As filed with the Securities and Exchange Commission on February 21, 1997
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. 17
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 18
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)
___ on May 1, 1997 pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)
___ on pursuant to paragraph (a) of Rule 485
_X_ 75 days after filing pursuant to paragraph (a)(2) of Rule 485
____ on May 1, 1997 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
will file the 24f-2 Notice for the period ended December 31, 1996 on or before
February 28, 1997.
<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item No. of
Form N1-A Caption
- - --------- -------
<S> <C>
Part A Prospectus
1.................. Cover Page
2.................. Not Applicable
3.................. Financial Highlights
4.................. GE Investments Funds, Inc.; Investment Objectives and Policies; Investment Practices
5.................. Management of the Fund
5A................. Not Applicable
6.................. GE Investments Funds, Inc., Dividends, Distributions and Taxes; Additional Information
7.................. Purchase and Redemption of Fund Shares
8.................. Purchase and Redemption of Fund Shares
9.................. Additional Information
Part B Statement of Additional Information
10................. Cover Page
11................. Table of Contents
12................. General Information
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................. Distributions and Taxes (prospectus)
21................. Purchase and Redemption of Fund Shares (prospectus)
22................. Not Applicable
23................. Financial Statements
</TABLE>
<PAGE>
PART A
PROSPECTUS
<PAGE>
GE INVESTMENTS FUNDS, INC.
6610 W. Broad Street
Richmond, Virginia 23230
(804) 281-6000
GE Investments Funds, Inc. is an open-end, management investment company
consisting of eight separate investment portfolios or funds (the, "Funds"), each
of which has different investment objectives.
Common Stock Index Fund 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 comprising that Index.
Government Securities Fund 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.
Money Market Fund 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 Fund is neither insured
nor guaranteed by the U.S. Government and no one can assure that the
Fund will maintain a stable net asset value of $1 per share.
Total Return Fund 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 seeks
to achieve its objective by investing in common stocks, bonds and
money market instruments.
International Equity Fund has the investment objective of providing
long-term capital appreciation. The Fund 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.
Real Estate Securities Fund has the investment objective of providing
maximum total return through current income and capital appreciation.
The Fund 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 Fund will not invest directly in real estate.
Global Income Fund has the investment objective of high total return,
emphasizing current income and, to a lesser extent, capital
appreciation. The Fund seeks to achieve these objectives by investing
primarily in income-bearing debt securities and other income-bearing
instruments of U.S. and foreign issuers.
Value Equity Fund had the investment objective of providing long-term
capital appreciation. The Fund seeks to achieve this objective by
investing primarily in common stock and other equity securities that
are undervalued by the market and offer above-average capital
appreciation potential.
Shares of the Funds are only available through the purchase of certain
variable annuity and variable life insurance contracts issued by The Life
Insurance Company of Virginia.
This Prospectus concisely sets forth information about the Funds 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, 1997, containing additional information about the
Funds, has been filed with the Securities and Exchange Commission. The Statement
may be obtained without charge by sending a written request to the GE
Investments Funds, Inc. at the above address or calling the telephone number
shown. The Statement of Additional Information is incorporated into this
Prospectus by reference.
Investments in the Funds are not deposits or obligations of, or guaranteed
or endorsed by, any bank or other insured depository institution, and are not
insured by the Federal Deposit Insurance Corporation or any other government
agency. An investment in any of the Funds involves investment risk including
possible loss of principal.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
May 1, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
GE Investments Funds, Inc. 3
Financial Highlights 4
Investment Objectives and Policies 13
Common Stock Index Fund 13
Government Securities Fund 14
Money Market Fund 15
Total Return Fund 16
International Equity Fund 16
Real Estate Securities Fund 17
Global Income Fund 18
Value Equity Fund 19
Investment Practices 21
Loans of Portfolio Securities 21
Short-Term Money Market Instruments 21
Foreign Investments and Currency 21
Debt Securities 24
Writing Covered Call and Put Options and Purchasing Call and Put Options 25
Financial Futures Contracts and Options on Such Contracts 26
Restricted Securities and Other Illiquid Investments 28
Borrowing 28
Real Estate Investment Trusts 28
Determination of Net Asset Value 29
Purchase and Redemption of Fund Shares 29
Dividends, Distributions and Taxes 29
Dividends and Distributions 29
Taxes 29
Management of the Company 31
Board of Directors 31
Investment Adviser 31
Investment Sub-Advisers 32
Compensation of Advisers 33
Fund Managers 33
Additional Information 34
Capital Stock 34
Contract Owner Voting Rights 34
Plan Participant Voting Rights 34
Annual Reports 34
Inquiries 34
Custodian, Transfer and Dividend Paying Agent 34
Legal Matters 34
</TABLE>
<PAGE>
GE INVESTMENTS FUNDS, INC.
GE Investments Funds, Inc. (the "Company") is an open-end management
investment company incorporated under the laws of the Commonwealth of Virginia
on May 14, 1984. The Company consists of eight separate investment portfolios
(the "Funds" or a "Fund"), each of which is, in effect, a separate mutual fund.
The Company issues a separate class of capital stock for each Fund representing
fractional undivided interests in that Fund. An investor, by investing in a
Fund, 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 Fund.
Likewise, an investor shares pro-rata in any losses of that Fund.
Pursuant to investment advisory agreements and subject to the authority of
the Company's board of directors, GE Investment Management Incorporated ("GEIM")
serves as the Company's investment adviser and administrator and conducts the
business and affairs of the Company. GEIM has engaged GMG/Seneca Capital
Management, L.L.C. ("Seneca") as the investment sub-adviser to provide
day-to-day portfolio management for the Real Estate Securities Fund; has engaged
NWQ Investment Management Company ("NWQ") as the investment sub-adviser to
provide day-to-day portfolio management to the Value Equity Fund; and has
engaged GE Investment (U.S.) Ltd. ("GEIUS") to provide day-to-day portfolio
management to the Global Income Fund. (As used herein, "Adviser" shall refer to
GEIM and, where applicable, either Seneca, NWQ or GEIUS in their respective
roles.)
The Company 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 Company does not offer its stock directly to
the general public. All but one of the Accounts, like the Company, 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 Company are
offered as a funding vehicle for such contracts. The Company 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.
A potential for certain conflicts exists between the interests of variable
annuity contract owners and variable life insurance contract owners. 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 plans
that might invest in the Funds. To the extent that such classes of investors are
invested in the same Fund when a conflict of interest arises that might involve
the Fund, one or more such classes of investors could be disadvantaged. The
Company does not currently foresee any such disadvantage to owners of variable
contracts or to plan participants. Nonetheless, the board of directors of the
Company will monitor the Funds 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 Funds or it may substitute
shares of one Fund for another. This might force a Fund to sell its portfolio
securities at a disadvantageous price.
3
<PAGE>
GE INVESTMENTS FUNDS, 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
FUND +
- - -----------------------------------------------------------------------------------------------------------------------------------
1/1 to 1/1 to 1/1 to 1/1 to 1/1 to 1/1 to
12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91
------- ------- ------- ------- ------- -------
<S> <C> <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 Fund was titled Common Stock Portfolio
In 1994, the Common Stock Index Fund received an expense reimbursement from its
investment adviser. 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 shares issued 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
FUND+
- - ---------------------------------------------------------------------------------------------------------------------------
1/1 to 1/1 to 1/1 to 1/1 to
12/31/90 12/31/89 12/31/88 12/31/87
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value at beginning of period $14.67 $12.33 $10.28 $12.66
Net investment income .41 .34 .32 .24
Net realized and unrealized gain (loss)
on investments (1.91) 2.81 2.05 (1.04)
------ ------ ------- -------
Income (loss) from operations (1.50) 3.15 2.37 (.80)
Distributions to shareholders from:
Net investment income (.41) (.34) (.32) (.78)
Net realized gain .-- (.46) .-- (.80)
Tax return of capital (.01) (.01) .-- .--
------ ------ ------- -------
(.42) (.81) (.32) (1.58)
------ ------ ------- -------
Increase (decrease) in net asset value (1.92) 2.34 2.05 (2.38)
------ ------ ------- -------
Net asset value at end of period $12.75 $14.67 $12.33 $10.28
====== ====== ====== ======
Total Return (10.22%) 25.72% 23.05% (6.32%)
====== ====== ====== ======
RATIOS:
Ratio of operating expenses to
average net assets 1.06% 1.20% 1.35% 1.42%
Ratio of net investment income to
average net assets 2.99% 2.67% 2.53% 2.03%
Portfolio turnover 57.06% 36.94% 186.43% 105.43%
NET ASSETS AT END OF PERIOD $3,154,412 $3,430,460 $2,126,551 $1,839,227
</TABLE>
+ Prior to May 1, 1993, this Fund was titled Common Stock Portfolio
5
<PAGE>
GE INVESTMENTS FUNDS, 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
FUND +
- - ---------------------------------------------------------------------------------------------------------------------------
1/1 to 1/1 to 1/1 to 1/1 to 1/1 to 1/1 to
12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91
-------- ------- ------- ------- ------- -------
<S> <C> <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 Fund was titled Bond Portfolio
Due to the significant increase in shares issued 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
FUND+
- - ---------------------------------------------------------------------------------------------------------------------------
1/1 to 1/1 to 1/1 to 1/1 to
12/31/90 12/31/89 12/31/88 12/31/87
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value at beginning of period $ 9.76 $ 9.58 $ 10.09 $ 11.50
Net investment income .64 .74 .90 .66
Net realized and unrealized gain (loss)
on investments (.15) .31 (.15) (.53)
------- ------- ------- -------
Income from investment operations .49 1.05 .75 .13
Distributions to shareholders from:
Net investment income (.64) (.74) (1.26) (1.43)
Net realized gain .-- (.12) .-- (.11)
Tax return of capital (.01) (.01) .-- .--
------- ------- ------- -------
(.65) (.87) (1.26) (1.54)
------- ------- ------- -------
Increase (decrease) in net asset value (.16) .18 (.51) (1.41)
------- ------- ------- -------
Net asset value at end of period $ 9.60 $ 9.76 $ 9.58 $ 10.09
======= ======= ======= =======
Total Return 5.05% 10.85% 7.83% 1.13%
======= ======= ======= =======
RATIOS:
Ratio of expenses to average net assets .96% 1.13% 1.07% 1.08%
Ratio of net investment income to average net assets 7.78% 7.95% 7.67% 7.51%
Portfolio turnover 56.62% 80.30% 177.76% 10.79%
NET ASSETS AT END OF PERIOD $3,701,835 $3,463,916 $2,933,506 $3,175,326
</TABLE>
+ Prior to May 1, 1993, this Fund was titled Bond Portfolio
7
<PAGE>
GE INVESTMENTS FUNDS, 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
FUND
- - --------------------------------------------------------------------------------------------------------------------------------
1/1 to 1/1 to 1/1 to 1/1 to 1/1 to 1/1 to
12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91
------- ------- ------- ------- ------- -------
<S> <C> <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 adviser 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, .63%
and 5.34%, respectively, for 1995 and .__% and .__%, respectively, for 1996.
Due to the significant increase in shares issued 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
FUND
- - ---------------------------------------------------------------------------------------------------------------------------
1/1 to 1/1 to 1/1 to 1/1 to
12/31/90 12/31/89 12/31/88 12/31/87
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value at beginning of period $ 9.76 $ 9.58 $ 10.09 $ 11.50
Net asset value at beginning of period $ 10.18 $ 9.94 $ 10.20 $ 10.55
Net investment income .73 .86 .68 .57
Net realized and unrealized gain(loss)
on investments .01 .-- .01 .--
------- ------- ------- -------
Income from operations .74 .86 .69 .57
Distributions to shareholders from:
Net investment income (.94) (.62) (.94) (.92)
Net realized gain (.01) .-- (.01) .--
Tax return of capital (.01) .-- .-- .--
------- ------- ------- -------
(.96) (.62) (.95) (.92)
------- ------- ------- -------
Increase (decrease) in net asset value (.22) .24 (.26) (.35)
------- ------- ------- -------
Net asset value at end of period $ 9.96 $ 10.18 $ 9.94 $ 10.20
======= ======= ======= =======
Total Return 7.28% 8.67% 6.76% 5.40%
======= ======= ======= =======
RATIOS:
Ratio of expenses to average net assets .75% .75% .75% .87%
Ratio of net investment income to average
net assets 7.02% 8.43% 6.68% 5.78%
Portfolio turnover 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
</TABLE>
9
<PAGE>
GE INVESTMENTS FUNDS, 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
FUND
- - -----------------------------------------------------------------------------------------------------------------------------------
1/1 to 1/1 to 1/1 to 1/1 to 1/1 to 1/1 to
12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91
-------- -------- -------- -------- -------- --------
<S> <C> <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 shares issued 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
12/31/90 12/31/89 12/31/88 12/31/87
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value at beginning of period $ 11.60 $ 10.42 $ 9.29 $ 11.19
Net investment income .55 .51 .39 .31
Net realized and unrealized gain (loss)
on investments (1.00) 1.51 1.28 (.90)
------- ------- ------- -------
Income (loss) from investment operations (.45) 2.02 1.67 (.59)
Distributions to shareholders from:
Net investment income (.56) (.51) (.39) (.94)
Net realized gain .-- (.32) (.15) (.37)
Tax return of capital .-- (.01) .-- .--
------- ------- ------- -------
(.56) (.84) (.54) (1.31)
------- ------- ------- -------
Increase (decrease) in net asset value (1.01) 1.18 1.13 (1.90)
------- ------- ------- -------
Net asset value at end of period $ 10.59 $ 11.60 $ 10.42 $ 9.29
======= ======= ======= =======
Total Return (3.85%) 19.51% 17.98% (5.27%)
======= ======= ======= =======
RATIOS:
Ratio of expenses to average net assets 1.10% 1.28% 1.35% 1.50%
Ratio of net investment income to
average net assets 4.81% 4.54% 3.97% 3.04%
Portfolio turnover 41.80% 48.94% 96.15% 81.80%
NET ASSETS AT END OF PERIOD $2,937,613 $3,065,217 $2,301,744 $1,569,825
</TABLE>
11
<PAGE>
GE INVESTMENTS FUNDS, 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
FUND FUND
------------------------ -------------------------
1/1 to 5/1 to 1/1 to 5/1 to
12/31/96 12/31/95 12/31/96 12/31/95
-------- -------- -------- --------
<S> <C> <C> <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 adviser. 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 adviser. 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 Fund 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 Funds will achieve its
investment objective or objectives. Investors should not consider any one Fund
alone to be a complete investment program. All of the Funds 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 Fund 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 Funds.
The different types of securities, investments, and investment practices used
by each Fund 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 Funds 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
Funds 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 Funds 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 Fund 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 Fund. A majority means the
lesser of (1) 67% of the Fund'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 Fund'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 Fund are not fundamental and may be changed by the Company's board of
directors without shareholder approval.
Common Stock Index Fund
The Common Stock Index Fund 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 comprising that Index. 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 Fund 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 Fund purchases each of the stocks
comprising the S&P 500 Index in the same weighted proportions that such stocks
have in the Index. Like the S&P 500 Index, the Common Stock Index Fund 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
Fund 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
Fund or any member of the public regarding the advisability of investing in
this Fund or in securities generally or the ability of the S&P 500 Index to
track general stock market performance.
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 Fund or the timing of
the issuance or sale of the shares of that Fund.
13
<PAGE>
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.
Active Fund management strategies are not used in making investment
decisions for the Common Stock Index Fund. Rather, the Common Stock Index Fund
utilizes a passive investment management approach.
The Common Stock Index Fund 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 Fund'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. The Adviser
monitors the Common Stock Index Fund's correlation to the S&P 500 Index and
attempts to minimize any "tracking error" (i.e., the statistical measure of the
difference between the investment results of the Common Stock Index Fund and
that of the S&P 500 Index). However, brokerage and other transaction costs, as
well as other Common Stock Index Fund expenses, in addition to potential
tracking error, will tend to cause the Common Stock Index Fund'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 Fund's performance will correspond to the
performance of the S&P 500 Index.
The Common Stock Index Fund 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 Fund may temporarily invest cash balances,
pending withdrawals or investments, in high quality money market instruments.
Nevertheless, the Common Stock Index Fund 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 Fund may write covered call and put options on
individual securities and stock indices which correlate with the Common Stock
Index Fund'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
Fund 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 Fund 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 Fund 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.
Government Securities Fund
The Government Securities Fund 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 Fund 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 Fund will
invest at least 80% of its total assets, valued at the time of purchase, in U.S.
Government securities of various maturities. See "Debt Securities" in this
prospectus for more information about U.S. Government securities.
The Government Securities Fund 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 Fund 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 Fund will receive scheduled monthly payments of principal
and interest on its GNMA and other similar securities. In addition, the
Government Securities Fund 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 Fund in instruments consistent with the Government Securities Fund's
investment objectives. 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 Fund to reinvest scheduled and unscheduled principal
payments. At the time principal payments or prepayments are received by the
Government Securities Fund, 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 Fund.
14
<PAGE>
The Government Securities Fund 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 Fund 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
Fund will fluctuate in response to various market forces and will vary inversely
with prevailing current interest rates. Therefore, the value of an investment in
the Government Securities Fund also will fluctuate. In this regard, any
government or agency guarantee of securities held in the Government Securities
Fund does not guarantee the value of an investment in the Fund.
Money Market Fund
The Money Market Fund 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 U.S. Government securities.
2. Obligations (including certificates of deposit, loan participation
interests, 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 banks or government securities dealers,
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 U.S. Government securities or
instruments rated in the highest rating category by the requisite
nationally recognized statistical rating organizations
("NRSRO's") (as defined below); and
4. Commercial paper, which consists of unsecured promissory notes issued
by corporations.
5. Other short-term obligations issued or guaranteed by U.S.
corporations, state and municipal governments or other issuers.
The Money Market Fund only invests 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:
1 rated in the two highest rating categories by at least two NRSROs (as
defined under Rule 2a-7, under the Investment Company Act of 1940), or
by only one NRSRO if only one NRSRO has issued a rating with respect
to the instrument ("requisite NRSRO's"); 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.
15
<PAGE>
All of the Money Market Fund money market instruments mature in 13 months or
less. The average maturity of the Fund's fund securities based on their dollar
value does not exceed 90 days at the time of each investment. If the disposition
of a fund security results in a dollar-weighted average fund maturity in excess
of 90 days, the Fund invests its available cash in such a manner as to reduce
its dollar-weighted average fund maturity to 90 days or less as soon as
reasonably practicable.
The Money Market Fund maintains 95% of its total assets in securities that
are rated in the highest category by the requisite NRSROs or unrated securities
of comparable investment quality. Of securities not rated in the highest
category (or not of comparable quality), the Fund does not invest more than the
greater of 1% of its total assets or $1 million in the securities of any single
issuer. Except as explained in the SAI, the Fund does not invest more than 5% of
its total assets (taken at amortized cost) in securities of any single issuer
(except U.S. Government securities or repurchase agreements collateralized by
such securities).
Total Return Fund
The Total Return Fund 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 attempts 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 Fund invests 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 Fund and the Money Market Fund. This Fund also invests in debt
obligations described below:
1. Marketable corporate 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 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 Fund 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 Fund will be rated within the four highest grades by
an NRSRO such as Standard and Poor's Corporation or Moody's Investors Service,
Inc. The balance of the value of any bonds held by this Fund may be rated below
those four highest grades, and if these lower-rated bonds were held in the Fund
in significant amounts they would increase financial risk and income volatility.
At the current time, the Fund has a non-fundamental investment restriction
limiting this Fund's investment in these lower-rated debt securities (i.e.,
rated less than Baa or BBB) to no more than 30% of the Fund'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 Fund 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 debt securities usually reflects yields
generally available on securities of similar quality and type. When such yields
decline, the market value of a fund 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 fund already
invested at lower yields can be expected to decline. It is likely that the
portfolio turnover rate for this Fund will be higher than for other funds 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 Fund
The International Equity Fund has the investment objective of providing
long-term capital appreciation. The Fund 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 Fund
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").
16
<PAGE>
The International Equity Fund 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."
Under normal market conditions, the Fund 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 Fund 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
Fund invests are common stock, preferred stock, convertible debt obligations,
convertible preferred stock and warrants or other rights to acquire stock. The
Fund 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 Fund 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 Fund may invest, or, subject to certain tax restrictions, foreign
currencies. The International Equity Fund 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 Fund 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 Fund 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 Fund 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
Fund is fully invested in securities of foreign issuers or non-dollar securities
while also maintaining foreign currency positions, it may be exposed to greater
combined risk. The Fund's net currency positions may expose it to risks
independent of its securities positions. See "Foreign Investments and Currency."
Real Estate Securities Fund
The Real Estate Securities Fund has the investment objective of providing
maximum total return through current income and capital appreciation. The Fund
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 Fund does not
invest directly in real estate.
The Real Estate Securities Fund 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 Fund 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.
17
<PAGE>
The Real Estate Equity Fund 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 Fund 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 Fund 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 Fund in
significant amounts, such 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 Fund 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 Fund. 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 Fund 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 (the "1940 Act"). 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" in this prospectus for more
information about real estate investment trusts.
Global Income Fund
The Global Income Fund has the investment objectives of high total return,
emphasizing current income and, to a lesser extent, capital appreciation. The
Fund seeks to achieve these objectives by investing primarily in income-bearing
debt securities and other income-bearing instruments of U.S. and foreign
issuers. Such investments may be denominated or quoted in foreign currencies
("non-dollar instruments") or U.S. dollars. Foreign issuers include: (1) foreign
governments, or instrumentalities of foreign governments, (2) international
entities (i.e., the World Bank), (3) companies organized outside the U.S. or
whose securities are principally traded outside the U.S. and, (4) companies
organized in the U.S. but having their principal activities and interests
outside the U.S.
The Global Income Fund may invest in: (1) U.S. Government securities of the
type that the Government Securities Fund may invest in, (2) debt securities
issued or guaranteed by a domestic or foreign issuer (including, in the case of
a foreign government or international entity, any political subdivision,
authority, agency or instrumentality thereof), (3) convertible bonds and
non-convertible preferred stock of domestic or foreign issuer companies, (4)
certificates of deposit, bankers' acceptances or time deposits of U.S. or
foreign banks (including domestic or foreign branches thereof) having total
assets of more than $1 billion, and (5) money market instruments of the type
that the Money Market Fund may invest in. Debt securities may include floating
rate and variable rate instruments, zero coupon obligations, mortgage-backed and
asset-backed securities, and structured securities. See "Investment Practices"
in this prospectus and the SAI for more information about these practices and
their risks.
The Global Income Fund is intended for investors who can accept the risks
involved in securities of foreign issuers and non-dollar instruments. See
"Foreign Investments and Currency."
18
<PAGE>
Under normal market conditions, the Global Income Fund invests at least 65%
of its total assets in either non-dollar instruments or in the securities of at
least three different foreign issuers or in a combination of both. The Fund also
may, for temporary defensive purposes, invest up to 100% of its total assets in
dollar-denominated instruments and/or securities of U.S. issuers (including
money market instruments of the type that the Money Market Fund may invest in).
In selecting investments for the Fund, the Adviser considers such factors as the
instrument's duration, yield, credit quality, the prospects for capital
appreciation, and the fundamental outlooks for currency and interest rate trends
that could affect the instrument. The Fund may use currency transactions both to
enhance overall returns for a given level of risk and to hedge its exposure to
foreign currencies. While the Fund generally has both long and short currency
positions, its net long and short foreign currency exposure generally does not
exceed the value of its total assets. See "Foreign Investments and Currency."
Debt securities held by the Global Income Fund are limited to those rated
within the six highest categories by S&P, Moody's, or another NRSRO, or, if
unrated by such rating organizations, are determined by the Adviser to be of
comparable quality. The Fund does not, however, invest more than 25% of its
total assets in securities rated below the four highest categories or more than
10% of its total assets in securities rated below the five highest categories.
If such lower-rated securities are held in the Global Income Fund in significant
amounts, they increase the financial risk and income volatility. Lower-rated
debt securities and their attendant risks are described in "Investment
Practices" in this prospectus and the SAI.
The Global Income Fund maintains a dollar-weighted average portfolio
duration of not more than seven years. Duration represents the weighted average
maturity of expected cash flows on a debt obligation, discounted to present
value. The longer the duration of a debt obligation, the more sensitive its
value is to changes in interest rates. The Fund may use various techniques to
shorten or lengthen the dollar-weighted average duration of its portfolio,
including the acquisition of debt obligations at a premium or discount,
transactions in structured securities, options, futures contracts and options on
futures contracts, and interest rate swaps. The Global Income Fund is not
subject to any limitation with respect to the average maturity of its portfolio.
The Global Income Fund employs certain currency and interest rate
management techniques involving risks different from those associated with
investing solely in dollar-denominated debt securities of U.S. issuers. Such
techniques include transactions in options, futures contracts, options on
futures contracts, structured securities, forward foreign currency exchange
contracts, currency options and futures and currency and interest rate swaps. To
the extent that the Fund is fully invested in securities of foreign issuers and
non-dollar instruments while also maintaining currency positions, it may be
exposed to greater combined risk. The Fund's net currency positions also may
expose it to risks independent of its securities positions. See "Investment
Practices" in this prospectus and the SAI. The Fund also may lend securities and
invest in short-term money market instruments, when-issued securities,
securities issued on a delayed-delivery basis, restricted securities and other
illiquid investments. See "Investment Practices" in this prospectus.
The Global Income Fund is not "diversified" as defined by the 1940 Act.
Therefore, it is more susceptible to adverse developments affecting any single
issuer. Nonetheless, a non-diversified Fund is still subject to the
diversification requirements that arise under federal tax law and the 25% limit
on concentration of investments in a single industry. See "Dividends,
Distributions and Taxes" and "Investment Restrictions" in this prospectus.
Value Equity Fund
The Value Equity Fund has the investment objective of providing long-term
capital appreciation. The Fund seeks to achieve this objective by investing
primarily in common stock and other equity securities of companies that NWQ
believes are undervalued by the market place at the time of purchase and offer
the potential for above-average capital appreciation. Other equity securities
include preferred stock, securities convertible or exchangeable into common
stock, rights and warrants, options on equity securities, and futures contracts
on equity indices (and options thereon). The Fund also may invest in undervalued
convertible preferred stock and debt securities.
The Value Equity Fund may invest in securities of companies in cyclical
industries during periods when such securities appear to NWQ to have strong
potential for capital appreciation. The Fund also may invest in the securities
of "special situation" companies. A "special situation" company is one that NWQ
believes has potential for significant future earnings growth but has not
performed well in the recent past. These situations may include companies with
management turnaround, corporate or asset restructuring or significantly
undervalued assets.
The universe from which NWQ selects securities includes those issued by
companies of varying capitalization. NWQ identifies potentially undervalued
securities by applying statistical measures designed to reveal value on an
absolute and relative basis. Such statistical measures include key financial
ratios such as stock price-to-earnings, stock price-to-book value and stock
price-to-cash flow. It also evaluates the issuers of such securities on the
basis of management strength, inside ownership, and competitive structure. The
process used by NWQ to select undervalued securities generally differs from that
used by many other "value" oriented investment advisers in that NWQ places a
heavy emphasis on normalized earnings, stock price-to-cash flow ratios, relative
value, and whether the security's issuer is in an industry that is likely to
benefit from long-term fundamental improvements such as restructuring,
turnaround
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trends or consolidation trends. At any point in time, NWQ also closely follows
approximately 200 companies whose securities appear to have market appreciation
potential based on statistical analysis. Because first-hand knowledge of
management can be an important element in analyzing and valuing a company, NWQ
interviews key management personnel of, and also may visit, these select
companies to obtain fundamental research information and verify their value.
Under normal market conditions, the Value Equity Fund invests at least 65%
of its total assets in common stocks and other equity securities believed by NWQ
to be undervalued. Nonetheless, the Fund may, for temporary defensive purposes,
invest up to 100% of its total assets in Money Market instruments of the type
that the Money Market Fund may invest in. The Value Equity Fund may invest up to
35% of its total assets in securities of foreign issuers, including ADRs, EDRs
and GDRs. The Fund may invest up to 35% of its total assets in investment grade
debt securities including those in which the Government Securities Fund may
invest as well as corporate bonds, mortgage-backed and asset-backed securities,
floating rate and variable rate instruments and zero coupon obligations.
Investment grade debt securities are those rated in the four highest categories
by S&P, Moody's, or another NRSRO, or, if unrated by such rating organizations,
are determined by NWQ (or GEIM) to be of comparable quality. Of these debt
securities, the Fund may invest an amount equal 15% of its total assets in
securities rated below investment grade. Securities of foreign issuers and debt
securities of various types (including lower-rated debt securities) and their
attendant risks are described in "Investment Practices" and this prospectus and
the SAI.
The Value Equity Fund may lend portfolio securities and invest in
short-term money market instruments, "when-issued" securities, securities issued
on a delayed-delivery basis, restricted securities and other illiquid
investments. See "Investment Practices" in this prospectus and in the SAI for
more information about these practices and their risks.
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INVESTMENT PRACTICES
In pursuing their investment objectives, the Funds may engage in the
following investment practices.
Loans of Portfolio Securities
Each Fund 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 Fund'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 Fund 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 Fund 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 Funds will make loans of
securities only to firms determined by the Adviser (under the supervision of the
board of directors) to be creditworthy.
Short-Term Money Market Instruments
All of the Funds 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
Fund 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
Fund 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 Fund, Government Securities Fund and Total Return
Fund 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 Funds 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. The Value
Equity Fund may invest up to 35% of its total assets in securities of foreign
issuers and non-dollar securities. These Funds will not concentrate their
investments in any particular foreign country. The International Equity Fund and
the Global Income Fund may, as described above, invest all of their 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 fund 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 dollar value of certain portfolio investments. In addition, if the exchange
rate for the currency in which a Fund receives interest payments declines
against the U.S. dollar before such interest is paid as dividends to
shareholders, the Fund may have to sell fund securities to obtain sufficient
cash to pay such dividends. As discussed below, the International Equity Fund
and the Global Income Fund may employ certain investment techniques to hedge its
foreign currency exposure; however, such techniques also entail certain risks.
Some foreign stock markets (and other securities markets) may have substantially
less volume than, for example, the New York Stock Exchange (or other domestic
markets) 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 Fund are uninvested and no return is earned thereon. The
inability of a Fund to make intended investments due to settlement problems
could cause it to miss attractive investment opportunities. Inability to
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dispose of portfolio securities or other investments due to settlement problems
could result either in losses to a Fund due to subsequent declines in value of
the portfolio investment or, if the Fund 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 Fund, 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.
Investments in ADRs, EDRs and GDRs. Many securities of foreign issuers are
represented by ADRs, EDRs and GDRs. The Common Stock Index Fund, Government
Securities Fund, Total Return Fund, Value Equity Fund, International Equity Fund
and Global Income Fund 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
Fund 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 Fund 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 Fund 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 Fund and the
Global Income Fund 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 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 Fund or the Global Income
Fund's investments in those countries and the availability to the Fund 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 Fund's or the Global Income
Fund's investments in such countries illiquid and more volatile than investments
in Japan or most Western European countries. As a result, these Funds 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 these Funds 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 Fund, Government Securities Fund, Total Return Fund, International Equity
Fund and the Global Income Fund may have currency exposure independent of their
securities positions, the value of the assets of these Funds as measured in U.S.
dollars may be affected by changes in foreign currency exchange rates. To the
extent that a Fund's assets consist of investments quoted or denominated in a
particular currency, the Fund's exposure to adverse developments affecting the
value of such currency will increase. The International Equity Fund and the
Global Income Fund often both have substantial currency exposure both from
investments quoted or denominated in foreign currencies and from their currency
positions.
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Currency exchange rates may fluctuate significantly over short periods of
time causing, along with other factors, a Fund'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
are 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 Fund's total assets, adjusted to reflect the Fund's net position after giving
effect to currency transactions, is denominated or quoted in the currencies of
foreign countries, the Fund is 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 Fund and the Global Income Fund may engage in
a variety of foreign currency management practices described below. Each 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. These Funds will incur costs in
connection with conversions between various currencies.
Forward Foreign Currency Exchange Contracts. The International Equity Fund
and the Global Income Fund 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, these Funds may enter into forward foreign currency exchange contracts
in order to protect against anticipated changes in future foreign currency
exchange rates. The International Equity Fund and the Global Income Fund 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 Fund and the Global Income Fund 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 a Fund if the
value of the hedged currency increased. If the International Equity Fund or the
Global Income Fund 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 Fund 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 Fund'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 Fund'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 Fund of unrealized profits, transaction costs
or the benefits of a currency hedge or force the Fund to cover its purchase or
sale commitments, if any, at the current market price.
Options on Currencies. The International Equity Fund and the Global Income
Fund 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 Fund and the Global Income Fund 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 Fund 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 Fund's position, the Fund may forfeit the entire amount of the premium plus
related transaction costs. In addition, the Fund 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 Fund. 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 Fund 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.
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Interest Rate Swaps and Currency Swaps. The International Equity Fund and
the Global Income Fund may enter into currency swaps for both hedging purposes
and to seek to increase total return. The Global Income Fund may enter into
interest rate swaps for these purposes. The Global Income Fund typically uses
interest rate swaps to shorten the effective duration of its portfolio. Interest
rate swaps involve the exchange by the Global Income Fund with another party of
their respective commitments to pay or receive interest, such as an exchange of
fixed rate payments for floating rate payments. Currency swaps involve the
exchange by a Fund with another party of their respective rights to make or
receive payments in specified currencies. Since currency swaps and interest rate
swaps are individually negotiated, a Fund expects to achieve an acceptable
degree of correlation between its fund investments and its swap positions
entered into for hedging purposes.
The Global Income Fund only enters into interest rate swaps on a net basis,
which means that the two payment streams are netted out, with the Fund receiving
or paying, as the case may be, only the net amount of the two payments. Interest
rate swaps do not involve the delivery of securities, or other underlying assets
or principal. Accordingly, the risk of loss with respect to interest rate swaps
is limited to the net amount of interest payments that the Fund is contractually
obligated to make. If the other party to an interest rate swap defaults, the
Fund's risk of loss consists of the net amount of interest payments that the
Fund is entitled to receive. In contrast, 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 a Fund'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 1940 Act and, accordingly, will not treat
them as being subject to the Fund's borrowing restriction.
The use of interest rate and currency swaps is a highly specialized
activity which involves investment techniques and risks different from those
associated with ordinary fund securities transactions. If the Adviser is
incorrect in its forecasts of market values, interest rates and currency
exchange rates, the investment performance of the International Equity Fund or
the Global Income Fund would be less favorable than it would have been if swaps
were not used.
Debt Securities
U.S. Government Debt Securities. All of the Funds may invest in U.S.
Government securities. These 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.
Zero Coupon Bonds. The Global Income Fund may invest in zero coupon bonds.
Zero coupon bonds are debt obligations issued at a significant discount from
face value. The original discount approximates the total amount interest the
bonds will accrue and compound over the period until maturity or the first
interest accrual date at a rate of interest reflecting the market rate of the
security at the time of issuance. A zero coupon security pays no interest to its
holder during its life and its value (above its cost to the Fund) consists of
the difference between its face value at maturity and its cost. Zero coupon
bonds benefit the issuer by mitigating its initial need for cash to meet debt
service, but some also provide a higher rate of return to attract investors who
are willing to defer receipt of such cash. Zero coupon bonds experience greater
volatility in market value due to changes in interest rates than debt
obligations that provide for regular payments of interest. The Fund accrues
income on zero coupon bonds for tax and accounting purposes, as required, which
is distributable to shareholders and which, because no cash is received at the
time of accrual, may require the liquidation of other portfolio securities to
satisfy the Fund's distribution obligations.
Mortgage-Backed and Asset-Backed Securities. All of the Funds except the
Common Stock Index Fund may invest in mortgage-backed securities, which
represent direct or indirect participation in, or are collateralized by and
payable from, mortgage loans secured by real property. These Funds may also
invest in asset-backed securities, which represent participation in, or are
secured by and payable from, assets such as motor vehicle installment sale
contracts, installment loan contracts, leases of various types of real and
personal property, receivables from revolving credit (credit card) agreements
and other categories of receivables. Such securities are generally issued by
trusts and special purpose corporations.
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Mortgage-backed and asset-backed securities are often subject to more rapid
repayment than their stated maturity dates would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. This may
increase the volatility of such instruments relative to other similarly rated
debt securities. During periods of declining interest rates, prepayment of loans
underlying mortgage-backed and asset-backed securities can be expected to
accelerate, and thus impair a Fund's ability to reinvest the returns of
principal at comparable yields. During periods of rising interest rates, reduced
prepayment rates may extend the average life of mortgage-backed and asset-backed
securities and increase the risk of depreciation due to future increases in
market interest rates. Accordingly, the market values of such securities varies
with changes in prevailing market rates of interest generally and in yield
differentials among various kinds of U.S. Government securities and other
mortgage-backed and asset-backed securities. Asset-backed securities present
certain additional risks not presented by mortgage-backed securities because
asset-backed securities generally do not have the benefit of a security interest
in collateral that is comparable to mortgage assets. There is the possibility
that, in some cases, recoveries on repossessed collateral may not be available
to support payments on these securities.
Structured Securities. The Global Income Fund may invest in structured
notes, bonds and debentures. The value of the principal of and/or interest on
such securities is determined by reference to changes in the value of specific
currencies, interest rates, commodities, indices or other financial indicators
(the "Reference") or the relative change in two or more References. The interest
rate or the principal amount payable upon maturity or redemption may be
increased or decreased depending upon changes in the applicable Reference. The
terms of the structured securities may provide that in certain circumstances no
principal is due at maturity and, therefore, may result in a loss of the Fund's
investment. Structured securities may be positively or negatively indexed, so
that appreciation of the Reference may produce an increase or a decrease in the
interest rate or value of the security at maturity. In addition, changes in
interest rates or the value of the security at maturity may be a multiple of
changes in the value of the Reference. Consequently, structured securities may
entail a greater degree of market risk than other types of debt securities.
Structured securities may also be more volatile, less liquid and more difficult
to accurately price than less complex debt securities.
Lower-Rated Debt Securities. The Total Return Fund, Real Estate Securities
Fund, Value Equity Fund and Global Income Fund may invest in debt securities
(and the Real Estate Securities Fund, Value Equity Fund and Global Income Fund
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 these Funds in significant amounts, such securities would increase
financial risk and income 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.
Writing Covered Call and Put Options and Purchasing Call and Put Options
The Common Stock Index Fund, Government Securities Fund, Value Equity Fund,
International Equity Fund, Real Estate Securities Fund and Global Income Fund
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 Fund 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 Funds are
covered, which means that the Fund will own the securities subject to the option
as long as the option is outstanding. All put options written by these Funds are
covered, which means that the Fund 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 Fund may also be covered to the extent that the Fund's liabilities under such
options are offset by its rights under call or put options purchased by the Fund
and call options written by a Fund 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 Fund 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 Fund 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 Fund, International Equity Fund, Real Estate
Securities Fund, Global Income Fund and Value Equity Fund may each, in
accordance with its investment objective(s) and investment program, also write
exchange-traded covered call and put options on stock indices. These Funds may
write such options for the same purposes as each may engage in such transactions
with respect to individual fund securities, that is, to generate additional
income or as a hedging technique to minimize anticipated declines in the value
of the Fund'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.
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The Common Stock Index Fund, Government Securities Fund, International Equity
Fund, Real Estate Securities Fund, Global Income Fund and Value Equity Fund may
each also purchase exchange-traded call and put options with respect to
securities and, except for the Government Securities Fund, with respect also to
stock indices that correlate with its particular portfolio securities. All six
Funds 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 Fund 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 six Funds may purchase call options on individual securities (or,
except for the Government Securities Fund, 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 Funds 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 Fund 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 Fund, International Equity Fund, Global Income
Fund and Value Equity Fund 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 Fund, International
Equity Fund, Global Income Fund and Value Equity Fund will engage in such
transactions only with firms of sufficient credit to minimize these risks. Where
one of these Funds has entered into agreements with primary dealers with respect
to the unlisted options it has written, and such agreements would enable the
Fund to have an absolute right to repurchase, at a pre-established formula
price, the over-the-counter options written by it, the Fund 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."
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 Fund,
International Equity Fund, Real Estate Securities Fund and Value Equity Fund
through the purchase or sale (writing) of stock index options will depend upon
the extent to which price movements in the Fund'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 Fund
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 Fund'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 Fund, Government Securities Fund, International
Equity Fund, Real Estate Securities Fund, Value Equity Fund and Global Income
Fund 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
Fund may write covered put options on financial futures contracts for the same
purposes.
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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 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 Fund, Real Estate Securities Fund and Global Income Fund
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
Fund, International Equity Fund, Real Estate Securities Fund and Value Equity
Fund may sell stock index futures contracts. To hedge against the possibility of
an adverse change in currency exchange rates, the International Equity Fund and
Global Equity Fund 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 Fund'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 Fund, Real Estate Securities Fund and Global Income Fund may purchase
interest rate futures contracts. Likewise, to hedge against increases in equity
prices, the Common Stock Index Fund, International Equity Fund, Real Estate
Securities Fund and Value Equity Fund may purchase stock index futures
contracts. To hedge against the possibility of an adverse change in currency
exchange rates, the International Equity Fund and Global Income Fund may
purchase currency futures contracts. For these Funds, 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 or currency market.
When used as hedges, the Funds 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 or
changes in currency exchange 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 six Funds 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.
All six Funds may write covered call options and may purchase put and call
options on futures contracts of the type which that Fund 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 Fund
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 Fund 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 Fund 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 Funds 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 Fund for outstanding
options to purchase futures contracts, would exceed 5% of the market value of
the Fund's total assets.
The use of futures contracts by these Funds 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 Fund'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, interest rates, or currency exchange
rates are incorrect, a Fund 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 fund securities. A
further discussion of futures contracts and their associated risks is contained
in the SAI.
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Restricted Securities and Other Illiquid Investments
The Adviser is responsible for determining the value and liquidity of
investments held by each Fund. 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 Fund, Government
Securities Fund, Money Market Fund and Total Return Fund 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
Fund, Real Estate Securities Fund, Value Equity Fund and Global Income Fund 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 "1933 Act").
The foregoing illiquid investment restrictions do not apply to purchases of
restricted securities by the International Equity, Real Estate Securities, Value
Equity or Global Income Funds eligible for sale to qualified institutional
purchasers in reliance upon Rule 144A under the 1933 Act of 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 Fund's holdings of those securities may become illiquid. The foregoing
investment restrictions also do not apply to purchases by the International
Equity Fund or the Global Income Fund 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 1933 Act.
Borrowing
From time to time, the International Equity Fund may increase its ownership
of various investments by borrowing from banks and investing the borrowed funds
(on which the Fund pays interest). The Fund may borrow only up to 10% of the
value of its total assets, subject to the 300% asset coverage requirement under
the 1940 Act. Purchasing investments with borrowed funds is a speculative
investment method known as "leverage," that may subject the Fund 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 Fund 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.
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DETERMINATION OF NET ASSET VALUE
The net asset value of each Fund 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 Fund 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 Fund is determined by adding the values of all securities, cash
and other assets (including accrued but uncollected interest and dividends) of
that Fund and subtracting all liabilities (including accrued expenses but
excluding capital and surplus). Expenses, including investment advisory fees are
accrued daily. The net asset value of a share is determined by dividing the net
asset value of a Fund by the number of outstanding shares of that Fund.
The value of each Fund's securities and assets, except those of the Money
Market Fund and certain short-term debt securities held by the other Funds, is
determined on the basis of their market values. All of the securities and assets
of the Money Market Fund and debt securities having a remaining maturity of
sixty days or less held by any of the other Funds are valued by the amortized
cost method, which approximates market value. Investments for which market
quotations are not readily available, are valued at their fair market value as
determined in good faith by, or under the authority delegated by, the Company's
board of directors. See "Determination of Net Asset Value" in the SAI for more
information.
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 Fund. FFSC is a
wholly-owned subsidiary of Forth Financial Resources, Ltd., which is in turn a
wholly-owned subsidiary of General Electric Company. 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 Funds are sold in a continuous offering and are authorized to
be offered to the Accounts to support the variable contracts and to qualified
pension and retirement plans for the benefit of 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 Fund corresponding to that subaccount. The Accounts purchase and redeem
shares of the Funds for their subaccounts at net asset value without sales or
redemption charges. Likewise, a qualified pension and retirement plan may
purchase and redeems shares of the Funds for its participants at net asset value
without sales or redemption charges. [In the future,qualified pension and
retirement plans may purchase and redeem shares of the Funds on a basis to be
negotiated between the Company or FFSC or both and such plans.]
For each day on which a Fund's net asset value is calculated, the Accounts
transmit to the Company any orders to purchase or redeem shares of the Fund(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, qualified pension and
retirement plans may transmit to the Company any orders to purchase or redeem
shares of the Fund(s) based on the instructions of plan trustees or
participants. The Account and plans purchase and redeem shares of each Fund at
the Fund's net asset value per share calculated as of the day the Company
receives the order, although such purchases and redemptions may be executed the
next morning. Money received by the Company from the Accounts or a plan for the
purchase of shares of International Equity Fund or Global Income Fund may not be
invested by these Funds 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 Company's intention to distribute, as dividends, substantially
all of the net investment income, if any, from each of the Funds. All dividends
of a Fund are subsequently reinvested in additional shares of that Fund at net
asset value. For dividend purposes, net investment income of a Fund consists of
all payments of dividends or interest received by that Fund less realized
investment losses, if any, and estimated expenses (including the investment
advisory fee). All net realized investment gains, if any, of a Fund are expected
to be declared and distributed annually.
Taxes
The Company believes that each of the Funds 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.
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Each Fund of the Company must meet several requirements to maintain its
status as a regulated investment company. These requirements include the
following: (1) at least 90% of the fund'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 fund'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 Fund's gross income; and (3) at the close
of each quarter of the fund's taxable year, (a) at least 50% of the value of the
fund's assets must consist of cash, United States Government securities and
other securities (no more than 5% of the value of the fund may consist of such
other securities of any one issuer, and the fund must not hold more than 10% of
the outstanding voting stock of any issuer), and (b) the fund 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 Funds) 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 Funds) 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 Company may, in its
business judgment, restrict a Fund'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 Fund to defer the closing out of a contract
beyond the time when it might otherwise be advantageous to do so.
Each of the Funds 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 Fund may invest. In order to comply with
the current or future requirements of section 817(h) (or related provisions of
the Code), the Company may be required, for example, to alter the investment
objectives of one or more of the Funds.
Foreign Investments. Funds 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 Fund 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. Funds
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
Fund 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 Fund failed to qualify as a regulated
investment company, owners of variable life insurance and annuity contracts
based on the Fund (1) might be taxed currently on the investment earnings under
their contracts and thereby lose the benefit of tax deferral, and (2) the Fund
might incur additional taxes. In addition, if a Fund 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 Fund 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 Fund 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 Fund, 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 Funds. Since the shareholders of the Funds are currently limited
to the Accounts and various qualified pension and retirement Plans, 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.
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MANAGEMENT OF THE FUND
Board of Directors
The Company 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 General Electric Company or their affiliates. The Directors are
responsible for the overall management of the Company and their duties include
reviewing the results of each Fund, monitoring investment activities and
practices, and receiving and acting upon future plans for the Company.
Investment Adviser
GEIM, a wholly-owned subsidiary of General Electric Corporation ("GEC"), is
the investment adviser and administrator for the Fund. It is registered under
the Investment Advisers Act of 1940 and its principal office is located at 3003
Summer Street, Stamford Connecticut 06905. In addition to the Fund, GEIM
provides investment advice and management to other investment companies, pension
plans, corporations, and other organizations. As of December 31, 1996, the
aggregated assets under management were approximately $58 billion.
GEIM manages the investments of the Common Stock Index Fund, Government
Securities Fund, Money Market Fund, Total Return Fund and International Equity
Fund 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, GEIM's policy is to attempt to
obtain the most favorable price and efficient execution available. [Subject to
this policy, GEIM may also allocate brokerage to broker/dealers based upon their
sale of Life of Virginia variable life insurance and variable annuity
contracts.] GEIM has engaged investment sub-advisers to provide the day-to-day
fund management of the Real Estate Securities Fund, Value Equity Fund and Global
Income Fund.
The Company has entered into an investment advisory and administration
agreement (together, the "advisory agreements") with GEIM for each Fund
effective May 1, 1997. Under these agreements, GEIM provides a continuous
investment program for each Fund's assets, including investment research and
management. GEIM determines what investments will be purchased, retained or sold
by the Funds and places purchase and sale orders for the Funds' investments.
GEIM provides the Company with all executive, administrative, clerical and other
personnel necessary to operate each Fund, and pays salaries and other
employment-related costs of employing these persons. GEIM furnishes the Company
and each Fund with office space, facilities, and equipment and pays the
day-to-day expenses related to the operation of such space, facilities and
equipment. GEIM, as administrator, also: (1) maintains the books and records of
each Fund; (2) prepares reports to shareholders of each Fund; (3) prepares and
files tax returns for each Fund; (4) assists with the preparation and filing of
reports and the Company's registration statement with the Securities and
Exchange Commission; (5) provides appropriate officers for the Company; (6)
provides administrative support necessary for the board of directors of the
Company to conduct meetings; and (7) supervises and coordinates the activities
of other service providers, including independent auditors, legal counsel,
custodians, accounting service agents, and transfer agents.
Prior to May 1, 1997, Aon Advisors, Inc. ("AAI") served as investment
adviser to the Company and each Fund pursuant to a series of investment advisory
agreements between the Company and AAI. AAI, a wholly owned subsidiary of Aon
Corporation, is located at 123 N. Wacker Drive, Chicago, Illinois 60606. The
investment advisory fees under the advisory agreements with GEIM are the same as
the fees under the Company's investment advisory agreements with AAI. The SAI
contains a further discussion of the Company's investment advisory agreements
with AAI and information about AAI.
Under its agreement with the Company, AAI agreed to reimburse the Fund for
any amount by which the total operating expenses of the Common Stock Index and
Money Market Funds in any fiscal year exceeded .75% of the aggregate average
daily net assets of those Funds. AAI also agreed to reimburse the Fund for any
amount by which the total operating expenses of the International Equity Fund in
any fiscal year exceeded 1.75% of the first $30 million of the aggregate average
daily net assets of that Fund and 1% of the aggregate average daily net assets
in excess of $30 million. With respect to Funds other than the foregoing three
Funds, AAI agreed to reimburse the Fund for any amount by which the total
operating expenses of such Funds exceeded 1.5% of the first $30 million of the
average daily net assets of those Funds and 1% of the amount by which the
average daily net assets of each of these Funds exceeded $30 million. On a
voluntary basis, AAI agreed to reimburse the International Equity and Real
Estate Securities Funds for expenses in excess of the following amounts:
International Equity Fund, 1.50% of the first $30 million of average daily net
assets; Real Estate Securities Fund, 1.25% of the first $30 million of average
daily net assets. For purposes of this reimbursement formula, "operating
expenses" did not include attorney's fees, court judgments or other litigation
expenses or certain costs relating to indemnification.
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During the Fund's fiscal year ended December 31, 1996, the total operating
expenses incurred by the Fund's Funds (including the advisory fees paid to AAI),
before reimbursement, represented 0.__% of the average net assets of the Common
Stock Index Fund, 0.__% of the average net assets of the Government Securities
Fund, 0.__% of the average net assets of the Money Market Fund, 0.__% of the
average net assets of the Total Return Fund, __% of the average net assets of
the International Equity Fund, and ___% of the Real Estate Securities Fund.
During the Fund's fiscal year ended December 31, 1996, AAI reimbursed the Fund
for expenses in an amount representing 0.__% of the average net assets of the
International Equity Fund and 0.__% of the average net assets of the Real Estate
Securities Fund.
Investment Sub-Advisers
Prior to May 1, 1997 Perpetual Fund Management, Limited ("Perpetual"), a
wholly-owned subsidiary of Perpetual plc, was the investment sub-adviser for the
International Equity Fund. 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 Fund, Perpetual provided investment advice and management to pension
plans, corporations and other institutional and individual clients.
Seneca, a limited liability company, is the investment sub-adviser for the
Real Estate Securities Fund pursuant to an investment sub-advisory agreement
effective May 1, 1997. Seneca is located at 909 Montgomery Street, San
Francisco, CA 94133. Seneca has three principal stockholders. They are Will K.
Weinstein, Gail P. Seneca and Richard D. Little. Seneca is an independent
investment adviser that provides investment management services to foundations,
endowments, corporations, mutual funds and private clients. Founded in 1989,
Seneca currently manages approximately $3.2 billion in equity, fixed-income and
real estate assets.
NWQ is the investment sub-adviser to the Value Equity Fund pursuant to an
investment sub-advisory agreement with GEIM effective May 1, 1997. NWQ located
at 655 South Hope Street, Los Angeles, CA 90017 and is a wholly owned subsidiary
of United Asset Management Corporation, a company whose principal business
managing investments for institutional clients and acquiring investment
management firms. NWQ is a manager of domestic investment portfolios for
individual, union, corporate, endowment and foundation clients with __ years of
experience. It manages approximately $__.__ billion in assets.
GE Investment (U.S.) Ltd. ("GEIUS") is the investment sub-adviser to the
Global Income Fund pursuant to an investment sub-advisory agreement with GEIM
effective May 1, 1997. Like GEIM, GEIUS is an indirect wholly owned subsidiary
of GEC and is considered under common control with GEIM. GEIUS is located at
______________ and is registered as an investment adviser under the Investment
Advisers Act of 1940. Although GEIUS has no prior experience advising a U.S.
mutual fund, it currently manages _______________.
Seneca, NWQ and GEIUS manage the investments of the Real Estate Securities
Fund, Value Equity Fund and the Global Income Fund, 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, all three sub-advisers follow the GEIM's policy of
seeking to obtain the most favorable price and efficient execution available.
For their services, GEIM pays Seneca, NWQ and GEIUS monthly compensation in
the form of an investment sub-advisory fee. The fee is paid by GEIM monthly and
is based upon the average daily net assets (see "Purchase and Redemption of Fund
Shares") of the Fund that each sub-adviser manages.
32
<PAGE>
Compensation of Advisers
<TABLE>
<CAPTION>
Maximum annual rate
Adviser or 1996 annual rate (as a % (as a % of average
Fund Sub-Adviser of average daily net assets) daily net assets)
------------- -------------- ---------------------------- -----------------------
<S> <C> <C> <C>
Common Stock Index GEIM .35
Government Securities GEIM .50
Money Market GEIM .50
Total Return GEIM .50
International Equity GEIM 1.00
Real Estate Securities GEIM . 85
Real Estate Securities Seneca .425
Value Equity GEIM .___
Value Equity NWQ .___
Global Income GEIM .
Global Income GEIUS .
</TABLE>
With respect to each of the Funds other than the Common Stock Index Fund,
the fee payable to the Adviser(s) is graduated so that increases in the
respective Fund's average annual net assets may result in a lower fee and
decreases in a Fund's average annual net assets may increase the fee. The
maximum annual rate payable to each Adviser is indicated in the right-hand
column.
See "Management of the Company" in the SAI for further information.
Fund Managers
Robert Aufiero, portfolio manager of the debt portion of the Total Return
Fund, joined GEIM in 1993 after five years at Shields Asset Management. Mr.
Aufiero began his career as a trader in 1983 with A.G. Becker and has held
additional positions with Citibank and McNeil Mantha. He is a generalist
portfolio manager and represents the GEIM fixed-income team in the corporate
bond sector. Mr. Aufiero received a B.S. in finance from Marist College and an
MBA in international finance from St. John's University.
Eugene K. Bolton, portfolio manager of the Common Stock Index Fund, is
Executive Vice President and a Director of GEIM. He joined GEIM in [1985], prior
to which he served for twenty years in various financial management positions in
GEC. Mr. Bolton received a B.A. in business and management from Mundelein
College.
Jon D. Bosse, portfolio manager of the Value Equity Fund, joined NWQ in
1996. Prior to joining NWQ, he spent ten years with ARCO Investment Management
Company where he was Director of Equity Research and managed a value-oriented
fund. Previous to this, he spent four years in the corporate finance department
of ARCO. Mr. Bosse received his B.A. (summa cum laude) in economics from
Washington University in St. Louis were he received the John M. Olin Award for
excellence in economics. Mr. Bosse is also a Chartered Financial Analyst and a
member of the Association for Investment Management and Research and the Los
Angeles Society of Financial Analysts.
Donald Duncan, portfolio manager of the Money Market Fund, joined GEIM in
1988. Mr. Duncan received a B.S. in business administration from the University
of Rhode Island.
Ralph R. Layman, portfolio manager of the International Equity Fund, joined
GEIM in 1991. Mr. Layman is an Executive Vice President and Director of GEIM and
a trustee of the GE Pension Fund. Prior to joining GEIM, he held positions over
a twelve-year period with Northern Capital Management, Templeton Management,
Wausau Insurance Company and Rockwell International. Mr. Layman received a B.S.
in economics and an M.S. in finance from the University of Wisconsin. He is a
Chartered Financial Analyst and a founding member of the International Society
of Financial Analysts.
William R. Wright, portfolio manager of the Global Income Fund, joined
GEIUS in 1993. He is also a Vice President of GEIM. Prior to joining GEIUS, Mr.
Wright worked for Continental Insurance Corp. where he was a portfolio manager
of its U.K. subsidiary. He began his career in 1980 at Bankers Trust Company
after service as a language specialist in the U.S. Army Security Agency. Mr.
Wright received his B.A. in political science/Asian studies from Wittenberg
University and an MBA in finance from New York University.
33
<PAGE>
ADDITIONAL INFORMATION
Capital Stock
The Fund is currently issuing eight classes of capital stock with each
representing interests in a different Fund. All shares of capital stock
(including fractional shares) have equal rights with regard to voting,
redemptions, dividends, distributions, and liquidations with respect to the fund
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 1940 Act 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 Funds 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 Fund-by-Fund 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 1940 Act requires a shareholder vote,
trustees of qualified pension and retirement 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 GE
Investments Funds, Inc. 6610 W. Broad Street, Richmond, Virginia 23230.
Custodian, Transfer and Dividend Paying Agent
Pursuant to a custody agreement with the Company, State Street Bank and Trust
Company ("State Street") serves as custodian of the Fund's assets and also
performs certain accounting services for the Company. These services include
maintaining certain of the Company's books, accounts, journals and other records
of original entry and performing certain daily functions related thereto,
including calculating each Fund's daily net asset value. State Street acts as
the Company's transfer and dividend paying agent. The principal office of State
Street is located at 225 Franklin Street, Boston, MA 02110.
Legal Matters
Sutherland, Asbill & Brennan of Washington, L.L.P., D.C. is Counsel for the
Fund. There are no material legal proceedings in which the Fund is a party.
34
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
GE INVESTMENTS FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1997
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 GE Investments Funds, Inc., 6610 W. Broad
Street, Richmond, Virginia 23230, or call (804)281-6000.
<PAGE>
TABLE OF CONTENTS
Page
----
General Information
Prior History ............................ 3
The Funds ................................ 3
Portfolio Turnover Rate Calculation ...... 4
Investment Practices and Restrictions
Investment Practices ..................... 5
Investment Restrictions .................. 15
Management of the Fund ..................... 17
Directors and Officers ................... 17
AAI ...................................... 18
AAI Investment Advisory Agreement ........ 18
AAI Investment Advisory Fee .............. 19
AAI Investment Sub-Advisers .............. 20
AAI Investment Sub-Advisory Agreements ... 20
AAI Investment Sub-Advisory Fees ......... 21
Reimbursement of Excess Operating Expenses 21
GEIM ..................................... 21
GEIM Investment Advisory Agreement ....... 22
GEIM Investment Sub-Advisers ............. 23
GEIM Investment Sub-Advisory Agreements .. 23
Securities Activities of the Advisers .... 24
Portfolio Transactions and Brokerage ....... 25
Determination of Net Asset Value ........... 25
Dividends and Distributions ................ 26
Redemption of Fund Shares .................. 27
Additional Information
Life of Virginia ......................... 27
Custodian, Dividend and Transfer Agent ... 27
Independent Auditors ..................... 27
Legal Counsel ............................ 27
Capital Stock ............................ 27
Voting Rights ............................ 28
Other Information ........................ 28
Audited Financial Statements ............... 29
Appendix A ................................. 30
Appendix B ................................. 32
<PAGE>
GENERAL INFORMATION
GE Investments Funds, Inc. (the "Company") is an open-end management
investment company incorporated under the laws of the Commonwealth of Virginia
on May 14, 1984. The Company consists of eight separate investment portfolios
(the "Funds" or a "Fund"), each of which is, in effect, a separate mutual fund.
The Company issues a separate class of capital stock for each Fund representing
fractional undivided interests in that Fund. An investor, by investing in a
Fund, 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 Fund.
Likewise, an investor shares pro-rata in any losses of that Fund.
Pursuant to investment advisory agreements and subject to the authority of
the Company's board of directors, GE Investment Management Incorporated ("GEIM")
serves as the Company's investment adviser and conducts the business and affairs
of the Company. GEIM has engaged GMG/Seneca Capital Management, L.L.C.
("Genesis") as the investment sub-adviser to provide day-to-day portfolio
management for the Real Estate Securities Fund; has engaged NWQ Investment
Management Company ("NWQ") as the investment sub-adviser to provide day-to-day
portfolio management to the Value Equity Fund; and engaged GE Investment (U.S.)
Ltd. ("GEIUS") to provide day-to-day portfolio management to the Global Income
Fund. (As used herein, "Adviser" shall refer to GEIM and, where applicable,
either Genesis, NWQ or GEIUS 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 Fund, (formerly the Common Stock Fund),
and the Government Securities Fund, (formerly the Bond Fund) were changed. The
investment objective of the Common Stock Fund was intermediate and long-term
growth of capital, with reasonable income a consideration. The Common Stock Fund
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 Fund 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 Funds
The Common Stock Index Fund 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 comprising that index. The
Common Stock Index Fund attempts 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 Fund purchases each of the stocks comprising
the S&P 500 Index in the same weighted proportions that such stocks have to the
Index. Like the S&P 500 Index, the Common Stock Index Fund 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
Fund's holdings due to changes in the composition or weightings of issues
comprising the S&P 500 Index. For the year ended December 31, 1996, the
portfolio turnover rate for the Common Stock Index Fund was _____ %. For the
year ended December 31, 1995, the portfolio turnover rate for the Common Stock
Index Fund was 14.58%.
The Government Securities Fund 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 Fund 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 Fund
invests 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, 1996, the portfolio turnover rate for the Government Securities Fund was
_____ %. For the year ended December 31, 1995, the portfolio turnover rate for
the Government Securities Fund was 130.64%.
The Money Market Fund 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.
3
<PAGE>
The Total Return Fund 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 attempts 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 Fund invests 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 Fund and the Money Market Fund. This Fund also invests in corporate
debt obligations.
There are no percentage limitations on the types of securities in which the
Total Return Fund 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 Company. At least 60% of the
value of any bonds held by this Fund 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, 1996, was _____ %. Stocks in the Fund had a turnover
ratio of _____ %. Bonds in the portfolio had a turnover ratio of _____ %. The
portfolio turnover rate for the year ended December 31, 1995, was 105.56%.
Stocks in the Fund had a turnover ratio of 154.74%. Bonds in the portfolio had a
turnover ratio of 51.62%.
The International Equity Fund has the investment objective of providing
long-term capital appreciation. The Fund seeks to achieve its objective by
investing primarily in equity and equity-related securities of companies that
are organized outside of 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 Fund
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"). For the year ended December 31, 1996, the
portfolio turnover rate for the International Equity Fund __%. For the fiscal
period ended December 31, 1995, the portfolio turnover rate for the
International Equity Fund was __% on an annualized basis.
The Real Estate Securities Fund has the investment objective of providing
maximum total return through current income and capital appreciation. The Fund
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 Fund does not
invest directly in real estate. For the year ended December 31, 1996, the
portfolio turnover rate for the Real Estate Securities Fund __%. For the fiscal
period ended December 31, 1995, the portfolio turnover rate for the Real Estate
Securities Fund was __% on an annualized basis.
The Global Income Fund has the investment objective of high total return,
emphasizing current income and, to a lesser extent, capital appreciation. The
Fund seeks to achieve these objectives by investing primarily in income-bearing
debt securities and other income-bearing instruments of U.S. and foreign
issuers. Such investments may be denominated or quoted in foreign currencies
("non-dollar instruments") or U.S. dollars. Foreign issuers include: (1) foreign
governments, or instrumentalityOs of foreign governments, (2) international
entities (i. e., the World Bank), (3) companies organized outside the U.S. or
whose securities are principally traded outside the U.S. and, (4) companies
organized in the U.S. but having their principal activities and interests
outside the U.S. The anticipated portfolio turnover rate for the Global Income
Fund is approximately ____ %.
The Value Equity Fund has the investment objective of providing long-term
capital appreciation. The Fund seeks to achieve this objective by investing
primarily in common stock and other equity securities of companies that NWQ
believes are undervalued by the market place at the time of purchase and offer
the potential for above-average capital appreciation. Other equity securities
include preferred stock, securities convertible or exchangeable into common
stock, rights and warrants, options on equity securities, and futures contracts
on equity indices (and options thereon). The Fund also may invest in undervalued
convertible preferred stock and debt securities. The anticipated portfolio
turnover rate for the Value Equity Fund is approximately #_____%.
Portfolio Turnover Rate Calculation
The turnover rate for each Fund 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 Fund'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 Fund'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 Fund's
shares and by requirements, the satisfaction of which enable the Company 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 Fund 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 Fund.
4
<PAGE>
INVESTMENT PRACTICES AND RESTRICTIONS
Investment Practices
The policies by which the Funds 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 Fund 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 Fund makes the commitment to purchase securities on a
when-issued or delayed-delivery basis, the Company will record the transaction
and thereafter reflect the value, each day, of such security in determining the
net asset value of that Fund. At the time of delivery of the securities, the
value may be more or less than the purchase price. Each Fund will also establish
a segregated account with the Company's custodian bank in which it will maintain
cash or cash equivalents or other 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 Fund 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
Fund would be so invested.
Loans of Portfolio Securities. The Funds may from time to time lend
securities each Fund holds to brokers, dealers and financial institutions, up to
a maximum of 20% of the total value of each Fund's assets. This percentage may
not be increased without approval of a majority of the outstanding voting
securities of the respective Funds. (See "Fundamental Restrictions" in this
SAI.) Such loans are secured by collateral in the form of cash or United States
Treasury securities, which at all times while the loan is outstanding, is
maintained in an amount at least equal to the current market value of the loaned
securities. The Funds continue to receive interest and dividends on the loaned
securities during the term of the loans, and, in addition, receive a fee from
the borrower or interest earned from the investment of cash collateral in
short-term securities. The Funds 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.
The right to terminate a loan of securities, subject to appropriate notice,
is given to either party. When a loan is terminated, the borrower returns the
loaned securities to the Company. The Company does not have the right to vote
securities on loan, but may 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
Company receives on loaned securities may be treated as other than qualified
income for the 90% test discussed under "Taxes" in the prospectus. The Company
intends to lend portfolio securities only to the extent that this activity does
not jeopardize a 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 a 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, a Fund makes loans of securities only
to firms the Adviser (under the supervision of the board of directors) deems
creditworthy.
Convertible Securities. The Total Return Fund, International Equity Fund,
Real Estate Securities Fund, Value Equity Fund and Global Income Fund 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 debt
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 Funds may invest are subject to the same rating
criteria as each portfolio's investment in non-convertible debt securities.
5
<PAGE>
Warrants. The International Equity Fund, Real Estate Securities Fund, Value
Equity Fund and Global Income Fund 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.
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 Fund may temporarily hold funds in bank deposits in
foreign currencies during completion of investment programs and since a Fund may
be subject to currency exposure independent of its securities positions, the
Fund 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 Fund 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.
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 Fund are uninvested and no return is
earned on such assets. The inability of a Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of portfolio investments due to
settlement problems could result either in losses to a Fund due to subsequent
declines in value of the portfolio securities or, if the Fund 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 Fund'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 Fund
and Global Income Fund 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, a Fund 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 Fund and Global Income Fund may enter into forward
foreign currency exchange contracts in several circumstances. First, when they
enter into a contract for the purchase or sale of a security denominated or
quoted in a foreign currency, or when they anticipate the receipt in a foreign
currency of dividend or interest payments on such a security which either holds,
the Funds 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 Funds will attempt to protect themselves 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.
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Additionally, when an 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 a Fund'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 these Funds'
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 Fund 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 a Fund's foreign assets.
The International Equity Fund and Global Income Fund 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 Funds 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 Funds.
The Company'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 Fund in an amount equal to the
value of a Fund's total assets committed to the consummation of forward foreign
currency exchange contracts requiring the Fund 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 Fund'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, a Fund's
ability to utilize forward foreign currency exchange contracts may be
restricted.
While the International Equity Fund and Global Income Fund will enter into
forward contracts to reduce currency exchange rate risks, transactions in such
contracts involve certain other risks. Therefore, while these Funds may benefit
from such transactions, unanticipated changes in currency prices may result in a
poorer overall performance for, the Funds than if they had not engaged in any
such transactions. Moreover, there may be imperfect correlation between a Funds
portfolio holdings of securities quoted or denominated in a particular currency
and forward contracts entered into by the Fund. Such imperfect correlation may
cause the Fund to sustain losses which will prevent the Fund from achieving a
complete hedge or expose the Fund to risk of foreign exchange loss.
Writing and Purchasing Currency Call and Put Options. The International
Equity Fund and Global Income Fund 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 Fund and Global Income Fund 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, these Funds 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 Fund. A call option written by these Funds
obligates the Fund 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 Fund would obligate the Fund 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 the Fund 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 Fund or Global Income Fund 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." These Funds also are able to enter into closing sale transactions
in order to realize gains or minimize losses on options that either purchases.
The International Equity Fund and Global Income Fund normally purchase call
options in anticipation of an increase in the U.S. dollar value of currency in
which securities to be acquired by either are quoted or denominated. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified currency at a specified price during the option period.
The Fund ordinarily realizes 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 Fund realizes either no gain or a loss on the
purchase of the call option.
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The International Equity Fund and Global Income Fund 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 a Fund, 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 a Fund's portfolio
securities due to currency exchange rate fluctuations. A Fund 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 Fund 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 Fund and Global Income Fund 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 Funds may forgo the opportunity to profit
from an increase in the market value of the underlying currency. Also, when
writing put options, the Funds accept, 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 Fund and Global Income Fund normally purchase call
options to seek to increase total return in anticipation of an increase in the
market value of a currency. They 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 Funds realize either no gain
or a loss on the purchase of the call option. Put options may be purchased by a
Fund 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.
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 Fund and Global Income Fund 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 is not possible to effect
closing transactions in particular options, with the result that a Fund 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 Fund as a covered call option writer is unable to
effect a closing purchase transaction in a secondary market, it is 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 Fund and Global Income Fund may purchase and write
over-the-counter options to the extent consistent with their limitations 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 Funds. See
"Investment Practices" in the Prospectus.
Interest Rate and Currency Swaps. The International Equity Fund and Global
Income Fund may enter into currency swaps for hedging purposes and to increase
total return. The Global Income Fund may enter into interest rate swaps for
these purposes. Inasmuch as swaps are entered into for good faith hedging
purposes (or are offset by a segregated account as described below), the Company
and the Adviser believe that swaps do not constitute senior securities as
defined in the Investment Company Act of 1940 (the"1940 Act") and, accordingly,
will not treat them as being subject to a Fund's borrowing restrictions. The net
amount of the excess, if any, of a Fund'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 Company's custodian. An amount of cash or liquid, high
grade debt securities having an aggregate net asset value at least equal to the
entire amount of payment stream payable by the Global Income Fund pursuant to an
interest rate swap, will be maintained in a segregated account with the
Company's custodian. Neither Fund enters into any interest rate or 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
Company 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 a Fund's limitation on such investments. See "Investment Practices"
in the prospectus.
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Options on Securities and Securities Indices. The Common Stock Index Fund,
Government Securities Fund, International Equity Fund, Real Estate Securities
Fund, Value Equity Fund and Global Income Fund 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 Fund 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 Funds are covered, which means that the Fund
will own the securities subject to the option as long as the option is
outstanding. All put options written by these Funds are covered, which means
that the Fund 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 Fund may also be
covered to the extent that the Fund's liabilities under such options are offset
by its rights under call or put options purchased by the Fund and call options
written by a Fund may also be covered by depositing cash or securities with the
Company's custodian in the same manner as written puts are covered.
Through the writing of a covered call option a Fund 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 Fund 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 Fund, International Equity Fund, Real Estate
Securities Fund and Value Equity Fund may each, in accordance with its
investment objective and investment program, also write exchange-traded covered
call and put options on stock indices. These Funds 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 Fund'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 Fund writes an option which expires unexercised or is closed out by
the Fund at a profit, it will retain the premium received for the option, which
will represent a capital gain to the Fund. If the price of the underlying
security moves adversely to the Fund's position, the option may be exercised and
the Fund, 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 Fund writes an option on an index, and the underlying index moves
adversely to its position, the option may be exercised. Upon such exercise, the
Fund, 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 Fund
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 Funds may also use options on such other indices as may now or in the
future be available. The four Funds 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 Funds 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 Fund 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 Fund. To close option
positions purchased by it, the Common Stock Index Fund 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.
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All seven Funds (other than the Money Market Fund) may use options traded
on a national securities exchange. Only the Government Securities Fund,
International Equity Fund and Global Income Fund, 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 Fund and
Global Income Fund may enter into contracts with the primary dealers with whom
they write over-the-counter options. The contracts will provide that the
Government Securities Fund and Global Income Fund 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 Fund and Global Income Fund, 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." The Company's board of directors
has established standards of creditworthiness for these primary dealers.
Financial Futures Contracts. The Common Stock Index Fund, Government
Securities Fund, International Equity Fund, Real Estate Securities Fund, Value
Equity Fund and Global Income Fund, 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 Fund and Global Income Fund may purchase and sell
exchange-traded currency futures contracts as a hedge to protect against
anticipated adverse changes in currency exchange rates. All six Funds also may
purchase and sell exchange-traded financial futures contracts to earn additional
income or otherwise seek to increase total return.
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 Fund 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 Fund are usually liquidated in this manner, a Fund 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.
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When financial futures contracts are entered into by a Fund, either as the
purchaser or the seller of such contracts, the Fund 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 Fund 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 Fund,
Government Securities Fund, International Equity Fund, Real Estate Securities
Fund, Value Equity Fund and Global Income Fund 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 Fund is authorized
to enter into. The Common Stock Index Fund and Value Equity Fund 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 Funds 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.
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 Fund desires
maximum flexibility. Whether, in order to achieve a particular objective, the
Fund 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 Fund 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 Fund are intended to correlate with the Fund'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 Fund. 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 Fund's
transactions in those instruments will not in fact offset the impact on the Fund
of adverse market developments in the manner or to the extent contemplated or
that such transactions will result in losses to the Fund which are not offset by
gains with respect to corresponding portfolio securities owned or to be
purchased by that Fund.
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 Fund, 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 Fund may use an amount of such
contract which is smaller than the amount of portfolio securities to which such
contracts relate.
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<PAGE>
The risk that the hedging technique used will not actually or entirely
offset an adverse change in the value of a Fund's securities is particularly
relevant to financial futures contracts and options written on stock indices. A
Fund 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 Fund 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 Fund 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 Fund. 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 Fund.
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 Fund'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 Fund of such exercise (usually
one day or more) thereby requiring the Fund 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 Funds 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 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 Fund 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 Fund 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 Funds' assets posted as margin in connection with these transactions as
permitted under the 1940 Act. See "Custodian, Dividend and Transfer Agent," in
this Statement of Additional Information. The Funds 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 Fund 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 Fund could effect such recovery.
The success of any Fund 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 Fund
is exposed. Hedging transactions also, of course, may be more, rather than less,
favorable to a Fund than originally anticipated.
Borrowing. From time to time the International Equity Fund 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 Fund 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 Fund's assets
so computed should fail to meet the 300% asset coverage requirement, the Fund
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 Fund would not
otherwise incur, so that it may have little or no net investment income during
periods of borrowing. Since substantially all of the Fund's assets fluctuate in
value whereas borrowing obligations are fixed, when the Fund 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.
Lower-Rated, Lower Quality Debt Instruments. Up to 30% of the total assets
of the Total Return Fund, 35% of the total assets of the Real Estate Securities
Fund, 15% of the total assets of the Value Equity Fund and 25% of the total
assets of the Global Income Fund 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"). 10% of the total assets of the Global Income Fund may be
invested in debt instruments rated lower than the five highest rating
categories. 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 a Fund, have their ratings lowered due to the deterioration of the
issuer's financial position.
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Risks of Lower-Rated, Lower Quality Debt Instruments. Lower-rated debt
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, Real Estate Securities, Value Equity, or Global Income
Funds invest in these securities, factors adversely affecting the market value
of lower-rated securities will adversely affect the Funds' net asset value. In
addition, the Funds 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 debt securities have a claim on the assets of the issuer prior to the
holders of common stock. Therefore, an investment in debt securities generally
entails less risk than an investment in common stock of the same issuer.
Lower-rated 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
lower-rated 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
lower-rated 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 lower-rated securities because such
securities are generally unsecured and are often subordinated to other creditors
of the issuer.
Lower-rated securities frequently have call or buy-back features that would
permit an issuer to call or repurchase the security from a Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund
would likely have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund.
The Total Return, Real Estate Securities, Value Equity, or Global Income
Funds may have difficulty disposing of certain lower-rated securities for which
there is a thin trading market. Because not all dealers maintain markets in all
lower-rated securities, there is no established retail secondary market for many
of these securities, and the Company 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 lower-rated 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 Company to
obtain accurate market quotations for purposes of valuing a Fund's assets.
Market quotations are generally available on many lower-rated 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 Company'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 lower-rated 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.
The Total Return, Real Estate Securities Value Equity, or Global Income
Funds may acquire lower-rated securities that are sold without registration
under the federal securities laws and therefore carry restrictions on resale.
These Funds 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 Funds also may acquire lower-rated securities during an initial
underwriting. Such securities involve special risks because they are new issues.
The Company 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.
Zero Coupon Bonds. The Global Income Fund may invest in zero coupon bonds
which are debt obligations that do not entitle the holder to any periodic
payments of interest prior to maturity or provide for a specified cash payment
date when the bonds begin paying interest. As a result, zero coupon bonds are
generally traded at a significant discount from their face value. The discount
approximates the present value of interest that the bonds would have accrued and
compounded over the period until maturity.
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Zero coupon bonds benefit the issuer by mitigating its initial need for
cash to meet debt service, but generally provide a higher rate of return to
compensate investors for the deferral of interest (and sometimes principal)
payments. Companies that issue zero coupon bonds often do not have the capacity
to pay current interest and so are likely to be poorer credit risks than other
issuers. In addition, the market prices of zero coupon bonds are likely to be
more volatile and to fluctuate to a greater degree in response to interest rates
than the market prices of interest-bearing bonds having similar maturities and
credit quality. Zero coupon bonds entail the disadvantage that cash cannot be
generated from them prior to the maturity or payment date except by liquidating
them at a discount. Similarly, if the issuer of a zero coupon bond defaults, the
Company may obtain no return on its investment.
Mortgage-Backed and Asset-Backed Securities. All of the Companys except the
Common Stock Index Fund may invest in mortgage-backed and asset-backed
securities, which represent direct or indirect participation in, or are
collateralized by and payable from, mortgage loans secured by real property.
These Funds may also invest in asset-backed securities, which represent
participation in, or are secured by and payable from, assets such as motor
vehicle installment sales contracts, installment loan contracts, leases of
various types of real and personal property, receivables from revolving credit
(i.e., credit card) agreements and other categories of receivables. Such assets
are securitized through the use of trusts and special purpose corporations.
Payments or distributions of principal and interest may be guaranteed up to
certain amounts and for certain time periods by letters of credit or pool
insurance policies issued by a financial institution unaffiliated with the trust
or corporation. Other credit enhancements also may exist.
Mortgage-backed and asset-backed securities are often subject to more rapid
repayment than their stated maturity date would indicate as a result of the
pass-through of prepayments of principal on the underlying loans. A Fund's
ability to maintain positions in such securities is affected by the reductions
in the principal amount of such securities resulting from prepayments, and its
ability to reinvest prepayments of principal at comparable yield is subject to
generally prevailing interest rates at that time. The values of mortgage-backed
or asset-backed securities varies with changes in market interest rates
generally and the differentials in yields among various kinds of U.S. Government
securities and other mortgage-backed and asset-backed securities.
Because asset-backed securities generally do not have the benefit of a
security interest in collateral that is comparable to mortgage assets,
asset-backed securities present certain additional risks that are not present
with mortgage-backed securities. Revolving credit receivables are generally
unsecured and the debtors on such receivables are entitled to the protection of
a number of state and federal consumer credit laws, many of which give debtors
the right to set-off certain amounts owed, thereby reducing the balance due.
Automobile receivables generally are secured, but by automobiles rather than by
real property. Most issuers of automobile receivables permit the loan servicers
to retain possession of the underlying obligations. If the servicer sells these
obligations to another party, there is the risk that the purchaser could acquire
an interest superior to that of holders of the asset-backed securities. In
addition, because of the large number of vehicles involved in a typical issue of
asset-backed securities and technical requirements under state law, the trustee
for the holders of the automobile receivables may not have a proper security
interest in the automobiles. Therefore, there is the possibility that recoveries
on repossessed collateral may not be available to support payments on these
securities.
GNMA Certificates. The Government Securities Fund 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 Fund 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 Fund 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.
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Investment Restrictions
Fundamental Restrictions. Each class of capital stock of the Company
represents interests in a separate Fund of the Company. The Funds 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 Funds affected by the change. Except where
otherwise noted, each Fund 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 Funds 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).
This restriction dose not apply to the Global Income Fund.
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 Fund.
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 Fund, the Real Estate Securities Fund, Value
Equity Fund or Global Income Fund.
7. Purchase any securities on margin except: (a) that a Fund may obtain
such short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities, or (b) in connection with
investments of Funds 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 Fund's guidelines.
10. Borrow amounts in excess of 10% (20% in the case of the Common Stock
Index Fund) 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 Fund,
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 Fund 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 Fund's total assets, taken at market value at
the time thereof, or (b) in connection with investments of certain
Funds in options and futures contracts.
12. Underwrite securities of other issuers except insofar as the Company
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 Fund, Real Estate Securities Fund, Value Equity Fund and Global
Income Fund) in repurchase agreements maturing in more than seven days
and other illiquid investments.
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<PAGE>
Nonfundamental Restrictions. The Company has also adopted the following
additional investment restrictions applicable (except as noted) to all Funds.
These are not fundamental and may be changed by the board of directors without
shareholder approval. Under these restrictions, each Fund 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 Fund 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 Fund, Value Equity Fund and
Global Income Fund.
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
Funds 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 Funds other than the Real Estate Securities Fund may not purchase
or retain the securities of any issuer if the individual officers and
directors of the Company, GEIM, 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 Fund would own more than 3% of the total outstanding
voting stock of any one investment company, or more than 5% of the
Fund's assets would be invested in any one investment company, or more
than a total of 10% of the Fund'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 Fund'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 Funds may invest in financial futures contracts and
related options.
7. Invest more than 30% (35% for the Real Estate Securities Fund) 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.
8. The Total Return Fund may not write, purchase or sell puts, calls
(other than covered call options on individual securities) or
combinations thereof.
9. The Money Market Fund 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 Fund, Government Securities Fund, International
Equity Fund, Real Estate Securities Fund, Value Equity Fund and Global
Income Fund 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 Fund and Global Income Fund 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 Fund: if up to 40% of the Fund's total assets are
invested in foreign issuers, two foreign countries; if between 40% and
60% of the Fund's total assets are invested in foreign issuers, three
foreign countries; if between 60% and 80% of the Fund's total assets
are invested in foreign issuers, four foreign countries; and if over
80% of the Fund's total assets are invested in foreign issuers, five
foreign countries.
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MANAGEMENT OF THE FUND
Directors and Officers
The directors and officers of the Company 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 Company
Occupation During the Past 5 Years
Wallace L. Chandler, Director
Hamilton & Broad Street
Richmond, VA 23260
Director, Universal Corporation, since 1986. Director, Lawyers Title
Corporation, since 1991. Director, Regency Financial Shares, Inc., since
1989 and Chairman, since 1992. Director, Regency Bank since 1987 and Vice
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; Director, Miller Manufacturing
Co., Inc., from 1977 to 1990; General Partner, Miller Land Company,
since 1987.
John J. Palmer *, President & Director
Director, Life of Virginia, since 1986; Senior Vice President--Life of
Virginia, since 1980; Director, Forth Financial Securities Corporation,
since 1986; President, Forth Financial Securities Corporation, since
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 RAC Income Fund, Inc. since 1991; Director,
Lawyers Title Corporation, 1991-1996.
Scott R. Reeks *, Treasurer
Director - Marketing Administration and Equity Operations, Life of
Virginia, since 1991; Treasurer, Vice President and Manager of
Operations, Forth Financial Securities Corporation, since 1985.
Linda L. Lanam *, Secretary
Corporate Secretary for Life of Virginia. Vice President and Senior
Counsel of Life of Virginia, since 1989.
- - ----------
* Directors and officers identified with an asterisk are considered
"interested persons" of the Company 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.
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<PAGE>
Directors or officers who are interested persons of the Company do not
receive any compensation from the Company for their services to the Company. The
directors who are not interested persons of the Company receive compensation
from the Company at a rate of $2,000 annually, plus $250 per meeting attended.
In addition, directors who are not interested persons of the Company are
reimbursed for any out-of-pocket expenses incurred in connection with affairs of
the Company. During 1996 the Company paid directors' fees of $17,500 to the
directors who were not interested persons of the Company.
TABLE OF DIRECTORS COMPENSATION
Aggregate Compensation
Name of Director From the Company
- - ---------------- ----------------
Mr. Chandler $3,500
Mr. Leard $3,500
Mr. Martin $3,500
Mr. C. Miller $3,500
Mr. G. Nelson 0
Mr. J. Palmer 0
Mr. L. Putney $3,500
Directors and officers of the Company do not receive any benefits from the
Company upon retirement nor does the Company accrue any expenses for pension or
retirement benefits.
AAI
Prior to May 1, 1997 the investment adviser for the Company was Aon
Advisors, Inc. ("AAI"), a wholly-owned subsidiary of Aon Corporation ("Aon"). In
addition to the Company, AAI provides investment advice and management to
pension plans, corporations, and other organizations. Aon, a publicly owned
Delaware corporation, is an insurance holding company organization principally
engaged through subsidiaries in the insurance and insurance brokerage business.
AAI Investment Advisory Agreement
The duties and responsibilities of AAI are specified in the Investment
Advisory Agreement ("AAI Agreement") between the Company and AAI. The Agreement
was first approved for each Fund by the board of directors of the Company
(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 Fund at a meeting held on April 20, 1993.
Likewise, the board of directors approved substantially identical additional
agreements ("AAI Additional Agreements") covering the International Equity Fund
and the Real Estate Securities Fund at a meeting held for that purpose on
January 25, 1995. The Additional Agreements were approved by the shareholders of
these Funds on May 24, 1995. The Agreement and the Additional Agreements were
not assignable and could be terminated without penalty upon 60 days written
notice at the option of either the Company or AAI or by a vote of shareholders.
The Agreement provided that it could be continued for each Fund from year to
year so long as such continuance was specifically approved annually (a) by the
board of directors of the Company or by a majority of the outstanding shares of
the Fund and (b) by a majority vote of the Directors who were 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 provided that it could be
continued from year to year so long as such continuance was specifically
approved annually (a) by the board of directors of the Company or by a majority
of the outstanding shares of the Fund and (b) by a majority vote of the
Directors who were not parties to the Agreement, or interested persons of any
such party, cast in person at a meeting held for that purpose.
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<PAGE>
AAI (under the supervision of the board of directors) continuously furnished
an investment program for the Funds other than the International Equity Fund and
the Real Estate Securities Fund, was responsible for the actual managing of the
investments of such Funds 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
Funds, AAI performed research and obtained and evaluated pertinent economic,
statistical and financial data relevant to the investment policies of these
Funds.
As described below, AAI had engaged Perpetual as the investment sub-adviser
to provide day-to-day portfolio management for the International Equity Fund and
had engaged Seneca, as the investment sub-adviser to provide day-to-day
portfolio management for the Real Estate Securities Fund.
In addition to performing management duties and providing the investment
advice described above, AAI was responsible for the administrative services in
connection with the management of the Company and the portfolios, including
financial reporting.
AAI was responsible for payment of all expenses it incured in performing the
services described. These expenses included 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 Company and the payment of any fees to
interested directors of the Company. AAI provided all executive, administrative,
clerical and other personnel necessary to operate the Company and paid the
salaries and other employment related costs of employing those persons. AAI
furnished the Company with office space, facilities and equipment and paid 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 Company or of new Funds of the Company,
including costs of registering under federal and state securities laws, were
also paid by AAI. AAI entered into an indemnity agreement with Life of Virginia,
whereby Life of Virginia agreed to reimburse it if certain expenses born by it
during any month exceeded the investment advisory fee paid by the Company during
that period.
The Company was responsible for payment of all expenses it incurred in its
operation and all of its general administrative expenses except those expressly
assumed by AAI as described in the preceding paragraph. These included (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
Company, 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 Company, or costs
related to indemnification of directors, officers and employees of the
Company.The board of directors of the Company determined the manner in which
expenses were allocated among the Funds of the Company.
The Agreement and the Additional Agreements also provided that AAI would not
be liable to the Company or to any shareholder or policyowner for any error of
judgment or mistake of law or for any loss suffered by the Company or by any
shareholder in connection with matters to which the such Agreements or
Additional Agreements related, 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.
AAI Investment Advisory Fee
AAI received investment advisory fees as compensation for its services. The
fees were accrued by each Fund of the Company daily but paid to AAI monthly. The
investment advisory fee for each portfolio was based upon the average daily net
assets of the portfolio (as computed in accordance with the description in the
Company prospectus) at the following annual rates:
Common Stock Index Fund: .35%
Government Securities Fund: .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 Fund: .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 Fund: .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.
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International Equity Fund: 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 Fund: .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 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 Fund, $49,571
was paid by the Government Securities Fund, $114,126 was paid by the Money
Market Fund, and $110,724 was paid by the Total Return Fund. 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 Fund, $88,566 was paid by the
Government Securities Fund, $201,711 was paid by the Money Market Fund, $250,070
was paid by the Total Return Fund, $79,321 was paid by the International Equity
Fund, and $66,047 was paid by the Real Estate Securities Fund.
For the fiscal year ended December 31, 1996, the total advisory fee paid
was $___,___ or which $__,__ was paid by the Common Stock Index Fund, $__,__ was
paid by the Government Securities Fund, $___,__ was paid by the Money Market
Fund, $___,__ was paid by the Total Return Fund, $__,__ was paid by the
International Equity Fund, and $__,__ was paid by the Real Estate Securities
Fund.
AAI Investment Sub-Advisers
Pursuant to separate sub-advisory agreements described below, AAI had
engaged Perpetual as the investment sub-adviser to provide day-to-day portfolio
management for the International Equity Fund and had engaged GMG/Seneca Capital
Management, L.L.C. ("Seneca") as the investment sub-adviser to provide
day-to-day portfolio management for the Real Estate Securities Fund.
Perpetual, a wholly-owned subsidiary of Perpetual plc, was the investment
sub-adviser for the International Equity Fund. It is registered under the
Investment Advisers Act of 1940 as an investment adviser and had its principal
offices at 48 Hart Street, Henley-on-Thames, Oxfordshire, England RG9 2AZ. In
addition to the International Equity Fund, Perpetual provides investment advice
and management to pension plans, corporations and other institutional and
individual clients. Although Perpetual had no prior experience advising a U.S.
mutual fund, it and its affiliates managed over 29 unit trusts (the British term
for mutual funds) in the United Kingdom and overseas.
Seneca was (and still is) the investment sub-adviser for the Real Estate
Securities Fund. Seneca is at 909 Montgomery Street, San Francisco, CA 94133.
Seneca 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.). Seneca is an independent
investment adviser that provides investment management services to foundations,
endowments, corporations, mutual funds and private clients. Founded in 1989,
Seneca currently manages approximately $3.2 billion in equity, fixed-income and
real estate assets.
AAI Investment Sub-Advisory Agreements
AAI entered into a separate sub-advisory agreement (the "AAI Sub-Advisory
Agreements") with Perpetual and with Seneca for the day-to-day portfolio
management of the International Equity Fund and the Real Estate Securities Fund.
The AAI Sub-Advisory Agreement for the International Equity Fund was approved by
the board of directors of the Company (including a majority of directors who are
not parties to such Agreement or interested persons, as defined by the 1940 Act,
of any such party) at a meeting held for that purpose on January 25, 1995. The
AAI Sub-Advisory Agreement for the Real Estate Securities Fund was approved by
the board of directors of the Company (including a majority of directors who are
not parties to such agreement or interested persons, as defined by the 1940 Act,
of any such party) at a meeting held for that purpose on April 24, 1996. The
International Equity Fund AAI Sub-Advisory Agreement was also approved by the
initial shareholder of that Fund on May 24, 1995. The Real Estate Securities
Fund AAI Sub-Advisory Agreement was approved by the shareholders of that Fund on
August 20, 1996. The AAISub-Advisory Agreements were not assignable and could
each be terminated without penalty upon 60 days written notice at the option of
AAI or either Perpetual or Seneca, as the case may be, or by the board of
directors of the Company or by a vote of a majority of the outstanding shares of
the class of stock representing an interest in the appropriate Fund. Each AAI
Sub-Advisory Agreement provided that it would continue in effect for two years
and could thereafter be continued for its Fund from year to year so long as such
continuance is specifically approved annually (a) by the board of directors of
the Company or by a majority of the outstanding shares of the Fund and (b) by a
majority vote of the Directors who were not parties to the Agreement, or
interested persons of any such party, cast in person at a meeting held for that
purpose.
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AAI Investment Sub-Advisory Fees
For their services, AAI paid Perpetual and Seneca monthly compensation in
the form of an investment sub-advisory fee. The fee was paid by AAI monthly and
was based upon the average daily net assets (see "Purchase and Redemption of
Fund Shares") of the Fund that each sub-adviser managed, at the following annual
rates:
International Equity Fund: .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 Fund: .425% of the first $100,000,000; .40% of the
next $100,000,000; and .375% of amounts in excess of $200,000,000.
For the fiscal year ended December 31, 1996, AAI paid Perpetual $__,___ and
Seneca $__,___ in sub-advisory fees. For the fiscal period ended December 31,
1995, AAI paid Perpetual $__,___ and Seneca $__,___ in sub-advisory fees.
Reimbursement of Excess Operating Expenses
Under the AAI Agreement and the AAI Additional Agreements, any operating
expenses allocable to the following Funds of the Company for the 1994, 1995 and
1996 fiscal years that exceeded the amounts indicated below, AAI reimbursed the
Company for the excess:
(1) With respect to the Government Securities Fund, the Total Return Fund
and the Real Estate Securities Fund, 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 Funds
exceed $30,000,000.
(2) With respect to the Money Market Fund and the Common Stock Index Fund,
0.75% of the average daily net assets of each of those Funds.
(3) With respect to the International Equity Fund, 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 Fund exceeds
$30,000,000.
Effective July 1, 1995, on a voluntary basis, AAI also agreed to reimburse
the International Equity and Real Estate Securities Funds annual for expenses in
excess of the following amounts: International Equity Fund, 1.50% of the first
$30 million of average daily net assets; Real Estate Securities Fund, 1.25% of
the first $30 million of average daily net assets. For purposes of this
reimbursement formula, "operating expenses" did not include attorneys' fees,
court judgements, decrees or awards, or any other litigation costs in legal
actions involving the Company, or costs related to indemnification of directors,
officers or employees of the Company where such costs were not covered by
director and officer liability insurance.
Expenses that were reimbursable as described above, if any, were calculated
daily and credited to the Company on a monthly basis.
For the fiscal year ended December 31, 1994, total reimbursements paid to
the Company by AAI amounted to $53,529, all of which pertained to the Common
Stock Index Fund. For the fiscal year ended December 31, 1995, total
reimbursements paid to the Company amounted to $72,688. Of this amount, $49,516
pertained to the International Equity Fund and $23,172 pertained to the Real
Estate Securities Fund. For the fiscal year ended December 31, 1996, total
reimbursements paid to the Company by AAI amounted to $__,__. Of this amount,
$__,__ pertained to the International Equity Fund and $__,__ pertained to the
Real Estate Securities Fund.
GEIM
GE Investment Management Incorporated ("GEIM") serves as the Company's
current investment adviser and administrator. GEIM is registered as an
investment adviser under the Investment Advisers Act of 1940 and is located at
3003 Summer Street, Stamford, Connecticut 06905. GEIM, which was formed under
the laws of Delaware in 1988, is a wholly owned subsidiary of General Electric
Company ("GEC"). GEC is the world's largest manufacturer of jet engines,
engineering plastics, medical diagnostic equipment and large electric power
generation equipment. In addition to the Company, GEIM provides investment
advice and management to other investment companies, pension plans, corporations
and other organizations. As of December 31, 1996, the aggregate assets under
GEIM's management were approximately $58 billion.
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GEIM Investment Advisory Agreements
The Duties and responsibilities of GEIM are specified in investment
advisory and administration agreements (the "advisory agreements") between GEIM
and the Company on behalf of each Fund. Under the advisory agreements, GEIM
provides a continuous investment program for each Fund's assets, including
investment research and management. GEIM determines what investments are
purchased, retained or sold by the Companys and places purchase and sale orders
for the Companys' investments. GEIM provides the Company with all executive,
administrative, clerical and other personnel necessary to operate each Fund, and
pays salaries and other employment-related costs of employing these persons.
GEIM furnishes the Company and each Fund with office space, facilities, and
equipment and pays the day-to-day expenses related to the operation of such
space, facilities and equipment. GEIM, as administrator, also: (1) maintains the
books and records of each Fund; (2) prepares reports to shareholders of each
Fund; (3) prepares and files tax returns for each Fund; (4) assists with the
preparation and filing of reports and the Company's registration statement with
the Securities and Exchange Commission; (5) provides appropriate officers for
the Company; (6) provides administrative support necessary for the board of
directors of the Company to conduct meetings; and (7) supervises and coordinates
the activities of other service providers, including independent auditors, legal
counsel, custodians, accounting service agents, and transfer agents.
GEIM is generally responsible for employing sufficient staff and consulting
with other persons that it determines to be necessary or useful in the
performance of its obligations under the advisory agreements. The advisory
agreements obligate GEIM to provide services in accordance with each Fund's
investment objectives, policies and restrictions as stated in the Company's
current registration statement, as amended from time to time and to keep the
Company informed of developments materially affecting each Fund, including
furnishing the Company with whatever information and reports that the board of
directors reasonably requests.
Other than those expenses expressly assumed by GEIM, as described above,
each Fund is responsible under the advisory agreement relating to it for paying
all expenses incurred in its operations and all of the Company's general
administrative expenses allocated to it. These include, but are not limited to:
(1) share redemption expenses, (2) shareholder servicing costs, (3) expenses of
any shareholder servicing plans or distribution plans adopted by the board of
directors, (4) custody expenses, (5) transfer agency and recordkeeping expenses,
(6) brokerage fees and commissions, (7) taxes, (8) federal and state
registration fees, (9) expenses of preparing, printing and distributing
prospectuses to regulators and existing shareholders, (10) expenses of
shareholder and board of directors meetings, (11) fees of disinterested
directors, (12) expenses of preparing and distributing proxy materials, (13)
fees of parties unaffiliated with GEIM for valuing portfolio securities and
computing net asset values for Funds, (14) legal fees, (15) auditors fees, (16)
insurance premiums, and (17) membership dues in industry associations.
The advisory agreements permit GEIM, subject to the approval of the board
of directors and other applicable legal requirements, to enter into any advisory
or sub-advisory agreement with affiliated or unaffiliated entities whereby such
entity would perform some or all of GEIM's responsibilities under one or more of
the advisory agreements. In this event, GEIM remains responsible for ensuring
that these entities performed the services that each undertakes pursuant to a
sub-advisory agreement.
For its services to each Fund of the Company, GEIM receives a monthly
advisory and administrative fee. The fee is deducted daily from the assets of
each of the Companys and paid to GEIM monthly. The fees payable to GEIM (which
are identical to the fees under the AAI Agreements) are based on the average
daily net assets of each Fund at the following annual rates:
Government Securities Fund, Money Market Fund and Total Return Fund: .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 the amounts in
excess of $400,000,000;
International Equity Fund: 1.00% of the first $100,000,000; .95% of the
next $100,000,000; and .90% of the amounts in excess of $200,000,000;
Real Estate Securities Fund: .85% of the first $100,000,000; .80% of the
next $100,000,000; and .75% of the amounts in excess of $200,000,000; and
Common Stock Index Fund: .35%.
Value Equity Fund:
Global Income Fund:
The advisory agreements do not contain any provisions prescribing limits on
the operating expenses of the Company or of any Fund.
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<PAGE>
The advisory agreements provide that GEIM may render similar advisory and
administrative services to other clients so long as the services that it
provides under the agreements are not impaired thereby. The advisory agreements
also provide that GEIM shall not be liable for any error of judgment or mistake
of law or for any loss arising out of the Companys in connection with GEIM's
services pursuant to the agreements, except for (1) willful misfeasance, bad
faith or gross negligence in the performance of its duties or by reason of
reckless disregard of its duties or obligations under the agreements, and (2) to
the extent specified in Section 36(b) of the Act concerning loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation.
Each advisory agreement, other than those for the Value Equity Fund and the
Global Income Fund, was approved by the board of directors (including a majority
of directors who are not parties to such agreement or interested persons, as
defined by the 1940 Act, of any such party) at a meeting held for that purpose
on January 29, 1997 and by shareholders at meetings held on April 16, 1997. The
advisory agreements for the Value Equity Fund and Global Income Fund were
approved by the board of directors (including a majority of directors who are
not parties to such agreement or interested persons, as defined by the 1940 Act,
of any such party) at a meeting held for that purpose on April 16, 1997 and by
the sole initial shareholder of these Funds on April __, 1997. All of the
advisory agreements are effective as of May 1, 1997 and continue in effect for
their respective Fund for an initial term ending April 30, 1999, and will
continue from year to year thereafter, subject to approval annually by (a) the
board of directors or a vote of a majority of the outstanding shares of the
Company, and (b) the vote of a majority of the independent directors, cast in
person at a meeting called for the purpose of voting on such approval.
The advisory agreements are not assignable and each may be terminated
without penalty by either the Company or GEIM upon no more than sixty days nor
less than thirty days written notice to the other or by the board of directors
of the Company or by the vote of a majority of the outstanding shares of the
class of stock representing an interest in the applicable Fund.
GEIM Sub-Advisers
As was the case with AAI, GEIM has retained Seneca as sub-adviser for the
Real Estate Securities Fund. GEIM also has engaged NWQ Investment Management
Company ("NWQ") as the investment sub-adviser to provide day-to-day portfolio
management to the Value Equity Fund; and engaged GE Investment (U.S.) Ltd.
("GEIUS") to provide day-to-day portfolio management to the Global Income Fund.
NWQ located at 655 South Hope Street, Los Angeles, CA 90017 and is a wholly
owned subsidiary of United Asset Management Corporation, a company whose
principal business managing investments for institutional clients and acquiring
investment management firms. NWQ is a manager of domestic investment portfolios
for individual, union, corporate, endowment and foundation clients with __ years
of experience. It manages approximately $__.__ billion in assets.
Like GEIM, GEIUS is an indirect wholly owned subsidiary of GEC and is
considered under common control with GEIM. GEIUS is located at ______________
and is registered as an investment adviser under the Investment Advisers Act of
1940. Although GEIUS has no prior experience advising a U.S. mutual fund, it
currently manages _______________.
GEIM Investment Sub-Advisory Agreements
NWQ is the investment sub-adviser to the Value Equity Fund and GEIUS is the
investment sub-adviser to the Global Income Fund pursuant to an investment
sub-advisory agreements with GEIM effective May 1, 1997. Both investment
sub-advisory agreements were approved by the board of directors (including a
majority of directors who are not parties to such agreement or interested
persons, as defined by the 1940 Act, of any such party) at a meeting held for
that purpose on April 16, 1997 and by the respective Funds' sole initial
shareholder on April __, 1997.
Seneca is the investment sub-adviser to the Real Estate Securities Fund
pursuant to an investment sub-advisory agreements with GEIM effective May 1,
1997. This investment sub-advisory agreement was approved by the board of
directors (including a majority of directors who are not parties to such
agreement or interested persons, as defined by the 1940 Act, of any such party)
at a meeting held for that purpose on January 29, 1997 and by the Fund's
shareholders on April 16, 1997.
The investment sub-advisory agreements are not assignable and each may be
terminated without penalty by either the sub-adviser or GEIM upon sixty days
written notice to the other or by the board of directors of the Company or by
the vote of a majority of the outstanding shares of the class of stock
representing an interest in the applicable Fund.
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<PAGE>
The investment sub-advisory agreements each provide that the sub-adviser
may render similar advisory and administrative services to other clients so long
as the services that it provides under the agreements are not impaired thereby.
The investment sub-advisory agreements also provide that the sub- adviser shall
not be liable for any error of judgment or mistake of law or for any loss
suffered by the applicable Fund or its shareholders or by GEIM in connection
with it's services pursuant to the agreements, except for a loss resulting from
willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of reckless disregard of its duties or obligations under the
agreements.
Securities Activities of the Advisers
Securities held by the Company may also be held by Life of Virginia, or by
separate accounts, mutual funds or pension funds for which GEIM acts as an
adviser. Because of different investment objectives or other factors, a
particular security may be bought by Life of Virginia or by GEIM 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 Fund or other client of GEIM
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 Fund,
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 GEIM 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 GEIM (under the supervision of the board of directors)
deems the purchase or sale of a security to be in the best interests of the
Company as well as other accounts, mutual funds, pension funds 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 Company
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 GEIM in the manner it considers to be most
equitable and consistent with its fiduciary obligations to the Company and to
such other accounts or companies. In some cases this procedure may adversely
affect the size of the position obtainable for a Fund. Likewise, Seneca, NWQ or
GEIUS 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
Company with those to be sold or purchased for other accounts or companies in
order to obtain favorable execution and low brokerage commissions. Like GEIM,
Seneca, NWQ or GEIUS 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 Company and
to such other accounts or companies.
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<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
As described above, GEIM, Seneca, NWQ or GEIUS determines which securities
to buy and sell for the Funds, 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
Fund. Debt 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, GEIM's policy (followed by
Seneca, NWQ and GEIUS) is to attempt to obtain the most favorable price and
efficient execution available. These entities, subject to the review of the
Company'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 Funds.
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 or 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 Company. 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
Company or GEIM. However, all such directed brokerage will be subject to GEIM's
policy to attempt to obtain the most favorable price and efficient execution
possible.
During the year ended December 31, 1996, the Company paid brokerage
commissions of $___,___, based on $___,___,___ of transactions. During the year
ended December 31, 1995, the Company paid brokerage commissions of $315,311,
based on $175,411,650 of transactions. During the year ended December 31, 1994,
the Company paid brokerage commissions of $48,969, based on $34,724,499 of
transactions.
DETERMINATION OF NET ASSET VALUE
The net asset value of each Fund 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 Fund 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 Fund is determined by adding the values of all securities, cash
and other assets (including accrued but uncollected interest and dividends) of
that Fund 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 Fund by the number of outstanding shares of
that Fund.
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.
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.
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<PAGE>
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 Funds investing in foreign securities may not take place
contemporaneously with the valuation of such foreign securities in such Funds.
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 Company, including valuations provided by a pricing service
retained for this purpose.
For Funds other than the Money Market Fund, 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 Company 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 Company 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 Fund 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.
All of the assets of the Money Market Fund are valued on the basis of
amortized cost in an effort to maintain a constant net asset value per share of
$1.00. The Compmany's board of directors has determined such a valuation to be
in the best interests of the Money Market Fund and its shareholders. Under the
amortized cost method of valuation, securities are valued at cost on the date of
their acquisition, and thereafter a constant accretion of any discount or
amortization of any premium to maturity is assumed, regardless of the impact of
fluctuating interest rates on the market value of the security. While this
method provides certainty in valuation, it may result in periods in which value
as determined by amortized cost is higher or lower than the price the Fund would
receive if it sold the security. During such periods, the quoted yield to
investors may differ somewhat from that obtained by a similar fund or portfolio
which uses available market quotations to value all of its portfolio securities.
The Company's board of directors has established procedures reasonably
designed, taking into account current market conditions and the Money Market
Fund's investment objective, to stabilize the net asset value per share for
purposes of sales and redemptions $1.00. These procedures include review by the
board, at such intervals as it deems appropriate, to determine the extent, if
any, to which the net asset value per share calculated by using available market
quotations deviates from $1.00 per share. In the event that such deviation
should exceed one half of one percent, the board of directors will promptly
consider initiating corrective action. If the board believes that the extent of
any deviation from a $1.00 amortized cost price per share may result in material
dilution or other unfair results to new or existing shareholders, it will take
such steps as it considers appropriate to eliminate or reduce these consequences
to the extent reasonably practicable. Such steps may include: selling portfolio
securities prior to maturity, shortening the average maturity of the portfolio;
withholding or reducing dividends; or utilizing a net asset value per share
determined from available market quotations. Even if these steps were taken, the
Money Market Fund's net asset value might still decline.
DIVIDENDS AND DISTRIBUTIONS
It is the Company's intention to distribute substantially all the net
investment income, if any, of a Fund. For dividend purposes, net investment
income of a Fund will consist of all payments of dividends or interest received
by that Fund less realized investment losses, if any, and the estimated expenses
of that Fund (including fees payable to GEIM). Dividends from net investment
income of a Fund will be paid at least semi-annually and are expected to be
reinvested in additional full and fractional shares of that Fund. 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 Company, if any, are declared and distributed
annually after the close of the Company's fiscal year to the shareholders of the
Company and are expected to be reinvested in additional full and fractional
shares of the Company.
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REDEMPTION OF FUND SHARES
The Company is required to redeem all full and fractional shares of the
Company 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 Fund's
securities or determination of the net asset value of a Fund 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 Fund.
ADDITIONAL INFORMATION
Life of Virginia
Life of Virginia contributed the initial capital necessary for the Company
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. Life of Virginia is an indirectly, wholly-owned subsidiary of General
Electric Capital Corporation. General Electric Capital Corporation is a wholly
owned subsidiary of General Electric Company and is a diversified financial
services company. 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
State Street Bank and Trust Company ("State Street") is the Company's
custodian and its transfer and dividend payment agent. Under a custody agreement
with the Company, State Street maintains the portfolio securities acquired by
the Company, administers the purchases and sales of portfolio securities,
collects interest and dividends and other distributions made on the securities
held in the Funds of the Company.
State Street Bank may hold securities of the Companys 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
Company's instructions) assets from a Fund'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 Funds constituting margin deposits with
respect to financial futures contracts at the disposal of FCMs through which
such transactions are effected. These Funds 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 Fund may be held by the Custodians
pursuant to similar arrangements with the brokers involved.
Independent Auditors
KPMG Peat Marwick, L.L.P. acts as independent auditors for the Company. Its
offices are at 345 Park Avenue, New York, NY 10154. KPMG Peat Marwick, LLP
performs an audit of the financial statements of the Company annually.
Legal Counsel
Sutherland, Asbill & Brennan, L.L.P., 1275 Pennsylvania Avenue, NW,
Washington, DC 20004-2404, is counsel for the Company.
Capital Stock
The Company was incorporated in the Commonwealth of Virginia on May 14,
1984. The authorized capital stock of the Company consists of 3.75 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 Fund; 250 million
shares have been designated as Class B shares, representing interests in the
Government Securities Fund; 250 million shares have been designated as Class C
shares representing interests in the Money Market Fund; 250 million shares have
been designated as Class D shares, representing interests in the Total Return
Fund; 250 million shares have been designated as Class E shares, representing
interests in the International Equity Fund; 250 million shares have been
designated as Class F shares, representing interests in the Real Estate
Securities Fund; 250 million shares have been designated as Class G shares,
reprsenting interests in the Value Equity Fund; and 250 million shares have been
designated Class H shares, representing interests in the Global Income Fund.
Classes I through O have also been designated with 250 million shares each.
These shares, however, do not yet represent interests in any Fund.
27
<PAGE>
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, 1997, Life of Virginia owned ______ Class B shares (having a market
value of $______) representing interests in the Government Securities Fund,
_______ Class C shares (with a market value of $________) representing interests
in the Money Market Fund, _______ Class E shares (with a market value of
$________) representing interests in the International Equity Fund and _________
Class F shares (with a market value of $_________) representing interests in the
Real Estate Securities Fund.
Life of Virginia and the Accounts currently are the only shareholders of
record. As of December 31, 1995, there were no contract owners who beneficially
owned a 5% or greater voting interest in any Fund. As of December 31, 1995,
officers and directors of the Company beneficially owned, as owners of variable
annuity or variable life insurance contracts,____% of the Common Stock Index
Fund and ____% of the Money Market Fund.
Voting Rights
All shares of capital stock have equal voting rights, except that only
shares representing interests in a particular Fund will be entitled to vote on
matters affecting only that Fund. The shares do not have cumulative voting
rights. Accordingly, owners of variable annuity or variable life insurance
contracts having voting interests in more than 50% of the shares of the Company
voting for the election of directors could elect all of the directors of the
Company if they choose to do so, and in such event, contract owners having
voting interests in the remaining shares would not be able to elect any
directors. Life of Virginia (directly or through the Accounts) currently owns
all shares of the Company. Life of Virginia will vote all shares of the Company
(or a Fund) as described in the prospectus.
Matters requiring separate shareholder voting by Fund shall have been
effectively acted upon with respect to any Fund if a majority of the outstanding
voting interests of that Fund 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 Fund; or (2) the matter has not been approved by a
majority of the outstanding voting interests of the Company.
Other Information
This Statement of Additional Information and the prospectus for the Company
do not contain all the information set forth in the registration statement and
exhibits relating thereto, which the Company 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.
28
<PAGE>
AUDITED FINANCIAL STATEMENTS
The financial statements of the Company 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.
<PAGE>
APPENDIX A
Description of Money Market Securities
The following information includes a description of certain money market
instruments in which a Fund 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 Fund 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 Company
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 Company 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.)
30
<PAGE>
Repurchase Agreements. A repurchase agreement is an instrument under which
the purchaser (i.e., a Fund) 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 subject to repurchase, in effect, serving as "collateral" for
the loan. The Company 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 Company 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 Fund 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 Fund's net assets.
31
<PAGE>
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.
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.
32
<PAGE>
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.
33
<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 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 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.
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.
5(f) Form of Investment Sub-Advisory Agreement between Aon Advisors, Inc.
and GMG/Seneca Capital Management, LLC incorporated herein by
reference to exhibit 17 to post-effective amendment # 16 to this Form
N-1A registration statement (File No. 2-91369), filed with the
Securities and Exchange Commission on May 1, 1996.
6 Underwriting Agreement between Life of Virginia Series Fund, Inc. and
Forth Financial Securities Corporation, dated April 2, 1996
incorporated herein by reference to post-effective amendment #16 to
this Form N-1A registration statement (File No. 2-91369), filed with
the Securities and Exchange Commission on May 1, 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.
1
<PAGE>
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 (to be filed by
amendment).
11(b) Consent of Ernst & Young, LLP (to be filed by amendment).
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 Powers 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.
2
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant.
GE Investments Funds, 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.
The Life Insurance Company of Virginia is an indirectly, 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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
__________________________________|____________________________________
| |
| |
Various General Electric
Subsidiaries Capital Services, Inc.
(06-1109503) DE
|
_______________|_______________
| |
| |
General Electric Various
Capital Corporation Subsidiaries
(13-1500700) NY
|
|
CNA Corporation
(91-1277112) NA
|
|
_____________________________________________________|_____________________________________________________
| | | | | | |
CNA Mortgage | GNA Distributors, Inc. | GNA Securities, Inc. | GNA Insurance
Funding Corporation | (91-1601607) WA | (91-1143830) WA | Services, Inc.
(91-1636446) OH | | | (51-0348373) DE
| | | | |
| | | | |
| GNA Capital General Electric Various Various State
| Management, Inc. Capital Assurance Subsidiaries Specific
| (91-1356174) WA Company Subsidiaries
| NAIC #70025
| (91-6027719) DE
| |
| |
| |
| ____________________________________________|_____________________________________________
| | | | | |
| 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 #67952
| (91-1127115) WA NAIC #73091 (35-0576390) IN (95-2009993) CA
| (05-0399955) RI
| | |
52% | | 40% |
| | |
| | ________________|__________________
| | | |
GR 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 (94-1099737) OH
</TABLE>
<PAGE>
Item 26. Number of Holders of Securities
Number of Record Holders
Title of Class as of December 31, 1996
- - ----------- ----------------------
Capital Stock, Class A 6
Capital Stock, Class B 6
Capital Stock, Class C 6
Capital Stock, Class D 6
Capital Stock, Class E 6
Capital Stock, Class F 6
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.
3
<PAGE>
Item 28. Business and Other Connections of Investment Adviser.
Directors and executive officers of GEIM are listed below.
<TABLE>
<CAPTION>
Name Principal Occupation
- - -------------------------------------------------------------------------------------------
<S> <C>
John H. Myers - Chairman of the Board of Directors, CEO Chairman and President, GEIM
Eugene K. Bolton - Director Executive Vice President, GEIM
Michael J. Cosgrove - Director Executive Vice President, GEIM
Ralph R. Layman - Director Executive Vice President, GEIM
Alan M. Lewis - Director Executive Vice President, General Counsel and
Secretary, GEIM
Robert A. MacDougall - Director Executive Vice President, GEIM
Geoffrey R. Norman - Director Executive Vice President, GEIM
Donald W. Torey - Director Executive Vice President, GEIM
Stephen B. Hoover Senior Vice President, GEIM
Philip A. Mercurio Senior Vice President, GEIM
Philip A. Riordan Senior Vice President, GEIM
Mark A. Dunham Senior Vice President, GEIM
Ronald I. Felmus Senior Vice President, GEIM
</TABLE>
The address for each person listed above is 3003 Summer St., Stamford, CT
06905.
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
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 State Street Bank and Trust Company, Boston, Massachusetts,
02209.
4
<PAGE>
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 hereby undertakes, if requested to do so by the holders of
at least 10% of the Registrant's outstanding shares, to call a meeting of
shareholders for the purpose of voting upon any question of removal of a
director or directors, and to assist in communications with other
shareholders as required by Section 1 6(c) of the Investment Company Act of
1940, as amended.
5
<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. has duly
caused this Post-Effective Amendment No. 17 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the County of Henrico, Commonwealth
of Virginia, on the 21st day of February, 1997.
Life of Virginia Series Fund, Inc.
Attest:______________________ By:_____________________________________
Scott R. Reeks, Treasurer
6
<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>
JOHN J. PALMER* , President (Principal Executive Officer) and Director
John J. Palmer
__________________________ , Treasurer (Principal Financial and Accounting Officer)
Scott R. Reeks
WALLACE L. CHANDLER* , Director
Wallace L. Chandler
JOHN E. LEARD* , Director
John E. Leard
J. GARNETT NELSON , Director
J. Garnett Nelson
J. CLIFFORD MILLER, III* , Director
J. Clifford Miller, III
LEE A. PUTNEY* , Director
Lee A. Putney
ROBERT P. MARTIN* , Director
Robert P. Martin, Jr.
</TABLE>
*/ By _______________________________pursuant to Power of Attorney
Scott R. Reeks
Date: February 20, 1997
7
