McGee Corp. 650 41,275
Louisiana Land & Expl. Co. 375 16,078
Oryx Energy Company (A) 1,400 18,725
Pennzoil Co. 600 25,350
Phillips Petroleum Co. 3,600 122,850
Sun Company Inc. 1,000 27,375
Texaco Inc. 3,600 282,600
Unocal Corp. 3,400 99,025
USX Marathon Group 4,100 79,950
-------------------------
2,914,654
</TABLE>
22
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- ------------------- -------------------------
<S> <C> <C> <C>
COMMON STOCK INDEX PORTFOLIO - Continued
COMMON STOCKS-Continued
Oil-Integrated International 3.37%
Chevron Corporation 9,000 $ 472,500
Mobil Corp. 5,500 616,000
Occidental Pete Corp. Del 4,400 94,050
Royal Dutch Petro 7,400 1,044,325
-------------------------
2,226,875
Oil & Gas Drilling 0.67%
Baker Hughes Inc. 2,000 48,750
Burlington Resources Inc. (A) 1,700 66,725
Dresser Industries Inc. 2,500 60,938
Helmerich & Payne Inc. 325 9,669
McDermott International Inc. 700 15,400
Rowan Companies Inc. (A) 1,100 10,862
Schlumberger Ltd. 3,300 228,525
-------------------------
440,869
Oil Well Services & Equipment 0.12%
Halliburton Co. 1,600 81,000
Paper & Forest Products 1.11%
Boise Cascade Corp. 600 20,775
Champion International Corp. 1,300 54,600
Federal Paper Board Inc. 600 31,125
Georgia Pacific Corp. 1,300 89,212
International Paper Co. 3,500 132,562
James River Corp. VA 1,100 26,538
Louisiana Pacific Corp. 1,400 33,950
Mead Corp. 800 41,800
Potlatch Corp. 350 14,000
Stone Container Corp. 1,300 18,688
Temple Inland Inc. 700 30,888
Union Camp Corp. 900 42,862
</TABLE>
23
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- ------------------- -------------------------
<S> <C> <C> <C>
COMMON STOCK INDEX PORTFOLIO - Continued
COMMON STOCKS-Continued
Paper & Forest Products - continued
Westvaco 1,350 $ 37,462
Weyerhauser Co. 2,800 121,100
Willamette Industries 700 39,375
-------------------------
734,937
Photographic 0.52%
Eastman Kodak Co. 4,700 314,900
Polaroid Corp. 550 26,056
-------------------------
340,956
Pollution Control 0.65%
Browning Ferris Industries Inc. 2,900 85,550
Johnson Controls Inc. 500 34,375
Millipore Corp. 550 22,619
Safety Kleen 700 10,938
Tyco Intl. Ltd. 2,100 74,812
WMX Technologies Inc. 6,700 200,162
-------------------------
428,456
Publishing 1.05%
American Greeting Corp. Class A 1,000 27,625
Deluxe Corp. 1,100 31,900
Donnelley R R & Sons Co. 2,100 82,688
Dow Jones & Co. Inc. 1,400 55,825
Dun & Bradstreet Crop. 2,300 148,925
Gannet Inc. 1,950 119,681
Harcourt General Inc. 1,000 41,875
John H. Harland Co. 350 7,306
Josten Inc. 500 12,125
Knight Ridder Inc. 600 37,500
McGraw Hill Inc. 750 65,344
Meredith Corp. 300 12,562
Tribune Co. 800 48,900
-------------------------
692,256
</TABLE>
24
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- ------------------- -------------------------
<S> <C> <C> <C>
COMMON STOCK INDEX PORTFOLIO - Continued
COMMON STOCKS-Continued
Publishing-Newspapers 0.14%
New York Times Co. A 1,300 $ 38,512
Times Mirror Co. Ser. A 1,600 54,200
-------------------------
92,712
Railroads 1.05%
Burlington Northern / Santa Fe 2,003 156,234
Conrail 1,000 70,000
CSX Corp. 3,000 136,875
Norfolk Southern Corp. 1,800 142,875
Union Pacific Corp. 2,800 184,800
-------------------------
690,784
Restaurants 0.86%
Darden Restaurants 2,200 26,125
Luby's Cafeterias 300 6,675
Marriott International 1,700 65,025
McDonald's Corp. 9,600 433,200
Ryans Family Steak House Inc. 700 4,900
Shoney's Inc. (A) 500 5,125
Wendys International Inc. 1,400 29,750
-------------------------
570,800
Retail Stores - Department Stores 1.38%
---------------------------------
Federated Department Stores (A) 2,700 74,250
K-Mart Corp. 6,300 45,675
Nordstrom Inc. 1,100 44,550
TJX Companies Inc. 900 16,988
Walmart Stores Inc. (A) 31,600 707,050
Woolworth Corp. 1,800 23,400
-------------------------
911,913
Retail Stores-Drug 0.06%
Rite Aid Corp. 1,100 37,675
Retail Stores- Food Chain 0.37%
American Stores Co. 2,100 56,175
</TABLE>
25
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- ------------------- -------------------------
<S> <C> <C> <C>
COMMON STOCK INDEX PORTFOLIO - Continued
COMMON STOCKS-Continued
Retail Stores- Food Chain - continued
Supervalu Inc. (A) 1,000 $ 31,500
Sysco Inc. 2,500 81,250
Winn Dixie Stores Inc. 2,000 73,750
-------------------------
242,675
Retail Stores-General Merchandise 0.90%
Dayton Hudson Corp. 900 67,500
Dillard Department Stores Inc. Class A 1,600 45,600
Longs Drug Stores 250 11,969
Melville Corp. 1,500 46,125
Mercantile Stores Inc. 450 20,812
Penney, J C Inc. 3,100 147,638
Price/Costco Inc. (A) 2,700 41,175
Sears Roebuck & Co. 5,400 210,600
-------------------------
591,419
Retail Stores-Specialty 1.49%
Charming Shoppes Inc. 1,400 4,025
Circuit City Stores Inc. 1,300 35,912
GAP Inc. 2,000 84,000
Home Depot Inc. 6,600 315,975
Lowes Cos. Inc. 2,200 73,700
May Dept. Stores Co. 3,450 145,762
Pep Boys Manny Moe & Jack 900 23,062
Tandy Corp. 800 33,200
The Limited Inc. 4,900 85,138
Toys R Us (A) 3,800 82,650
Walgreen Co. 3,400 101,575
-------------------------
984,999
Savings & Loans/Holding Companies 0.20%
Ahmanson H F & Co. 1,600 42,400
</TABLE>
26
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- ------------------- -------------------------
<S> <C> <C> <C>
COMMON STOCK INDEX PORTFOLIO - Continued
COMMON STOCKS-Continued
Savings & Loans/Holding Companies - continued
Golden West Financial Corp. Del 800 $ 44,200
Great Western Financial Corp. 1,900 48,450
-------------------------
135,050
Steel 0.35%
Armco Inc. (A) 1,500 8,812
Bethlehem Stl Corp. (A) 1,500 21,000
Inco Ltd. 1,700 56,525
Inland Stl Industries Inc. 600 15,075
Nucor Corp. 1,200 68,550
USX-US Steel 1,100 33,825
Worthington Industries Inc. 1,300 27,056
-------------------------
230,843
Telecommunications 0.52%
Alltel Corp. 2,600 76,700
DSC Communications (A) 1,600 59,000
Northern Telecom Ltd. 3,500 150,500
Scientific Atlanta Inc. 1,000 15,000
Tellabs Inc. (A) 1,200 44,400
-------------------------
345,600
Telephone 8.04%
Airtouch Communications (A) 6,800 192,100
Ameritech Corp. 7,600 448,400
AT&T 21,800 1,411,566
Bell Atlantic Corp. 6,000 401,250
Bellsouth Corp. 13,700 595,950
GTE Corp. 13,400 589,600
M C I Corp. (A) 9,300 242,962
Nynex Corp. 5,900 318,600
Pacific Telesis Group 5,900 198,388
SBC Communications 8,400 483,000
Sprint Corp. 4,800 191,400
</TABLE>
27
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- ------------------- -------------------------
<S> <C> <C> <C>
COMMON STOCK INDEX PORTFOLIO - Continued
COMMON STOCKS-Continued
Telephone - continued
US West Inc. 6,500 $ 232,375
-------------------------
5,305,591
Textiles- Apparel Manufacturers 0.48%
Brown Group 225 3,206
Fruit of the Loom (A) 1,000 24,375
Liz Claiborne Inc. 1,000 27,750
National Service Industries Inc. 600 19,425
Nike Corp. Class B 2,000 139,250
Reebok International Ltd. 1,000 28,250
Russell Corp. 500 13,875
Springs Industries Inc. Class A 275 11,378
Stride Rite Corp. 650 4,875
VF Corp. 850 44,838
-------------------------
317,222
Tobacco 1.90%
American Brands Inc. DEL 2,600 116,025
Philip Morris Cos. Inc. 11,600 1,049,800
UST Inc. 2,700 90,112
-------------------------
1,255,937
Truckers 0.19%
Consolidated Freightways 500 13,250
Federal Express Corp. 700 51,712
Navistar International Corp. (A) 1,000 10,500
Roadway Services Inc. 500 24,438
Ryder Systems Inc. 1,000 24,750
Yellow Corporations 300 3,712
-------------------------
128,362
TOTAL COMMON STOCKS -
-------- -------------------------
(Cost - $53,872,364) 99.52% 65,699,480
</TABLE>
28
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK INDEX PORTFOLIO - Continued
COMMERCIAL PAPER (Cost - $250,000) 0.38%
Household Finance Corp.
5.77% due January 3, 1996 $ 250,000 $ 250,000
PREFERRED STOCK (Cost - $187) 0.00%
Electronics
Teledyne Pref. Class E 13 187
TOTAL INVESTMENTS -
(Cost - $54,122,551) 99.90% 65,949,667
Cash and other assets
less liabilities 0.10% 67,173
-------------- -------------------------
Net Assets 100.00% $ 66,016,840
============== =========================
</TABLE>
(A) - Non-income producing security
See accompanying notes
29
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal
of Net Assets Amount Value
----------------- ------------------ ------------------------
<S> <C> <C> <C>
GOVERNMENT SECURITIES PORTFOLIO
U.S. GOVERNMENT OBLIGATIONS
U.S. Treasury Bill
5.27% due January 25, 1996 $ 100,000 $ 99,649
U.S. Treasury Bill
5.26% due March 7, 1996 150,000 148,553
U.S. Treasury Bill
4.84% due March 28, 1996 100,000 98,830
U.S. Treasury Bill
5.01% due May 9, 1996 180,000 176,769
U.S. Treasury Bond
10.375% due November 15, 2012 500,000 691,562
U.S. Treasury Bond
8.125% due May 15, 2021 1,000,000 1,265,625
U.S. Treasury Bond
7.125% due February 15, 2023 1,200,000 1,370,623
U.S. Treasury Bond
7.625% due February 15, 2025 2,000,000 2,443,750
U.S. Treasury Bond
6.875% due August 15, 2025 500,000 564,062
U.S. Treasury Note
5.875% due July 31, 1997 1,000,000 1,010,311
U.S. Treasury Note
6.00% due August 31, 1997 1,400,000 1,417,060
U.S. Treasury Note
5.75% due September 30, 1997 1,000,000 1,009,061
U.S. Treasury Note
7.375% due November 15, 1997 500,000 518,906
U.S. Treasury Note
5.375% due November 30, 1997 1,500,000 1,504,688
U.S. Treasury Note
6.125% due May 15, 1998 1,000,000 1,019,686
</TABLE>
30
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal
of Net Assets Amount Value
------------------- ------------------ ------------------------
<S> <C> <C> <C>
GOVERNMENT SECURITIES PORTFOLIO - Continued
U.S. GOVERNMENT OBLIGATIONS-Continued
U.S. Treasury Note
5.875% due August 15, 1998 $ 1,000,000 $ 1,015,625
U.S. Treasury Note
7.125% due September 30, 1999 2,350,000 2,490,262
U.S. Treasury Note
7.75% due January 31, 2000 750,000 814,921
U.S. Treasury Note
6.875% due March 31, 2000 1,500,000 1,586,250
U.S. Treasury Note
6.125% due July 31, 2000 1,000,000 1,029,686
U.S. Treasury Note
7.25% due August 15, 2004 900,000 1,000,968
U.S. Treasury Note
7.875% due November 15, 2004 800,000 926,500
U.S. Treasury Note
6.50% due August 15, 2005 1,000,000 1,065,311
------------------------
TOTAL INVESTMENTS -
(Cost - $21,972,616) 98.15% 23,268,658
Cash and other assets 1.85% 439,523
------------------- ------------------------
Net Assets 100.00% $ 23,708,181
=================== ========================
</TABLE>
See accompanying notes
31
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal
of Net Assets Amount Value
----------------- ------------------- ---------------------
<S> <C> <C> <C>
MONEY MARKET PORTFOLIO
COMMERCIAL PAPER
American General Finance
5.74% due January 19, 1996 $ 1,300,000 $ 1,300,000
Ameritech Capital
5.55% due January 16, 1996 1,665,000 1,661,150
American Express Credit Corp.
5.70% due February 8, 1996 1,730,000 1,730,000
Asset Securitization Corp.
5.73% due January 18, 1996 2,000,000 1,994,588
Associates Corp.
5.71% due January 19, 1996 490,000 490,000
5.63% due February 2, 1996 700,000 700,000
5.60% due February 16, 1996 1,400,000 1,400,000
Avco Financial Services, Inc.
5.70% due January 22, 1996 1,000,000 996,675
Baltimore Gas & Electric
5.68% due January 24, 1996 490,000 488,222
Bell Atlantic Network
5.65% due February 20, 1996 2,200,000 2,182,736
Bell South
5.63% due January 29, 1996 2,000,000 1,991,242
Beneficial Corp.
5.65% due February 5, 1996 2,000,000 2,000,000
Coca Cola
5.56% due February 7, 1996 1,000,000 994,285
Corporate Asset Funding Inc.
5.65% due February 12, 1996 2,105,000 2,091,125
FMCC
5.72% due January 5, 1996 225,000 225,000
5.63% due January 24, 1996 440,000 440,000
5.62% due February 13, 1996 690,000 690,000
5.53% due March 1, 1996 1,270,000 1,270,000
</TABLE>
32
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal
of Net Assets Amount Value
----------------- ------------------- ---------------------
<S> <C> <C> <C>
MONEY MARKET PORTFOLIO - Continued
COMMERCIAL PAPER-Continued
General Electric Capital
5.68% due January 17, 1996 $ 935,000 $ 935,000
5.68% due February 8, 1996 300,000 300,000
5.70% due February 16, 1996 1,010,000 1,010,000
General Motors Acceptance Corp.
5.70% due January 26, 1996 1,130,000 1,125,527
5.69% due February 6, 1996 460,000 457,383
5.73% due February 27, 1996 620,000 614,375
Goldman Sachs
5.67% due February 9, 1996 2,040,000 2,027,469
Hewlett Packard
5.56% due January 2, 1996 1,645,000 1,644,746
Household Finance Corp.
5.69% due February 15, 1996 1,240,000 1,240,000
IBM Credit
5.72% due January 5, 1996 600,000 599,619
5.70% due January 25, 1996 1,200,000 1,195,440
International Lease Finance
5.71% due January 9, 1996 1,775,000 1,772,748
Merrill Lynch & Company
5.75% due January 30,1996 800,000 796,295
5.75% due January 31,1996 1,000,000 999,557
Morgan Stanley Group
5.72% due January 23, 1996 1,600,000 1,594,407
5.55% due February 26, 1996 630,000 624,561
PHH Corp.
5.72% due January 12, 1996 1,600,000 1,597,203
5.55% due February 23, 1996 1,000,000 991,829
Philip Morris
5.57% due January 19, 1996 1,350,000 1,346,240
</TABLE>
33
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal
of Net Assets Amount Value
------------------- -------------------- --------------------
<S> <C> <C> <C>
MONEY MARKET PORTFOLIO - Continued
COMMERCIAL PAPER-Continued
Prudential Funding Corp.
5.52% due February 14, 1996 $ 950,000 $ 950,000
Raytheon
5.90% due January 8, 1996 1,215,000 1,213,606
Southwestern Bell
5.65% due January 3, 1996 1,600,000 1,599,498
5.65% due February 6, 1996 365,000 362,938
US West Capital
5.73% due January 11, 1996 2,000,000 1,996,817
---------------------
TOTAL COMMERCIAL PAPER -
(Cost - $49,640,281) 78.69% 49,640,281
U.S. GOVERNMENT AGENCY OBLIGATIONS
Federal Farm Credit Bank
5.66% due February 1, 1996 2,000,000 1,999,901
5.72% due February 1, 1996 2,000,000 2,000,000
FHLB
5.41% due February 26, 1996 3,750,000 3,718,441
FNMA
5.67% due January 4, 1996 2,050,000 2,049,031
5.67% due January 8, 1996 1,860,000 1,857,949
5.60% due January 10, 1996 1,690,000 1,687,634
---------------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS -
(Cost - $13,312,956) 21.10% 13,312,956
---------------------
</TABLE>
34
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal
of Net Assets Amount Value
-------------- ------------------ --------------------
<S> <C> <C> <C>
MONEY MARKET PORTFOLIO - Continued
TOTAL INVESTMENTS -
(Cost - $62,953,237) 99.79% $ 62,953,237
Cash and other assets 0.21% 130,123
------- -------------
Net Assets 100.00% $ 63,083,360
======= =============
</TABLE>
See accompanying notes
35
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- --------------------- ---------------------
<S> <C> <C> <C>
TOTAL RETURN PORTFOLIO
U.S. GOVERNMENT AND AGENCY OBLIGATIONS
Agency-Government Sponsored 1.59%
Federal Home Loan Bank
8.25% due May 27, 1996 $ 150,000 $ 151,692
Federal Home Loan Bank
8.25% due September 25, 1996 100,000 102,044
Federal Home Loan Bank
6.32% due December 4, 1997 500,000 510,092
Federal National Mortgage
7.05% due December 10, 1998 250,000 260,382
5.45% due October 10, 2003 100,000 97,626
---------------------
1,121,836
U.S. Government Obligations 36.45%
U.S. Treasury Bond
6.25% due August 15, 2023 1,000,000 1,027,812
U.S. Treasury Bond
7.625% due February 15, 2025 5,000,000 6,109,375
U.S. Treasury Bond
6.875% due August 15, 2025 2,000,000 2,256,250
U.S. Treasury Note
7.25% due November 30, 1996 500,000 508,750
U.S. Treasury Note
7.125% due September 30, 1999 800,000 847,749
U.S. Treasury Note
7.75% due January 31, 2000 1,750,000 1,901,482
U.S. Treasury Note
6.25% due May 31, 2000 500,000 517,030
U.S. Treasury Note
6.125% due July 31, 2000 2,000,000 2,059,372
</TABLE>
36
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- --------------------- ---------------------
<S> <C> <C> <C>
TOTAL RETURN PORTFOLIO - Continued
U.S. GOVERNMENT AND
AGENCY OBLIGATIONS-Continued
U.S. Government Obligations - continued
U.S. Treasury Note
6.25% due August 31, 2000 $ 1,000,000 $ 1,035,000
U.S. Treasury Note
7.875% due August 15, 2001 300,000 335,437
U.S. Treasury Note
5.75% due August 15, 2003 350,000 354,265
U.S. Treasury Note
7.25% due August 15, 2004 500,000 556,093
U.S. Treasury Note
7.875% due November 15, 2004 1,550,000 1,795,094
U.S. Treasury Note
6.5% due May 15, 2005 3,000,000 3,196,875
U.S. Treasury Note
6.5% due August 15, 2005 3,000,000 3,195,933
---------------------
25,696,517
TOTAL U.S. GOVERNMENT AND
AGENCY OBLIGATIONS -
----------------- ---------------------
(Cost - $25,085,400) 38.04% 26,818,353
PREFERRED STOCK (Cost-$298,000)
Broker-Dealers 0.53%
Morgan Stanley Group 9,000 373,500
</TABLE>
37
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- --------------------- ---------------------
<S> <C> <C> <C>
TOTAL RETURN PORTFOLIO - Continued
COMMON STOCKS
Automobiles 0.57%
Ford Motor Co. 4,000 $ 116,000
Harley Davidson Inc. 10,000 287,500
---------------------
403,500
Banks 2.23%
Barnett Banks Inc. 8,000 472,000
First Chicago NBD 5,500 217,250
NationsBank Corp. 12,700 884,238
---------------------
1,573,488
Beverages-Soft Drinks 0.95%
Pepsico Inc. 12,000 670,500
Broadcast Media 3.07%
Cox Communications (A) 10,000 195,000
Evergreen Media Corp. 11,800 377,600
Time Warner Inc. 7,000 265,125
Turner Broadcasting System 25,000 646,875
Viacom Class A (A) 8,600 394,525
Viacom Class B (A) 6,061 287,140
---------------------
2,166,265
Business Services 0.71%
Alco Standard Corp. 11,000 501,875
Chemicals-Other 1.04%
Air Products & Chems Inc. 5,000 263,750
DuPont E I De Nemours 6,700 468,162
---------------------
731,912
</TABLE>
38
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- --------------------- ---------------------
<S> <C> <C> <C>
TOTAL RETURN PORTFOLIO - Continued
COMMON STOCKS - Continued
Computer Software & Services 6.22%
Bell & Howell Holdings (A) 18,400 $ 515,200
Compaq Computer (A) 5,500 264,000
EMC Corp. (A) 35,500 545,812
First Data Corp. 7,929 530,252
Informix Corp. (A) 15,000 450,000
McAfee Associates (A) 16,200 710,775
Network General (A) 11,000 367,125
SPSS, Inc. (A) 13,000 253,500
Sterling Software (A) 12,000 748,500
---------------------
4,385,164
Computer Systems 3.28%
Digital Equipment (A) 10,500 673,312
Hewlett Packard Co. 11,000 921,250
Sun Microsystems (A) 15,800 720,875
---------------------
2,315,437
Cosmetics 0.96%
Colgate Palmolive Co. 5,500 386,375
Procter & Gamble Co. 3,500 290,500
---------------------
676,875
Drugs 2.23%
Merck & Co. 6,000 394,500
Pfizer Inc. 5,000 315,000
Schering Plough 8,600 470,850
Watson Pharmaceuticals (A) 8,000 392,000
---------------------
1,572,350
Electronics 1.41%
Itron Inc. (A) 6,000 202,500
U.S. Robotics 9,000 789,750
---------------------
992,250
</TABLE>
39
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- --------------------- ---------------------
<S> <C> <C> <C>
TOTAL RETURN PORTFOLIO - Continued
COMMON STOCKS - Continued
Financial Services Misc. 2.38%
Cityscape Financial (A) 25,000 $ 518,750
Green Tree Financial 18,000 474,750
Household International 8,000 473,000
Omega Healthcare Investors 8,000 213,000
---------------------
1,679,500
Food Processing 0.45%
Archer Daniels Midland 17,699 318,582
Healthcare-Diversified 2.89%
Humana 23,000 629,625
Johnson & Johnson 10,000 856,250
United Healthcare 8,400 550,200
---------------------
2,036,075
Insurance-Life 1.07%
American General Corp. 8,000 279,000
American Intl Group Inc. 5,155 476,838
---------------------
755,838
Leisure Time 0.75%
Walt Disney Co. 9,000 531,000
Machinery-Diversified 1.02%
Illinois Tool Works 9,000 531,000
Watsco Inc. Class A 3,750 67,031
Watsco Class B (A) 6,750 118,125
---------------------
716,156
</TABLE>
40
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- --------------------- ---------------------
<S> <C> <C> <C>
TOTAL RETURN PORTFOLIO - Continued
COMMON STOCKS - Continued
Medical Products 1.36%
Abbott Labs 14,000 $ 584,500
Becton Dickinson & Co. 5,000 375,000
---------------------
959,500
Office Equipment & Supplies 1.09%
BT Office Products (A) 14,000 224,000
Xerox Corp. 4,000 548,000
---------------------
772,000
Oil-Integrated Domestic 0.91%
Amoco Corp. 8,900 639,688
Oil-Integrated International 0.67%
Mobil Corp. 2,300 257,600
Royal Dutch Petroleum 1,500 211,688
---------------------
469,288
Publishing 0.45%
Tribune, Inc. 5,200 317,850
Railroads 0.76%
Conrail 6,700 469,000
Union Pacific Corp. 1,000 66,000
---------------------
535,000
Real Estate 0.77%
Centerpoint Properties 4,000 92,500
First Industry Realty 20,000 450,000
---------------------
542,500
Retail Stores-Specialty 2.26%
Central Garden & Pet (A) 49,500 470,250
General Nutrition Cos Inc. (A) 24,000 552,000
</TABLE>
41
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- --------------------- ---------------------
<S> <C> <C> <C>
TOTAL RETURN PORTFOLIO - Continued
COMMON STOCKS - Continued
Retail Stores-Specialty-continued
Walgreen 8,000 $ 239,000
Williams-Sonoma Inc. (A) 18,000 333,000
---------------------
1,594,250
Telecommunications 2.60%
DSC Communications (A) 12,500 460,938
Echostar Communications (A) 18,800 455,900
Panamsat Corp. (A) 22,000 485,375
Saville Systems Ireland (A) 15,000 213,750
Techforce Corp. (A) 25,000 218,750
---------------------
1,834,713
Textile/Apparel 0.34%
Tommy Hilfiger Corp. (A) 5,600 237,300
TOTAL COMMON STOCKS -
----------------- ---------------------
(Cost - $23,923,700) 42.45% 29,928,856
CORPORATE BONDS
Drugs 0.57%
Merck & Co.
7.75% due May 1, 1996 $400,000 403,011
Financial Services 0.21%
Commercial Credit
6.0% due June 15, 2000 150,000 150,677
</TABLE>
42
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- --------------------- ---------------------
<S> <C> <C> <C>
TOTAL RETURN PORTFOLIO - Continued
CORPORATE BONDS - Continued
Telephone 0.57%
Norwest Financial
6.25% due February 15, 1997 $ 400,000 $ 403,506
TOTAL CORPORATE BONDS-
----------------- ---------------------
(Cost - $945,774) 1.36% 957,194
CONVERTIBLE CORPORATE BONDS
Gaming/Hotel 0.13%
Argosy Gaming
12.0% due June 1, 2001 100,000 90,250
Real Estate 0.07%
Liberty Property
8.0% due July 1, 2001 50,000 51,312
TOTAL CORPORATE CONVERTIBLE
----------------- ---------------------
BONDS-(Cost-$150,000) 0.20% 141,562
COMMERCIAL PAPER
Baltimore Gas & Electric
5.70% due January 8, 1996 1,670,000 1,668,149
Beneficial Corp.
5.77% due January 3, 1996 830,000 830,000
Ford Motor Credit Corp
5.80% due January 19, 1996 2,070,000 2,070,000
</TABLE>
43
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- --------------------- ---------------------
<S> <C> <C> <C>
TOTAL RETURN PORTFOLIO - Continued
COMMERCIAL PAPER - Continued
General Motors Acceptance Corp.
5.73% due January 22, 1996 $ 400,000 $ 398,663
Illinois Tool Works
5.78% due January 4, 1996 1,000,000 999,518
Merrill Lynch & Co.
5.75% due January 26, 1996 700,000 697,205
Pitney Bowes
5.78% due January 5,1996 265,000 264,830
Prudential Funding Corp.
5.78% due January 11, 1996 400,000 400,000
Raytheon Co.
5.90% due January 8, 1996 450,000 449,484
TOTAL COMMERCIAL PAPER -
----------------- ------------------
(Cost - $7,777,849) 11.03% 7,777,849
SHORT TERM U.S. GOVERNMENT
AND AGENCY OBLIGATIONS
Federal Home Loan Bank
5.66% due January 8, 1996 1,545,000 1,543,300
5.41% due February 26, 1996 640,000 634,614
Federal Home Loan Marketing
5.47% due January 24, 1996 1,575,000 1,569,496
TOTAL SHORT TERM U.S. GOVERNMENT
AND AGENCY OBLIGATIONS -
----------------- ------------------
(Cost - $3,747,477) 5.31% 3,747,410
----------------- ------------------
</TABLE>
44
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
--------------- --------------------- ---------------------
<S> <C> <C> <C>
TOTAL RETURN PORTFOLIO - Continued
TOTAL INVESTMENTS
(Cost - $61,929,100) 98.92% $ 69,744,724
Cash and other assets 1.08% 762,369
--------------- ---------------------
Net Assets 100.00% $ 70,507,093
=============== =====================
</TABLE>
(A) - Non-income producing security
See accompanying notes
45
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage
of Net Assets Shares/Units Value
------------------ ------------------ ---------------------
<S> <C> <C> <C>
INTERNATIONAL EQUITY PORTFOLIO
COMMON STOCKS
Denmark 3.70%
Danisco 5,900 $ 285,322
Sophus Berendsen (A) 2,500 281,948
---------------------
567,270
Finland 2.71%
Nokia (A) 3,700 145,716
Cultor (A) 6,500 269,461
---------------------
415,177
France 5.80%
AXA 4,600 310,405
Axime (A) 4,000 308,361
Roussel-Uclaf 1,600 271,554
---------------------
890,320
Germany 5.43%
Adidas AG (A) 6,000 317,339
SAP AG Vorug (A) 1,000 152,172
Veba AG 5,200 223,073
Wella AG 260 141,147
---------------------
833,731
Great Britian 16.15%
Abbey National 14,500 143,181
Argyll Group 27,200 143,585
BAT Industries 20,000 176,220
British Airways 17,100 123,721
British Telecommunications 23,200 127,512
General Accident 12,500 126,343
Glaxo Holdings 10,200 144,904
Grand Metropolitan 17,800 128,232
Inchcape 15,400 59,536
Land Securities 11,000 105,375
Lloyds Chemists 24,700 99,325
</TABLE>
46
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage
of Net Assets Shares/Units Value
------------------ ------------------ ---------------------
<S> <C> <C> <C>
INTERNATIONAL EQUITY PORTFOLIO - Continued
COMMON STOCKS - Continued
Great Britian - continued
Northern Foods 35,500 $ 94,250
Prudential Corp. 18,500 119,201
Refuge Group 17,900 125,896
Salvesen Christian 24,000 98,559
Scot & Newcastle 12,000 114,209
Scotia Holdings (A) 5,000 41,920
WH Smith Group 18,000 118,494
Standard Charter 18,800 159,955
Tate & Lyle 14,400 105,527
Unilever 6,000 123,245
---------------------
2,479,190
Hong Kong 7.77%
Bank of East Asia 9,000 32,301
CDL Hotels International (A) 100,000 50,440
Cheung Kong 18,000 109,649
China Resources Enterp (A) 20,000 10,347
Citic Pacific Ltd 5,000 17,104
Dah Sing Financial (A) 12,000 27,936
Henderson Inv 97,000 79,663
Hong Kong Electric 20,000 65,572
Hong Kong Telecom (A) 35,000 62,468
HSBC Holdings 11,104 168,026
Hong Kong & China Gas 20,000 32,204
Hutchison Whampoa 6,000 36,550
Hysan Development 14,000 37,028
Mingly Corporation (A) 100,000 20,047
National Mutual Asia Ltd. 60,000 54,320
New Asia Realty Class A 20,000 38,283
New World Development 38,000 165,625
New World Infrastructure (A) 20,066 38,409
Swire Pacific 9,000 69,840
</TABLE>
47
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage
of Net Assets Shares/Units Value
------------------ ------------------ ---------------------
<S> <C> <C> <C>
INTERNATIONAL EQUITY PORTFOLIO - Continued
COMMON STOCKS - Continued
Hong Kong - continued
Television Broadcast 12,000 $ 42,758
Wheelock and Company (A) 20,000 34,274
---------------------
1,192,844
Indonesia 0.50%
Astri International 25,000 51,937
PT Sorini Corp. 5,000 25,148
---------------------
77,085
Japan 29.96%
Bandai Co. (A) 2,000 82,015
Bank of Tokyo (A) 5,000 87,735
Bridgestone Corp. 6,000 95,394
Chudendo Corporation 3,000 102,955
Credit Saison Co. (A) 3,000 71,545
Dainippon Ink & Chemical 24,000 111,913
Daiwa Kosho Lease (A) 11,000 109,838
Fanuc 3,000 130,003
Hankyu Corp. (A) 15,000 82,161
Heiwa Corp. 3,000 78,234
Hitachi 19,000 191,563
Hokkaido Elec 80 1,861
Jaccs (A) 9,000 93,358
Jeol (A) 10,000 85,117
Jusco (A) 5,000 130,391
Kamigumi Co. (A) 15,000 144,108
Kao Corporation 10,000 124,089
Kawasaki Heavy Ind (A) 20,000 92,097
Kirin Beverage 8,000 107,802
Kurimoto (A) 14,000 142,509
Kurita Water Industries 3,000 79,979
Kyocera Corp (A) 1,000 74,357
</TABLE>
48
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage
of Net Assets Shares/Units Value
------------------ ------------------ ---------------------
<S> <C> <C> <C>
INTERNATIONAL EQUITY PORTFOLIO - Continued
COMMON STOCKS - Continued
Japan - continued
Mitsubishi Estate (A) 12,000 $ 150,070
Mitsubishi Motors 4,000 32,612
Mitsui Trust & Banking 3,000 32,864
Murata Mfg. (A) 3,000 110,517
NEC Corporation 5,000 61,075
NGK Insulators (A) 5,000 49,926
Namco (A) 2,000 66,698
Nichicon Corporation 10,000 147,356
Nippon Meat Packer (A) 3,000 43,625
Nippon Tel & Tel 10.2 82,568
Promise Co. (A) 2,900 139,726
Raito Kogyo Co. (A) 5,000 98,399
Rinnai Corp. 5,000 116,818
Sakura Bank (A) 12,000 152,397
Sanwa Bank (A) 4,000 81,434
Sekisui House Ltd. (A) 12,000 153,560
Shimachu (A) 4,000 128,355
Shizuoka Bank 16,000 201,645
Showa Corporation (A) 5,000 38,341
Skylark 2,000 36,839
Taisho Pharm (A) 7,000 138,437
Tostem Corp. (A) 1,000 33,252
Yokogawa Bridge 3,000 45,370
York-Benimaru (A) 3,000 114,879
Yokohama Reito 10,000 123,120
---------------------
4,598,907
Latin America 4.83%
Chilectra 1,700 82,154
Cia Vale Do Rio Doce (A) 400 16,462
Citc Seoul (A) 2 21,280
Empresas ICA (A) 1,800 18,450
Empresas La Modera (A) 1,100 17,050
</TABLE>
49
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage
of Net Assets Shares/Units Value
------------------ ------------------ ---------------------
<S> <C> <C> <C>
INTERNATIONAL EQUITY PORTFOLIO - Continued
COMMON STOCKS - Continued
Latin America - continued
Formosa Growth Fund (A) 5,000 67,500
Grupo Carso (A) 3,000 32,006
Gujarat Ambuja Cem 5,000 39,387
Indian Opportunities Fnd (A) 2,000 18,720
Jardine Matheson 2,000 13,700
Jardine Strategic 7,000 21,420
Sansung Electronics (A) 200 19,500
Schroder Korea Fund (A) 12,000 150,000
Taipei Fund (A) 1,000 73,460
Telebras (A) 1,500 71,062
Telefonica De Argentina 2,900 79,025
---------------------
741,176
Malaysia/Singapore 3.38%
ACMA Ltd 12,000 39,874
Boustead Holdings 20,000 36,866
Commerce Asset Holdings (A) 12,000 60,499
DBS Land (A) 30,000 101,381
Dev Bank 3,000 37,329
Magnum Corp. 35,000 66,170
Malayan Banking 3,000 25,287
Public Finance (A) 15,000 32,494
Sriwani Hldgs (A) 20,000 27,414
Straits Trading Corp. 13,000 30,513
Telekom Malaysia (A) 2,000 15,597
United Overseas Bank 400 3,846
Wing Tai Holdings 20,000 40,863
---------------------
518,133
Netherlands 5.53%
ABN-AMRO Holdings (A) 2,700 123,126
AMEV 3,500 234,718
</TABLE>
50
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage
of Net Assets Shares/Units Value
------------------ ------------------ ---------------------
<S> <C> <C> <C>
INTERNATIONAL EQUITY PORTFOLIO - Continued
COMMON STOCKS - Continued
Netherlands - continued
Aegon (A) 7,000 $ 310,046
Polygram (A) 3,400 180,712
---------------------
848,602
Philippines 0.49%
Aboitiz Equity (A) 92,000 17,538
Filinvest Land (A) 50,000 16,013
Pilipino Telephone (A) 41,300 41,726
---------------------
75,277
Spain 3.71%
Banco Popular Espanol 1,400 258,152
Gas Natural (A) 2,000 311,583
---------------------
569,735
Sweden 3.43%
Ericsson (A) 11,300 221,662
Securitas 6,400 304,201
---------------------
525,863
Switzerland 1.96%
Roche Holding 38 301,351
Thailand 2.17%
Banpu Public Co. (A) 2,000 43,034
Cogeneration (A) 11,000 25,329
Ptt Exploration & Pro (A) 7,000 69,474
Shinawatra C & Comms 1,000 23,740
Siam City Bank (A) 33,000 37,993
</TABLE>
51
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage
of Net Assets Shares/Units Value
------------------ ------------------ ---------------------
<S> <C> <C> <C>
INTERNATIONAL EQUITY PORTFOLIO - Continued
COMMON STOCKS - Continued
Thailand - continued
Thai Military Bank 26,000 $ 105,283
Tipco Asphalt Co. (A) 5,000 27,989
---------------------
332,842
TOTAL INVESTMENTS-
------------------ ---------------------
(Cost - $14,031,009) 97.52% 14,967,503
SECURITIES SOLD SHORT (Cost-$46,165) (0.30%)
Japanese Yen (4,744,374) (45,994)
Cash and other assets
less liabilities 2.78% 426,273
------------------ ---------------------
Net Assets 100.00% $ 15,347,782
================== =====================
</TABLE>
(A) - Non-income producing security
See accompanying notes
52
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- ------------------ ----------------------
<S> <C> <C> <C>
REAL ESTATE SECURITIES PORTFOLIO
COMMON STOCKS
Real Estate
Apartment Investment & Management Co. 30,000 $ 585,000
Associated Estates Realty Corp. 15,000 322,500
Avalon Properties 19,800 425,700
Beacon Properties Corp. 15,000 345,000
Cali Realty Corp 26,600 581,875
CBL & Associates Properties 10,000 217,500
Chateau Properties 20,000 450,000
Crescent Real Estate 7,400 252,525
Crown American Realty 46,400 365,400
Debartolo Realty Corp. 35,000 455,000
Developers Diversified Realty Corp. 10,400 312,000
Felcor Suite Hotels 15,000 416,250
First Industry Realty Trust 20,000 450,000
Franchise Finance Corp 15,000 339,375
Highwoods Properties 20,000 565,000
Irvine Apartment Communities 27,900 537,075
Liberty Property Trust 25,000 518,750
Merry Land & Investment Inc 20,000 472,500
Pacific Gulf Properties 10,800 175,500
Patriot American Hospitality 16,700 430,025
Post Properties 10,000 318,750
Security Capital Pacific Trust 20,000 395,000
Shurgard Storage 12,600 340,200
Smith Residential Realty 10,000 236,250
Speiker Properties 15,000 376,875
Starwood Lodging Trust 15,000 446,250
Storage Trust Realty 15,200 345,800
Summit Properties Inc 25,000 496,875
Trinet Corp Realty Trust 15,000 408,750
</TABLE>
53
<PAGE>
Life of Virginia Series Fund, Inc.
Portfolio of Investments - continued
<TABLE>
<CAPTION>
Percentage Principal/
of Net Assets Shares Value
----------------- ------------------- ---------------------
<S> <C> <C> <C>
REAL ESTATE SECURITIES PORTFOLIO - Continued
COMMON STOCKS-Continued
Real Estate - continued
Weeks Corporation 11,000 $ 276,375
Wellsford Residential 22,500 517,500
TOTAL COMMON STOCK
----------------- ---------------------
(Cost - $11,275,692) 92.16% $ 12,375,600
COMMERCIAL PAPER
FMCC
5.65% due January 12, 1996 $ 100,000 100,000
5.75% due January 19, 1996 365,000 365,000
Household Finance Corp.
5.75% due January 3, 1996 350,000 350,000
Pitney Bowes
5.95% due January 5, 1996 100,000 99,934
Prudential Funding Corp.
5.80% due January 10, 1996 175,000 175,000
TOTAL COMMERCIAL PAPER
----------------- ---------------------
(Cost - $1,089,900) 8.12% 1,089,934
TOTAL INVESTMENTS
(Cost - $12,365,592) 100.27% 13,465,534
Cash and other assets
less liabilities (0.27%) (36,657)
----------------- ---------------------
Net Assets 100.00% $ 13,428,877
================= =====================
See accompanying notes
</TABLE>
54
<PAGE>
Life of Virginia Series Fund, Inc.
Notes to Financial Statements
December 31, 1995
1. DESCRIPTION OF ENTITY
Life of Virginia Series Fund, Inc. (the Fund), incorporated in Virginia in 1984,
is registered under the Investment Company Act of 1940, as a diversified,
open-end management investment company. Shares are sold to the Life of Virginia
Separate Accounts (the Separate Accounts) and to the Aon Corporation Savings
Plan, a retirement savings plan maintained by Aon Corporation (Aon) for its
employees and subsidiaries under the provisions of Section 401(K) of the
Internal Revenue Code. The Separate Accounts fund certain benefits for flexible
and single premium variable life insurance and annuity policies issued by The
Life Insurance Company of Virginia (Life of Virginia). Life of Virginia is an
indirect wholly-owned subsidiary of Aon.
To facilitate the commencement of operations, in 1984, Life of Virginia, through
its Separate Account I, invested $500,000 in 50,000 shares of capital stock of
the Common Stock portfolio of the Fund and in 1985 invested $2,000,000 in
200,000 shares, $500,000 in 50,000 shares and $1,000,000 in 100,000 shares of
capital stock of the Government Securities, Money Market and Total Return
portfolios, respectively, of the Fund. In 1987, Life of Virginia, through its
Separate Account I, invested an additional $500,000 in 49,950 shares of capital
stock of the Money Market portfolio of the Fund. In 1995, Life of Virginia,
through its Separate Account I, redeemed $1,368,036, $1,350,00, and $1,180,892
from the Common Stock Index, Government Securities, and Total Return portfolios,
respectively, resulting in withdrawals of 81,869 shares, 138,746 shares, and
85,510 shares of the respective capital stock. These redemptions withdrew all
Life of Virginia funds invested in the Common Stock Index and Total Return
portfolios. In addition, Life of Virginia, through its Separate Account 4,
invested $10,000,000 in 1,000,000 shares of capital stock of the Real Estate
Securities portfolio which commenced operations in May 1995. As of December 31,
1995, Life of Virginia owned $1,000,794 in 95,496 shares, $1,674,039 in 161,586
shares and $11,700,000 in 1,058,824 shares of the Government Securities, Money
Market, and Real Estate Securities portfolios, respectively.
In 1995, to facilitate the commencement of operations for the International
Equity portfolio, Combined Insurance Company of America invested $10,000,000 in
1,000,000 shares of capital stock.
Effective May 1, 1993, the Fund changed the name of the Common Stock and Bond
portfolios to the Common Stock Index and Government Securities portfolios,
respectively, in conjunction with changing the portfolios' underlying investment
strategies. See the May 1993 Prospectus for additional information.
55
<PAGE>
Life of Virginia Series Fund, Inc.
Notes to Financial Statements (continued)
1. DESCRIPTION OF ENTITY (CONTINUED)
In December 1995, Aon Corporation announced that it has agreed to sell all of
the common stock of Life of Virginia and Forth Financial Resources, Ltd., the
parent of Forth Financial Securities Corporation ("FFSC"), to General Electric
Capital Corporation (the "Transaction"). FFSC is the principal underwriter of
the shares of Life of Virginia Series Fund, Inc. (the "Fund"). The Transaction
is expected to be completed during the first half of 1996. Management believes
it is likely that after closing the sale of Life of Virginia, Aon and its
affiliates will discontinue their relationships with the Fund. This relationship
includes the following:
[bullet] Aon Advisors, a subsidiary of Aon, serves as investment advisor to
the Fund. Aon Advisors has expressed willingness to continue this
relationship for at least one year following date of closing.
[bullet] Combined Insurance Company of America, a wholly owned subsidiary
of Aon, owns 1,019,175 shares of the International Equity
portfolio at December 31, 1995 for purposes of seeding the
portfolio. These shares will be redeemed or transferred no later
than the time Aon Advisors ceases to be investment advisor to the
Fund.
[bullet] As of December 31, 1995, the Aon Savings Plan owns the following
shares of the Fund and it is likely that these shares will be
redeemed at some time after date of closing and before the time
that Aon Advisors ceases to be investment advisor to the Fund:
NUMBER OF SHARES PORTFOLIO
- --------------------------------------------------------------------------------
1,930,784 Common Stock Index
1,115,626 Government Securities
2,097,380 Money Market
2,737,783 Total Return
263,749 International Equity
95,171 Real Estate Securities
56
<PAGE>
Life of Virginia Series Fund, Inc.
Notes to Financial Statements (continued)
1. DESCRIPTION OF ENTITY (CONTINUED)
FFSC currently serves as the principal underwriter pursuant to a distribution
agreement dated June 30, 1994 (the "Agreement"). Pursuant to the terms of the
Agreement, a change of control of FFSC will result in a technical assignment and
the termination of the Agreement. It is anticipated that a meeting of the Board
of Directors of the Fund will be convened in the near future to consider
approval of a new distribution agreement with FFSC.
2. SIGNIFICANT ACCOUNTING POLICIES
Valuation of Investments: Securities traded on a national exchange are valued at
the last reported sales price on the last business day of the fiscal year.
Securities traded on the over-the-counter market are stated at a price between
the bid and asked quotations. Securities for which quotations are not readily
available are valued at the estimated fair value obtained from yield data
relating to instruments or securities with similar characteristics. Commercial
paper is purchased and valued at par which approximates fair value. Short-term
securities purchased at a premium or discount are valued at amortized cost,
which approximates fair value. Foreign securities in the International Equity
portfolio for which quotations are readily available are valued at the last
sales price, or if no sale price, at the closing bid prices in the principal
market in which such securities are normally traded. Foreign securities for
which market quotations are not readily available are valued primarily using
dealer-supplied valuations. The values of foreign securities denominated in or
expected to settle in foreign currencies have been translated into U.S. dollars
at the foreign exchange rates reported by a major pricing service.
Investment Transactions and Income: Security transactions are recorded on the
trade date (the date the order to buy or sell is executed) plus one day.
Interest income is recorded on the accrual basis and dividend income is reported
on the ex-dividend date. Realized gains and losses on investments are determined
on a first-in, first-out basis. Discounts and premiums on securities purchased
are amortized over the life of the respective securities.
Distribution to Shareholders: Distributions of net investment income and capital
gains are determined in accordance with income tax regulations and are declared
and paid yearly. The Fund has no material differences between book and tax
income.
Foreign Currency Transactions: The Fund does not isolate that portion of the
results of operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in market prices of
securities held. Such fluctuations are included with the net realized and
unrealized gain or loss from investments.
57
<PAGE>
Life of Virginia Series Fund, Inc.
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign Currency Transactions (continued): Reported net realized foreign
exchange gains or losses arise from sales of portfolio securities, sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on security transactions, and the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books, and the U.S. dollar equivalent of the amounts actually received or
paid. Net unrealized foreign exchange gains and losses arise from changes in the
value of assets and liabilities including investments in securities at fiscal
year end, resulting from changes in the exchange rate.
Other income and expenses are translated into U.S. dollars at the foreign
exchange rates reported by a major pricing service on the respective date of the
transactions.
Federal Income Taxes: The Fund's policy is to comply with the requirements of
the Internal Revenue Code that are applicable to regulated investment companies
and to distribute all of its taxable income to its shareholders. Therefore, no
federal income tax provision is required. The Government Securities Portfolio's
accumulated net realized loss on sales of investments for the Federal income tax
purposes at December 31, 1995 of $512,850 is available to offset future tax
gains. If unused, this loss carryover expires in 2002. The International Equity
Portfolio's accumulated net realized loss on sales of investments for the
Federal income tax purposes at December 31, 1995 of $367,915 is available to
offset future tax gains. If unused, this loss carryover expires in 2003.
58
<PAGE>
Life of Virginia Series Fund, Inc.
Notes to Financial Statements (continued)
3. CAPITAL SHARE TRANSACTIONS
At December 31, 1995, there were 250,000,000 shares of $.01 par value common
stock authorized in each portfolio of the Fund. An analysis of net assets at
December 31, 1995 follows:
<TABLE>
<CAPTION>
COMMON STOCK REAL
INDEX GOVERNMENT MONEY MARKET INTERNATIONAL ESTATE
PORTFOLIO SECURITIES PORTFOLIO TOTAL RETURN EQUITY SECURITIES
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common stock -
$.01 par value $ 31,450 $ 22,619 $ 60,872 $ 44,263 $ 14,666 $ 12,148
Accumulated net
realized loss on
sales of investments - (512,850) - - (367,915) -
Paid in capital 54,143,770 22,894,443 63,022,488 62,632,100 14,764,537 12,307,521
Undistributed net
investment income 14,504 7,927 - 15,108 - 9,266
Unrealized
appreciation of
investments 11,827,116 1,296,042 - 7,815,622 936,494 1,099,942
--------------------------------------------------------------------------------------------------
Net assets $66,016,840 $23,708,181 $63,083,360 $70,507,093 $15,347,782 $13,428,877
==================================================================================================
For the Government Securities Portfolio, the accumulated net realized loss on
sales of investments of $330,315 has been reclassified to paid in capital as of
December 31, 1995 to reflect the difference between financial reporting and tax
reporting.
</TABLE>
59
<PAGE>
Life of Virginia Series Fund, Inc.
Notes to Financial Statements (continued)
3. CAPITAL SHARE TRANSACTIONS (CONTINUED)
A summary of capital share transactions follows:
<TABLE>
<CAPTION>
COMMON STOCK GOVERNMENT
INDEX SECURITIES MONEY MARKET TOTAL RETURN
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at
December 31, 1993 517,666.937 751,844.849 982,499.468 927,904.470
Shares sold 1,165,778.229 835,658.172 8,746,017.333 1,876,652.288
Shares issued to
shareholders in
reinvestment of dividends
and distributions 24,742.640 56,125.692 91,648.456 99,535.585
-------------------------------------------------------------------------------------------
Total issued 1,190,520.869 891,783.864 8,837,665.789 1,976,187.873
Shares redeemed (186,424.404) (319,102.858) (6,524,361.055) (314,489.726)
-------------------------------------------------------------------------------------------
Net increase in
shares 1,004,096.465 572,681.006 2,313,304.734 1,661,698.147
-------------------------------------------------------------------------------------------
Balance at
December 31, 1994 1,521,763.402 1,324,525.855 3,295,804.202 2,589,602.617
===========================================================================================
Shares sold 1,724,502.707 1,110,603.363 4,980,205.753 1,671,480.292
Shares issued to
shareholders in
reinvestment of dividends
and distributions 60,268.746 132,251.775 223,722.137 316,672.376
-------------------------------------------------------------------------------------------
Total issued 1,784,771.453 1,242,855.138 5,203,927.890 1,988,152.668
Shares redeemed (161,547.365) (305,502.791) (2,412,483.605) (151,411.433)
-------------------------------------------------------------------------------------------
Net increase in
shares 1,623,224.088 937,352.347 2,791,444.285 1,836,741.235
-------------------------------------------------------------------------------------------
Balance at
December 31, 1995 3,144,987.490 2,261,878.202 6,087,248.487 4,426,343.852
===========================================================================================
</TABLE>
60
<PAGE>
Life of Virginia Series Fund, Inc.
Notes to Financial Statements (continued)
3. CAPITAL SHARE TRANSACTIONS (CONTINUED)
INTERNATIONAL REAL ESTATE
EQUITY SECURITIES
PORTFOLIO PORTFOLIO
----------------------------------------------
Balance at
December 31, 1994 - -
==============================================
Shares sold 1,445,079.395 1,170,284.586
Shares issued to
shareholders in
reinvestment of dividends
and distributions 27,499.836 66,903.314
----------------------------------------------
Total issued 1,472,579.231 1,237,187.900
Shares redeemed (6,016.718) (22,406.663)
----------------------------------------------
Net increase in
shares 1,466,562.513 1,214,781.237
----------------------------------------------
Balance at
December 31, 1995 1,466,562.513 1,214,781.237
==============================================
61
<PAGE>
Life of Virginia Series Fund, Inc.
Notes to Financial Statements (continued)
4. INVESTMENT TRANSACTIONS
Purchases and sales, excluding maturities, of investment securities during 1995
were as follows:
<TABLE>
<CAPTION>
COMMON GOVERNMENT
STOCK SECURITIES MONEY MARKET TOTAL RETURN
INDEX PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PURCHASES
U.S. Government and
Agency Obligations - $53,302,804 $ 31,384,874 $ 24,325,480
Corporate bonds - - - 299,000
Commercial paper $47,138,606 - 291,354,093 99,991,267
Common stock 35,828,900 - - 44,427,053
Preferred stock - - - 1,409,060
-------------------------------------------------------------------------------------
Total purchases $82,967,506 $53,302,804 $322,738,967 $170,451,860
=====================================================================================
SALES
U.S. Government and
Agency Obligations - $42,885,090 - $ 3,243,750
Corporate bonds - - - 6,480,661
Commercial paper $ 5,354,719 - $ 120,000 18,164,990
Common stock 5,806,128 - - 35,270,918
Preferred stock - - - 1,312,568
-------------------------------------------------------------------------------------
Total sales $11,160,847 $42,885,090 $ 120,000 $ 64,472,887
=====================================================================================
</TABLE>
INTERNATIONAL EQUITY REAL ESTATE
PORTFOLIO SECURITIES PORTFOLIO
---------------------------------------------------
PURCHASES
Commercial paper - $50,119,074
Common stock $21,669,924 16,587,309
---------------------------------------------------
Total purchases $21,669,924 $66,706,383
===================================================
SALES
Commercial paper - 2,224,394
Common stock 7,271,000 5,828,792
---------------------------------------------------
Total sales $ 7,271,000 $8,053,186
===================================================
62
<PAGE>
Life of Virginia Series Fund, Inc.
Notes to Financial Statements (continued)
4. INVESTMENT TRANSACTIONS (CONTINUED)
At December 31, 1995, based on cost for federal income tax purposes, net
unrealized appreciation of portfolio securities consisted of the following:
<TABLE>
<CAPTION>
COMMON GOVERNMENT
STOCK SECURITIES MONEY MARKET TOTAL RETURN
INDEX PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
--------------------------------------------------------------
<S> <S> <C> <C> <C>
Appreciated Securities $12,325,523 $1,296,042 - $8,076,720
Depreciated Securities (498,407) - - (261,096)
--------------------------------------------------------------
Net unrealized
appreciation $11,827,116 $1,296,042 - $7,815,624
==============================================================
</TABLE>
INTERNATIONAL REAL ESTATE
EQUITY SECURITIES
PORTFOLIO PORTFOLIO
--------------------------------------------
Appreciated Securities $1,331,996 $1,151,626
Depreciated Securities (395,502) (51,684)
--------------------------------------------
Net unrealized
appreciation $ 936,494 $1,099,942
============================================
5. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of an investment advisory contract with Aon Advisors, Inc.
(Investment Advisor), a subsidiary of Aon, investment advisory fees are based on
a percentage of aggregate average daily net assets and will be deducted from the
Fund daily and paid monthly. The schedule of investment advisory fees follows:
Common Stock Index Fund: .35%
Government Securities Portfolio, Money Market Portfolio and Total Return
Portfolio:
AGGREGATE AVERAGE DAILY NET ASSETS FEE PERCENTAGE
(IN MILLIONS) (ON AN ANNUAL BASIS)
- ---------------------------------------------------------------------------
First $100 .50%
Next 100 .45
Next 100 .40
Next 100 .35
Over 400 .30
63
<PAGE>
Life of Virginia Series Fund, Inc.
Notes to Financial Statements (continued)
5. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
(CONTINUED)
International Equity Portfolio:
AGGREGATE AVERAGE DAILY NET ASSETS FEE PERCENTAGE
(IN MILLIONS) (ON AN ANNUAL BASIS)
--------------------------------------------------------------------------
First $100 1.00%
Next 100 .95
Over 200 .80
Real Estate Securities Portfolio:
AGGREGATE AVERAGE DAILY NET ASSETS FEE PERCENTAGE
(IN MILLIONS) (ON AN ANNUAL BASIS)
--------------------------------------------------------------------------
First $100 .85%
Next 100 .80
Over 200 .75
Effective July 1, 1994, the investment advisor agreed to waive a portion of the
advisory fee for the Money Market Portfolio such that the effective annual rate
is .10%.
64
<PAGE>
Life of Virginia Series Fund, Inc.
Notes to Financial Statements (continued)
5. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
(CONTINUED)
The Investment Advisor provides administrative services to the Fund and manages
its business affairs, including personnel, facilities and equipment and all
legal, accounting and other costs incurred in the operation of the Fund.
Expenses of each portfolio of the Fund are subject to reimbursement to the
extent that ordinary business expenses of the Fund (including the advisory fees
but excluding attorneys' fees, court judgments, decrees or awards, or any other
litigation costs in legal actions involving the Fund, or costs relating to the
indemnification of directors, officers, or employees of the Fund, not covered by
directors' and officers' liability insurance) in any year exceed (a) 1.5% of the
first $30 million of aggregate average daily net assets and 1% of any excess of
the aggregate average daily net assets over $30 million of the Government
Securities, Total Return, and Real Estate Securities portfolios of the Fund (b)
.75% of the average daily net assets of the Common Stock Index and Money Market
portfolios of the Fund (c) 1.75% of the first $30 million of aggregate average
daily net assets and 1.00% of any excess of the aggregate average daily net
assets over $30 million of the International Equity portfolio. Effective July 1,
1995, on a voluntary basis (outside the investment advisory agreement), the
Investment Advisor has agreed until May 1, 1996 to reimburse the International
Equity and Real Estate Securities portfolios for expenses in excess of the
following amounts: International Equity Portfolio, 1.50% of the first $30
million of average daily net assets; Real Estate Securities Portfolio, 1.25% of
the first $30 million of average daily net assets. As of year end, the 1995
expense reimbursement for the International Equity portfolio had not been paid
by the Investment Advisor.
Certain officers and directors of the Fund were also officers and directors of
the Investment Advisor, Life of Virginia and Aon. The Fund incurred fees and
expenses for attendance by unaffiliated directors at meetings during 1995 of
$14,750.
65
<PAGE>
Life of Virginia Series Fund, Inc.
Financial Highlights
<TABLE>
<CAPTION>
COMMON STOCK INDEX COMMON STOCK
PORTFOLIO PORTFOLIO
------------------------------------------------- ------------------------------
1995 1994 1993 1992 1991
------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of
period $ 15.72 $ 15.99 $ 17.04 $ 16.21 $ 12.75
Net investment income .27 .22 .31 .35 .30
Net realized and unrealized gain
(loss) on investments 5.41 (.23) 2.16 1.01 4.08
------------------------------------------------- ------------------------------
Income (loss) from investment
operations 5.68 (.01) 2.47 1.36 4.38
Distributions to shareholders from:
Net investment income (.27) (.22) (.31) (.35) (.30)
Net realized gain (.14) (.04) (3.21) (.17) (.61)
Tax return of capital - - - (.01) (.01)
------------------------------------------------- ------------------------------
(.41) (.26) (3.52) (.53) (.92)
------------------------------------------------- ------------------------------
Increase (decrease) in net asset
value 5.27 (.27) (1.05) .83 3.46
------------------------------------------------- ------------------------------
Net asset value at end of period $ 20.99 $ 15.72 $ 15.99 $ 17.04 $ 16.21
================================================= ==============================
Total Return 36.14% (0.06)% 14.52% 8.39% 34.43%
================================================= ==============================
Ratios:
Ratio of operating expenses to
average net assets .66% .75% .87% 1.03% 1.08%
Ratio of net investment income to
average net assets 1.98% 2.22% 2.00% 2.24% 2.28%
Portfolio turnover 14.58% 4.31% 73.43% 9.72% 35.87%
Net assets at end of period $66,016,840 $23,929,572 $8,276,765 $5,178,316 $4,429,044
</TABLE>
In 1994, the Common Stock Index portfolio received an expense reimbursement from
the investment advisor. Absent this reimbursement, the ratio of expenses to
average net assets and the ratio of net investment income to average net assets
would have been 1.10% and 1.90%, respectively, for 1994.
Due to the significant increase in Fund shares related to the Aon Savings Plan,
the net changes in the 1994 Net Asset Value per share as calculated in
accordance with the requirements of Form N-1A are not commensurate with the
Statement of Changes in Net Assets.
66
<PAGE>
Life of Virginia Series Fund, Inc.
Financial Highlights (continued)
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES
PORTFOLIO BOND PORTFOLIO
------------------------------------------------- ------------------------------
1995 1994 1993 1992 1991
------------------------------------------------ ------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period
$ 9.51 $ 10.49 $ 10.54 $ 10.54 $ 9.60
Net investment income .49 .42 .45 .69 .75
Net realized and unrealized gain (loss)
on investments 1.13 (.98) .50 .06 .99
------------------------------------------------ ------------------------------
Income from investment operations 1.62 (.56) .95 .75 1.74
Distributions to shareholders from:
Net investment income (.49) (.42) (.45) (.69) (.75)
Net realized gain (.16) - (.54) (.05) (.04)
Tax return of capital - - (.01) (.01) (.01)
------------------------------------------------ ------------------------------
(.65) (.42) (1.00) (.75) (.80)
------------------------------------------------ ------------------------------
Increase (decrease) in net asset value
.97 (.98) (.05) - .94
------------------------------------------------ ------------------------------
Net asset value at end of period $ 10.48 $ 9.51 $ 10.49 $ 10.54 $ 10.54
================================================ ==============================
Total Return 17.08% (5.34)% 8.96% 7.13% 18.16%
================================================ ==============================
Ratios:
Ratio of operating expenses to average
net assets .74% .81% .86% .99% .97%
Ratio of net investment income to
average net assets 5.92% 5.44% 5.41% 6.69% 7.73%
Portfolio turnover 130.64% 565.65% 112.86% 14.43% 23.24%
Net assets at end of period $23,708,181 $12,598,072 $7,884,928 $5,053,246 $4,444,984
</TABLE>
Due to the significant increase in Fund shares related to the Aon Savings Plan,
the net changes in the 1994 Net Asset Value per share as calculated in
accordance with the requirements of Form N-1A are not commensurate with the
Statement of Changes in Net Assets.
67
<PAGE>
Life of Virginia Series Fund, Inc.
Financial Highlights (continued)
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
--------------------------------------------------------------------------------
1995 1994 1993 1992 1991
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period
$ 10.17 $ 10.08 $ 10.04 $ 10.00 $ 9.96
Net investment income .60 .29 .25 .31 .53
Net realized and unrealized gain (loss)
on investments - .09 (.01) - -
--------------------------------------------------------------------------------
Income from investment operations .60 .38 .24 .31 .53
Distributions to shareholders from:
Net investment income (.41) (.29) (.20) (.26) (.49)
Net realized gain - - - - -
Tax return of capital - - - (.01) -
--------------------------------------------------------------------------------
(.41) (.29) (.20) (.27) (.49)
--------------------------------------------------------------------------------
Increase (decrease) in net asset value
.19 .09 .04 .04 .04
--------------------------------------------------------------------------------
Net asset value at end of period $ 10.36 $ 10.17 $ 10.08 $ 10.04 $ 10.00
================================================================================
Total Return 5.90% 3.77% 2.39% 3.10% 5.32%
================================================================================
Ratios:
Ratio of operating expenses to average
net assets .23% .42% .75% .75% .75%
Ratio of net investment income to
average net assets 5.74% 4.04% 2.53% 3.06% 5.43%
Portfolio turnover N/A N/A N/A N/A N/A
Net assets at end of period $63,083,360 $33,528,739 $9,904,184 $5,845,136 $4,092,986
</TABLE>
Effective July 1, 1994, the investment advisor agreed to waive a portion of the
advisory fee for the Money Market Portfolio. Absent this waiver, the ratio of
expenses to average net assets and the ratio of net investment income to average
net assets would have been .63% and 5.30% for 1995 and .70% and 3.76% for 1994,
respectively.
Due to the significant increase in Fund shares related to the Aon Savings Plan,
the net changes in the 1994 Net Asset Value per share as calculated in
accordance with the requirements of Form N-1A are not commensurate with the
Statement of Changes in Net Assets.
68
<PAGE>
Life of Virginia Series Fund, Inc.
Financial Highlights (continued)
<TABLE>
<CAPTION>
TOTAL RETURN PORTFOLIO
----------------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period
$ 13.40 $ 13.59 $ 13.00 $ 12.62 $ 10.59
Net investment income .41 .35 .42 .44 .43
Net realized and unrealized gain (loss)
on investments 3.34 (.01) 1.35 .51 2.47
----------------------------------------------------------------------------------
Income from investment operations 3.75 .34 1.77 .95 2.90
Distributions to shareholders from:
Net investment income (.42) (.35) (.41) (.44) (.43)
Net realized gain (.80) (.18) (.76) (.12) (.43)
Tax return of capital - - (.01) (.01) (.01)
----------------------------------------------------------------------------------
(1.22) (.53) (1.18) (.57) (.87)
----------------------------------------------------------------------------------
Increase (decrease) in net asset value
2.53 (.19) .59 .38 2.03
----------------------------------------------------------------------------------
Net asset value at end of period $ 15.93 $ 13.40 $ 13.59 $ 13.00 $ 12.62
==================================================================================
Total Return 28.07% 2.54% 13.67% 7.53% 27.45%
==================================================================================
Ratios:
Ratio of operating expenses to average
net assets .65% .77% .85% .98% 1.11%
Ratio of net investment income to
average net assets 3.42% 4.00% 3.80% 4.13% 4.39%
Portfolio turnover 105.56% 66.92% 48.12% 12.46% 32.58%
Net assets at end of period $70,507,093 $34,708,256 $12,609,407 $7,247,897 $4,608,823
</TABLE>
Due to the significant increase in Fund shares related to the Aon Savings Plan,
the net changes in the 1994 Net Asset Value per share as calculated in
accordance with the requirements of Form N-1A are not commensurate with the
Statement of Changes in Net Assets.
69
<PAGE>
Life of Virginia Series Fund, Inc.
Financial Highlights (continued)
INTERNATIONAL EQUITY PORTFOLIO
----------------------------------
PERIOD FROM MAY 1, 1995 TO
DECEMBER 31, 1995
----------------------------------
Net asset value at beginning of period
$ 10.00
Net investment income .20
Net realized and unrealized gain on
investments .47
----------------------------------
Income (loss) from investment operations
.67
Distributions to shareholders from:
Net investment income (.20)
----------------------------------
(.20)
----------------------------------
Increase in net asset value .47
----------------------------------
Net asset value at end of period $ 10.47
==================================
Total Return* 6.70%
==================================
Ratios*:
Ratio of operating expenses to average
net assets 1.54%
Ratio of net investment income to
average net assets 0.44%
Portfolio turnover 58.11%
Net assets at end of period $15,347,782
*Amounts have been determined on an annualized basis.
In 1995, the International Equity portfolio received an expense reimbursement
from the investment advisor. Absent this reimbursement, the ratio of expenses to
average net assets and the ratio of net investment income to average net assets
would have been 2.17% and (.18%), respectively.
70
<PAGE>
Life of Virginia Series Fund, Inc.
Financial Highlights (continued)
REAL ESTATE SECURITIES PORTFOLIO
----------------------------------
PERIOD FROM MAY 1, 1995 TO
DECEMBER 31, 1995
----------------------------------
Net asset value at beginning of period
$ 10.00
Net investment income .46
Net realized and unrealized gain on
investments 1.23
----------------------------------
Income from investment operations 1.69
Distributions to shareholders from:
Net investment income (.46)
Net realized gain (.18)
----------------------------------
(.64)
----------------------------------
Increase in net asset value 1.05
----------------------------------
Net asset value at end of period $ 11.05
==================================
Total Return* 17.00%
==================================
Ratios*:
Ratio of operating expenses to average
net assets 1.31%
Ratio of net investment income to
average net assets 6.85%
Portfolio turnover 54.43%
Net assets at end of period $13,428,877
*Amounts have been determined on an annualized basis.
In 1995, the Real Estate Securities portfolio received an expense reimbursement
from the investment advisor. Absent this reimbursement, the ratio of expenses to
average net assets and the ratio of net investment income to average net assets
would have been 1.61% and 6.55%, respectively.
71
<PAGE>
APPENDIX A
Description of Money Market Securities
The following information includes a description of certain money market
instruments in which a Portfolio may invest to the extent consistent with its
investment objective.
Bank Money Instruments. These include instruments, such as certificates of
deposit and bankers' acceptances. Certificates of deposit are generally
short-term, interest-bearing negotiable certificates issued by commercial banks
or savings and loan associations against funds deposited in the issuing
institution. A bankers' acceptance is a time draft drawn on a commercial bank by
a borrower usually in connection with an international commercial transaction
(to finance the import, export, transfer or storage of goods). The borrower is
liable for payment as well as the bank, which unconditionally guarantees to pay
the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity.
A Portfolio may not invest in any security issued by a commercial bank or a
savings and loan association unless the bank or association is organized and
operating in the United States, has total assets of at least one billion dollars
and is a member of the Federal Deposit Insurance Corporation, in the case of
banks, or the Federal Savings and Loan Insurance Corporation, in the case of
savings and loan associations provided that this limitation shall not prohibit
investments in foreign branches of banks which meet the foregoing requirements.
Government Agency Securities. These include debt securities issued by
government-sponsored enterprises, federal agencies or instrumentalities and
international institutions. Such securities are not direct obligations of the
U.S. Treasury but involve government sponsorship or guarantees. Thus the Fund
may not be able to assert a claim against the United States itself in the event
the agency or instrumentality does not meet its commitment.
United States Government Securities. These include marketable securities
issued by the United States Treasury, which consist of bills, notes and bonds.
Such securities are direct obligations of the United States government and
differ mainly in the length of their maturity. Treasury bills, the most
frequently issued marketable government security, have a maturity of up to one
year and are issued on a discount basis.
Short-Term Corporate Debt Instruments. These include commercial paper
(including variable amount master demand notes), which refers to short-term
unsecured promissory notes issued by corporations to finance short-term credit
needs. Commercial paper is usually sold on a discount basis and has a maturity
at the time of issuance not exceeding nine months. Variable amount master demand
notes are demand obligations that permit the investment of fluctuating amounts
at varying market rates of interest pursuant to arrangements between the issuer
and a commercial bank acting as agent for the payees of such notes, whereby both
parties have the right to vary the amount of the outstanding indebtedness on the
notes.
Because variable amount master notes are direct lending arrangements between
the lender and borrower, it is not generally contemplated that such instruments
will be traded and there is no secondary market for the notes. Typically,
agreements relating to such notes provide that the lender may not sell or
otherwise transfer the note without the borrower's consent. Such notes provide
that the interest rate on the amount outstanding is adjusted periodically,
typically on a daily basis in accordance with a stated short-term interest rate
benchmark. Since the interest rate of a variable amount master note is adjusted
no less often than every 60 days and since repayment of the note may be demanded
at any time, the Fund values such a note in accordance with the amortized cost
basis at the outstanding principal amount of the note. (See Determination of Net
Asset Value, on page 29.)
Also included are nonconvertible corporate debt securities (e.g., bonds and
debentures) with no more than one year remaining to maturity at the date of
settlement. Corporate debt securities with a remaining maturity of less than one
year tend to become extremely liquid and are traded as money market securities.
Such issues with less than one year remaining to maturity tend to have greater
liquidity and considerably less market value fluctuations than longer term
issues. Commercial paper investments at the time of purchase will be rated at
least "A" by Standard and Poor's Corporation or "Prime" by Moody's Investors
Service, Inc., or, if not rated, issued by companies having an outstanding debt
issue rated at least "A" by Standard and Poor's or by Moody's. (See Corporate
Bond Ratings, Appendix B.)
Repurchase Agreements. A repurchase agreement is an instrument under which the
purchaser (i.e., a Portfolio) acquires ownership of the obligation (debt
security) and the seller agrees, at the time of the sale, to repurchase the
obligation at a mutually agreed upon time and price, thereby determining the
yield during the purchaser's holding period. This results in a fixed rate of
return insulated from market fluctuations during such period. The underlying
securities will consist only of U.S. government or government agency securities,
certificates of deposit, commercial paper or bankers' acceptances. Repurchase
agreements usually are for short periods, such as under one week. Repurchase
agreements are considered to be loans under the Investment Company Act of 1940,
with the security
72
<PAGE>
subject to repurchase, in effect, serving as "collateral" for the loan. The Fund
will require the seller to provide additional collateral if the market value of
the securities falls below the repurchase price at any time during the term of
the repurchase agreement. In the event of a default by the seller because of
bankruptcy or otherwise, the Fund may suffer time delays and incur costs or
losses in connection with the disposition of the collateral. Repurchase
agreements will be entered into with primary dealers for periods not to exceed
30 days and only with respect to underlying money market securities in which the
Portfolio may otherwise invest. Because a repurchase agreement maturing in more
than seven days is deemed an illiquid investment, investments in such repurchase
agreements and other illiquid assets cannot exceed 10% of the Portfolio's net
assets.
APPENDIX B
Description of Corporate Bond Ratings
Moody's Investors Services, Inc.
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 thereby 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 the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - 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.
Moody's applies 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 midrange ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Standard & Poor's Corporation
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
73
<PAGE>
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB-B-CCC-CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C - The rating C is reserved for income bonds on which no interest is being
paid.
D - Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
The ratings from "AA" to "B" may be modified by the addition of a plus or
minus sign to relative standing within the major rating categories.
Description of Commercial Paper Ratings
Commercial paper rated A-1 by Standard & Poor's has the following
characteristics: Liquidity ratios are adequate to meet cash requirements.
Long-term senior debt is rated "A" or better, although in some cases "BBB"
credits may be allowed. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances. Typically, the issuer's industry is
well established and the issuer has a strong position within the industry. The
reliability and quality of management are unquestioned. Relative strength or
weakness of the above factors determine whether the issuer's commercial paper is
rated A-1, A-2 or A-3.
The rating Prime-1 is the highest commercial paper rating assigned by Moody's
Investor's Service, Inc. 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) trends 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 the management
of obligations which may be present or may arise as a result of public interest
questions and preparations to meet such obligations.
74
<PAGE>
LIFE OF VIRGINIA SERIES FUND, INC.
PART C - OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The financial statements of Life of Virginia Series Fund, Inc. are
included in Part B of Post-Effective Amendment No. 16 to this
Registration Statement.
(b) Exhibits
1(a) Articles of Incorporation of Life of Virginia Series Fund, Inc.
incorporated herein by reference to the initial Form N-1A
registration statement, File No. 2-91369.
1(b) Articles of Amendment to the Articles of Incorporation of Life of
Virginia Series Fund, Inc. incorporated herein by reference to
post-effective amendment #1 to this Form N-1A registration statement
(File No. 2-91369), filed with the Securities and Exchange Commission
on 6/28/85.
1(c) Amended and restated Articles of Incorporation of Life of Virginia
Series Fund, Inc. incorporated herein by reference to post- effective
amendment #15 to this Form N-1A registration statement (File No.
2-91369), filed with the Securities and Exchange Commission on May 1,
1995.
2(a) By-laws of Life of Virginia Series Fund, Inc. incorporated herein by
reference to the initial Form N-1A registration statement (File No.
2-91369).
2(b) Amendment to By-laws of Life of Virginia Series Fund, Inc.
incorporated herein by reference to post-effective amendment #1 to
this Form N-1A registration statement (File No. 2-91369), filed with
the Securities and Exchange Commission on 6/28/85.
2(c) Amended By-laws of Life of Virginia Series Fund, Inc., incorporated
herein by reference to post-effective amendment #8 to this Form N-1A
registration statement (File No. 2-91369), filed with the Securities
and Exchange Commission on 4/26/90.
2(d) Amendment to By-Laws of Life of Virginia Series Fund, Inc.
incorporated herein by reference to post-effective amendment #10 to
this Form N-1A registration statement (File No. 2-91369), filed with
the Securities and Exchange Commission on 3/2/92.
2(e) Amendment to By-Laws of Life of Virginia Series Fund, Inc.
incorporate herein by reference to post-effective amendment #12 to
this Form N-1A registration statement (File No. 2-91369), filed with
Securities and Exchange Commission on 4/29/93.
2(f) Amended and restated By-laws of Life of Virginia Series Fund, Inc.
dated January 25, 1995 incorporated herein by reference to
post-effective amendment #15 to this Form N-1A registration statement
(File No. 2-91369), filed with the Securities and Exchange Commission
on May 1, 1995.
3 Not Applicable
4 Not Applicable
5(a) Investment Advisory Agreement between Life of Virginia Series Fund,
Inc. and Aon Advisors, Inc., dated May 1, 1993 incorporated herein by
reference to post-effective amendment #13 to this Form N-1A
registration statement (File No. 2- 91369), filed with the Securities
and Exchange Commission on April 29, 1994.
5(b) New Investment Advisory Agreement between Life of Virginia Series
Fund, Inc. and Aon Advisors, Inc. dated April 27, 1995, covering the
International Equity Portfolio incorporated herein by reference to
post-effective amendment #15 to this Form N-1A registration statement
(File No. 2-91369), filed with the Securities and Exchange Commission
on May 1, 1995.
5(c) New Investment Advisory Agreement between Life of Virginia Series
Fund, Inc. and Aon Advisors, Inc. dated April 27, 1995, covering the
Real Estate Securities Portfolio incorporated herein by reference to
post-effective amendment #15 to this Form N-1A registration statement
(File No. 2-91369), filed with the Securities and Exchange Commission
on May 1, 1995.
1
<PAGE>
5(d) Form of Investment Sub-Advisory Agreement between Aon Advisors, Inc.
and Perpetual Portfolio Management, Limited incorporated herein by
reference to post-effective amendment #15 to this Form N-1A
registration statement (File No. 2- 91369), filed with the Securities
and Exchange Commission on May 1, 1995.
5(e) Form of Investment Sub-Advisory Agreement between Aon Advisors, Inc.
and Genesis Realty Capital Management, L.P. incorporated herein by
reference to post-effective amendment #15 to this Form N-1A
registration statement (File No. 2- 91369), filed with the Securities
and Exchange Commission on May 1, 1995.
6(a) Underwriting Agreement between Life of Virginia Series Fund, Inc. and
Forth Financial Securities Corporation, dated June 30, 1994
incorporated herein by reference to post-effective amendment #15 to
this Form N-1A registration statement (File No. 2-91369), filed with
the Securities and Exchange Commission on May 1, 1995.
6(b) Underwriting Agreement between Life of Virginia Series Fund, Inc. and
Forth Financial Securities Corporation, dated April 2, 1996.
7 Not Applicable
8(a) Custody Agreement between Life of Virginia Series Fund, Inc. and
Crestar incorporated herein by reference to post-effective amendment
#4 to this Form N-1A registration statement (File No. 2-91369), filed
with the Securities and Exchange Commission on 4/10/87.
8(b) Form of Custody Agreement between Life of Virginia Series Fund, Inc.
and Firstar Trust Company incorporated herein by reference to
post-effective amendment #15 to this Form N-1A registration statement
(File No. 2-91369), filed with the Securities and Exchange Commission
on May 1, 1995.
8(c) Form of Sub-Custody Agreement between Firstar Trust Company and Chase
Manhattan Bank, N.A. incorporated herein by reference to
post-effective amendment #15 to this Form N-1A registration statement
(File No. 2-91369), filed with the Securities and Exchange Commission
on May 1, 1995.
9(a)(i) Stock Sale Agreement incorporated herein by reference to
pre-effective amendment #1 to this Form N-1A registration statement
(File No. 2-91369), filed with the Securities and Exchange Commission
on 12/21/84.
9(a)(ii) Stock Sale Agreements for Separate Accounts III and 4; Amendments to
Stock Sale Agreements for Separate Accounts I and II incorporated
herein by reference to post-effective amendment #7 to this Form N-1A
registration statement (File No. 2-91369), filed with the Securities
and Exchange Commission on 4/19/89.
9(a)(iii) Stock Sale Agreement relating to the International Equity Portfolio
and the Real Estate Securities Portfolio. (To be filed by amendment.)
9(b) Indemnity Agreement between The Life Insurance Company of Virginia
and Aon Advisors, Inc., dated May 1, 1993, incorporated herein by
reference to post-effective amendment #13 to this registration
statement (File No. 2-91369), filed with the Securities and Exchange
Commission on 4/29/94.
9(c) Form of Accounting Services Agreement between Life of Virginia Series
Fund, Inc. and Firstar Trust Company incorporated herein by reference
to post-effective amendment #15 to this Form N-1A registration
statement (File No. 2-91369), filed with the Securities and Exchange
Commission on May 1, 1995.
10 Opinion and consent of William E. Daner, Jr., Esq. incorporated
herein by reference to pre-effective amendment #1 to this Forn N-1A
registration statement (File No. 2-91369), filed with the Securities
and Exchange Commission on 12/21/84.
11(a) Consent of Messrs. Sutherland, Asbill & Brennan
11(b) Consent of Ernst & Young LLP
2
<PAGE>
12 Not Applicable
13 Letter regarding initial capital incorporated herein by reference to
post-effective amendment #1 to this Form N-1A registration statement
(File No. 2-91369), filed with the Securities and Exchange Commission
on 6/28/85.
14 Not Applicable
15 Not Applicable
16 Power of Attorney incorporated herein by reference to post-effective
amendment #8 to this Form N-1A registration statement (File No.
2-91369), filed with the Securities and Exchange Commission on
4/26/90.
17 Form of Sub-Advisory Agreement with Genesis Merchant Group/Seneca
Capital Management, L.L.C.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Life of Virginia Series Fund, Inc. ("Fund") is a Virginia corporation
organized on May 14, 1984. The Life Insurance Company of Virginia, a corporation
chartered under the Laws of the Commonwealth of Virginia, has provided the
initial investment in the Fund. The Life Insurance Company of Virginia owns a
significant amount of the shares of each class of the Fund's stock through the
Separate Accounts to support the variable life insurance and variable annuity
contracts which it offers. In addition, Aon Savings Plan, an affiliated person
of Aon Advisors Inc., owns the remaining shares of the Fund not owned by Life of
Virginia.
The Life Insurance Company of Virginia is an indirectly, wholly-owned
subsidiary of GNA Corporation. GNA Corporation is a wholly-owned subsidiary of
General Electric Capital Corporation ("GE Capital"). GE Capital, a diversified
financial services company, is a wholly-owned subsidiary of General Electric
Company. The chart that follows this page illustrates the structure of GE
Capital and its subsidiaries. Previously, Life of Virginia was an indirectly,
wholly-owned subsidiary of Aon Corporation, an affiliate of Aon Advisors, Inc.
Applicant's Insurance Holding Company System
100% Common Stock Ownership Unless Otherwise Indicated
(see attached list for affiliates of the applicant)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
General Electric
Company
(14-0689340) NY
_______________________________|____________________________
| |
| |
Various General Electric
Subsidiaries Capital Services,
Inc.
(06-1109503) DE
|
__________|_________
| |
| |
General Electric Various
Capital Subsidiaries
Corporation
(13-1500700) NY
|
|
GNA Corporation
(91-1277112) WA
___________________________________________|_________________________________________
| | | | | | |
| | |
GNA Mortgage | GNA Distributors, Inc. | GNA Securities, Inc. | GNA Insurance
Funding Corporation | (91-1601607) WA | (91-1143830) WA | Services, Inc.
(91-1636446) DE | | | (51-0348373) DE
| | |
| |
| GNA Capital General Electric Various |
| Management, Inc. Capital Assurance Subsidiaries
| (91-1356174) WA Company Various State
| NAIC #70025 Specific
| (91-6027719) DE Subsidiaries
|
| |
| |
| __________________________________|________________________________
| | | | | |
|
| Great Northern American First Federal Home Life AMEX Life LOV
| Insured Annuity Security Life Insurance Assurance
| Corporation Insurance Company Company
| NAIC #94366 Company NAIC #67695 NAIC #67962
| (91-1127115) WA NAIC #73091 (35-0576390) IN (95-2009993) CA
| (05-0399955) RI
| | |
52% | | 48% |
| | |
| | ___________|___________
| |
GE Capital Life Assurance Company
of New York PHF Life The Harvest Life
(fka First GNA Life Insurance Insurance Insurance
Company of New York) Company Company
NAIC #72990 NAIC #84808 NAIC # 79421
(22-2882416) NY (38-2055892) FL (34-1099737) OH
</TABLE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
Title of Class Number of Record Holders
_______________ as of December 31, 1995
Capital Stock, Class A 5
Capital Stock, Class B 5
Capital Stock, Class C 5
Capital Stock, Class D 5
Capital Stock, Class E 5
Capital Stock, Class F 5
3
<PAGE>
ITEM 27. INDEMNIFICATION
Under Section 13.1-697.A of the Virginia Stock Corporation Act, with respect
to any threatened, pending or completed proceeding against a present or former
director, officer, employee or agent ("corporate representative") of the
registrant, except a proceeding brought by or on the behalf of the registrant,
the registrant may indemnify the corporate representative against expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such proceedings, if:
(i) he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interest of the registrant; and (ii) with respect to any
criminal action or proceeding, he had no reasonable cause to believe his conduct
was unlawful. The registrant is also authorized under Section 13.1-3.1(b) of the
Virginia Stock Corporation Act to indemnify a corporate representative under
certain circumstances against expenses incurred in connection with any
threatened, pending, or completed proceeding brought by or in the right of the
registrant.
The Articles of Incorporation of the Fund (Exhibit 1.(c) to this Registration
Statement) provide that the Fund may indemnify it corporate representatives, in
a manner that is consistent with the laws of the Commonwealth of Virginia. The
Articles preclude indemnification for "disabling conduct" (willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties involved in the
conduct of office) and sets forth reasonable and fair means for determining
whether indemnification shall be made.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the Fund 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 the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of such action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by 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 INVESTMENT ADVISOR.
The Fund's investment advisor, Aon Advisors, Inc., is a wholly-owned
subsidiary of Aon. Aon Advisors, Inc. markets its investment advisory services
to pension funds and corporations. In addition to the Fund, it currently
provides investment advice and management to pension plans, corporations, and
other organizations.
Set forth below is a list of the principal officers of Aon Advisors, Inc.,
indicating each business, profession, vocation, or employment of a substantial
nature in which each person has been engaged at any time during the past two
fiscal years, for his or her own account or in the capacity of director,
officer, partner or trustee. The principal business address for Aon Advisors,
Inc. is 6610 West Broad Street, Richmond, Virginia 23230. The principal business
address of The Life Insurance Company of Virginia is 6610 West Broad Street,
Richmond, Virginia 23230.
<TABLE>
<CAPTION>
Name and Position With Other Business, Profession
Aon Advisors, Inc. Vocation, or Employment
<S> <C>
Michael A. Conway Director and President, Advisors, Inc., since 1990; Director and Senior Vice
Director and President President - Investments, Combined Insurance Company of America, since 1990;
Senior Vice President and Senior Investment Officer, Aon Corporation, since
1990; President and Chief Executive Officer, Manhattan National Corporation,
from 1985 to 1990
Lawrence R. Miller Director and Senior Executive Director, Aon Advisors, Inc., since 1991; Executive
Senior Executive Director Director, Aon Advisors, Inc., since 1987; Vice President - Investments,
Combined Insurance Company of America, since 1978; Director, Aon Asset Management
Fund, since 1991.
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Mark B. Burka Executive Director, Aon Advisors, Inc., since 1990; Managing Director, Aon
Executive Director Advisors, Inc., from 1987 to 1990; Vice President - Investments, Combined
Insurance Company of America, since 1984
Pendleton M. Shiflett, III Vice President, Life of Virginia since 1988; Executive Director, Aon Advisors,
Executive Director since 1990; Managing Director, Aon Advisors, from 1986 to 1990
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Forth Financial Securities, Inc. ("FFSC") serves as principal
underwriter for the registrant and also acts as principal underwriter
for the variable life insurance contracts and variable annuity
contracts issued by The Life Insurance Company of Virginia. The
principal business address of FFSC is 6610 West Broad Street, Richmond,
Virginia 23230.
(b) The principal business address of directors and officers of FFSC is the
same as that of FFSC. Set forth below is a list of each director and
officer of FFSC.
Name and Position With FFSC Position With Registrant
John J. Palmer, President President and Director
Scott R. Reeks, Vice President Treasurer
Manager of Operations,
Treasurer, and Compliance
Officer
Jerry G. Overman, Assistant Vice President
Treasurer
William E. Daner, General Counsel
General Counsel
Linda L. Lanam Secretary
Secretary
Marianne O'Doherty Assistant Secretary
Assistant Secretary
5
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder will be maintained at the office
of the Fund or at Crestar Bank, 919 East Main Street, Richmond, Virginia 23219.
Firstar Trust Company, 777E Wisconsin Avenue, Milwaukee, Wisconsin 53201, or at
Chase Manhattan Bank, N.A., 1211 6th Avenue, New York, NY 10036.
ITEM 31. MANAGEMENT SERVICES
None.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) Not applicable.
(c) The Registrant will furnish each person to whom a prospectus is delivered
with a copy of the Registrant's latest annual report to shareholders, upon
request and without charge.
(d) The Registrant undertakes that, so long as its shares are sold to the
Separate Accounts of The Life Insurance Company of Virginia, and the
Separate Accounts are relying on the provisions of Rule
6e-3(T)(b)(13)(iii) and are making a representation based upon paragraph
(F)(4)(ii)(A) thereunder, its board of directors, a majority of which will
not be interested persons of the Registrant, will formulate and approve
any plan under Rule 12b-1 under the Investment Company Act of 1940 to
finance distribution expenses.
6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, Life of Virginia Series Fund, Inc. certifies
that it meets all of the requirements for effectiveness of this Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Post-Effective Amendment No. 16 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the County of Henrico, Commonwealth
of Virginia, on the 26th day of April, 1996.
Life of Virginia Series Fund, Inc.
Attest:______________________ By: /s/ SCOTT R. REEKS
_____________________________________
Scott R. Reeks, Treasurer
Life of Virginia Series Fund, Inc.
7
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title
<S> <C>
/s/ JOHN J. PALMER*
_______________________________, President (Principal Executive Officer) and Director
John J. Palmer
/s/ SCOTT R. REEKS
_______________________________, Treasurer (Principal Financial and Accounting Officer)
Scott R. Reeks
/s/ WALLACE L. CHANDLER*
_______________________________, Director
Wallace L. Chandler
/s/ JOHN E. LEARD*
_______________________________, Director
John E. Leard
/s/ J. GARNETT NELSON
_______________________________, Director
J. Garnett Nelson
/s/ J. CLIFFORD MILLER, III*
_______________________________, Director
J. Clifford Miller, III
/s/ LEE A. PUTNEY*
_______________________________, Director
Lee A. Putney
/s/ ROBERT P. MARTIN*
_______________________________, Director
Robert P. Martin, Jr.
</TABLE>
*/ By /s/ SCOTT R. REEKS
_______________________________ pursuant to Power of Attorney
Scott R. Reeks
Date: April 26, 1996
_______________________
8
<PAGE>
INDEX OF EXHIBITS
6(b) Distribution Agreement
11(a) Consent of Messrs. Sutherland, Asbill & Brennan
11(b) Consent of Ernst & Young LLP
17 Form of Sub-Advisory Agreement with Genesis Merchant Group/Seneca Capital
Management, L.L.C.
9
DISTRIBUTION AGREEMENT
AGREEMENT (the "Agreement") made this 2nd day of April,
1996, by and between LIFE OF VIRGINIA SERIES FUND, INC., a
Virginia corporation (the "Fund"), and FORTH FINANCIAL SECURITIES
CORPORATION, a Virginia corporation (the "Distributor").
1. Furnishing of Documents and Information.
1.1 The Fund has furnished the Distributor with copies of
each of the following:
(a) Articles of Incorporation of the Fund;
(b) By-laws of the Fund as in effect on the date
hereof;
(c) The most recent post-effective amendment to the
Fund's registration statement on Form N-1A, as filed with the
Securities and Exchange Commission ("SEC");
(d) The most recent prospectus of the Fund.
1.2 The Fund will furnish the Distributor from tine to time
with copies of all amendments of or supplements to the items
referred to in Section 1.1 hereof, and any other information for
use in connection with the Distributor's duties hereunder that
the Distributor reasonably requests regarding the Fund or shares
of the Fund's common stock ("Shares"), including the Fund's
Prospectus and Statement of Additional Information. The Fund
shall not, however, pay the cost of reproducing its Prospectus
and Statement of Additional Information for use by the
Distributor as sales material. The Distributor shall pay the
costs of any other Fund documents (such as semiannual reports)
used as sales material.
1.3 The Fund represents to the Distributor that the
Prospectus and Statement of Additional Information relating to
the Fund contained in its Registration Statement on Form N-1A, or
any amendments thereto, as of their respective effective dates,
contain all statements and information which are required to be
stated therein by the Securities Act of 1933 (the "1933 Act") and
in all respects conform to the requirements thereof, and neither
the Fund Prospectus nor the Statement of Additional Information
includes any untrue statement of a material fact or omits to
state any material fact required to be stated therein, or
necessary to make the statements therein not misleading;
provided, however, that the foregoing representations shall not
apply to information contained in or omitted from the Fund
Prospectus and Statement of Information in reliance upon, and in
conformity with, written information furnished by the Distributor
specifically for use in the preparation thereof.
1.4 The Fund shall advise the Distributor promptly of (a)
any action of the SEC or any authorities of any State or
Territory, of which it may be advised, affecting registration or
qualification of the Fund or the Shares, or the right to offer
the Shares for sale, and (b) the happening of any event which
makes untrue any statement in the Registration Statement or
Prospectus or which requires the making of any change in the
Registration Statement or Prospectus in order to make the
statements therein not misleading.
1.5 The Distributor shall furnish to the Fund reports as to
the sales made pursuant to this Agreement. These reports may be
combined with any similar report prepared for the Fund by the
Distributor or any affiliate of the Distributor.
2. Distribution Services. The Fund and Distributor
hereby agree that the Distributor will act as the principal
underwriter of the Shares in accordance with the Fund's
Registration Statement and Prospectus. In connection therewith,
it is specifically agreed that:
(a) the Distributor will use its best efforts in
soliciting such orders and accompanying funds for the
purchase of Shares and will promptly remit same to the Fund.
However, the Distributor shall not be obligated to solicit
any minimum number of orders in connection with its duties
hereunder;
(b) the Distributor will have authority to receive
orders for the purchase of Shares and to receive funds on
the Fund's behalf; however, no order for the purchase of
Shares will be binding upon the Fund until accepted by the
Fund;
(c) the Distributor may undertake such advertising and
promotion as it deems reasonable in connection with its
duties hereunder;
(d) the Distributor is not authorized to give any
information or make any representations regarding the Fund
or its Shares (other than those contained in the Fund's
Registration Statement or its Prospectus, as in effect from
time to time) other than such sales literature, information
or representations as the Fund may authorize in writing;
(e) the Fund reserves the right to decline to accept
any orders for, or to make any sales of, the Shares until
such time as the officers of the Fund deem it advisable to
accept such orders and to make such sales. The Fund will
promptly advise the Distributor of any such determination;
and
(f) no orders for the purchase of Shares will be
solicited by the Distributor or by the Fund, if and so long
As the effectiveness of the Fund's Registration Statement or
any necessary amendments thereto shall be suspended under
any of the provisions of the 1933 Act, or if and so long as
a current prospectus, as required by Section 5(b) of such
Act, is not on file with the SEC, or redemption rights of
shareholders have been suspended under any of the
circumstances specified in Section 22(e) of the 1940 Act,
provided nothing in this Section 2(f) will affect the Fund's
obligation to redeem its Shares from any shareholder in
accordance with the provisions of the Fund's Articles of
Incorporation, By-Laws or Prospectus, and provided further
that the Distributor may continue to act under this
Agreement until it has been notified in writing (which may
include written notice transmitted by facsimile) of the
occurrence of any of the foregoing events.
3. Compliance. The Distributor represents that it is
duly registered as a broker-dealer under the Securities Exchange
Act of 1934 (the "1934 Act") and is a member in good standing of
the National Association of Securities Dealers, Inc. (the "NASD")
and, to the extent necessary to distribute the Shares, shall be
duly registered or otherwise qualified under the securities laws
of any state or other jurisdiction. The Distributor shall be
responsible for the fulfillment of its obligations under this
Agreement, by itself and by its agents, in continued compliance
with the NASD Rules of Fair Practice, and all rules and
regulations made or adopted pursuant to the 1933 Act or the 1940
Act by the SEC.
In addition, the Distributor agrees to maintain all required
books of account and related financial records, and make all
required reports, in connection with the distribution of the
Shares. All such books of account, records, and reports shall be
maintained, preserved, and submitted to the SEC (and any other
required supervisory authority, including the NASD) pursuant to
the 1934 Act, and rules and regulations thereunder, including
(but not limited to) Rules 17a-3, 17a-4, and 17a-5. In addition,
the Distributor will maintain records of sales commissions, if
any, paid to agents of the Distributor in connection with sales
of Shares of the Fund. All such books, records, and reports
shall be the property of the Distributor, and shall at all times
be subject to reasonable periodic, special or other examination
by the Fund, and by the SEC and all other supervisory
authorities, including the NASD, having jurisdiction. The
Distributor agrees to send to purchasers of Shares all required
confirmations on customer transactions.
4. Registration, Qualification and Expenses.
4.1 The Fund agrees at its own expense to execute such
papers and to do such acts and things as shall from time to time
be reasonably requested by the Distributor for the purpose of
qualifying and maintaining qualification of the Shares for sale
under the Blue Sky Laws of any state, if such qualification is
required, or for maintaining the registration of the Fund and of
the Shares under the 1933 Act and the 1940 Act; the Fund will
pay all registration, filing and other fees in connection
therewith and for qualifying itself under applicable Blue Sky
Laws and any costs of printing and mailing registration
statements.
4.2 The Distributor will pay or cause to be paid all
expenses relating to its qualification as a broker-dealer in any
state in which it qualifies in connection with the distribution
of Shares and all of its expenses relating to the sale and
distribution of the Shares.
5. Similar Activities For Others. The services of the
Distributor under this Agreement are not to be deemed exclusive
and the Distributor will be free to render similar services to
others so long as its services under this Agreement are not
impaired. Likewise, the Fund may accept orders for purchases of
its Shares that it receives directly from prospective purchasers.
6. Liability of the Distributor. In the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of
obligations or duties on the part of the Distributor (or its
officers, directors, agents, employees, controlling persons,
shareholders, and any other person or entity affiliated with the
Distributor or retained by it to perform or assist in the
performance of its obligations under this Agreements, neither the
Distributor nor any of its officers, directors, employees or
agents shall be subject to liability to the Fund or to any
shareholder or to any other person with a beneficial interest in
the Fund for any act or omission in the course of, or connected
with, rendering services hereunder, including without limitation
any error of judgment or mistake of law or for any loss suffered
by the Fund or any shareholder or other person in connection with
the matters to which this Agreement relates, except to the extent
specified in Section 36(b) of the 1940 Act concerning loss
resulting from a breach of fiduciary duty with respect to the
receipt of compensation for services.
7. Dual Interests. It is understood by the parties to
this Agreement that any of the shareholders, directors, officers,
employees and agents of the Fund may be a director, officer,
employee or agent of, or be otherwise interested in the
Distributor, any affiliated person of the Distributor, any
organization in which the Distributor may have an interest, or
any organization which may have an interest in the Distributor;
and that the Distributor, and any such affiliated person or any
such organization may have an interest in the Fund; and that the
existence of any such dual interest shall not affect the validity
hereof, or of any transactions hereunder, except as otherwise
provided in the Articles of Incorporation of the Fund and of the
Distributor, respectively, or by specific provisions of
applicable law including the 1940 Act.
8. Duration. Termination and Amendment of this Agreement.
This Agreement shall not become effective (and the Distributor
shall not serve or act as the Fund's principal underwriter)
unless and until this Agreement is approved by the Fund's Board
of Directors, including a majority of directors who are not
parties to this Agreement or interested persons of any such party
to this Agreement, and will remain in force from year to year
thereafter so long as such continuance is specifically approved
at least annually either (i) by the Board of Directors of the
Fund or (ii) by a vote of a majority of the outstanding voting
securities of the Fund, provided that in either event such
continuance will also be approved by the vote of a majority of
the directors who are not parties to this Agreement or interested
persons of the Fund or of the Distributor, cast in person at a
meeting called for the purpose of voting on such approval.
This Agreement may, on sixty days' written notice, be
terminated at any time, without the payment of any penalty, by
the Board of Directors of the Fund, by a vote of a majority of
the Fund's outstanding voting securities, or by the Distributor.
This Agreement shall automatically terminate in the event of its
assignment. In interpreting the provisions of this Section 8,
the definitions contained in Section 2(a) of the Investment
Company Act of 1940 (particularly the definitions of "interested
person" and "assignment", and "majority of outstanding voting
securities") shall be applied.
This Agreement shall not be amended without specific
approval of such amendment by (i) the vote of a majority of the
outstanding voting securities of the Fund, or (ii) the vote of a
majority of the Fund's directors, including a majority of
directors who are not parties to this Agreement and who are not
interested persons of the Fund or of the Distributor, cast in
person at a meeting called for the purpose of voting on such
approval.
9. Miscellaneous.
9.1 The Distributor may from time to time employ or
associate with any person or persons it may believe to be
particularly fitted to assist it in the performance of this
Agreement. The compensation of any such persons will be the
responsibility of the Distributor, and no obligation with respect
to providing compensation, or otherwise, will be incurred by, or
on behalf of, the Fund with respect to such persons. In
addition, the Fund understands that the persons employed by the
Distributor to assist in the performance of its duties hereunder
may not devote their full time to those duties and that nothing
contained herein will be deemed to limit or restrict the
Distributor's right or the right of any of the Distributor's
affiliates to engage in and devote time and attention to other
businesses or to render other services of whatever kind or
nature.
9.2 The captions in this Agreement are included for
convenience of reference only and in no way define or limit any
of the provisions hereof or otherwise affect their construction
or effect. This Agreement may be executed simultaneously in two
or more counterparts, each of which will be deemed an original,
but all of which together will constitute one and the same
instrument.
9.3 It is intended by the parties that this Agreement be
governed by the law of the Commonwealth of Virginia; however,
this Agreement is also governed by, and subject to, the 1940 Act,
and rules thereunder, including such exemptions therefrom as the
SEC may grant.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto
duly authorized.
Attest: Life of Virginia Series Fund, Inc.
/s/ M.O. 'DOHERTY /s/ John J. Palmer
Assistant Secretary President
Attest: Forth Financial Securities
Corporation
/s/ M.O. 'DOHERTY /s/ John J. Palmer
Assistant Secretary President
Exhibit 11(a)
Consent of Messrs. Sutherland, Asbill & Brennan
<PAGE>
[Sutherland, Asbill & Brennan Letterhead]
April 22, 1996
Board of Directors
Life of Virginia Series Fund, Inc.
6610 West Broad Street
Richmond, Virginia 23230
Re: Life of Virginia Series Fund, Inc.
File No. 2-91369
Gentlemen:
We hereby consent to the reference to our name under
the caption "Legal Matters" in the Prospectus and Statement of
Additional Information filed as part of the Post-Effective
Amendment No. 16 to Form N-1A for Life of Virginia Series Fund
(File No. 2-91369). In giving this consent, we do not admit that
we are in the category of persons whose consent is required under
Section 7 of the Securities Act of 1933.
Very truly yours,
SUTHERLAND, ASBILL & BRENNAN
By: /s/ STEPHEN E. ROTH
Stephen E. Roth
Exhibit 11(b)
Consent of Ernst & Young LLP
<PAGE>
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the captions "Independent
Auditors" and "Audited Financial Statements" and to the use of our report
dated February 8, 1996, in the Registration Statement (Form N1A) of Life
of Virginia Series Fund, Inc. filed with the Securities and Exchange
Commission in this Post Effective Amendment No. 16 to the Registration
Statement under the Securities Act of 1933 (Registration No. 2-91369)
and in this Amendment No. 17 to the Registration under the Investment
Company Act of 1940 (Registration No. 811-4041).
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
Richmond, Virginia
April 25, 1996
Exhibit 17
Form of Sub-Advisory Agreement
with
Genesis Merchant Group/Seneca
Capital Management, L.L.C.
<PAGE>
SUB-INVESTMENT ADVISORY AGREEMENT
THIS SUB-INVESTMENT ADVISORY AGREEMENT ("Agreement") made
this day of 1996 by and Between Aon
Advisors, Inc., a Virginia corporation, (the "Adviser") and Genesis
Merchant Group/Seneca Capital Management, L.L.C., a limited
liability company organized under the laws of California (the
"Sub-Adviser").
Adviser and Sub-Adviser agree as follows:
1. Adviser hereby engages the services of Sub-Adviser in
connection with Adviser's management of the Real Estate Securities
Portfolio (the "Portfolio") of Life of Virginia Series Fund, Inc.
(the "Fund"). Pursuant to this Agreement and subject to the
oversight and supervision by Adviser and the officers and the board
of directors of the Fund, Sub-Adviser shall manage the investment
and reinvestment of the assets of the Portfolio.
2. Sub-Adviser hereby accepts employment by Adviser in the
foregoing capacity and agrees, at its own expense, to render the
services set forth herein and to provide the office space,
furnishings, equipment and personnel required by it to perform such
services on the terms and for the compensation provided in this
Agreement.
3. In particular, Sub-Adviser shall furnish continuously an
investment program for the Portfolio and shall determine from time
to time in its discretion the securities and other investments to
be purchased or sold or exchanged and what portions of the
Portfolio shall be held in various securities, cash or other
investments. In this connection, Sub-Adviser shall provide Adviser
and the officers and directors of the Fund with such reports and
documentation as the latter shall reasonably request regarding
Sub-Adviser's management of the Portfolio's assets.
4. Sub-Adviser shall carry out its responsibilities under this
Agreement in compliance with: (a) the Portfolio's investment
objective, policies and restrictions as set forth in the Fund's
current registration statement, (b) such policies or directives as
the Fund's directors may from time to time establish or issue, and
(c) applicable law and related regulations. In particular,
Sub-Adviser shall make every effort to ensure that the Portfolio
complies with (1) Section 817(h) of the Internal Revenue Code of
1986 (the "Code") and regulations issued thereunder relating to the
diversification requirements for variable annuity, endowment, and
life insurance contracts and to ensure that the Portfolio
continuously qualifies as a regulated investment company under
sub-chapter M of the Code and (2) the California Insurance
Department's Borrowing Guideline Limits Applicable to a Portfolio
of a Separate Account and its Diversification Guidelines for
Foreign Country Investments by a Portfolio of a Separate Account.
5. Sub-Adviser shall take all actions which it considers
necessary to implement the investment policies of the Portfolio,
and in particular, to place all orders for the purchase or sale
of securities or other investments for the Portfolio with brokers
or dealers selected by it, and to that end, Sub-Adviser is
authorized as the agent of the Fund to give instructions to the
Fund's custodian as to deliveries of securities or other
investments and payments of cash for the account of the Portfolio.
In connection with the selection of brokers or dealers and the
placing of purchase and sale orders with respect to investments of
the Portfolio, Sub-Adviser is directed at all times to seek to
obtain best execution and price within the policy guidelines
determined by the Fund's board of directors and set forth in the
Fund's current registration statement.
In addition to seeking the best price and execution, Sub-Adviser
may also take into consideration research and statistical
information and wire and other quotation services provided by
brokers and dealers to Sub-Adviser. Sub-Adviser is also authorized
to effect individual securities transactions at commission rates in
excess of the minimum commission rates available, if it determines
in good faith that such amount of commission is reasonable in
relation to the value of the brokerage and research services
provided by such broker or dealer, viewed in terms of either that
particular transaction or Sub-Adviser's overall responsibilities
with respect to the Portfolio. The policies with respect to
brokerage allocation, determined from time to time by the Fund's
board of directors are those disclosed in the Fund's currently
effective registration statement. Sub-Adviser will periodically
evaluate the statistical data, research and other investment
services provided to it by brokers and dealers. Such services may
be used by Sub-Adviser in connection with the performance of its
obligations under this Agreement or in connection with other
advisory or investment operations including using such information
in managing its own accounts.
6. Sub-Adviser's services under this Agreement are not
exclusive. Sub-Adviser may provide the same or similar services to
other clients provided that Sub-Adviser's services to Adviser are
not impaired thereby. Sub-Adviser shall for all purposes herein be
deemed to be an independent contractor and shall, unless otherwise
expressly provided or authorized, have no authority to act for or
represent the Adviser, the Fund or the Portfolio or otherwise be
deemed agents of the Adviser, the Fund or the Portfolio.
7. Sub-Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and shall remain so
registered throughout the term of this Agreement. Sub-Adviser shall
<PAGE>
2
notify Adviser immediately if Sub-Adviser ceases to be so
registered as an investment adviser.
8. Subject to: (a) the requirement that Sub-Adviser seek to
obtain best execution and price within the policy guidelines
determined by the Fund's board of directors and set forth in the
Fund's current registration statement, (b) the provisions of the
Investment Advisers Act of 1940 (the "Act"), (c) the provisions of
the Securities Exchange Act of 1934, and (d) other applicable
provisions of law; Sub-Adviser or an affiliated person of Sub-Adviser
may act as broker for the Portfolio in connection with the
purchase or sale of securities or other investments for the
Portfolio. Such brokerage services are not within the scope of the
duties of Sub-Adviser under this Agreement. Subject to the
requirements of applicable law and any procedures adopted by Fund's
board of directors, Sub-Adviser or its affiliated persons may
receive brokerage commissions, fees or other remuneration from the
Portfolio or the Fund for such services in addition to
Sub-Adviser's fees for services under this Agreement.
9. For the services rendered, the facilities furnished and the
expenses assumed by Sub-Adviser, Adviser shall pay Sub-Adviser at
the end of each calendar month a fee based on the average daily net
assets of the Portfolio at the following annual rates:
.425% of the first $100,000,000; .40% of the next
$100,000,000; and .375% of amounts in excess of $200,000,000
Sub-Adviser's fee shall be accrued daily at 1/365th of the
applicable annual rate set forth above. For the purpose of accruing
compensation, the net assets of the Portfolio shall be determined
in the manner and on the dates set forth in the current prospectus
of the Fund, and on days on which the net assets are not so
determined, the net asset value computation to be used shall be as
determined on the next day on which the net assets shall have been
determined. In the event of termination of this Agreement, all
compensation due through the date of termination will be calculated
on a pro-rated basis through the date of termination and paid
within thirty business days of the date of termination.
During any period when the determination of net value is
suspended, the net asset value of the Portfolio of the last
business day prior to such suspension shall for this purpose be
deemed to be the net asset value at the close of each succeeding
business day until it is again determined.
10. Sub-Adviser hereby undertakes and agrees to maintain, in the
form and for the period required by Rule 31a-2 under the Investment
Company Act of 1940, all records relating to the Portfolio's
investments that are required to be maintained by the Fund pursuant
to the requirements of Rule 31a-1 of that Act.
<PAGE>
3
Sub-Adviser agrees that all books and records which it
maintains for the Portfolio or the Fund are the property of the
Fund and further agrees to surrender promptly to the Adviser or the
Fund any such books, records or information upon the Adviser's or
the Fund's request. All such books and records shall be made
available, within five business days of a written request, to the
Fund's accountants or auditors during regular business hours at
Sub-Adviser's offices. Adviser and the Fund or their authorized
representative shall have the right to copy any records in the
possession of Sub-Adviser which pertain to the Portfolio or the
Fund. Such books, records, information or reports shall be made
available to properly authorized government representatives
consistent with state and federal law and/or regulations. In the
event of the termination of this Agreement, all such books, records
or other information shall be returned to Adviser or the Fund free
from any claim or assertion of rights by Sub-Adviser.
11. Sub-Adviser agrees that it will not disclose or use any
records or information obtained pursuant to this Agreement in any
manner whatsoever except as authorized in this Agreement and that
it will keep confidential any information obtained pursuant to this
Agreement and disclose such information only if Adviser or the Fund
has authorized such disclosure, or if such disclosure is required
by federal or state regulatory authorities.
12. Sub-Adviser hereby indemnifies, defends and protects Adviser
and holds Adviser harmless, from and against any losses arising
out of Sub-Adviser's willful misfeasance, bad faith, gross
negligence or reckless disregard of obligations or duties
hereunder on the part of Sub-Adviser, its officers, directors,
agents, partners, employees, controlling persons, shareholders or
affiliated persons.
Adviser hereby indemnifies, defends and protects Sub-Adviser
and holds Sub-Adviser harmless, from and against any losses arising
out of Adviser's willful misfeasance, bad faith, gross negligence
or reckless disregard of obligations or duties hereunder on the
part of Adviser, its officers, directors, agents, partners,
employees, controlling persons, shareholders or affiliated persons.
13. This Agreement shall not become effective unless and until
it is approved by the board of directors of the Fund, including a
majority of directors who are not parties to this Agreement or
interested persons of any such party to this Agreement. This
Agreement shall come into full force and effect on the date which
it is so approved. This Agreement shall continue in effect for two
years and shall thereafter continue in effect from year to year so
long as such continuance is specifically approved at least annually
by (i) the board of directors of the Fund, or by the vote of a
majority of the outstanding shares of the class of stock
representing an interest in the Portfolio; and (ii) a majority of
those directors who are not parties to this Agreement or interested
4
persons of any such party cast in person at a meeting called for
the purpose of voting on such approval.
14. This Agreement may be terminated at any time without the
payment of any penalty, by the Fund's board of directors, or by
vote of a majority of the outstanding shares of the class of stock
representing an interest in the Portfolio on sixty days written
notice to the Adviser and Sub-Adviser, or by the Adviser, or by the
Sub-Adviser, on sixty days written notice to the other. This
Agreement shall automatically terminate in the event of its
assignment or in the event of the termination of the investment
advisory agreement between the Adviser and the Fund regarding the
Adviser's management of the Portfolio.
15. This Agreement may be amended by either party only if such
amendment is specifically approved by (i) the vote of a majority of
outstanding shares of the class representing an interest in the
Portfolio, and (ii) a majority of those directors who are not
parties to this Agreement or interested persons of any such party
cast in person at a meeting called for the purpose of voting on
such approval.
16. The terms "assignment", affiliated person" and "interested
person", when used in this Agreement, shall have the respective
meanings specified in the Investment Company Act of 1940. The term
"majority of the outstanding shares of the class" means the lesser
of (a) 67% or more of the shares of such class present at a meeting
if more than 50% of such shares are present or represented by proxy
or (b) more than 50% of the shares of such class.
17. This Agreement shall be construed in accordance with laws of
the Commonwealth of Virginia, and applicable provisions of the Act
and the Investment Company Act of 1940.
18. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the date first above written.
AON ADVISORS, INC. GENESIS MERCHANT GROUP/SENECA
CAPITAL MANAGEMENT, L.L.C.
ATTEST: ATTEST:
By: By:
Its: Its:
5
