Prospectus December ^ 9, 1996
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO Variable Investment Funds, Inc. (the "Company"), a Maryland
corporation, is an open-end management investment company that offers shares of
common stock of eight diversified investment portfolios (the "Funds"): the
INVESCO VIF - Industrial Income Portfolio (the "Industrial Income Fund"), the
INVESCO VIF - Total Return Portfolio (the "Total Return Fund"), the INVESCO VIF
- - Dynamics Portfolio (the "Dynamics Fund"), the INVESCO VIF - High Yield
Portfolio (the "High Yield Fund"), the INVESCO VIF - Small Company Growth
Portfolio (the "Small Company Growth Fund"), the INVESCO VIF - Health Sciences
Portfolio (the "Health Sciences Fund"), the INVESCO VIF - Technology Portfolio
(the "Technology Fund") and the INVESCO VIF - Utilities Portfolio (the
"Utilities Fund"). The Company's shares are not offered directly to the public,
but are sold exclusively to life insurance companies ("Participating Insurance
Companies") as a pooled funding vehicle for variable annuity and variable life
insurance contracts issued by separate accounts of Participating Insurance
Companies. The Funds have the following investment objectives:
Industrial Income Fund:
to seek the best possible current income while following sound investment
practices. Capital growth potential is an additional consideration in the
selection of portfolio securities. The Fund normally invests at least 65%
of its total assets in dividend-paying common stocks. Up to 10% of the
Fund's total assets may be invested in equity securities that do not pay
regular dividends. The remaining assets are invested in other
income-producing securities, such as corporate bonds. The Fund also has
the flexibility to invest in other types of securities.
Total Return Fund:
to seek a high total return on investment through capital appreciation and
current income. The Total Return Fund seeks to achieve its investment
objective by investing in a combination of equity securities (consisting
of common stocks and, to a lesser degree, securities convertible into
common stock) and fixed income securities.
Dynamics Fund:
to seek appreciation of capital through aggressive investment policies.
The Dynamics Fund invests primarily in common stocks of U.S. companies
traded on national securities exchanges and over-the-counter.
<PAGE>
High Yield Fund:
to seek a high level of current income by investing substan tially all of
its assets in lower rated bonds and other debt securities and in preferred
stock. See "Risk Factors" for a description of the risks involved in
investing in lower rated bonds. The Fund pursues its investment objective
through investment in a variety of long-term, intermediate-term, and
short-term bonds. Potential capital appreciation is a factor in the
selection of investments, but is secondary to the Fund's primary
objective.
Small Company Growth Fund:
to seek long-term capital growth. The Small Company Growth Fund invests
primarily in equity securities of U.S. companies with market
capitalizations of $1 billion or less at the time of purchase ("small-cap
companies") traded "over-the-counter."
Health Sciences Fund:
to seek capital appreciation. The Health Sciences Fund normally invests at
least 80% of its total assets in equity securities of companies that
develop, produce, or distribute products or services related to health
care.
Technology Fund:
to seek capital appreciation. The Technology Fund normally invests at
least 80% of its total assets in equity securities of companies in
technology-related industries such as computers, communications, video,
electronics, oceanography, office and factory automation, and robotics.
Utilities Fund:
to seek capital appreciation and income. The assets of the Utilities Fund
are invested primarily in equity securities of companies principally
engaged in business as public utilities.
This Prospectus sets forth concisely the information about the Funds that
a prospective purchaser should know before purchasing a variable contract from a
Participating Insurance Company or allocating contract values to one or more of
the Funds. Please read this Prospectus and retain it for future reference.
Additional information about the Funds has been filed with the Securities and
Exchange Commission and is available upon request by writing INVESCO Funds
Group, Inc., Post Office Box 173706, Denver, Colorado 80217-3706, by calling
1-800-525- 8085, or by contacting a Participating Insurance Company and
requesting the "Statement of Additional Information for INVESCO Variable
Investment Funds, Inc." (the "Statement of Additional Information"). The
Statement of Additional Information dated December ^ 9, 1996, is incorporated by
reference into this Prospectus.
<PAGE>
The High Yield Fund invests primarily in lower rated bonds, commonly known as
"junk bonds." Investments of this type are subject to greater risks, including
default risks, than those found in higher rated securities. Purchasers should
carefully assess the risks associated with an investment in the High Yield Fund.
See "Investment Objectives and Policies" and "Risk Factors."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE. THE SHARES OF THE FUNDS ARE NOT DEPOSITS OR
OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR OTHER FINANCIAL
INSTITUTION. THE SHARES OF THE FUNDS ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
TABLE OF CONTENTS
Page
SUMMARY.............................................................. 2
FINANCIAL HIGHLIGHTS................................................. 4
INVESTMENT OBJECTIVES AND POLICIES................................... 6
RISK FACTORS......................................................... 9
INVESTMENT RESTRICTIONS.............................................. 14
MANAGEMENT........................................................... 14
PURCHASES AND REDEMPTIONS............................................ 16
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS.............................. 17
PERFORMANCE INFORMATION.............................................. 18
ADDITIONAL INFORMATION............................................... 19
APPENDIX............................................................. 20
<PAGE>
SUMMARY
The Company is a registered, open-end management investment company that
was organized as a Maryland corporation on August 19, 1993, and is currently
comprised of eight diversified investment portfolios ("Funds"), the INVESCO VIF
Industrial Income Portfolio, the INVESCO VIF - Total Return Portfolio, the
INVESCO VIF - Dynamics Portfolio, the INVESCO VIF - High Yield Portfolio, the
INVESCO VIF - Small Company Growth Portfolio, the INVESCO VIF - Health Sciences
Portfolio, the INVESCO VIF - Technology Portfolio and the INVESCO VIF -
Utilities Portfolio. Additional portfolios may be created from time to time. The
overall supervision of each Fund is the responsibility of the Company's board of
directors.
The Company is intended to be a funding vehicle for variable annuity
contracts and variable life insurance contracts to be offered by separate
accounts of certain life insurance companies ("Participating Insurance
Companies"). Fund shares are not available for purchase other than through the
purchase of such contracts. The variable annuity and variable life insurance
contracts are described in separate prospectuses of the Participating Insurance
Companies (the "Separate Account Prospectuses"). The Company assumes no
responsibility for the Separate Account Prospectuses. A contract owner should
refer to the Separate Account Prospectuses for information on how to purchase or
surrender a contract, make partial withdrawals of contract values, allocate
contract values to one or more of the Funds, or change existing allocations
among investment alternatives, including the Funds.
Each Fund has its own distinct investment objective. There is, of course,
no guarantee that any Fund will achieve its invest ment objective. The
Industrial Income Fund seeks to attain its investment objective by investing at
least 65% of its total assets in dividend-paying common stocks, with up to 10%
of its total assets invested in equity securities that do not pay regular
dividends and the remainder invested in other income-producing securities, such
as corporate bonds. The Total Return Fund seeks to attain its investment
objective by investing in a combination of equity securities and fixed income
securities; ordinarily, its investment portfolio will be comprised of at least
30% equity securities and at least 30% debt securities, with the remaining 40%
allocated according to business, economic and market conditions. The Dynamics
Fund seeks to attain its investment objective by investing aggressively in
common stocks of U.S. companies traded on national securities exchanges and
over-the-counter. The High Yield Fund seeks to attain its investment objective
by investing substantially all of its assets in lower rated bonds and other debt
securities and in preferred stock. See "Risk Factors" for a description of the
risks involved in investing in lower rated bonds. The Small Company Growth Fund
seeks to attain its investment objective by investing primarily in small-
capitalization equity securities of U.S. companies traded over-the-counter. The
<PAGE>
Health Sciences Fund seeks to attain its investment objective by investing
at least 80% of its total assets in equity securities of companies which
develop, produce, or distribute products or services related to health care. The
Technology Fund seeks to attain its investment objective by investing at least
80% of its total assets in equity securities of companies in technology- related
industries such as computers, communications, video, electronics, oceanography,
office and factory automation, and robotics. The Utilities Fund seeks to attain
its investment objective by investing primarily in securities of companies
principally engaged in business as public utilities, which may be either
established, well-capitalized companies or newly formed, small capitalization
companies. A discussion of each Fund's investment objective and policies is
provided below under the caption "Investment Objectives and Policies."
Various types of risks are involved with each Fund. Each Fund may lend
portfolio securities and may enter into repurchase agreements with respect to
debt instruments eligible for investment by that Fund. Each Fund may invest up
to 15% of its net assets in illiquid securities. Each Fund also may invest up to
25% of its total assets directly in foreign securities, which present certain
additional risks not associated with investments in domestic companies and
markets. Securities of Canadian issuers and securities purchased by means of
American Depository Receipts ("ADRs") are not subject to this 25% limitation.
The High Yield Fund may invest without limit, the Industrial Income Fund may
invest up to 15%, and the Small Company Growth Fund may invest up to 5% of its
total assets, in lower-rated debt securities that present a greater risk of
default and have prices that fluctuate more than those of higher-rated
securities. Many securities purchased by the Small Company Growth Fund will not
be listed on exchanges, may trade less frequently and in smaller volume than
exchange-listed securities and may have greater price volatility and less
liquidity than exchange-listed securities. The Technology and Health Sciences
Funds will each be concentrated in a specific business sector. Compared to the
broad market, an individual sector may be more strongly affected by changes in
the economic climate, broad market shifts, moves in a particular, dominant
stock, or regulatory changes. The Utilities Fund is subject to risks related to
the uncertainties to which the gas and electric public utilities industries are
subject, including difficulties in obtaining adequate financing, government
regulation of investment return, environmental issues, prices of fuel for
electric generation, availability of natural gas, and risks associated with
nuclear power facilities. Each of the Funds may invest in options and futures
contracts, each of which presents special risks. These and other risks are
discussed below under the caption "Risk Factors."
<PAGE>
INVESCO Funds Group, Inc.("INVESCO"), the Funds' investment adviser, is
primarily responsible for providing the Company with various administrative
services and supervising the Company's daily business affairs. Portfolio
management is provided to each Fund by its sub-adviser (referred to collectively
with INVESCO as "Fund Management"). INVESCO Capital Management, Inc. ("ICM")
serves as sub-adviser to the Total Return Fund and INVESCO Trust Company
("INVESCO Trust") serves as sub-adviser to each of the other Funds. Each Fund
pays INVESCO an advisory fee for the management of its investments and business
affairs. A discussion of these fees and additional information about INVESCO,
INVESCO Trust and ICM are provided below under the caption "Management."
<PAGE>
FINANCIAL HIGHLIGHTS
(For a Fund Share Outstanding Throughout Each Period)
The following information, unless otherwise noted, has been audited by
Price Waterhouse LLP, independent accountants. This information should be read
in conjunction with the audited financial statements and the Report of
Independent Accountants thereon appearing in the Company's 1995 annual report to
shareholders which is incorporated by reference into the Statement of Additional
Information. Both are available without charge by contacting INVESCO Funds
Group, Inc. at the address or telephone number shown on the cover page of this
Prospectus, or by contacting a Participating Insurance Company. Because the
Dynamics, Small Company Growth, Health Sciences and Technology Funds had not
commenced operations prior to the date of this Prospectus, no financial
information is provided for those Funds.
<TABLE>
<CAPTION>
High Yield Fund Industrial Income Fund
Six Months Year Period Six Months Year Period
Ended Ended Ended Ended Ended Ended
June 30 December 31 December 31 June 30 December 31 December 31
------------ ------------ ------------ ------------ ----------- -----------
1996 1995 1994^ 1996 1995 1994^
<S> <C> <C> <C> <C> <C> <C>
^
PER SHARE DATA
Net Asset Value - Beginning of Period $11.04 $10.01 $10.00 $12.58 $10.09 $10.00
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.43 0.55 0.05 0.17 0.19 0.03
Net Gains on Securities
(Both Realized and Unrealized) 0.03 1.43 0.01 1.25 2.76 0.09
------------ ------------ ------------ ------------ ------------ ------------
Total from Investment Operations 0.46 1.98 0.06 1.42 2.95 0.12
----------- ------------ ------------ ------------ ------------ ------------
LESS DISTRIBUTIONS
Dividends from Net Investment Income 0.00 0.55 0.05 0.00 0.20 0.03
Distributions from Capital Gains 0.00 0.40 0.00 0.00 0.26 0.00
------------ ------------ ------------ ------------ ------------ ------------
Total Distributions 0.00 0.95 0.05 0.00 0.46 0.03
------------ ------------ ------------ ------------ ------------ ------------
Net Asset Value - End of Period $11.50 $11.04 $10.01 $14.00 $12.58 $10.09
============ ============ ============ ============ ============ ============^
TOTAL RETURN > 4.17%* 19.76% 0.60%* 11.29%* 29.25% 1.23%*
<PAGE>
RATIOS
Net Assets - End of Period ($000 Omitted) $7,542 $5,233 $624 $13,479 $8,362 $525
Ratio of Expenses to Average Net Assets# 0.44%*@ 0.97%@ 0.74%~ 0.49%*@ 1.03%@ 0.79%~
Ratio of Net Investment Income to
Average Net Assets# 4.50%* 8.79% 2.72%~ 1.54%* 3.50% 1.69%~
Portfolio Turnover Rate 137%* 310% 23%* 43%* 97% 0%*
</TABLE>
^ For the High Yield and Industrial Income Funds, from May 27, 1994 and August
10, 1994, respectively, commencement of investment operations, to December 31,
1994.
> Total return does not reflect expenses that apply to the related insurance
policies, and inclusion of these charges would reduce the total return for the
periods shown.
* These amounts are based on operations for the period shown and, accordingly,
are not representative of a full year.
# Various expenses of the High Yield and Industrial Income Funds were
voluntarily absorbed by ^ IFG for the six months ended June 30, 1996, the year
ended December 31, 1995 and the period ended December 31, 1994. If such expenses
had not been voluntarily absorbed, ^ ratio of expenses to average net assets
would have been 0.77% (not annualized), 2.71% and 30.38% for High Yield Fund and
0.67% (not annualized), 2.31% and 32.55% for Industrial Income Fund,
respectively, and ^ ratio of net investment income to average net assets would
have been 4.17% (not annualized), 7.05% and (26.92%) for High Yield Fund and
1.35% (not annualized), 2.22% and (30.07%)for Industrial Income Fund,
respectively.
@ Ratio ^ is based on Total Expenses, less ^ Expenses Absorbed by Investment
Adviser which is before any expense offset arrangements.
^~ Annualized
<PAGE>
<TABLE>
<CAPTION>
Total Return Fund Utilities Fund
Six Months Year Period Six Months Year Period
Ended Ended Ended Ended Ended Ended
June 30 December 31 December 31 June 30 December 31 December 31
------------ ------------ ------------ ------------ ------------ ------------
1996 1995 1994^ 1996 1995 1994^
<S> <C> <C> <C> <C> <C> <C>
^ PER SHARE DATA
Net Asset Value - Beginning of Period $12.14 $10.09 $10.00 $10.84 $10.00 $10.00
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.17 0.25 0.09 0.10 0.07 0.00
Net Gains on Securities
(Both Realized and Unrealized) 0.44 2.05 0.09 0.80 0.84 0.00
------------ ------------ ------------ ------------ ------------ ------------
Total from Investment Operations 0.61 2.30 0.18 0.90 0.91 0.00
------------ ------------ ------------ ------------ ------------ ------------
LESS DISTRIBUTIONS
Dividends from Net Investment Income 0.00 0.24 0.09 0.00 0.07 0.00
Distributions from Capital Gains 0.00 0.01 0.00 0.00 0.00 0.00
------------ ------------ ------------ ------------ ------------ ------------
Total Distributions 0.00 0.25 0.09 0.00 0.07 0.00
------------ ------------ ------------ ------------ ------------ ------------
Net Asset Value - End of Period $12.75 $12.14 $10.09 $11.74 $10.84 $10.00
============ ============ ============ ============ ============ ============^
TOTAL RETURN > 5.02%* 22.79% 1.75%* 8.30%* 9.08% 0.00%
RATIOS
Net Assets - End of Period ($000 Omitted) $10,733 $6,553 $1,055 $943 $290 $25
Ratio of Expenses to Average Net Assets# 0.48%*@ 1.01%@ 0.86%~ 0.65%*@ 1.80%@ 0.00%
Ratio of Net Investment Income to
Average Net Assets# 1.66%* 3.91% 3.86%~ 1.46%* 2.47% 0.00%
Portfolio Turnover Rate 4%* 5% 0%* 38%* 24% 0%
</TABLE>
<PAGE>
^ ^ From June 2, 1994, commencement of ^ operations, to December 31, 1994.
+ All of the expenses for the ^ Fund were voluntarily absorbed by ^ IFG for the
period ended December 31, 1994, since investment operations did not commence
during 1994.
> Total return does not reflect expenses that apply to the related insurance
policies, and inclusion of these charges would reduce the total return for the
periods shown.
* ^ Based on operations for the period shown and, accordingly, are not
representative of a full year.
# Various expenses of ^ Total Return and Utilities Funds were voluntarily
absorbed by ^ IFG for the six months ended June 30, 1996, the year ended
December 31, 1995 and the period ended December 31, 1994. If such expenses had
not been voluntarily absorbed, ratio of expenses to average net assets would
have been 0.71% (not annualized), 2.51% and 16.44% for Total Return Fund and
4.28% (not annualized), 57.13% and 0.00% for Utilities Fund, respectively, and
ratio of net investment income to average net assets would have been 1.43% (not
annualized), 2.41% and (11.72%) for Total Return Fund and (2.17%) (not
annualized), (52.86%) and 0.00% for Utilities Fund, respectively.
@ Ratio ^ is based on Total Expenses, less ^ Expenses Absorbed by Investment
Adviser, which is before any expense offset arrangement.
~ Annualized
Further information about the performance of the Funds is contained in the
Company's annual report to shareholders, which may be obtained without charge by
contacting INVESCO Funds Group, Inc. at the address or telephone number set
forth on the cover page of this Prospectus, or by contacting a Participating
Insurance Company.
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Fund, as described below, is fundamental
and may be changed only by vote of a majority of the outstanding shares of that
Fund. There is no assurance that any Fund will achieve its investment objective.
Any investment policy of a Fund may be changed by the Company's board of
directors without shareholder approval unless the policy is one required by the
Fund's fundamental investment restrictions set forth in the Statement of
Additional Information. When Fund Management believes market or economic
conditions are unfavorable, each of the Funds may assume a defensive position by
temporarily investing up to 100% of its total assets in high quality money
market instruments, such as short-term U.S. government obligations, commercial
paper or repurchase agreements, high quality corporate bonds or notes, or by
holding cash.
Industrial Income Fund
The investment objective of the Industrial Income Fund is to seek the best
possible current income while following sound investment practices. Capital
growth potential is an additional consideration in the selection of portfolio
securities.
The Industrial Income Fund normally invests at least 65% of its total
assets in dividend-paying common stocks. Up to 10% of the Fund's total assets
may be invested in equity securities that do not pay regular dividends. The
remaining assets are invested in other income-producing securites, such as
corporate bonds and other straight debt securities ("debt securities"). The Fund
also has the flexibility to invest in preferred stock and convertible bonds.
There is no maximum limit on the amount of equity or debt securities in which
the Fund may invest. In periods of uncertain market and economic conditions, as
determined by Fund Management, the Fund may depart from its basic investment
objective and assume a defensive position with up to 100% of its total assets
temporarily invested in high quality corporate bonds, or notes and government
issues, or held in cash.
The Industrial Income Fund may invest no more than 15% of its total assets
in debt securities that are rated below BBB by Standard & Poor's Ratings
Services, a division of McGraw-Hill Companies, Inc. ("Standard & Poor's"), or
Baa by Moody's Investors Service, Inc. ("Moody's"), and in no event will the
Fund ever invest in a debt security rated below CCC by Standard & Poor's or Caa
by Moody's. Generally, bonds rated in one of the top four rating categories are
considered "investment grade." However, those in the fourth highest category
(Standard & Poor's BBB or Moody's Baa) may have speculative characteristics and
a weaker ability to pay interest or repay principal under adverse economic
conditions or changing circumstances. The risks of investing in debt securities
rated lower than BBB by Standard & Poor's or Baa by Moody's are discussed below
<PAGE>
under the caption "Risk Factors." See the Appendix to this Prospectus for a
specific description of each corporate bond rating category.
Dynamics Fund
The Dynamics Fund seeks appreciation of capital through aggressive
investment policies. This investment objective is fundamental and may not be
changed without the approval of the Fund's shareholders. The Fund seeks to
achieve this objective through the investment of its assets in a variety of
securities that are believed to present opportunities for capital enhancement --
primarily common stocks of companies traded on U.S. securities exchanges, as
well as over-the-counter. The Fund also has the flexibility to invest in
preferred stocks and convertible or straight issues of debentures, as well as
foreign securities.
The Dynamics Fund may invest in illiquid securities, including securities
that are subject to restrictions on resale and securities that are not readily
marketable. The Fund may also invest in restricted securities that may be resold
to institutional investors, known as "Rule 144A Securities." See "Risk Factors
- -- Illiquid and Rule 144A Securities" below.
Total Return Fund
The investment objective of the Total Return Fund is to seek a high total
return on investment through capital appreciation and current income. The Fund
seeks to accomplish its objective by investing in a combination of equity
securities and fixed income securities. Although there is no limitation on the
maturity of the Total Return Fund's investments in fixed income securities, the
dollar-weighted average maturity of such investments normally will be from 3 to
15 years.
The equity securities to be acquired by the Total Return Fund consist of
common stocks and, to a lesser extent, securities convertible into common
stocks. Such securities generally will be issued by companies that are listed on
a national securities exchange (such as the New York Stock Exchange) and that
usually pay regular dividends. However, the Fund also may invest in securities
traded on regional stock exchanges or in the over-the-counter market. The
Company has not established any minimum investment standards (such as an
issuer's asset level, earnings history, type of industry, dividend payment
history, etc.) with respect to the Fund's investments in common stocks. Because
smaller companies may be subject to more significant losses, as well as have the
potential for more substantial growth, than larger, more established companies,
the Fund's investments may consist in part of securities that may be deemed to
be speculative.
The income securities to be acquired by the Total Return Fund will include
obligations of the U.S. government and government agencies. These U.S.
government obligations consist of direct obligations of the U.S. government,
<PAGE>
such as U.S.Treasury Bills, Notes and Bonds, obligations guaranteed by the
U.S. government, such as Government National Mortgage Association obligations,
and obligations of U.S. government authorities, agencies and instrumentalities,
which are supported only by the assets of the issuer, such as the Federal
National Mortgage Association, Federal Home Loan Bank, Federal Financing Bank
and Federal Farm Credit Bank. In the case of securities not backed by the full
faith and credit of the United States, the Fund must look principally to the
agency issuing or guaranteeing the obligation for ultimate repayment, and may
not be able to assert a claim against the United States itself in the event the
agency or instrumentality does not meet its commitments. The Fund will invest in
securities of such instrumentalities only when Fund Management is satisfied that
the credit risk with respect to any such instrumentality is minimal.
The Total Return Fund also may invest in corporate debt obligations that
are rated in one of the four highest ratings of corporate obligations by
Standard & Poor's (AAA, AA, A and BBB) or by Moody's (Aaa, Aa, A and Baa), or,
if not rated, that in Fund Management's opinion have investment characteristics
similar to those described in such ratings. The investment characteristics of
the securities rated Baa by Moody's or BBB by Standard & Poor's are discussed
above in the description of the investment policies of the Industrial Income
Fund. See the Appendix to this Prospectus for a specific description of each
corporate bond rating category.
Typically, at least 30% of the Total Return Fund's investment portfolio
will be comprised of equities and at least 30% fixed and variable income
securities. The remaining 40% of the portfolio will vary in asset allocation
according to Fund Management's assessment of business, economic, and market
conditions. The analytical process associated with making allocation decisions
is based upon a combination of demonstrated historic financial results, current
prices for stocks, and the current yield to maturity available in the market for
bonds. The return available from one category relative to the other determines
the actual asset deployment. Fund Management's asset allocation process is
systematic and is based on current information rather than forecasted change.
The Fund seeks reasonably consistent returns over a variety of market cycles.
Small Company Growth Fund
The Small Company Growth Fund seeks long-term capital growth. This
investment objective is fundamental and may not be changed without the approval
of the Fund's shareholders. The Fund seeks to achieve this objective through the
investment of 65% or more of its total assets in equity securities of companies
with market capitalizations of $1 billion or less at the time of purchase
("small-cap companies"). The balance of the Fund's assets may be invested in the
equity securities of companies with market capitalizations in excess of $1
billion, debt securities and short-term investments. With respect to small-cap
companies, Fund Management primarily looks for companies in the developing
<PAGE>
of their life cycle, which are believed to be currently undervalued in the
marketplace, have earnings which may be expected to grow faster than the U.S.
economy in general, and/or offer the potential for accelerated earnings growth
due to rapid growth of sales, new products, management changes, or structural
changes in the economy.
The majority of the Small Company Growth Fund's holdings consist of common
stocks traded over-the-counter. The Fund also has the flexibility to invest in
other U.S. and foreign securities.
The Small Company Growth Fund's investments in debt securities include U.S.
government and corporate debt securities. Investments in U.S. government
securities may consist of securities issued or guaranteed by the U.S. government
and any agency or instrumentality of the U.S. government. In some cases, these
securities are direct obligations of the U.S. government, such as U.S. Treasury
^ Bills, Notes and ^ Bonds. In other cases, these securities are obligations
guaranteed by the U.S. government, consisting of Government National Mortgage
Association obligations, or obligations of U.S. government authorities, agencies
or instrumentalities, consisting of the Federal National Mortgage Association,
Federal Home Loan Bank, Federal Financing Bank and Federal Farm Credit Bank,
which are supported only by the assets of the issuer. The Fund may invest in
both investment grade and lower-rated corporate debt securities. However, the
Fund will not invest more than 5% of its total assets (measured at the time of
purchase) in corporate debt securities that are rated below BBB by Standard &
Poor's or Baa by Moody's or, if unrated, are judged by Fund Management to be
equivalent in quality to debt securities having such ratings. In no event will
the Fund invest in a debt security rated below CCC by Standard & Poor's or Caa
by Moody's. The risks of investing in below-investment grade debt securities are
discussed below under "Risk Factors." For a description of each corporate bond
rating category, please refer to the Appendix to this Prospectus.
The short-term investments of the Small Company Growth Fund may consist of
U.S. government and agency securities, domestic bank certificates of deposit and
bankers' acceptances, and commercial paper rated A-1 by Standard and Poor's or
P-1 by Moody's, as well as repurchase agreements with banks and registered
broker-dealers and registered government securities dealers with respect to the
foregoing securities. The Fund's assets invested in U.S. government securities
and short-term investments will be used to meet current cash requirements, such
as to satisfy requests to redeem shares of the Fund and to preserve investment
flexibility.
The Small Company Growth Fund may invest in illiquid securities, including
securities that are subject to restrictions on resale and securities that are
not readily marketable. The Fund may also invest in Rule 144A Securities. For
more information concerning illiquid and Rule 144A Securities, see "Investment
Policies" in the Statement of Additional Information.
<PAGE>
High Yield Fund
The investment objective of the High Yield Fund is to seek a high level of
current income by investing substantially all of its assets in lower rated bonds
and other debt securities and in preferred stock. Accordingly, the Fund invests
primarily in bonds and other debt securities, including convertible and
non-convertible issues, and in preferred stocks rated in medium and lower
categories by Standard & Poor's or Moody's (BB or lower by Standard & Poor's or
Ba or lower by Moody's). The Fund does not invest in securities rated lower than
CCC by Standard & Poor's or Caa by Moody's; these ratings are applied to issues
that are predominantly speculative and may be in default or as to which there
may be present elements of danger with respect to principal or interest. The
Fund does not invest in issues that are in default. The Fund may invest in
unrated securities where Fund Management believes that the financial condition
of the issuer or the protection afforded by the terms of the securities limits
risk to a level similar to that of securities eligible for purchase by the Fund
rated in medium and lower categories by Standard & Poor's or Moody's (between BB
and CCC ratings by Standard & Poor's and between Ba and Caa ratings by Moody's).
The Fund also may invest in state and local municipal obligations when Fund
Management believes that the potential total return on the investment is better
than the return that otherwise would be achieved by investing in securities
issued by private issuers. See the Appendix to this Prospectus for a specific
description of each corporate bond rating category.
The High Yield Fund also may hold cash or invest all or a portion of its
assets in securities issued or guaranteed by the U.S. government or its agencies
(which may or may not be backed by the full faith and credit of the United
States) and bank certificates of deposit, if Fund Management determines it to be
appropriate for purposes of preserving liquidity or capital in light of
prevailing market or economic conditions. The Fund also may invest in corporate
short-term notes rated at the time of purchase at least A-1 by Standard & Poor's
or Prime-1 by Moody's, and municipal short-term notes rated at the time of
purchase at least SP-1 by Standard & Poor's or MIG-1 by Moody's (the highest
rating category for such notes, indicating a very strong capacity to make timely
payments of principal and interest).
Potential capital appreciation is a factor in the selection of investments,
but is secondary to the High Yield Fund's primary objective. The securities in
which the Fund invests offer a wide range of maturities (from less than one year
to thirty years) and yields. These securities include short-term bonds or notes
(maturing in less than three years), intermediate-term bonds or notes (maturing
in three to ten years), and long-term bonds (maturing in more than ten years).
Fund Management will seek to adjust the portfolio of securities held by the Fund
to maximize current income consistent with the preservation of principal.
<PAGE>
There are no limitations on the average maturity of the securities in the
High Yield Fund. Securities will be selected on the basis of Fund Management's
assessment of interest rate trends and the liquidity of various instruments
under prevailing market conditions. As a matter of policy, which may be changed
without a vote of shareholders, under normal circumstances, at least 65% of the
value of the total assets of the Fund will be invested in debt securities having
maturities at the time of issuance of at least three years.
Securities in which the High Yield Fund invests may at times be purchased
or sold on a delayed delivery or a when-issued basis (i.e., securities may be
purchased or sold by the Fund with settlement taking place in the future, often
a month or more later). The High Yield Fund may invest up to 10% of its net
assets in when-issued securities. The payment obligation and the interest rate
that will be received on the securities are fixed at the time the Fund enters
into a purchase commitment. Between the date of purchase and the settlement
date, the value of the securities is subject to market fluctuations, and no
interest is payable to the Fund prior to the settlement date. When the Fund
purchases securities on a when-issued basis, its custodian bank will place cash
or liquid debt securities in a separate account of the Fund in an amount equal
to the amount of the purchase obligation.
Health Sciences Fund
The Health Sciences Fund seeks capital appreciation. The investment
strategy used in attempting to attain this investment objective is aggressive;
holdings are focused on equity securities whose price appreciation is expected
to outpace that of the health sciences business sector. These stocks may not pay
regular dividends. The Fund normally invests at least 80% of its total assets in
the equity securities (common and preferred stocks, and convertible bonds) of
companies which develop, produce, or distribute products or services related to
health care.
The health sciences business sector consists of numerous industries. In
deciding whether a company is principally engaged in that business sector, Fund
Management must determine that the company derives more than 50% of its gross
income or net sales from activities in that sector or that the company dedicates
more than 50% of its assets to the production of revenues from that sector. If,
based on available financial information, a question exists whether a company
meets one of these standards, Fund Management determines whether the company's
primary business is within the health sciences business sector.
The remainder of the Health Sciences Fund's assets may be invested in any
securities or other instruments deemed appropriate by Fund Management,
consistent with the Fund's investment policies and restrictions. These
investments include debt securities issued by companies principally engaged in
<PAGE>
the health sciences business sector, debt or equity securities issued by
companies outside that business sector, short-term high grade debt obligations
maturing no later than one year from the date of purchase (including U.S.
government and agency securities, domestic bank certificates of deposit,
commercial paper rated at least A-2 by Standard & Poor's or P-2 by Moody's ^ and
repurchase agreements) and cash.
Technology Fund
The Technology Fund seeks capital appreciation. The investment strategy
used in attempting to attain this investment objective is aggressive. Holdings
are focused on equity securities whose price appreciation is expected to outpace
that of the overall technology business sector. These stocks may not pay regular
dividends. The Fund normally invests at least 80% of its total assets in the
equity securities (common and preferred stocks, and convertible bonds) of
companies in technology-related industries such as computers, communications,
video, electronics, oceanography, office and factory automation, and robotics.
The technology business sector consists of numerous industries. In deciding
whether a company is principally engaged in the technology business sector, Fund
Management must determine that the company derives more than 50% of its gross
income or net sales from activities in that sector; or that the company
dedicates more than 50% of its assets to the production of revenues from that
sector. If, based on available financial information, a question exists whether
a company meets one of these standards, Fund Management determines whether the
company's primary business is within that sector.
The remainder of the Technology Fund's assets may be invested in any
securities or other instruments deemed appropriate by Fund Management,
consistent with the Fund's investment policies and restrictions. These
investments include debt securities issued by companies principally engaged in
the technology business sector, debt or equity securities issued by companies
outside that business sector, short-term high grade debt obligations maturing no
later than one year from the date of purchase (including U.S. government and
agency securities, domestic bank certificates of deposit, commercial paper rated
at least A-2 by Standard & Poor's or P-2 by Moody's ^ and repurchase
agreements), and cash.
Utilities Fund
The investment objective of the Utilities Fund is to seek capital
appreciation and income. The assets of the Utilities Fund are invested primarily
in securities of companies principally engaged in business as public utilities,
which may be either established, well-capitalized companies or newly-formed,
small capitalization companies. The public utilities business includes the
following industries: companies which manufacture, produce, generate, transmit,
or sell gas or electric energy; and companies engaged in various aspects of
<PAGE>
communications, such as telephone, telegraph, satellite, microwave, and the
provision of other communication facilities, excluding broadcasting, for public
use and benefit. Uncertainties to which the gas and electric public utilities
industries are subject include difficulties in obtaining adequate financing and
investment return, environmental issues, prices of fuel for electric generation,
availability of natural gas, and risks associated with nuclear power facilities.
Under normal conditions, the Utilities Fund will invest at least 80% of its
total assets in the equity securities (common stocks and securities convertible
into common stocks, including convertible debt obligations and convertible
preferred stock) of companies that are principally engaged in business as public
utilities, and that are traded on regional or national stock exchanges or on the
over-the-counter market. A particular company is deemed to be principally
engaged in the public utilities business if, in the determination of Fund
Management, more than 50% of its gross income or net sales is derived from
activities in that business or more than 50% of its assets are dedicated to the
production of revenues from that business. In circumstances where, based on
available financial information, a question exists whether a company meets one
of these standards, the Utilities Fund may invest in equity securities of the
company only if Fund Management determines, after review of information
describing the company and its business activities, that the company's primary
business is within the public utilities business.
The balance of the Utilities Fund's assets may be held as cash or invested
in debt securities issued by companies principally engaged in the public
utilities business, debt or equity securities issued by companies outside the
public utilities sector, or in short-term debt obligations maturing no later
than one year from the date of purchase, which are determined by Fund Management
to be of high grade, including U.S. government and agency securities, domestic
bank certificates of deposit, commercial paper rated A-2 or higher by Standard &
Poor's or P-2 or higher by Moody's, and repurchase agreements with banks and
securities dealers. The equity securities purchased may be issued by either
established, well-capitalized companies or newly-formed, small cap companies,
and may be traded on national or regional stock exchanges or in the
over-the-counter market.
RISK FACTORS
Contract owners should consider the special factors associated with the
policies discussed below in determining the appropriateness of allocating
contract values to one or more of the Funds. See the Statement of Additional
Information for a discussion of additional risk factors.
<PAGE>
Potential Conflicts
The Company has received an exemptive order of the Securities and Exchange
Commission that permits the sale of Fund shares to variable annuity separate
accounts and variable life insurance separate accounts of affiliated and
unaffiliated Participating Insurance Companies. The Company currently does not
foresee any disadvantages to the owners of variable annuity or variable life
insurance contracts arising from the fact that the interests of those owners may
differ. Nevertheless, the Company's board of directors will monitor events in
order to identify any material irreconcilable conflicts which may possibly arise
due to differences of tax treatment or other considerations and to determine
what action, if any, should be taken in response thereto.
Credit and Market Risks
All securities, including those purchased by each Fund, are subject to some
degree of credit risk and market risk. Credit risk refers to the ability of an
issuer of a debt security to pay its principal and interest, and to the earnings
stability and overall financial soundness of an issuer of an equity security.
Market risk refers to the volatility of a security's price in response to
changes in conditions in securities markets in general and, particularly in the
case of debt securities, changes in the overall level of interest rates. An
increase in interest rates will tend to reduce the market values of debt
securities, whereas a decline in interest rates will tend to increase their
values.
To limit exposure to credit risks, each Fund, as a matter of fundamental
policy, will be diversified. With respect to 75% of each Fund's total assets, no
more than 5% of the purchasing Fund's total assets will be invested in the
securities of any one issuer. In addition, with the exception of the Health
Sciences, Technology and Utilities Funds, no more than 25% of a Fund's total
assets will be invested in any one industry. These percentage limitations apply
immediately after a purchase or initial investment. Any subsequent change in a
percentage resulting from fluctuations in value will not require elimination of
any security from a Fund. The credit risk exposure of the Health Sciences,
Technology and Utilities Funds may be increased by their policy of concentrating
investments in specific business sectors. See "Risk Factors -- Concentration."
Portfolio Lending
Each Fund may make loans of its portfolio securities to broker-dealers or
other institutional investors under contracts requiring such loans to be
callable at any time and to be secured continuously by collateral in cash, cash
equivalents, high quality short-term government securities or irrevocable
letters of credit maintained on a current basis at an amount at least equal to
the market value of the securities loaned. This practice permits a Fund to earn
income, which, in turn, can be invested in additional securities to pursue the
Fund's investment objective. The lending Fund will continue to collect the
equivalent of the interest or dividends paid by the issuer on the securities
loaned and will also receive either interest (through investment of cash
<PAGE>
collateral) or a fee (if the collateral is government securities). A
lending Fund may pay finder's and other fees in connection with its securities
loans.
Lending securities involves certain risks, the most signifi cant of which
is the risk that a borrower may fail to return a portfolio security. Fund
Management monitors the creditworthiness of borrowers in order to minimize such
risks. A Fund will not lend any security if, as a result of that loan, the
aggregate value of securities then on loan would exceed 331/3% of the Fund's
total assets (taken at market value).
Repurchase Agreements
Each Fund may enter into repurchase agreements with respect to debt
instruments eligible for investment by that Fund. These agreements are entered
into with member banks of the Federal Reserve System, registered broker-dealers,
and registered govern ment securities dealers which are deemed creditworthy by
Fund Management (subject to review by the Company's board of directors). A
repurchase agreement is a means of investing monies for a short period. In a
repurchase agreement, the Fund acquires a debt instrument (generally a security
issued by the U.S. government or an agency thereof, a banker's acceptance or a
certificate of deposit) subject to resale to the seller at an agreed upon price
and date (normally the next business day). If the other party defaults on its
obligation to repurchase the security, a Fund could incur costs or delays in
seeking to sell the security.
To minimize risks associated with repurchase agreements, the securities
underlying each repurchase agreement will be maintained with the Company's
custodian in an amount at least equal to the repurchase price under the
agreement (including accrued interest), and such agreements will be effected
only with parties that meet certain creditworthiness standards established by
the Company's board of directors. No Fund will enter into a repurchase agreement
maturing in more than seven days if as a result more than 15% of that Fund's net
assets would be invested in such repurchase agreements and other illiquid
securities.
Portfolio Turnover
There are no fixed limitations regarding portfolio turnover for any of the
Funds. Although the Funds do not trade for short-term profits, securities may be
sold without regard to the time they have been held in a Fund when, in the
opinion of Fund Management, market considerations warrant such action.
Therefore, the portfolio turnover rates of the Funds may be higher than those of
other investment companies with comparable investment objectives. Increased
portfolio turnover would cause a Fund to incur greater brokerage costs than
would otherwise be the case. The actual portfolio turnover rates for those Funds
that have been in operation are set forth under "Financial Highlights." Each of
<PAGE>
the other Funds is actively traded and is expected to have a portfolio
turnover rate that could exceed 200%. The Company's brokerage allocation
policies, including the consideration of sales of Participating Life Insurance
Companies' variable annuity and variable life insurance contracts when selecting
among qualified brokers offering comparable best price and execution on Fund
transactions, are discussed in the Statement of Additional Information.
Illiquid and Rule 144A Securities
The Funds are authorized to invest in securities that are illiquid because
they are subject to restrictions on their resale ("restricted securities") or
because, based upon their nature or the market for such securities, they are not
readily marketable. However, a Fund will not purchase any such security if the
purchase would cause the Fund to invest more than 15% of its net assets in
illiquid securities. Repurchase agreements maturing in more than seven days will
be considered illiquid for purposes of this restriction. Investments in illiquid
securities involve certain risks to the extent that a Fund may be unable to
dispose of such a security at the time desired or at a reasonable price. In
addition, in order to resell a restricted security, a Fund might have to bear
the expense and incur the delays associated with effecting registration.
Certain restricted securities that are not registered for sale to the
general public, but that can be resold to institutional investors ("Rule 144A
Securities"), may be purchased without regard to the foregoing 15% limitation if
a liquid institutional trading market exists. The liquidity of a Fund's
investments in Rule 144A Securities could be impaired if dealers or
institutional investors become uninterested in purchasing these securities. The
Company's board of directors has delegated to Fund Management the authority to
determine the liquidity of Rule 144A Securities pursuant to guidelines approved
by the board. For more information concerning Rule 144A Securities, see the
Statement of Additional Information.
Foreign Securities
Each Fund may invest up to 25% of its total assets, measured at the time of
purchase, directly in foreign securities. Investments in securities of foreign
companies (including Canadian securities, which are not subject to the 25%
limitation) and in foreign markets involve certain additional risks not
associated with investments in domestic companies and markets. For U.S.
investors, the returns on foreign securities are influenced not only by the
returns on the foreign investments themselves, but also by currency
fluctuations. That is, when the U.S. dollar generally rises against foreign
currencies, returns on foreign securities for a U.S. investor may decrease. By
contrast, in a period when the U.S. dollar generally declines, those returns may
increase.
<PAGE>
Other risks of international investing to consider include:
-less publicly available information than is generally available about U.S.
issuers;
-differences in accounting, auditing and financial reporting standards;
-generally higher commission rates on foreign portfolio transactions and
longer settlement periods;
-smaller trading volumes and generally lower liquidity of foreign stock
markets, which may cause greater price volatility;
-less government regulation of stock exchanges, brokers and listed
companies abroad than in the United States; and
-investments in certain countries may be subject to foreign withholding
taxes, which may reduce dividend income or capital gains payable to
shareholders.
There is also the possibility of expropriation or confiscatory taxation;
adverse changes in investment or exchange control regulations; political
instability; potential restrictions on the flow of international capital; and
the possibility of a Fund experiencing difficulties in pursuing legal remedies
and collecting judgments.
Securities purchased by means of ADRs also are not subject to the 25%
limitation. ADRs are receipts, typically issued by a U.S. bank or trust company,
evidencing ownership of the underlying foreign securities. ADRs are denominated
in U.S. dollars and trade in the U.S. securities markets. ADRs may be issued in
sponsored or unsponsored programs. In sponsored programs, the issuer makes
arrangements to have its securities traded in the form of ADRs; in unsponsored
programs, the issuer may not be directly involved in the creation of the
program. Although the regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, the issuers of unsponsored ADRs are
not obligated to disclose material information in the United States and,
therefore, such information may not be reflected in the market value of the
ADRs. ADRs are subject to certain of the same risks as direct investments in
foreign securities, including the risk that changes in the value of the currency
in which the security underlying an ADR is denominated relative to the U.S.
dollar may adversely affect the value of the ADR.
Forward Foreign Currency Contracts
Each of the Funds may enter into contracts to purchase or sell foreign
currencies at a future date ("forward contracts") as a hedge against
fluctuations in foreign exchange rates pending the settlement of transactions in
foreign securities or during the time the Funds hold foreign securities. A
forward contract is an agreement between contracting parties to exchange an
<PAGE>
amount of currency at some future time at an agreed upon rate. Although the
Funds have not adopted any limitations on their ability to use forward contracts
as a hedge against fluctuations in foreign exchange rates, the Funds do not
attempt to hedge all of their foreign investment positions and will enter into
forward contracts only to the extent, if any, deemed appropriate by Fund
Management. The Funds will not enter into forward contracts for a term of more
than one year or for purposes of speculation. Hedging against a decline in the
value of a currency in the foregoing manner does not eliminate fluctuations in
the prices of portfolio securities or prevent losses if the prices of such
securities decline. Furthermore, such hedging transactions preclude the
opportunity for gain if the value of the hedged currency should rise. No
predictions can be made with respect to whether the total of such transactions
will result in a better or worse position than had the Fund not entered into any
forward contracts. Forward contracts may, from time to time, be considered
illiquid, in which case they would be subject to the Funds' limitation on
investing in illiquid securities, discussed above. For additional information
regarding forward contracts, see "Investment Policies" in the Statement of
Additional Information.
Zero Coupon and Pay-In-Kind Bonds (High Yield Fund Only)
The High Yield Fund may invest in zero coupon bonds and pay- in-kind bonds,
provided that Fund Management determines that the risk of a default on the
security, which could result in adverse tax consequences, is not significant. A
zero coupon bond ("zero") does not make cash interest payments during the life
of the bond. Instead, it is sold at a discount to face value, and the interest
consists of the gradual appreciation in price as the bond approaches maturity.
Zeros can be an attractive financing method for issuers with near-term cash flow
problems. Pay-in-kind ("PIK") bonds pay interest in cash or additional
securities, at the issuer's option, for a specified period. Like zeros, they may
help a corporation economize on cash. PIK prices reflect the market value of the
underlying debt plus any accrued interest. Zeros and PIKs can be higher or lower
quality debt, and may be more speculative and subject to greater fluctuation in
value due to changes in interest rates than coupon bonds. To maintain the High
Yield Fund's qualification as a regulated investment company, it may be required
to distribute income recognized on these bonds, even though no cash may be paid
to the Fund until the maturity or call date of the bond, and such distribution
could reduce the amount of cash available for investment by the Fund.
High-Risk, High-Yield Securities (High Yield, Industrial Income and Small
Company Growth Funds Only)
Although Fund Management limits the High Yield, Industrial Income and Small
Company Growth Funds' debt security investments to securities it believes are
not highly speculative, both credit and market risks are increased by those
Funds' investments in debt securities rated below the top four grades by
<PAGE>
Standard & Poor's or Moody's (high-risk, high-yield securities commonly
known as "junk bonds") and comparable unrated debt securities. Lower rated bonds
by Moody's (categories Ba, B, Caa) are of poorer quality and may have
speculative characteristics. Bonds rated Caa may be in default or there may be
present elements of danger with respect to principal or interest. Lower rated
bonds by Standard & Poor's (categories BB, B, CCC) include those which are
regarded, on balance, as predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with their terms; BB
indicates the lowest degree of speculation and CCC a high 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.
Because investment in medium and lower rated securities involves both
greater credit risk and market risk, achievement of the High Yield Fund's (and,
to a lesser extent, the Industrial Income Fund's) investment objectives may be
more dependent on Fund Management's credit analysis than is the case for funds
investing in higher quality securities. In addition, the share price and yield
of the High Yield Fund may be expected to fluctuate more than in the case of
funds investing in higher quality, shorter term securities. Moreover, a
significant economic downturn or major increase in interest rates may result in
issuers of lower rated securities experiencing increased financial stress, which
would adversely affect their ability to service their principal, dividend and
interest obligations, meet projected business goals, and obtain additional
financing. In this regard, it should be noted that while the market for high
yield corporate bonds has been in existence for many years and from time to time
has experienced economic downturns in recent years, this market has involved a
significant increase in the use of high yield corporate debt securities to fund
highly leveraged corporate acquisitions and restructurings. Past experience may
not, therefore, provide an accurate indication of future performance of the high
yield bond market, particularly during periods of economic recession.
Furthermore, expenses incurred to recover an investment by a Fund in a defaulted
security may adversely affect the Fund's net asset value. Finally, while Fund
Management attempts to limit purchases of medium and lower rated securities to
securities having an established secondary market, the secondary market for such
securities may be less liquid than the market for higher quality securities. The
reduced liquidity of the secondary market for such securities may adversely
affect the market price of, and ability of the High Yield, Industrial Income or
Small Company Growth Funds to value, particular securities at certain times,
thereby making it difficult to make specific valuation determinations.
While Fund Management continuously monitors all of the debt securities held
by the Funds for the issuers' ability to make required principal and interest
payments and other quality factors, a Fund may retain in the portfolio a debt
security whose rating is changed to one below the minimum rating required for
purchase.
<PAGE>
More information on debt securities is contained in the Statement of Additional
Information.
The following table shows the composition of the Industrial Income Fund's
and the High Yield Fund's investments in corporate (and municipal) bonds by
rating category for the fiscal year ended December 31, 1995. All of these
percentages were determined on a dollar-weighted basis, calculated by averaging
the Funds' month-end portfolio holdings during the fiscal year. These figures do
not represent actual holdings of the Funds as of December 31, 1995, nor do they
imply that the overall quality of portfolio holdings is fixed.
Percentage of Total Assets
---------------------------------------------
Rating Category Industrial Income Fund High Yield Fund
- --------------- ---------------------- ---------------
AAA 11.26% 0.00%
AA 0.00% 0.00%
A 2.00% 0.68%
BBB 4.13% 0.73%
BB 4.74% 23.09%
B 2.34% 54.54%
CCC 0.00% 4.55%
Unrated 0.00% 2.23%
Concentration (Health Sciences, Technology and Utilities Funds Only)
While each of the Health Sciences, Technology and Utilities Funds, like the
other Funds, diversifies its investments by investing, with respect to at least
75% of its total assets, not more than 5% of its total assets in the securities
of any one issuer, its assets normally will be invested primarily in companies
engaged in a single business sector. As a result of this investment policy, an
investment in those Funds may be subject to greater fluctuations in value than
generally would be the case if an investment were made in an investment company
which did not concentrate its investments in a similar manner. For example,
certain economic factors or specific events may exert a disproportionate impact
upon the prices of equity securities of companies within a particular industry
relative to their impact on the prices of securities of companies engaged in
other industries. Additionally, changes in the market price of the equity
securities of a particular company which occupies a dominant position in an
industry may tend to influence the market prices of other companies within the
same industry. As a result of the foregoing factors, the net asset value of the
Health Sciences, Technology and Utilities Funds may be more susceptible to
change than those of investment companies which spread their investments over
many different business sectors.
The Technology Fund may not invest more than 25% of its total assets in a
single industry (e.g., computer software) within the technology business sector.
The Health Sciences and Utilities Funds do not operate under this restriction.
<PAGE>
Options and Futures Contracts
Each of the Funds other than the Dynamics, Health Sciences and Technology
Funds may enter into futures contracts for hedging or other non-speculative
purposes within the meaning and intent of applicable rules of the Commodity
Futures Trading Commission ("CFTC"). For example, futures contracts may be
purchased or sold to attempt to hedge against the effects of interest or
exchange rate changes on a Fund's current or intended investments. If an
anticipated decrease in the value of portfolio securities occurs as a result of
a general increase in interest rates or a change in exchange rates, the adverse
effects of such changes may be offset, in whole or part, by gains on the sale of
futures contracts. Conversely, an increase in the cost of portfolio securities
to be acquired caused by a general decline in interest rates or a change in
exchange rates may be offset, in whole or part, by gains on futures contracts
purchased by a Fund. A Fund will incur brokerage fees when it purchases and
sells futures contracts, and it will be required to maintain margin deposits.
Each of the Funds other than the Dynamics, Health Sciences and Technology
Funds also may use options to buy or sell futures contracts or debt securities.
Such investment strategies will be used as a hedge and not for speculation.
Put and call options on futures contracts or securities may be traded by a
Fund in order to protect against declines in the values of portfolio securities
or against increases in the cost of securities to be acquired. Purchases of
options on futures contracts may present less dollar risk in hedging the Fund's
portfolio than the purchase and sale of the underlying futures contracts, since
the potential loss is limited to the amount of the premium plus related
transaction costs. The premium paid for such a put or call option plus any
transaction costs will reduce the benefit, if any, realized by the Fund upon
exercise or liquidation of the option, and, unless the price of the underlying
futures contract changes sufficiently, the option may expire without value to
the Fund. The writing of covered options, however, does not present less risk
than the trading of futures contracts, and will constitute only a partial hedge,
up to the amount of the premium received, and, if an option is exercised, the
Fund may suffer a loss on the transaction.
A Fund may purchase put or call options in anticipation of changes in
interest rates or other factors which may adversely affect the value of its
portfolio or the prices of securities which the Fund anticipates purchasing at a
later date. The Fund may be able to offset such adverse effects on its
portfolio, 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 the Fund upon exercise or liquidation of the option, and,
unless the price of the underlying security changes sufficiently, the option may
expire without value to the Fund.
<PAGE>
A Fund may, from time to time, also sell ("write") covered call options or
cash secured puts in order to attempt to increase the yield on its portfolio or
to protect against declines in the value of its portfolio securities. By writing
a covered call option, the Fund, in return for the premium income realized from
the sale of the option, gives up the opportunity to profit from a price increase
in the underlying security above the option exercise price, where the price
increase occurs while the option is in effect. In addition, the Fund's ability
to sell the underlying security will be limited while the option is in effect.
By writing a cash secured put, the Fund, which receives the premium, has the
obligation during the option period, upon assignment of an exercise notice, to
buy the underlying security at a specified price. A put is secured by cash if
the Fund maintains at all times cash, Treasury ^ Bills or other high grade
short-term obligations with a value equal to the option exercise price in a
segregated account with its custodian.
Although those Funds that may enter into options and futures contracts will
do so solely for hedging or other non-speculative purposes, within the meaning
and intent of applicable rules of the CFTC, their use does involve certain
risks. For example, a lack of correlation between the value of an instrument
underlying an option or futures contract and the assets being hedged, or
unexpected adverse price movements, could render a Fund's hedging strategy
unsuccessful and could result in losses. In addition, there can be no assurance
that a liquid secondary market will exist for any contract purchased or sold,
and the Fund may be required to maintain a position until exercise or
expiration, which could result in losses. Transactions in futures contracts and
options are subject to other risks as well.
The risks related to transactions in options and futures to be entered into
by the Funds are set forth in greater detail in the Statement of Additional
Information, which should be reviewed in conjunction with the foregoing
discussion.
INVESTMENT RESTRICTIONS
Each Fund is subject to certain fundamental restrictions regarding its
investments which may not be altered without the approval of the Fund's
shareholders. Those restrictions include, among others, limitations with respect
to the percentages of the value of the Fund's total assets which may be invested
in any one company or, with the exception of the Health Sciences and Utilities
Fund, in one industry. A list of each Fund's fundamental investment restrictions
and a list of additional, non-fundamental investment restrictions of each Fund
(which can be changed by the Company's board of directors without shareholder
approval) are contained in the Statement of Additional Information.
<PAGE>
MANAGEMENT
On November 4, 1996, an Agreement and Plan of Merger among INVESCO PLC,
INVESCO Group Services, Inc. ("Services") and AIM Management Group, Inc. ("AIM")
was signed under which AIM will be merged with Services. When this merger takes
effect, which is expected to occur in the first part of 1997, the Funds'
Investment Advisory, Sub-Advisory, Distribution, Administrative Services,
Transfer Agency and Rule 12b-1 Agreements (the "Agreements") will automatically
terminate. Consummation of this merger is conditioned, among other things, on
new Agreements, essentially identical to the existing Agreements, including the
provisions governing fees, being presented to and approved by, the Company's
Board of Directors, and where necessary, the Funds' shareholders prior to this
merger taking effect. The meeting of the Funds' shareholders to consider
approving the necessary new Agreements is expected to occur in early 1997. Fund
Management anticipates that the key personnel responsible for providing services
to the Funds will remain unchanged.
Pursuant to an agreement with the Company, INVESCO, 7800 E. Union Avenue,
Denver, Colorado, serves as the Funds' investment adviser. INVESCO is primarily
responsible for providing the Funds with various administrative services and
supervising the Funds' daily business affairs. These services are subject to
review by the Company's board of directors.
INVESCO is an indirect wholly-owned subsidiary of INVESCO PLC, a financial
holding company that, through its subsidiaries, engages in the business of
investment management on an international basis. INVESCO was established in 1932
and, as of August 31, 1996, managed 14 mutual funds, consisting of 39 separate
portfolios, with combined assets of approximately $12.8 billion on behalf of
over 827,000 shareholders.
Pursuant to agreements with INVESCO, INVESCO Trust serves as the
sub-adviser of the Industrial Income, High Yield, Utilities, Dynamics, Small
Company Growth, Health Sciences and Technology Funds and ICM serves as the
sub-adviser of the Total Return Fund. Although the Company is not a party to
either sub-advisory agreement, each agreement has been approved for each Fund
affected by that agreement by the Company's board of directors. In addition,
each agreement has been approved as to each affected Fund by the initial
shareholder of that Fund. The address of INVESCO Trust is 7800 E. Union Avenue,
Denver, Colorado and the address of ICM is 1315 Peachtree Street, N.E., Atlanta,
Georgia. Subject to the supervision of INVESCO and review by the Company's board
of directors, INVESCO Trust is primarily responsible for selecting and managing
the investments of the Industrial Income, Dynamics, High Yield, Small Company
Growth, Health Sciences, Technology and Utilities Funds and ICM is primarily
responsible for selecting and managing the investments of the Total Return Fund.
<PAGE>
INVESCO Trust, a trust company founded in 1969, is a wholly-owned
subsidiary of INVESCO that served as adviser or sub-adviser to 46 investment
portfolios as of August 31, 1996, including 27 portfolios in the INVESCO group.
These 46 portfolios had aggregate assets of approximately $12.0 billion as of
August 31, 1996. In addition, INVESCO Trust provides investment management
services to private clients, including employee benefit plans that may be
invested in a collective trust sponsored by INVESCO Trust.
The following persons serve as portfolio managers of the respective Funds:
Industrial Income Fund
- ----------------------
Charles P. Mayer Co-portfolio manager of the INVESCO
VIF - Industrial Income Portfolio
since 1993; co-portfolio manager of
INVESCO Industrial Income Fund;
portfolio manager (since 1993),
senior vice president (since 1994)
and vice president (1993 to 1994) of
INVESCO Trust; formerly (1984 to
1993), portfolio manager with
Westinghouse Pension; began
investment career in 1969; B.A., St.
Peter's College; M.B.A., St. John's
University.
Donovan J. (Jerry) Paul Co-portfolio manager of the INVESCO
VIF - Industrial Income Portfolio
since 1994; co-portfolio manager of
INVESCO Industrial Income Fund,
INVESCO Balanced Fund and INVESCO
Short-Term Bond Fund; portfolio
manager of INVESCO VIF - High Yield
Portfolio, INVESCO High Yield Fund
and INVESCO Select Income Fund;
portfolio manager and senior vice
president of INVESCO Trust since
1994; formerly, senior vice
president and director of fixed
income research (1989 to 1992) and
portfolio manager (1987 to 1992)
with Stein, Roe & Farnham Inc.; and
president (1993 to 1994) of Quixote
Investment Management, Inc.; began
investment career in 1976; B.B.A.
University of Iowa; M.B.A. University of
Northern Iowa; Chartered Financial Analyst;
Certified Public Accountant.
<PAGE>
Dynamics Fund
- -------------
Timothy J. Miller Portfolio Manager of the INVESCO VIF
- Dynamics Portfolio 199__; portfolio
manager for the INVESCO Dynamics Fund since
1993; senior vice president since 1995, vice
president (1993 to 1995) and portfolio
manager (1992 to present) of INVESCO Trust.
Formerly (1979 to 1992), analyst and
portfolio manager with Mississippi Valley
Advisors. B.S.B.A., St. Louis University;
M.B.A., University of Missouri; Chartered
Financial Analyst.
High Yield Fund
- ---------------
Donovan J. (Jerry) Paul Portfolio manager of the INVESCO VIF
- High Yield Portfolio since 1994;
portfolio manager of INVESCO High
Yield Fund and INVESCO Select Income
Fund; co-portfolio manager of INVESCO
Industrial Income Fund, INVESCO VIF -
Industrial Income Portfolio, INVESCO
Balanced Fund and INVESCO Short-Term
Bond Fund; portfolio manager and senior vice
president of INVESCO Trust since 1994;
formerly, senior vice president and director
of fixed income research (1989 to 1992) and
portfolio manager (1987 to 1992) with Stein,
Roe & Farnham Inc.; and president (1993 to
1994) of Quixote Investment Management,
Inc.; began investment career in 1976;
B.B.A. University of Northern Iowa; M.B.A.
University of Northern Iowa; Chartered
Financial Analyst; Certified Public
Accountant.
Small Company Growth and Health Sciences Funds
- ----------------------------------------------
John Schroer Portfolio manager of INVESCO VIF -
Small Company Growth Portfolio and
INVESCO VIF - Health Sciences
Portfolio since 1996, portfolio
manager of INVESCO Emerging Growth
Fund since 1995; portfolio manager
of the Health Sciences Portfolio of
INVESCO Strategic Portfolios since
1966 and co-portfolio manager of
that Portfolio from 1994 to 1996;
<PAGE>
vice president and portfolio manager of The
Global Health Sciences Fund since 1996;
assistant vice president with Trust Company
of the West from 1990 to 1992; M.B.A. and
B.S. from the University of Wisconsin-
Madison; Chartered Financial Analyst.
Technology Fund
- ---------------
Daniel B. Leonard Co-portfolio manager of INVESCO VIF
- Technology Portfolio since 199__;
co-portfolio manager (since 1996) and
formerly portfolio manager (1985-1996) of
the Technology Portfolio of INVESCO
Strategic Portfolios; portfolio manager of
Gold Portfolio of INVESCO Strategic
Portfolios since 1989; joined INVESCO in
1975, and was appointed successively
portfolio manager (1977-1983; 1985-1991) and
senior vice president (1975-1983; 1985-1991)
of INVESCO Funds Group, Inc., as well as
vice president (1977-1983) and senior vice
president (1991 to present) of INVESCO Trust
Company; B.A. from Washington & Lee
University; began his investment career in
1960.
Gerard F. Hallaren, Jr. Co-portfolio manager of INVESCO VIF
- Technology Portfolio since 199__;
co-portfolio manager since 1996 of
the Technology Portfolio of INVESCO
Strategic Portfolios; joined INVESCO
Trust Company in 1994, served as a
research analyst from 1994 to 1995
and became a vice president in 1995;
vice president and research analyst
with Hanifen Imhoff (1992 to 1994);
retail broker with Merrill Lynch
(1991); director of business
planning for MiniScribe Corporation
(1989 to 1990); and research analyst
with various firms beginning in
1978; B.A. from the University of
Massachusetts, Amherst; Chartered
Financial Analyst.
<PAGE>
Utilities Fund
- --------------
Jeffrey G. Morris Portfolio manager of the INVESCO VIF -
Utilities Portfolio since 1996; portfolio
manager of the INVESCO Strategic
Utilities Portfolio and Environmental
Services Portfolio; portfolio manager of
INVESCO Trust Company since 1995; joined
INVESCO in 1991 and served as a research
analyst from 1994 to 1995; formerly, loan
processor for Norwest Mortgage (1991);
B.S. Colorado State University; Chartered
Financial Analyst.
ICM is an indirect, wholly-owned subsidiary of INVESCO PLC that, as of
December 31, 1995, managed approximately $32 billion of tax-exempt accounts
(such as pension and profit-sharing funds for corporations and state and local
governments) and acted as investment adviser or sub-adviser to 17 investment
portfolios of eight investment companies (including the Company) with combined
assets of approximately $3.1 billion.
The following persons serve as portfolio managers of the Total Return Fund:
Edward C. Mitchell, Jr. Portfolio manager of the INVESCO VIF
- Total Return Portfolio since 1993;
portfolio manager of INVESCO Value
Trust Total Return Fund since 1987
and of the ^ Advisor Flex Portfolio
(formerly, the "EBI Flex Fund")
since 1988; president (1992 to
present), vice president (1979 to
1991) and director (1979 to present)
of ICM; began investment career in
1969; B.A., University of Virginia;
M.B.A., University of Colorado;
Chartered Financial Analyst;
Chartered Investment Counselor; past
president, Atlanta Society of
Financial Analysts.
David S. Griffin Co-portfolio manager of the INVESCO
VIF - Total Return Portfolio since
1993; co-portfolio manager of
INVESCO Value Trust Total Return
Fund and of the ^ Advisor Flex
Portfolio (formerly, the "EBI Flex
Fund") since 1993; portfolio manager
of ICM since 1991; mutual fund sales
representative with INVESCO
Services, Inc. (1986 to 1991); began
investment career in 1982; B.A.,
Ohio Wesleyan University; M.B.A.,
William and Mary; Chartered
Financial Analyst.
<PAGE>
Each Fund pays INVESCO a monthly advisory fee which is based upon a
percentage of the Fund's average net assets, determined daily. For the
Industrial Income and Total Return Funds, the advisory fees are each computed at
the annual rate of 0.75% on the first $500 million of the Fund's average net
assets; 0.65% on the next $500 million of the Fund's average net assets; and
0.55% on the Fund's average net assets in excess of $1 billion. For the Small
Company Growth, Health Sciences and Technology Funds, the advisory fees are each
computed at the rate of 0.75% on the first $350 million of the Fund's average
net assets; 0.65% on the next $350 million of the Fund's average net assets; and
0.55% on the Fund's average net assets in excess of $700 million. For the High
Yield and Utilities Funds, the advisory fees are each computed at the annual
rate of 0.60% on the first $500 million of the Fund's average net assets; 0.55%
on the next $500 million of the Fund's average net assets and 0.45% on the
Fund's average net assets in excess of $1 billion. For the Dynamics Fund, the
advisory fees are computed at the annual rate of 0.60% on the first $350 million
of the Fund's average net assets; 0.55% on the next $350 million; and 0.50% on
the Fund's average net assets in excess of $700 million. While the portion of
INVESCO's fees which is equal to 0.75% of average net assets is higher than
those generally charged by investment advisers to mutual funds, it is not higher
than those charged by many other investment advisers to funds with investment
objectives and asset levels comparable to those of the Industrial Income and
Total Return Funds. For the fiscal period ended December 31, 1995, the
investment advisory fees paid by the Industrial Income Fund, Total Return Fund,
High Yield Fund, and Utilities Fund were 0.75%, 0.75%, 0.60%, and 0.60%,
respectively, of each Fund's average net assets.
Out of the advisory fee received from each Fund, INVESCO pays that Fund's
sub-adviser a monthly subadvisory fee. No fee is paid by any Fund to its
sub-adviser. The sub-advisory fees for the Industrial Income and Total Return
Funds are each computed at the annual rate of 0.375% on the first $500 million
of the Fund's average net assets; 0.325% on the next $500 million of the Fund's
average net assets; and 0.275% on the Fund's average net assets in excess of $1
billion. The sub-advisory fees for the Dynamics, Small Company Growth, Health
Sciences and Technology Funds are each computed at the annual rate of 0.25% for
the first $200 million of the Fund's average net assets and 0.20% on the Fund's
average net assets in excess of $200 million. The sub-advisory fees for the High
Yield and Utilities Funds are each computed at the annual rate of 0.30% on the
first $500 million of the Fund's average net assets; 0.275% on the next $500
million of the Fund's average net assets; and 0.225% on the Fund's average net
assets in excess of $1 billion.
The Company also has entered into an Administrative Services Agreement with
INVESCO dated October 20, 1993 (the "Administrative Agreement"). Pursuant to the
Administrative Agreement, INVESCO performs certain administrative, recordkeeping
and internal accounting services, including without limitation, maintaining
general ledger and capital stock accounts, preparing a daily trial balance,
calculating net asset value daily, providing selected general ledger reports and
providing certain sub-accounting and recordkeeping services for shareholder
accounts. For such services, the Company pays INVESCO a fee consisting of a base
<PAGE>
fee of $10,000 per year for each Fund, plus an additional incremental fee
computed at the annual rate of 0.015% per year of the average net assets of each
Fund. INVESCO also is paid a fee by the Company for providing transfer agent
services. See "Additional Information."
Each Fund's expenses, which are accrued daily, are generally deducted from
its total income before dividends are paid. Total expenses of the Industrial
Income Fund, Total Return Fund, High Yield Fund, and Utilities Fund (prior to
expense offsets) for the fiscal year ended December 31, 1995, including
investment advisory fees (but excluding brokerage commissions, which are a cost
of acquiring securities), amounted to 1.03%, 1.01%, 0.97% and 1.80%,
respectively, of each Fund's average net assets. Certain Fund expenses are
absorbed voluntarily by INVESCO pursuant to a commitment to the Company. This
commitment may be changed following consultation with the Company's board of
directors. If such voluntary expense limits were not in effect, the total
operating expenses, as a percentage of each Fund's average net assets, of the
Industrial Income, Total Return, High Yield and Utilities Funds for the fiscal
year ended December 31, 1995, would have been 2.31%, 2.51%, 2.71%, and 57.13%,
respectively.
Fund Management permits investment and other personnel to purchase and sell
securities for their own accounts, subject to a compliance policy governing
personal investing. This policy requires Fund Management's personnel to conduct
their personal investment activities in a manner that Fund Management believes
is not detrimental to the Funds or Fund Management's other advisory clients. See
"Management" in the Statement of Additional Information for more detailed
information.
PURCHASES AND REDEMPTIONS
Investors may not purchase or redeem shares of the Funds directly, but only
through variable annuity and variable life insurance contracts offered through
the separate accounts of Participating Insurance Companies. A contract owner
should refer to the applicable Separate Account Prospectus for information on
how to purchase or surrender a contract, make partial withdrawals of contract
values, allocate contract values to one or more of the Funds, or change existing
allocations among investment alternatives, including the Funds. Shares of the
Funds are sold on a continuous basis to separate accounts of Participating
Insurance Companies by INVESCO, as the Funds' Distributor. Please note that the
Dynamics Fund, Small Company Growth Fund, Health Sciences Fund and Technology
Fund will not be available for purchase until January 2, 1997. No sales charge
is imposed upon the sale of shares of the Funds. Sales charges for the variable
annuity or variable life insurance contracts are described in the Separate
Account Prospectuses. INVESCO may from time to time make payments from its
revenues to Participating Insurance Companies, broker dealers and other
financial institutions that provide administrative services for the Funds.
<PAGE>
The Participating Insurance Companies place orders for their separate
accounts to purchase and redeem shares of each Fund based on, among other
things, the amount of premium payments to be invested and transfer and surrender
requests to be effected on that day pursuant to variable annuity and variable
life insurance contracts. Fund shares are purchased or redeemed at the net asset
value per share next computed after receipt of a purchase or redemption order in
good form. Payment for redemptions ordinarily will be made on behalf of the
Company and the relevant Fund by the Company's transfer agent (INVESCO) within
seven days after the redemption request is received. However, payment may be
postponed under unusual circumstances, such as when normal trading is not taking
place on the New York Stock Exchange or an emergency as defined by the
Securities and Exchange Commission exists.
Net asset value per share is computed for each Fund once each day that the
New York Stock Exchange is open, as of the close of regular trading on that
Exchange (usually 4:00 p.m., New York time), and also may be computed on other
days under certain circumstances. Net asset value per share for each Fund is
calculated by dividing the market value of the Fund's securities plus the value
of its other assets (including dividends and interest accrued but not
collected), less all liabilities (including accrued expenses), by the number of
outstanding shares of the Fund. If market quotations are not readily available,
a security will be valued at fair value as determined in good faith by the board
of directors. Debt securities with remaining maturities of 60 days or less at
the time of purchase will be valued at amortized cost, absent unusual
circumstances, so long as the Company's board of directors believes that such
value represents fair value.
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS
Taxes
The Internal Revenue Code of 1986, as amended (the "Code"), provides that
each investment portfolio of a series fund is to be treated as a separate
taxpayer. Accordingly, each Fund of the Company intends to continue to qualify
as a separate regulated investment company under Subchapter M of the Code.
Each Fund intends to comply with the diversification require ments of Code
Section 817(h). By meeting this and other require ments, the Participating
Insurance Companies, rather than the owners of variable annuity or variable life
insurance contracts, should be subject to tax on distributions received with
respect to Fund shares. For further information concerning federal income tax
consequences for the owners of variable annuity or variable life insurance
contracts, a contract owner should consult his or her Separate Account
Prospectus.
<PAGE>
As a regulated investment company, each Fund generally will not be subject
to tax on its ordinary income and net realized capital gains to the extent such
income and gains are distributed in conformity with applicable distribution
requirements under the Code to the separate accounts of the Participating
Insurance Companies which hold its shares. Distributions of income and the
excess of net short-term capital gain over net long-term capital loss will be
treated as ordinary income, and distributions of the excess of net long-term
capital gain over net short-term capital loss will be treated as long-term
capital gain by the Participating Insurance Companies. Participating Insurance
Companies should consult their own tax advisers concerning whether such
distributions are subject to federal income tax if they are retained as part of
contract reserves.
Dividends
In addition to any increase in the value of a Fund's shares which may
occur from increases in the value of the Fund's invest ments, the Fund may earn
income in the form of dividends and interest on its investments. Dividends paid
by each Fund will be based solely on the income earned by that Fund. The
Company's policy with respect to each Fund is to distribute substantially all of
this income, less expenses, to shareholders of that Fund. At the discretion of
the board of directors, distributions are customarily made annually to
shareholders of the Funds. Dividends are automatically reinvested in additional
shares of the Fund making the dividend distribution at its net asset value on
the ex- dividend date, unless an election is made on behalf of a separate
account to receive distributions in cash.
Capital Gains
Capital gains or losses are the result of a Fund selling its portfolio
securities at prices that are higher or lower than the prices paid by it to
purchase such securities. Total gains from such sales, less any losses from such
sales (including losses carried forward from prior years) represent net realized
capital gains. Each Fund distributes its net realized capital gains, if any, to
its shareholders at least annually, usually in December. Capital gains
distributions are automatically reinvested in additional shares of the Fund
making the distribution at its net asset value per share on the ex-dividend
date, unless an election is made on behalf of a separate account to receive
distributions in cash.
PERFORMANCE INFORMATION
From time to time, a Fund's total return and/or yield may be included in
advertisements, sales literature, shareholder reports or Separate Account
Prospectuses. A Fund's total return and yield include the effect of deducting
that Fund's expenses, but do not include charges and expenses attributable to a
particular variable annuity or variable life insurance contract. Because shares
<PAGE>
of the Funds can be purchased only through a variable annuity or variable
life insurance contract, the Funds' total return and yield data should be
reviewed along with the description of contract charges and expenses contained
in the applicable Separate Account Prospectus. Total return or yield for a Fund
must always be accompanied by, and reviewed with, comparable total return or
yield data for an associated variable annuity separate account, or data that
would permit evaluation of the magnitude of variable life insurance charges and
expenses not reflected in the Fund's total return or yield. Fund total return
and yield figures are based upon historical results and are not intended to
indicate future performance.
The "total return" of a Fund refers to the average annual rate of return
of an investment in the Fund. This figure is computed by calculating the
percentage change in value of an investment of $1,000, assuming reinvestment of
all income dividends and capital gain distributions, to the end of a specified
period. "Total return" quotations reflect the performance of the Fund and
include the effect of capital changes.
The total return performance for the Industrial Income Fund, Total Return
Fund, High Yield Fund and Utilities Fund for the fiscal period ended December
31, 1995, was 29.25%, 22.79%, 19.76% and 9.08%, respectively.
The yield of a Fund refers to the income generated by an investment in the
Fund over a 30-day or one-month period, and is computed by dividing the net
investment income per share earned during the period by the net asset value per
share at the end of the period, then adjusting the result to provide for
semi-annual compounding.
In conjunction with performance reports and/or analyses of shareholder
service for the Fund, comparisons of the Fund's performance for a given period
to the performance of recognized indices and for the same period may be made.
Such indices include ones provided by Dow Jones & Company, Standard & Poor's,
Lipper Analytical Services, Inc., Lehman Brothers, National Association of
Securities Dealers, Inc., Frank Russell Company, Value Line Investment Survey,
the American Stock Exchange, Morgan Stanley Capital International, Wilshire
Associates, the Financial Times- Stock Exchange, the New York Stock Exchange,
the Nikkei Stock Average and the Deutcher Aktienindex, all of which are
unmanaged market indicators. Such comparisons can be a useful measure of the
quality of the Funds' investment performance. However, because Fund performance
data does not reflect separate account and contract charges, Fund performance
data is not an appropriate measure of the performance of a contract owner's
investment in the variable annuity and variable life insurance contracts.
In addition, rankings, ratings, and comparisons of investment
performance and/or assessments of the quality of shareholder service appearing
<PAGE>
in publications such as Money, Forbes, Kiplinger's Personal Finance,
Financial World, Morningstar, and similar sources which utilize information
compiled (i) internally; (ii) by Lipper Analytical Services, Inc.; or (iii) by
other recognized analytical services, may be used in sales literature. The
Lipper Analytical Services, Inc. rankings and comparisons, which may be used by
the Funds in performance reports, will be drawn from the "Equity Income Funds"
variable insurance product grouping for the Industrial Income Fund, the
"Flexible Portfolio Funds" grouping for the Total Return Fund, the "High Current
Yield Funds" grouping for the High Yield Fund and the "Utility Funds" grouping
for the Utility Fund, the Capital Appreciation Funds grouping for the Dynamics
Fund, the Small Company Growth Funds grouping for the Small Company Growth Fund,
the Health/Biotechnology Funds grouping for the Health Sciences Fund and the
Science and Technology Funds grouping for the Technology Fund. In addition, the
broad-based Lipper variable insurance product groupings may be used for
comparison to any of the Funds. A more complete list of publications that may be
quoted in sales literature is contained under the caption "Performance" in the
Statement of Additional Information.
ADDITIONAL INFORMATION
Voting Rights
The Participating Insurance Companies and their separate accounts, rather
than individual contract owners, are the share holders of the Funds. However,
each Participating Insurance Company will vote shares held by its separate
accounts as required by law and interpretations thereof, as amended or changed
from time to time. In accordance with current law and interpretations thereof, a
Participating Insurance Company is required to request voting instructions from
its contract owners and must vote Fund shares held by each of its separate
accounts in proportion to the voting instructions received. Additional
information about voting procedures (including a discussion, where applicable,
of circumstances under which some Participating Insurance Companies may vote
Fund shares held by variable life insurance separate accounts other than in
accordance with contract owner instructions) is contained in the applicable
Separate Account Prospectuses.
All shares of the Funds have equal voting rights. When shareholders are
entitled to vote upon a matter, each shareholder is entitled to one vote for
each share owned and a corresponding fractional vote for each fractional share
owned. Voting with respect to certain matters, such as ratification of
independent accountants and the election of directors, will be by all Funds of
the Company voting together. In other cases, such as voting upon an investment
advisory contract, voting is on a Fund-by-Fund basis. To the extent permitted by
law, when not all Funds are affected by a matter to be voted upon, only
shareholders of the Fund or Funds affected by the matter will be entitled to
vote thereon. The Company is not generally required and does not expect to hold
<PAGE>
regular annual meetings of shareholders. However, the board of directors will
call special meetings of shareholders for the purpose, among other reasons, of
voting upon the question of removal of a director or directors when requested to
do so in writing by the holders of 10% or more of the outstanding shares of the
Company or as may be required by applicable law or the Company's Articles of
Incorporation. The Company will assist shareholders in communicating with other
shareholders as required by the Investment Company Act of 1940. Directors may be
removed by action of the holders of a majority or more of the outstanding shares
of the Company.
Shareholder Inquiries
Inquiries regarding the Funds may be directed to the Company at the
telephone number or mailing address set forth on the cover page of this
Prospectus or to a Participating Insurance Company.
Transfer and Disbursing Agent
INVESCO acts as registrar, transfer agent, and dividend disbursing agent
for the Company pursuant to a Transfer Agency Agreement that provides for an
annual fee of $5,000 per Fund.
Master/Feeder Option
The Company may in the future seek to achieve any Fund's investment
objective by investing all of that Fund's assets in another investment company
having the same investment objective and substantially the same investment
policies and restrictions as those applicable to that Fund. It is expected that
any such investment company would be managed by INVESCO in substantially the
same manner as the existing Fund. If permitted by applicable laws and policies
then in effect, any such investment may be made in the sole discretion of the
Company's board of directors without further approval of the Funds'
shareholders. However, Fund shareholders will be given at least 30 days prior
notice of any such investment. Such investment would be made only if the
Company's board of directors determines it to be in the best interests of a Fund
and its shareholders. In making that determination, the board will consider,
among other things, the benefits to shareholders and/or the opportunity to
reduce costs and achieve operational efficiencies. No assurance is given that
costs will be materially reduced if this option is implemented.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE STATEMENT OF
ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
PRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE COMPANY IN ANY
JURISDICTION IN WHICH SUCH AN OFFERING MAY NOT LAWFULLY BE MADE.
<PAGE>
APPENDIX
BOND RATINGS
The following is a description of Standard & Poor's Ratings
Services and Moody's Investors Service, Inc. ("Moody's") bond
rating categories:
Standard & Poor's Ratings Services Corporate Bond Ratings
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 than bonds in higher rated categories.
BBB - Bonds rated BBB are regarded as having an adequate capability to pay
principal and interest. Whereas they normally exhibit adequate 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 higher rated categories.
BB - Bonds rated BB have less near-term vulnerability to default than
other speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments.
B - Bonds rated B have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal.
CCC - Bonds rated CCC have a currently identifiable vulnerability to
default and are dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial, or economic conditions, they are not
likely to have the capacity to pay interest and repay principal.
Moody's Investors Service, Inc. Corporate Bond Ratings
Aaa - Bonds 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-edged." Interest payments are protected by a large or by an exceptionnally
<PAGE>
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 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 risk appear somewhat larger than in Aaa securities.
A - Bonds 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 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 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 rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any longer period of time may be small.
Caa - Bonds 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.
<PAGE>
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO VIF - Industrial Income Portfolio
INVESCO VIF - Health Sciences Portfolio
INVESCO VIF - Small Company Growth Portfolio
INVESCO VIF - Total Return Portfolio
INVESCO VIF - Technology Portfolio
INVESCO VIF - High Yield Portfolio
INVESCO VIF - Utilities Portfolio
INVESCO VIF - Dynamics Portfolio
Prospectus
December ^ 9, 1996
To receive additional information about the Funds,
call toll free: 1-800-525-8085
or write to: INVESCO Funds Group, Inc.
Post Office Box 173706
Denver, Colorado 80217-3706
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
December ^ 9, 1996
INVESCO VARIABLE INVESTMENT FUNDS, INC.
Address: Mailing Address:
7800 E. Union Avenue Post Office Box 173706
Denver, Colorado 80237 Denver, Colorado 80217-3706
Telephone:
In continental U.S., 1-800-525-8085
INVESCO Variable Investment Funds, Inc. (the "Company") was incorporated
under the laws of Maryland on August 19, 1993. The Company is an open-end
management investment company which offers shares of eight diversified
investment portfolios (the "Funds"): the INVESCO VIF - Industrial Income
Portfolio (the "Industrial Income Fund"), the INVESCO VIF - Total Return
Portfolio (the "Total Return Fund"), the INVESCO VIF - Dynamics Portfolio (the
"Dynamics Fund"), the INVESCO VIF - High Yield Portfolio (the "High Yield
Fund"), the INVESCO VIF - Small Company Growth Portfolio (the "Small Company
Growth Fund"), the INVESCO VIF - Health Sciences Portfolio (the "Health Sciences
Fund"), the INVESCO VIF - Technology Portfolio (the "Technology Fund") and the
INVESCO VIF -Utilities Portfolio (the "Utilities Fund"). Please note that the
Dynamics Fund, Small Company Growth Fund, Health Sciences Fund and Technology
Fund will not be available for purchase until January 2, 1997. Additional Funds
may be offered in the future. The Company's shares are not offered directly to
the public, but are sold exclusively to life insurance companies ("Participating
Insurance Companies") as a pooled funding vehicle for variable annuity and
variable life insurance contracts issued by separate accounts of Participating
Insurance Companies. The Funds have the following investment objectives:
Industrial Income Fund:
to seek the best possible current income while following sound investment
practices. Capital growth potential is an additional, but secondary,
consideration in the selection of portfolio securities. The Fund normally
invests at least 65% of its total assets in dividend-paying common stocks.
Up to 10% of the Fund's total assets may be invested in other
income-producing securities, such as corporate bonds. The Fund also has
the flexibility to invest in other types of securities.
<PAGE>
Total Return Fund:
to seek a high total return on investment through capital appreciation and
current income. The Total Return Fund seeks to achieve its investment
objective by investing in a combination ^ of equity securities (consisting
of common stocks and, to a lesser degree, securities convertible into
common stock) and fixed income securities.
Dynamics Fund:
to seek appreciation of capital through aggressive investment
policies. The Dynamics Fund invests primarily in common
stocks of U.S. companies traded on national securities
exchanges and over-the-counter.
High Yield Fund:
to seek a high a level of current income by investing substantially all of
its assets in lower rated bonds and other debt securities and in preferred
stock. The Fund pursues its investment objective through investment in a
variety of long-term, intermediate-term, and short-term bonds. Potential
capital appreciation is a factor in the selection of investments, but is
secondary to the Fund's primary objective.
Small Company Growth Fund:
to seek long-term capital growth. The Small Company Growth
Fund invests primarily in small-capitalization equity securi-
ties of U.S. companies traded "over-the-counter."
Health Sciences Fund:
to seek capital appreciation. The Health Sciences Fund normally invests at
least 80% of its total assets in equity securities of companies which
develop, produce, or distribute products or services related to
health-care.
Technology Fund:
to seek capital appreciation. The Technology Fund normally invests at
least 80% of its total assets in equity securities of companies in
technology-related industries such as computers, communications, video,
electronics, oceanography, office and factory automation, and robotics.
Utilities Fund:
to seek capital appreciation and income through investments primarily in
equity securities of companies principally engaged in the public utilities
business.
A prospectus for the Company dated December ^ 9, 1996 (the "Prospectus"),
which provides the basic information a variable annuity or variable life
insurance contract owner should know about the Company and the Funds before
allocating variable annuity or variable life insurance contract values to one or
more of the Funds, may be obtained without charge from INVESCO Funds Group,
Inc., Post Office Box 173706, Denver, Colorado 80217-3706 or by contacting a
Participating Insurance Company. This Statement of Additional Information is not
<PAGE>
a prospectus, but contains information in addition to and more detailed
than that set forth in the Prospectus. It is intended to provide additional
information regarding the activities and operations of the Funds and should be
read in conjunction with the Prospectus and with the prospectus and statement of
additional information for the applicable variable annuity or variable life
insurance contract.
Investment Adviser and Distributor: INVESCO Funds Group, Inc. ("INVESCO")
<PAGE>
TABLE OF CONTENTS
Page
INVESTMENT POLICIES........................................................ 5
INVESTMENT RESTRICTIONS.................................................... 11
MANAGEMENT................................................................. 16
Investment Adviser................................................... 16
Investment Sub-Advisers.............................................. 16
Advisory Agreement................................................... 18
Sub-Advisory Agreements.............................................. 20
Administrative Services Agreement.................................... 21
Transfer Agency Agreement............................................ 23
Officers and Directors of the Company................................ 23
HOW SHARES ARE VALUED...................................................... 30
PERFORMANCE................................................................ 31
Total Return Calculations............................................ 31
Yield Calculations................................................... 32
Comparison of Fund Performance....................................... 32
PORTFOLIO TURNOVER......................................................... 34
PORTFOLIO BROKERAGE........................................................ 34
REDEMPTIONS................................................................ 36
ADDITIONAL INFORMATION..................................................... 37
Common Stock......................................................... 37
Principal Shareholders............................................... 38
Independent Accountants.............................................. 40
Custodian.................................................................. 40
Transfer Agent....................................................... 40
Reports to Shareholders.............................................. 40
Legal Counsel........................................................ 40
Prospectus........................................................... 41
Registration Statement............................................... 41
APPENDIX A................................................................. 42
<PAGE>
INVESTMENT POLICIES
Reference is made to the section entitled "Investment Objectives and
Policies" in the Prospectus for a discussion of the investment objectives and
policies of the Funds. In addition, set forth below is further information
relating to the Funds. Portfolio management is provided to each Fund by its
sub-adviser (referred to collectively with INVESCO as "Fund Management").
Loans of Portfolio Securities
As described in the section entitled "Risk Factors" in the Prospectus,
each Fund may lend its portfolio securities to brokers, dealers, and other
financial institutions, provided that such loans are callable at any time by the
Funds and are at all times secured by collateral consisting of cash, cash
equivalents, high-quality short-term government securities or irrevocable
letters of credit, or any combination thereof, equal to at least the market
value, determined daily, of the loaned securities. The advantage of such loans
is that the Funds continue to earn income on the loaned securities, while at the
same time receiving interest from the borrower of the securities. Loans will be
made only to firms deemed by INVESCO or the applicable Fund's Sub-Adviser (under
procedures established by the Company's board of directors) to be creditworthy,
and when the amount of interest to be received justifies the inherent risks. A
loan may be terminated by the borrower on one business day's notice, or by the
Fund at any time. If at any time the borrower fails to maintain the required
amount of collateral, the Fund will require the deposit of additional collateral
not later than the business day following the day on which a collateral
deficiency occurs or the collateral appears inadequate. If the deficiency is not
remedied by the end of that period, the Fund will use the collateral to replace
the securities while holding the borrower liable for any excess of replacement
cost over collateral. Upon termination of the loan, the borrower is required to
return the securities to the Fund. Any gain or loss during the loan period would
inure to the Fund.
While voting rights may pass with the loaned securities, if a material
event (e.g., proposed merger, sale of assets, or liquidation) is to occur
affecting an investment on loan, the loan must be called and the securities
voted. Loans of securities made by the Fund will comply with all other
applicable regulatory requirements, including the rules of the New York Stock
Exchange and the requirements of the Investment Company Act of 1940, as amended
(the "1940 Act"), and rules thereunder.
Futures, Options on Futures and Options on Securities
As discussed in the section entitled "Risk Factors" in the Prospectus, the
Funds may enter into futures contracts, and purchase and sell ("write") options
to buy or sell futures contracts and other securities. These instruments are
sometimes referred to as "derivatives." The Funds will comply with and adhere to
<PAGE>
all limitations in the manner and extent to which they effect transactions
in futures and options on such futures currently imposed by the rules and policy
guidelines of the Commodity Futures Trading Commission (the "CFTC") as
conditions for exemption of a mutual fund, or investment advisers thereto, from
registration as a commodity pool operator. Under those restrictions, a Fund will
not, as to any positions, whether long, short or a combination thereof, enter
into futures and options thereon for which the aggregate initial margins and
premiums exceed 5% of the fair market value of the Fund's total assets after
taking into account unrealized profits and losses on options it has entered
into. In the case of an option that is "in-the-money" (as defined in the
Commodities Exchange Act (the "CEA")), the in-the-money amount may be excluded
in computing such 5%. (In general a call option on a future is "in-the-money" if
the value of the future exceeds the exercise ("strike") price of the call; a put
option on a future is "in-the-money" if the value of the future which is the
subject of the put is exceeded by the strike price of the put.) The Funds may
use futures and options thereon solely for bona fide hedging or for other
non-speculative purposes within the meaning and intent of the applicable
provisions of the CEA. As to long positions which are used as part of the Funds'
portfolio strategies and are incidental to their activities in the underlying
cash market, the "underlying commodity value" of the Funds' futures and options
thereon must not exceed the sum of (i) cash set aside in an identifiable manner,
or short-term U.S. debt obligations or other dollar-denominated high-quality,
short-term money instruments so set aside, plus sums deposited on margin; (ii)
cash proceeds from existing investments due in 30 days; and (iii) accrued
profits held at the futures commission merchant. The "underlying commodity
value" of a future is computed by multiplying the size of the future by the
daily settlement price of the future. For an option on a future, that value is
the underlying commodity value of the future underlying the option.
Unlike when a Fund purchases or sells a security, no price is paid or
received by a Fund upon the purchase or sale of a futures contract. Instead, the
Fund will be required to deposit in a segregated asset account with the broker
an amount of cash or qualifying securities (currently U.S. Treasury bills),
currently in a minimum amount of $15,000. This is called "initial margin." Such
initial margin is in the nature of a performance bond or good faith deposit on
the contract. However, since losses on open contracts are required to be
reflected in cash in the form of variation margin payments, the Fund may be
required to make additional payments during the term of the contracts to its
broker. Such payments would be required, for example, where, during the term of
an interest rate futures contract purchased by the Fund, there was a general
increase in interest rates, thereby making the Fund's portfolio securities less
valuable. In all instances involving the purchase of financial futures contracts
by a Fund, an amount of cash together with such other securities as permitted by
applicable regulatory authorities to be utilized for such purpose, at least
equal to the market value of the futures contracts, will be deposited in a
<PAGE>
segregated account with the Funds' custodian to collateralize the position.
At any time prior to the expiration of a futures contract, the Fund may elect to
close its position by taking an opposite position which will operate to
terminate the Fund's position in the futures contract. For a more complete
discussion of the risks involved in interest rate futures and options on
interest rate futures and other debt securities, refer to Appendix A
("Description of Futures and Options Contracts").
Where futures are purchased to hedge against a possible increase in the
price of a security before a Fund is able in an orderly fashion to invest in the
security, it is possible that the market may decline instead. If the Fund, as a
result, concluded not to make the planned investment at that time because of
concern as to possible further market decline or for other reasons, the Fund
would realize a loss on the futures contract that is not offset by a reduction
in the price of securities purchased.
In addition to the possibility that there may be an imperfect correlation
or no correlation at all between movements in the futures and the portion of the
portfolio being hedged, the price of futures may not correlate perfectly with
movements in interest rates or exchange rates due to certain market distortions.
All participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between interest rates
or exchange rates and the value of a future. Moreover, the deposit requirements
in the futures market are less onerous than margin requirements in the
securities market and may therefore cause increased participation by speculators
in the futures market. Such increased participation also may cause temporary
price distortions. Due to the possibility of price distortion in the futures
market and because of the imperfect correlation between movements in interest
rates or exchange rates and movements in the prices of futures contracts, the
value of futures contracts as a hedging device may be reduced.
In addition, if a Fund has insufficient available cash, it may at times
have to sell securities to meet variation margin requirements. Such sales may
have to be effected at a time when it may be disadvantageous to do so.
Options on Futures Contracts
The Funds may buy and write options on futures contracts for hedging
purposes. The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the price of the futures
contract upon which it is based or the price of the underlying instrument,
ownership of the option may or may not be less risky than ownership of the
futures contract or the underlying instrument. As with the purchase of futures
<PAGE>
contracts, when a Fund is not fully invested it may buy a call option on a
futures contract to hedge against a market advance.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security or foreign currency which is
deliverable under, or the index comprising, the futures contract. If the futures
price at the expiration of the option is below the exercise price, a Fund will
retain the full amount of the option premium, which provides a partial hedge
against any decline that may have occurred in the Fund's portfolio holdings. The
writing of a put option on a futures contract constitutes a partial hedge
against increasing prices of the security or foreign currency which is
deliverable under, or of the index comprising, the futures contract. If the
futures price at expiration of the option is higher than the exercise price, the
Fund will retain the full amount of the option premium which provides a partial
hedge against any increase in the price of securities which the Fund is
considering buying. If a call or put option the Fund has written is exercised,
the Fund will incur a loss which will be reduced by the amount of the premium it
received. Depending on the degree of correlation between change in the value of
its portfolio securities and changes in the value of the futures positions, the
Fund's losses from existing options on futures may to some extent be reduced or
increased by changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, a Fund may buy a put option on a futures contract to hedge the Fund's
portfolio against the risk of falling prices.
The amount of risk a Fund assumes when it buys an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the options bought.
Forward Foreign Currency Contracts
The Funds may enter into forward currency contacts to purchase or sell
foreign currencies (i.e., non-U.S. currencies) as a hedge against possible
variations in foreign exchange rates. These instruments are sometimes referred
to as "derivatives." A forward foreign currency exchange contract is an
agreement between the contracting parties to exchange an amount of currency at
some future time at an agreed upon rate. The rate can be higher or lower than
the spot rate between the currencies that are the subject of the contract. A
forward contract generally has no deposit requirement, and such transactions do
not involve commissions. By entering into a forward contract for the purchase or
sale of the amount of foreign currency invested in a foreign security
transaction, a Fund can hedge against possible variations in the value of the
<PAGE>
dollar versus the subject currency either between the date the foreign
security is purchased or sold and the date on which payment is made or received
or during the time the Fund holds the foreign security. Hedging against a
decline in the value of a currency in the foregoing manner does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Furthermore, such hedging transactions
preclude the opportunity for gain if the value of the hedged currency should
rise. The Funds will not speculate in forward currency contracts. Although the
Funds have not adopted any limitations on their ability to use forward contracts
as a hedge against fluctuations in foreign exchange rates, the Funds do not
attempt to hedge all of their non-U.S. portfolio positions and will enter into
such transactions only to the extent, if any, deemed appropriate by Fund
Management. The Funds will not enter into forward contracts for a term of more
than one year. Forward contracts may from time to time be considered illiquid,
in which case they would be subject to the Funds' limitation on investing in
illiquid securities, discussed in the Prospectus.
Restricted/144A Securities
In recent years, a large institutional market has developed for certain
securities that are not registered under the Securities Act of 1933, as amended
(the "1933 Act"). Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend on an efficient
institutional market in which such unregistered securities can readily be resold
or on an issuer's ability to honor a demand for repayment. Therefore, the fact
that there are contractual or legal restrictions on resale to the general public
or certain institutions is not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
that might develop as a result of Rule 144A could provide both readily
ascertainable values for restricted securities and the ability to liquidate an
investment in order to satisfy share redemption orders. An insufficient number
of qualified institutional buyers interested in purchasing Rule 144A-eligible
securities held by a Fund, however, could affect adversely the marketability of
such portfolio securities and the Fund might be unable to dispose of such
securities promptly or at reasonable prices.
When-Issued and Delayed Delivery Securities
The Funds may purchase and sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities (normally, debt obligations of issuers eligible for investment by the
Funds) are purchased or sold by a Fund with payment and delivery taking place in
the future in order to secure what is considered to be an advantageous price and
<PAGE>
yield. However, the yield on a comparable security available when delivery
takes place may vary from the yield on the security at the time that the
when-issued or delayed delivery transaction was entered into. When a Fund
engages in when-issued and delayed delivery transactions, it relies on the
seller or buyer, as the case may be, to consummate the sale. Failure to do so
may result in the Fund missing the opportunity of obtaining a price or yield
considered to be advantageous. When-issued and delayed delivery transactions may
generally be expected to settle within one month from the date the transactions
are entered into, but in no event later than 90 days. However, no payment or
delivery is made by the Fund until it receives delivery or payment from the
other party to the transaction.
To the extent that a Fund remains substantially fully invested at the same
time that it has purchased when-issued securities, as it would normally expect
to do, there may be greater fluctuations in its net assets than if the Fund set
aside cash to satisfy its purchase commitments.
When a Fund purchases securities on a when-issued basis, it will maintain
in a segregated account cash, U.S. government securities or other high-grade
debt obligations readily convertible into cash having an aggregate value equal
to the amount of such purchase commitments, until payment is made. If necessary,
additional assets will be placed in the account daily so that the value of the
account will equal or exceed the amount of the Fund's purchase commitments.
U.S. Government Obligations
Each Fund may, from time to time, purchase U.S. government obligations.
These securities consist of treasury bills, treasury notes, and treasury bonds,
which differ only in their interest rates, maturities, and dates of issuance.
Treasury bills have a maturity of one year or less. Treasury notes generally
have a maturity of one to ten years, and treasury bonds generally have
maturities of more than ten years. U.S. government obligations also include
securities issued or guaranteed by agencies or instrumentalities of the U.S.
government.
Some obligations of United States government agencies, which are
established under the authority of an act of Congress, such as Government
National Mortgage Association (GNMA) participation certificates, are supported
by the full faith and credit of the United States Treasury. GNMA certificates
are mortgage-backed 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 either insured by the Federal
Housing Administration or guaranteed by the Veterans Administration. A "pool" or
group of such mortgages is assembled and, after being approved by GNMA, is
offered to investors through securities dealers. Once approved by GNMA, the
timely payment of interest and principal on each mortgage is guaranteed by GNMA
<PAGE>
and backed by the full faith and credit of the United States government.
The market value of GNMA certificates is not guaranteed. GNMA certificates
differ from bonds in that principal is paid back monthly by the borrower over
the term of the loan rather than returned in a lump sum at maturity. GNMA
certificates are called "pass-through" securities because both interest and
principal payments (including prepayments) are passed through to the holder of
the certificate. Upon receipt, principal payments will be used by each Fund to
purchase additional securities under its investment objective and investment
policies.
Other United States government obligations, such as securities of the
Federal Home Loan Banks, are supported by the right of the issuer to borrow from
the Treasury to repay its obligations. Still others, such as bonds issued by the
Federal National Mortgage Association, a federally chartered private
corporation, are supported only by the credit of the instrumentality.
INVESTMENT RESTRICTIONS
As described in the section of the Prospectus entitled "Investment
Restrictions," the Funds operate under certain investment restrictions that are
fundamental and may not be changed with respect to a particular Fund without the
prior approval of the holders of a majority of the outstanding voting securities
of that Fund, as defined in the 1940 Act. For purposes of the following
limitations, all percentage limitations apply immediately after a purchase or
initial investment. Any subsequent change in a particular percentage resulting
from fluctuations in value does not require elimination of any security from a
Fund.
Each Fund may not:
1. With respect to seventy-five percent (75%) of its total
assets, purchase the securities of any one issuer (except
cash items and "government securities" as defined under
the 1940 Act), if the purchase would cause the Fund to
have more than 5% of the value of its total assets
invested in the securities of such issuer or to own more
than 10% of the outstanding voting securities of such
issuer;
2. Borrow money, except that the Fund may borrow money for
temporary or emergency purposes (not for leveraging or
investment) and may enter into reverse repurchase
agreements in an aggregate amount not exceeding 33 1/3%
of the value of its total assets (including the amount
borrowed) less liabilities (other than borrowings). Any
borrowings that come to exceed 33 1/3% of the value of
the Fund's total assets by reason of a decline in net
assets will be reduced within three business days to the
extent necessary to comply with the 33 1/3% limitation.
This restriction shall not prohibit deposits of assets to
margin or guarantee positions in futures, options, swaps or forward
<PAGE>
contracts, or the segregation of assets in connection with such
contracts.
3. Invest more than 25% of the value of its total assets in any
particular industry (other than government securities), except that:
(i) the Utilities Fund may invest more than 25% of the value of its
total assets in public utilities industries; and (ii) the Health
Sciences Fund may invest more than 25% of the value of its total
assets in one or more industries relating to health care.
4. Invest directly in real estate or interests in real estate; however,
the Fund may own debt or equity securities issued by companies
engaged in those businesses.
5. Purchase or sell physical commodities other than foreign currencies
unless acquired as a result of ownership of securities (but this
shall not prevent the Fund from purchasing or selling options,
futures, swaps and forward contracts or from investing in securities
or other instruments backed by physical commodities).
6. Lend any security or make any other loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties (but this
limitation does not apply to purchases of commercial paper, debt
securities or to repurchase agreements.)
7. Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of portfolio securities of the Fund.
Each Fund may, notwithstanding any other investment policy or limitation
(whether or not fundamental), invest all of its assets in the securities of a
single open-end management investment company with substantially the same
fundamental investment objectives, policies and limitations as the Fund.
Furthermore, the board of directors has adopted additional investment
restrictions for each Fund. These restrictions are operating policies of each
Fund and may be changed by the board of directors without shareholder approval.
The additional investment restrictions adopted by the board of directors to date
include the following:
(a) The Fund's investments in warrants, valued at the lower
of cost or market, may not exceed 5% of the value of its
net assets. Included within that amount, but not to
exceed 2% of the value of the Fund's net assets, may be
warrants that are not listed on the New York or American
Stock Exchanges. Warrants acquired by the Fund in units
or attached to securities shall be deemed to be without
value.
<PAGE>
(b) The Fund will not (i) enter into any futures contracts or
options on futures contracts if immediately thereafter
the aggregate margin deposits on all outstanding futures
contracts positions held by the Fund and premiums paid on
outstanding options on futures contracts, after taking
into account unrealized profits and losses, would exceed
5% of the market value of the total assets of the Fund,
or (ii) enter into any futures contracts if the aggregate
net amount of the Fund's commitments under outstanding
futures contracts positions of the Fund would exceed the
market value of the total assets of the Fund.
(c) The Fund does not currently intend to sell securities short, unless
it owns or has the right to obtain securi ties equivalent in kind
and amount to the securities sold short without the payment of any
additional consideration therefor, and provided that transactions in
options, swaps and forward futures contracts are not deemed to
constitute selling securities short.
(d) The Fund does not currently intend to purchase securities on margin,
except that the Fund may obtain such short-term credits as are
necessary for the clearance of transactions, and provided that
margin payments and other deposits in connection with transactions
in options, futures, swaps and forward contracts shall not be deemed
to constitute purchasing securities on margin.
(e) The Fund does not currently intend to (i) purchase
securities of closed end investment companies, except in
the open market where no commission except the ordinary
broker's commission is paid, or (ii) purchase or retain
securities issued by other open-end investment companies.
Limitations (i) and (ii) do not apply to money market
funds or to securities received as dividends, through
offers of exchange, or as a result of a reorganization,
consolidation, or merger. If the Fund invests in a money
market fund, the Fund's investment adviser will reduce
its advisory fee by the amount of any investment advisory
and administrative services fees paid to the investment
manager of the money market fund.
(f) The Fund may not mortgage or pledge any securities owned
or held by the Fund in amounts that exceed, in the
aggregate, 15% of the Fund's net asset value, provided
that this limitation does not apply to reverse repurchase
agreements or in the case of assets deposited to margin
or guarantee positions in futures, options, swaps or
forward contracts or placed in a segregated account in
connection with such contracts.
(g) The Fund does not currently intend to purchase securities
of any issuer (other than U.S. government agencies and
<PAGE>
instrumentalities or instruments guaranteed by an entity with a
record of more than three years' continuous operation, including
that of predecessors) with a record of less than three years'
continuous operation (including that of predecessors) if such
purchase would cause the Fund's investments in all such issuers
to exceed 5% of the Fund's total assets taken at market value
at the time of such purchase.
(h) The Fund does not currently intend to invest directly in oil, gas,
or other mineral development or exploration programs or leases;
however, the Fund may own debt or equity securities of companies
engaged in those businesses.
(i) The Fund does not currently intend to purchase any
security or enter into a repurchase agreement if, as a
result, more than 15% of its net assets would be invested
in repurchase agreements not entitling the holder to
payment of principal and interest within seven days and
in securities that are illiquid by virtue of legal or
contractual restrictions on resale or the absence of a
readily available market. The board of directors, or the
Fund's investment adviser acting pursuant to authority
delegated by the board of directors, may determine that
a readily available market exists for securities eligible
for resale pursuant to Rule 144A under the Securities Act
of 1933, or any successor to such rule, and therefore
that such securities are not subject to the foregoing
limitation.
(j) The Fund may not invest in companies for the purpose of exercising
control or management, except to the extent that exercise by the
Fund of its rights under agreements related to portfolio securities
would be deemed to constitute such control.
(k) The Fund may not invest more than 25% of the value of its total
assets directly in foreign securities. Securities of Canadian
issuers and securities purchased by means of American Depository
Receipts ("ADRs") are not subject to this 25% limitation.
In applying the industry concentration investment restriction (no. 3,
above) the Funds use an industry classification system based on the O'Neil
Database published by William O'Neil & Co., Inc.
With respect to investment restriction (i) above, the board of directors
has delegated to Fund Management the authority to determine whether a liquid
market exists for securities eligible for resale pursuant to Rule 144A under the
1933 Act, or any successor to such rule and that such securities are not subject
to this restriction. Under guidelines established by the board of directors,
Fund Management will consider the following factors, among others, in making
<PAGE>
this determination: (1) the unregistered nature of a Rule 144A security,
(2) the frequency of trades and quotes for the security; (3) the number of
dealers willing to purchase or sell the security and the number of other
potential purchasers; (4) dealer undertakings to make a market in the security;
and (5) the nature of the security and the nature of marketplace trades (e.g.,
the time needed to dispose of the security, the method of soliciting offers and
the mechanics of transfer).
In order to enable California investors to allocate variable annuity or
variable life insurance contract values to one or more of the Funds, the Company
has committed to comply with the following guidelines: (i) the borrowing limits
for any Fund are (a) 10% of net asset value when borrowing for any general
purpose and (b) 25% of net asset value when borrowing as a temporary measure to
facilitate redemptions (for purposes of this clause, the net asset value of a
Fund is the market value of all investments or assets owned less outstanding
liabilities of the Fund at the time that any new or additional borrowing is
undertaken); and (ii) if a Fund invests in foreign companies, the foreign
country diversification guidelines to be followed by the Fund are as follows:
(a) The Fund will be invested in a minimum of five different foreign
countries at all times. However, this minimum is reduced to four
when foreign country investments comprise less than 80% of the
Fund's net asset value, to three when less than 60% of such value,
to two when less than 40% and to one when less than 20%.
(b) Except as set forth in items (c) and (d) below, the Fund will have
no more than 20% of its net asset value invested in securities of
issuers located in any one country.
(c) The Fund may have an additional 15% of its net asset
value invested in securities of issuers located in any
one of the following countries: Australia, Canada,
France, Japan, the United Kingdom, or Germany.
(d) The Fund's investments in United States issuers are not subject to
the foreign country diversification guidelines.
State insurance laws and regulations may impose additional limitations on
lending securities and the use of options, futures and other derivative
instruments.
MANAGEMENT
Investment Adviser
INVESCO Funds Group, Inc., a Delaware corporation ("INVESCO"), is employed
as the Company's investment adviser. INVESCO was established in 1932 and also
<PAGE>
serves as an investment adviser to INVESCO Diversified Funds, Inc., INVESCO
Dynamics Fund, Inc., INVESCO Emerging Opportunity Funds, Inc., INVESCO Growth
Fund, Inc., INVESCO Income Funds, Inc., INVESCO Industrial Income Fund, Inc.,
INVESCO International Funds, Inc., INVESCO Money Market Funds, Inc., INVESCO
Multiple Asset Funds, Inc., INVESCO Specialty Funds, Inc., INVESCO Strategic
Portfolios, Inc., INVESCO Tax-Free Income Funds, Inc., and INVESCO Value Trust.
Investment Sub-Advisers
Pursuant to agreements with INVESCO, INVESCO Capital Manage ment, Inc.
("ICM") serves as sub-adviser to the Total Return Fund and INVESCO Trust Company
("INVESCO Trust") serves as the sub- adviser to the others Funds. INVESCO Trust,
a trust company founded in 1969, is a wholly-owned subsidiary of INVESCO that,
as of August 31, 1996, managed 46 other investment portfolios, including 27
portfolios in the INVESCO group.
ICM is an indirect wholly-owned subsidiary of INVESCO PLC whose business
is the management of institutional investment portfolios, consisting primarily
of discretionary employee benefit plans for corporations and state and local
governments, and endowment funds. In addition, ICM serves as investment adviser
or sub-adviser to 19 investment portfolios of 4 investment companies (including
the Company). ICM is the sole shareholder of INVESCO Services, Inc., a
registered broker-dealer whose primary business is the distribution of shares of
two registered investment companies.
INVESCO is an indirect, wholly-owned subsidiary of INVESCO PLC, a
publicly-traded holding company organized in 1935. Through subsidiaries located
in London, Denver, Atlanta, Boston, Louis- ville, Dallas, Tokyo, Hong Kong, and
the Channel Islands, INVESCO PLC provides investment services around the world.
INVESCO was acquired by INVESCO PLC in 1982 and as of August 31, 1996, managed
14 mutual funds, consisting of 39 separate portfolios, on behalf of over 827,000
shareholders. INVESCO PLC's other North American subsidiaries include the
following:
--INVESCO Capital Management, Inc. of Atlanta, Georgia,
manages institutional investment portfolios, consisting primarily
of discretionary employee benefit plans for corporations and state
and local governments, and endowment funds. INVESCO Capital
Management, Inc. is the sole shareholder of INVESCO Services, Inc.,
a registered broker-dealer whose primary business is the distribu-
tion of shares of two registered investment companies.
--INVESCO Management & Research, Inc. of Boston, Massachu-
setts, primarily manages pension and endowment accounts.
--PRIMCO Capital Management, Inc. of Louisville, Kentucky,
specializes in managing stable return investments, principally on
behalf of Section 401(k) retirement plans.
<PAGE>
--INVESCO Realty Advisors of Dallas, Texas, is responsible for providing
advisory services in the U.S. real estate markets for INVESCO PLC's clients
worldwide. Clients include corporate plans, public pension funds as well as
endowment and foundation accounts.
The corporate headquarters of INVESCO PLC are located at 11 Devonshire
Square, London, EC2M 4YR, England.
As indicated in the Prospectus, INVESCO permits investment and other
personnel to purchase and sell securities for their own accounts in accordance
with a compliance policy governing personal investing by directors, officers and
employees of INVESCO and its North American affiliates. The policy requires
officers, inside directors, investment and other personnel of INVESCO and its
North American affiliates to pre-clear all transactions in securities not
otherwise exempt under the policy. Requests for trading authority will be denied
when, among other reasons, the proposed personal transaction would be contrary
to the provisions of the policy or would be deemed to adversely affect any
transaction then known to be under consideration for or to have been effected on
behalf of any client account, including the Funds.
In addition to the pre-clearance requirement described above, the policy
subjects officers, inside directors, investment and other personnel of INVESCO
and its North American affiliates to various trading restrictions and reporting
obligations. All reportable transactions are reviewed for compliance with the
policy. The provisions of this policy are administered by and subject to
exceptions authorized by INVESCO, INVESCO Trust and ICM.
Advisory Agreement
INVESCO serves as investment adviser pursuant to an investment advisory
agreement (the "Agreement") with the Company which was approved on October 20,
1993, and amended on ^ December 9, 1996, in each case by a vote cast in person
by a majority of the directors of the Company, including a majority of the
directors who are not "interested persons" of the Company, INVESCO, INVESCO
Trust or ICM (the "Independent Directors") at a meeting called for such purpose.
The initial shareholder of the Company approved the Agreement, on December 17,
1993 for an initial term expiring April 30, 1995. The Agreement has been
continued by action of the board of directors through April 30, 1997.
Thereafter, the Agreement may be continued from year to year as to each Fund as
long as each such continuance is specifically approved at least annually by the
board of directors of the Company, or by a vote of the holders of a majority, as
defined in the 1940 Act, of the outstanding shares of the Fund. Any such
continuance also must be approved by vote of a majority of the Independent
Directors, cast in person at a meeting called for the purpose of voting on such
continuance. The Agreement may be terminated at any time without penalty by
either party upon sixty (60) days' written notice and terminates automatically
in the event of an assignment to the extent required by the 1940 Act and the
<PAGE>
rules thereunder. Shareholder approval of any continuance of the Agreement,
or of the sub-advisory agreements discussed below, shall be effective with
respect to any Fund if a majority of the outstanding voting securities of the
series of shares of that Fund vote to approve the continuance, notwithstand ing
that the continuance may not have been approved by a majority of the outstanding
voting securities of (i) any other Fund affected by the Agreement or (ii) all of
the Funds.
The Agreement provides that INVESCO shall manage the invest ment
portfolios of the Funds in conformity with the Funds' investment objectives and
policies (either directly or by delega tion to a sub-adviser, which may be a
party affiliated with INVESCO). Further, INVESCO shall perform all
administrative, internal accounting (including computation of net asset value),
clerical, statistical, secretarial and all other services necessary or
incidental to the administration of the affairs of the Funds excluding, however,
those services that are the subject of separate agreement between the Company
and INVESCO or any affiliate thereof, including the distribution and sale of
Fund shares and provision of transfer agency, dividend disbursing agency, and
registrar services, and services furnished under an Administrative Services
Agreement with INVESCO discussed below. Services provided under the Agreement
include, but are not limited to: supplying the Company with officers, clerical
staff and other employees, if any, who are necessary in connection with the
Funds' operations; furnishing office space, facilities, equipment, and supplies;
providing personnel and facilities required to respond to inquiries related to
shareholder accounts; conducting periodic compliance reviews of the Funds'
operations; preparation and review of required documents, reports and filings by
INVESCO's in-house legal and accounting staff (including the Prospectus,
Statement of Additional Information, proxy statements, shareholder reports, tax
returns, reports to the SEC, and other corporate documents of the Funds), except
insofar as the assistance of independent accountants or attorneys is necessary
or desirable; supplying basic telephone service and other utilities; and
preparing and maintaining certain of the books and records required to be
prepared and maintained by the Funds under the 1940 Act. Expenses not assumed by
INVESCO are borne by the Funds.
As full compensation for its advisory services to the Company, INVESCO
receives a monthly fee. The fee is based upon a percentage of each Fund's
average net assets determined daily. For the Industrial Income and Total Return
Funds, the advisory fees are each computed at the annual rate of 0.75% of the
first $500 million of the Fund's average net assets; 0.65% of the next $500
million of the Fund's average net assets; and 0.55% of the Fund's average net
assets in excess of $1 billion. For the High Yield and Utilities Funds, the
advisory fees are each computed at the annual rate of 0.60% of the first $500
million of the Fund's average net assets, 0.55% of the next $500 million of the
Fund's average net assets and 0.45% of the Fund's average net assets in excess
of $1 billion. For the Small Company Growth, Health Sciences and Technology
Funds, the advisory fees are each computed at the rate of 0.75% on the first
<PAGE>
$350 million of the Fund's average net assets; 0.65% on the next $350
million of the Fund's average net assets; and 0.55% on the Fund's average net
assets in excess of $700 million. For the Dynamics Fund, the advisory fees are
computed at the annual rate of 0.60% on the first $350 million of the Fund's
average net assets; 0.55% on the next $350 million; and 0.50% on the Fund's
average net assets in excess of $700 million.
Any amendment of the Agreement requires approval of a majority of the
Company's board of directors, including a majority of the Independent Directors,
by votes cast in person at a meeting called for such purpose and (other than
amendments that can become effective without shareholder approval under
applicable law) also requires approval of a majority of the outstanding voting
securities of any Fund affected by such amendment.
Sub-Advisory Agreements
ICM serves as sub-adviser to the Total Return Fund pursuant to a
sub-advisory agreement with INVESCO (the "ICM Sub-Agreement," and INVESCO Trust
serves as sub-adviser to the other Funds pursuant to a sub-advisory agreement
with INVESCO (the "INVESCO Trust Sub-Agreement,") collectively with the ICM
Sub-Agreement, the "Sub-Agreements"). Each Sub-Agreement initially was approved
on October 20, 1993, and the INVESCO Trust Sub-Agreement was amended on ^
December 9, 1996, by a majority of the Independent Directors by votes cast in
person at a meeting called for such purpose. The initial shareholder of the
Industrial Income, Total Return, High Yield and Utilities Funds approved the
applicable Sub-Agreement on December 17, 1993, for an initial term expiring
April 30, 1995 and the initial shareholder of each of the other Funds approved
the amended INVESCO Sub-Agreement on ^ December 9, 1996. Each Sub- Agreement has
been continued by action of the board of directors until April 30, 1997.
Thereafter, each Sub-Agreement may be continued from year to year as to a
particular Fund as long as each such continuance is specifically approved at
least annually by the board of directors of the Company, or by a vote of the
holders of a majority, as defined in the 1940 Act, of the outstanding shares of
that Fund. Each such continuance also must be approved by a majority of the
Independent Directors, cast in person at a meeting called for the purpose of
voting on such continuance. Each Sub-Agreement may be terminated at any time
without penalty by either party or the Company upon sixty (60) days' written
notice, and terminates automatically in the event of an assignment to the extent
required by the 1940 Act and the rules thereunder.
The Sub-Agreements provide that, subject to the supervision of INVESCO,
ICM shall manage the investment portfolio of the Total Return Fund and INVESCO
Trust shall manage the investment portfolio of the other Funds, in conformity
with the respective Funds' investment objectives and policies. In each case,
these management services would include: (a) managing the investment and
reinvest- ment of all the assets, now or hereafter acquired, of the Fund, and
executing all purchases and sales of portfolio securities; (b) maintaining a
continuous investment program for the Fund, consistent with (i) the Fund's
investment objective and policies as set forth in the Company's Articles of
<PAGE>
Incorporation, Bylaws, and Registration Statement, as from time to time
amended, under the 1940 Act, and in any prospectus and/or statement of
additional information of the Company, as from time to time amended and in use
under the 1933 Act, and (ii) the Company's status as a regulated investment
company under the Internal Revenue Code of 1986, as amended; (c) determining
what securities are to be purchased or sold for the Fund, unless otherwise
directed by the directors of the Company or INVESCO, and executing transactions
accordingly; (d) providing the Fund the benefit of all of the investment
analysis and research, the reviews of current economic conditions and trends,
and the consideration of long-range investment policy now or hereafter generally
available to investment advisory customers of the Fund's sub-adviser; (e)
determining what portion of the Fund should be invested in the various types of
securities authorized for purchase by that Fund; and (f) making recommendations
as to the manner in which voting rights, rights to consent to Company action and
any other rights pertaining to the portfolio securities of the Fund shall be
exercised.
Any amendment of a Sub-Agreement, in order to be applicable to a Fund,
requires approval of a majority of the Company's board of directors, including a
majority of the Independent Directors, by votes cast in person at a meeting
called for such purpose and (other than amendments that can become effective
without shareholder approval under applicable law) also requires approval of a
majority of the outstanding voting securities of that Fund.
The INVESCO Trust Sub-Agreement provides that as compensation for its
services, INVESCO Trust shall receive from INVESCO, at the end of each month, a
fee based upon the average daily value of the net assets of each Fund managed.
The sub-advisory fee for the Industrial Income Fund is computed at the annual
rate of 0.375% on the first $500 million of the Fund's average net assets;
0.325% on the next $500 million of the Fund's average net assets; and 0.275% on
the Fund's average net assets in excess of $1 billion. The sub- advisory fees
for the High Yield and Utilities Funds are each computed at the annual rate of
0.30% on the first $500 million of the Fund's average net assets; 0.275% on the
next $500 million of the Fund's average net assets and 0.225% on the Fund's
average net assets in excess of $1 billion. The sub-advisory fees for the
Dynamics, Small Company Growth, Health Sciences and Technology Funds are each
computed at the annual rate of 0.25% for the first $200 million of the Fund's
average net assets and 0.20% on the Fund's average net assets in excess of $200
million.
The ICM Sub-Agreement provides that as compensation for its services, ICM
shall receive from INVESCO, at the end of each month, a fee based upon the
average daily value of the Total Return Fund's net assets at the following
annual rates: 0.375% on the Fund's average net assets up to $500 million; 0.325%
on the Fund's average net assets in excess of $500 million but not more than $1
billion; and 0.275% on the Fund's average net assets in excess of $1 billion.
Each sub-advisory fee is paid by INVESCO, NOT the Funds.
Administrative Services Agreement
INVESCO, either directly or through affiliated companies, provides certain
administrative, sub-accounting, and record keeping services to the Company
pursuant to an Administrative Services Agreement dated October 20, 1993 (the
"Administrative Agreement"). The Administrative Agreement was approved on
<PAGE>
October 20, 1993, by all of the directors of the Company, including all of
the Independent Directors, by votes cast at a meeting called for such purpose.
The Administrative Agreement was for an initial term expiring April 30, 1994 and
has been continued by action of the board of directors until April 30, 1997. The
Administrative Agreement may be continued from year to year thereafter as long
as each such continuance is specifically approved by the board of directors of
the Company, including a majority of the directors, cast in person at a meeting
called for the purpose of voting on such continuance. The Administrative
Agreement may be terminated at any time without penalty by INVESCO on sixty (60)
days' written notice, or by the Company upon thirty (30) days' written notice,
and terminates automatically in the event of an assignment unless the Company's
board of directors approves such assignment.
The Administrative Agreement provides that INVESCO shall provide the
following services to the Funds: (a) such accounting and record keeping services
and functions as are reasonably necessary for the operation of the Funds; and
(b) such accounting, record keeping, and administrative services and functions,
which may be provided by affiliates of INVESCO, as are reasonably necessary for
the operation of Fund shareholder accounts. As full compensation for services
provided under the Administrative Agreement, each Fund pays a monthly fee to
INVESCO consisting of a base fee of $10,000 per year, plus an additional
incremental fee computed daily and paid monthly at an annual rate of 0.015% per
year of the average net assets of the Fund.
For the fiscal year ended December 31, 1995 and the fiscal period ended
December 31, 1994, prior to the voluntary absorption of certain Fund expenses by
INVESCO, the Funds paid INVESCO advisory fees and administrative services fees
in the following amounts:
Fiscal Year Ended Advisory Administrative
December 31 Fee Services Fee
- ----------------- -------- --------------
Industrial Income Fund
1995 $27,073 $10,541
1994 848 10,017
Total Return Fund
1995 $24,649 $10,493
1994 1,753 10,035
<PAGE>
High Yield Fund
1995 $16,298 $10,407
1994 735 10,018
Utilities Fund
1995 $467 $10,011
1994(1) 0 0
(1) The Utilities Fund did not commence operations until January 1, 1995. The
Dynamics, Small Company Growth, Health Sciences and Technology Funds had not
commenced operations as of the date of this Statement of Additional Information.
Transfer Agency Agreement
INVESCO also performs transfer agent, dividend disbursing agent, and
registrar services for the Company pursuant to a Transfer Agency Agreement which
was approved by the board of directors of the Company, including a majority of
the Independent Directors, on October 20, 1993, for an initial term expiring
April 30, 1994 and has been continued by action of the board of directors until
April 30, 1997. The Transfer Agency Agreement may be continued thereafter from
year to year as to each Fund as long as such continuance is specifically
approved at least annually by the board of directors of the Company, or by a
vote of the holders of a majority of the outstanding shares of the Fund. Any
such continuance also must be approved by a majority of the Independent
Directors by votes cast in person at a meeting called for the purpose of voting
on such continuance. The Transfer Agency Agreement may be terminated at any time
without penalty by either party upon sixty (60) days' written notice and
terminates automatically in the event of assignment.
The Transfer Agency Agreement provides that the Company shall pay to
INVESCO an annual fee of $5,000 per Fund. This fee is paid monthly at 1/12 of
the annual fee.
Officers and Directors of the Company
The overall direction and supervision of the Company is the responsibility
of the board of directors, which has the primary duty of seeing that the
Company's general investment policies and programs are carried out and that the
Funds are properly adminis tered. The officers of the Company, all of whom are
officers and employees of, and are paid by, INVESCO, are responsible for the
day-to-day administration of the Company and each of the Funds. INVESCO (along
with ICM in the case of the Total Return Fund and INVESCO Trust in the case of
the other Funds) has the primary responsibility for making investment decisions
on behalf of the Funds. These investment decisions are reviewed by the
investment committee of INVESCO.
<PAGE>
All of the officers and directors of the Company hold comparable positions
with INVESCO Diversified Funds, Inc., INVESCO Dynamics Fund, Inc., INVESCO
Emerging Opportunity Funds, Inc., INVESCO Growth Fund, Inc., INVESCO Income
Funds, Inc., INVESCO Industrial Income Fund, Inc., INVESCO International Funds,
Inc., INVESCO Money Market Funds, Inc., INVESCO Multiple Asset Funds, Inc.,
INVESCO Specialty Funds, Inc., INVESCO Strategic Portfolios, Inc., and INVESCO
Tax-Free Income Funds, Inc. All of the directors of the Company also serve as
trustees of INVESCO Value Trust. In addition, all of the directors of the
Company also are directors of INVESCO Advisor Funds, Inc. (formerly known as The
EBI Funds, Inc.); and, with the exception of Mr. Hesser, trustees of INVESCO
Treasurer's Series Trust. All of the officers of the Fund also hold comparable
positions with INVESCO Value Trust. Set forth below is information with respect
to each of the Company's officers and directors. Unless otherwise indicated, the
address of the directors and officers is Post Office Box 173706, Denver,
Colorado 80217-3706. Their affiliations represent their principal occupations
during the past five years.
CHARLES W. BRADY,*+ Chairman of the Board. Chief Executive Officer and
Director of INVESCO PLC, London, England, and of various subsidiaries thereof.
Chairman of the Board of INVESCO Advisor Funds, Inc., INVESCO Treasurer's Series
Trust and The Global Health Sciences Fund. Address: 1315 Peachtree Street, NE,
Atlanta, Georgia. Born: May 11, 1935.
FRED A. DEERING,+# Vice Chairman of the Board. Vice Chairman of INVESCO
Advisor Funds, Inc., and INVESCO Treasurer's Series Trust. Trustee of The Global
Health Sciences Fund. Formerly, Chairman of the Executive Committee and Chairman
of the Board of Security Life of Denver Insurance Company, Denver, Colorado;
Director of ING America Life Insurance Company, Urbaine Life Insurance Company
and Midwestern United Life Insurance Company. Address: Security Life Center,
1290 Broadway, Denver, Colorado. Born: January 12, 1928.
DAN J. HESSER,+* President and Director. Chairman of the Board, President,
and Chief Executive Officer of INVESCO Funds Group, Inc.; Director of INVESCO
Trust Company. Director of INVESCO Advisor Funds, Inc. Trustee of The Global
Health Sciences Fund. Born: December 27, 1939.
VICTOR L. ANDREWS,** Director. Professor Emeritus, Chairman Emeritus and
Chairman of the CFO Roundtable of the Department of Finance of Georgia State
University, Atlanta, Georgia; President, Andrews Financial Associates, Inc.
(consulting firm); since October 1984, Director of the Center for the Study of
Regulated Industry at Georgia State University; formerly, member of the
faculties of the Harvard Business School and the Sloan School of Management of
MIT. Dr. Andrews is also a Director of The Southeastern Thrift and Bank Fund,
Inc. and The Sheffield Funds, Inc. Address: 4625 Jettridge Drive, Atlanta,
Georgia. Born: June 23, 1930.
<PAGE>
BOB R. BAKER,+** Director. President and Chief Executive Officer of AMC
Cancer Research Center, Denver, Colorado, since January 1989; until mid-December
1988, Vice Chairman of the Board of First Columbia Financial Corporation (a
financial institution), Englewood, Colorado. Formerly, Chairman of the Board and
Chief Executive Officer of First Columbia Financial Corporation. Address: 1775
Sherman Street, #1000, Denver, Colorado. Born: August 7, 1936.
LAWRENCE H. BUDNER,# Director. Trust Consultant; prior to June 30, 1987,
Senior Vice President and Senior Trust Officer of InterFirst Bank, Dallas,
Texas. Address: 7608 Glen Albens Circle, Dallas, Texas. Born: July 25, 1930.
DANIEL D. CHABRIS,+# Director. Financial Consultant; Assistant Treasurer of
Colt Industries Inc., New York, New York, from 1966 to 1988. Address: 15
Sterling Road, Armonk, New York. Born: August 1, 1923.
A. D. FRAZIER, JR.*,** Director. Executive Vice President of INVESCO PLC
(since November 1996). Formerly, Senior Vice President and Chief Operating
Officer of the Atlanta Committee for the Olympic Games. From 1982 to 1991, Mr.
Frazier was employed in various capacities by First Chicago Bank^. Trustee of
The Global Health Sciences Fund. Director of Magellan Health Services, Inc. and
of Charter Medical Corp. Address: 250 Williams Street, Suite 6000, Atlanta,
Georgia. Born: June 23, 1944.
HUBERT L. HARRIS, JR.*, Director. Chairman (since May 1996), President
(January 1990 to April 1996) of INVESCO Services, Inc. Director of INVESCO PLC
and Chief Financial officer of INVESCO Individual Services Group. Member of the
Executive Committee of the Alumni Board of Trustees of Georgia Institute of
Technology. Address: 1315 Peachtree St., NE, Atlanta, Georgia. Born: July 15,
1943.
KENNETH T. KING,** Director. Formerly, Chairman of the Board of The Capitol
Life Insurance Company, Providence Washington Insurance Company, and Director of
numerous subsidiaries thereof in the U.S. Formerly, Chairman of the Board of The
Providence Capitol Companies in the United Kingdom and Guernsey. Chairman of the
Board of the Symbion Corporation (a high technology company) until 1987.
Address: 4080 North Circulo Manzanillo, Tucson, Arizona. Born: November 16,
1925.
JOHN W. McINTYRE,# Director. Retired. Formerly, Vice Chairman of the Board
of Directors of The Citizens and Southern Corporation and Chairman of the Board
and Chief Executive Officer of The Citizens and Southern Georgia Corp. and
Citizens and Southern National Bank. Director of Golden Poultry Co., Inc.
Trustee of The Global Health Sciences Fund and Gables Residential Trust.
Address: 7 Piedmont Center, Suite 100, Atlanta, Georgia. Born: September 14,
1930.
<PAGE>
GLEN A. PAYNE, Secretary. Senior Vice President, General Counsel and
Secretary of INVESCO Funds Group, Inc. and INVESCO Trust Company since April
1995 and formerly (May 1989 to April 1995) Vice President, Secretary and General
Counsel of INVESCO Funds Group, Inc. and INVESCO Trust Company. Formerly,
employee of a U.S. regulatory agency, Washington, D.C., (June 1973 through May
1989). Born: September 25, 1947.
RONALD L. GROOMS, Treasurer. Senior Vice President and Treasurer of INVESCO
Funds Group, Inc. and INVESCO Trust Company since January 1988. Born: October 1,
1946.
WILLIAM J. GALVIN, JR., Assistant Secretary. Senior Vice President of
INVESCO Funds Group, Inc. and Trust Officer of INVESCO Trust Company since July
1995 and formerly (August 1992 to July 1995) Vice President of INVESCO Funds
Group, Inc. and trust officer of INVESCO Trust Company; Vice President of 440
Financial Group from June 1990 to August 1992; Assistant Vice President of
Putnam Companies from November 1986 to June 1990. Born: August 21, 1956.
ALAN I. WATSON, Assistant Secretary. Vice President of INVESCO Funds Group,
Inc. and Trust Officer of INVESCO Trust Company. Born: September 14, 1941.
JUDY P. WIESE, Assistant Treasurer. Vice President of INVESCO Funds Group,
Inc. and Trust Officer of INVESCO Trust Company. Born: February 3, 1948.
#Member of the audit committee of the Company's board of directors.
+Member of the executive committee of the Company's board of directors. On
occasion, the executive committee acts upon the current and ordinary business of
the Company between meetings of the board of directors. Except for certain
powers which, under applicable law, may only be exercised by the full board of
directors, the executive committee may exercise all powers and authority of the
board of directors in the management of the business of the Company. All
decisions are subsequently submitted for ratification by the board of Directors.
*These directors are "interested persons" of the Company as defined in the
Investment Company Act of 1940.
**Member of the management liaison committee of the Company's board of
directors.
As of October 4, 1996, officers and directors of the Company, as a group,
beneficially owned 0% of each Fund's outstanding shares.
<PAGE>
Director Compensation
The following table sets forth, for the fiscal period ended December 31,
1995: the compensation paid by the Company to its eight independent directors
for services rendered in their capacities as directors of the Company; the
benefits accrued as Company expenses with respect to the Defined Benefit
Deferred Compensation Plan discussed below; and the estimated annual benefits to
be received by these directors upon retirement as a result of their service to
the Company. In addition, the table sets forth the total compensation paid by
all of the mutual funds distributed by INVESCO Funds Group, Inc. (including the
Company), INVESCO Advisor Funds, Inc., INVESCO Treasurer's Series Trust and The
Global Health Sciences Fund (collectively, the "INVESCO Complex") to these
directors for services rendered in their capacities as directors or trustees
during the year ended December 31, 1995. As of December 31, 1995, there were 49
funds in the INVESCO Complex.
Total
Compensa-
Benefits Estimated tion From
Aggregate Accrued As Annual INVESCO
Compensa- Part of Benefits Complex
Name of Person, tion From Company Upon Paid To
Position Company(1) Expenses(2) Retirement(3) Directors(1)
- --------------- ---------- ----------- ------------- ------------
Fred A.Deering, $ 4,023 $ 25 $ 21 $ 87,350
Vice Chairman of
the Board
Victor L. Andrews 4,017 22 23 68,000
Bob R. Baker 4,021 23 31 73,000
Lawrence H. Budner 4,018 24 23 68,350
Daniel D. Chabris 4,021 27 17 73,350
A. D. Frazier, Jr.(4),(5) 3,013 0 0 63,500
Kenneth T. King 4,018 26 19 70,000
John W. McIntyre(4) 3,016 0 0 67,850
------ --- --- -------
Total $30,147 $147 $134 $571,400
% of Net Assets 0.1475%(6) 0.0007%(6) 0.0043%(7)
(1)The vice chairman of the board, the chairmen of the audit, management
liaison and compensation committees, and the members of the executive and
valuation committees each receive compensation for serving in such capacities in
addition to the compensation paid to all independent directors.
<PAGE>
(2)Represents benefits accrued with respect to the Defined Benefit Deferred
Compensation Plan discussed below, and not compensation deferred at the election
of the directors.
(3)These figures represent the Company's share of the estimated annual
benefits payable by the INVESCO Complex (excluding the Global Health Sciences
Fund which does not participate in any retirement plan) upon the directors'
retirement, calculated using the current method of allocating director
compensation among the funds in the INVESCO Complex. These estimated benefits
assume retirement at age 72 and that the basic retainer payable to the directors
will be adjusted periodically for inflation, for increases in the number of
funds in the INVESCO Complex, and for other reasons during the period in which
retirement benefits are accrued on behalf of the respective directors. This
results in lower estimated benefits for directors who are closer to retirement
and higher estimated benefits for directors who are further from retirement.
With the exception of Messrs. Frazier and McIntyre, each of these directors has
served as a director/trustee of one or more of the funds in the INVESCO Complex
for the minimum five-year period required to be eligible to participate in the
Defined Benefit Deferred Compensation Plan.
(4)Messrs. Frazier and McIntyre began serving as directors of the Company
on April 19, 1995.
^ (5)Effective November 1, 1996, Mr. Frazier was employed by INVESCO PLC, a
company affiliated with INVESCO ^. Because it was possible that Mr. Frazier
would be employed with INVESCO PLC effective May 1, 1996, he was deemed to be an
"interested person" of the Company and of the other funds in the INVESCO Complex
effective May 1, 1996. ^ Effective November 1, 1996, Mr. Frazier will no longer
receive any director's fees or other compensation from the Company or other
funds in the INVESCO Complex for his service as a director.
(6)Totals as a percentage of the Company's net assets as of December 31,
1995.
(7)Total as a percentage of the net assets of the INVESCO Complex as of
December 31, 1995.
Messrs. Brady, Harris ^, Hesser and, effective November 1, 1996, Frazier,
as "interested persons" of the Company and the other funds in the INVESCO
Complex, receive compensation as officers or employees of INVESCO or its
affiliated companies, and do not receive any director's fees or other
compensation from the Company or the other funds in the INVESCO Complex for
their service as directors.
The boards of directors/trustees of the mutual funds managed
by INVESCO, INVESCO Advisor Funds, Inc. and INVESCO Treasurer's
Series Trust have adopted a Defined Benefit Deferred Compensation Plan for the
<PAGE>
non-interested directors and trustees of the funds. Under this plan, each
director or trustee who is not an interested person of the funds (as defined in
the 1940 Act) and who has served for at least five years (a "qualified
director") is entitled to receive, upon retiring from the boards at the
mandatory retirement age of 72 (or the retirement age of 73 to 74, if the
retirement date is extended by the boards for one or two years but less than
three years), continuation of payments for one year (the "first year retirement
benefit") of the annual basic retainer payable by the funds to the qualified
director at the time of his retirement (the "basic retainer"). Commencing with
any such director's second year of retirement, and commencing with the first
year of retirement of a director whose retirement has been extended by the board
for three years, a qualified director shall receive quarterly payments at an
annual rate equal to 25% of the basic retainer. These payments will continue for
the remainder of the qualified director's life or ten years, whichever is longer
(the "reduced retainer payments"). If a qualified director dies or becomes
disabled after age 72 and before age 74 while still a director of the funds, the
first year retirement benefit and the reduced retainer payments will be made to
him or to his beneficiary or estate. If a qualified director becomes disabled or
dies either prior to age 72 or during his 74th year while still a director of
the funds, the director will not be entitled to receive the first year
retirement benefit; however, the reduced retainer payments will be made to his
beneficiary or estate. The plan is administered by a committee of three
directors who are also participants in the plan and one director who is not a
plan participant. The cost of the plan will be allocated among the INVESCO,
INVESCO Advisor Funds, Inc. and Treasurer's Series funds in a manner determined
to be fair and equitable by the committee. The Company is not making any
payments to directors under the plan as of the date of this Statement of
Additional Information. The Company has no stock options or other pension or
retirement plans for management or other personnel and pays no salary or
compensation to any of its officers.
The Company has an audit committee which is comprised of four of the
directors who are not interested persons of the Company. The committee meets
periodically with the Company's independent accountants and officers to review
accounting principles used by the Company, the adequacy of internal controls,
the responsibilities and fees of the independent accountants, and other matters.
The Company also has a management liaison committee which meets quarterly
with various management personnel of INVESCO in order (a) to facilitate better
understanding of management and operations of the Company, and (b) to review
legal and operational matters which have been assigned to the committee by the
board of directors, in furtherance of the board of directors' overall duty of
supervision.
<PAGE>
HOW SHARES ARE VALUED
As described in the section of the Prospectus entitled "Purchases and
Redemptions," the net asset value of shares of each Fund of the Company is
computed once each day that the New York Stock Exchange is open, as of the close
of regular trading on that Exchange (usually 4:00 p.m., New York time) and
applies to purchase and redemption orders received prior to that time. Net asset
value per share is also computed on any other day on which there is a sufficient
degree of trading in the securities held by a Fund that the current net asset
value per share might be materially affected by changes in the value of the
securities held, but only if on that day the Company receives a request to
purchase or redeem shares of that Fund. Net asset value per share is not
calculated on days the New York Stock Exchange is closed, such as federal
holidays including New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving^ and Christmas.
The net asset value per share of each Fund is calculated by dividing the
value of all securities held by the Fund and its other assets (including
dividends and interest accrued but not collected), less the Fund's liabilities
(including accrued expenses), by the number of outstanding shares of that Fund.
Securities traded on national securities exchanges, the NASDAQ National Market
System, the NASDAQ Small Cap Market and foreign markets are valued at their last
sale prices on the exchanges or markets where such securities are primarily
traded. Securities traded in the over-the-counter market for which last sale
prices are not available, and listed securities for which no sales are reported
on a particular date, are valued at their highest closing bid prices (or, for
debt securities, yield equivalents thereof) obtained from one or more dealers
making markets for such securities. If market quotations are not readily
available, securities will be valued at fair values as determined in good faith
by the Company's board of directors or pursuant to procedures adopted by the
board of directors. The above procedures may include the use of valuations
furnished by a pricing service which employs a matrix to determine valuations
for normal institutional-size trading units of debt securities. Prior to
utilizing a pricing service, the board of directors of the Company reviews the
methods used by such service to assure itself that securities will be valued at
their fair values. The Company's board of directors also periodically monitors
the methods used by such pricing services. Debt securities with remaining
maturities of 60 days or less at the time of purchase are normally valued at
amortized cost.
The values of securities held by the Funds, and other assets used in
computing net asset value, generally are determined as of the time regular
trading in such securities or assets is completed each day. ^ Because regular
trading in most foreign securities markets is completed simultaneously with, or
prior to, the close of regular trading on the New York Stock Exchange, closing
prices for foreign securities usually are available for purposes of computing
the Funds' net asset values. However, in the event that the closing price of a
foreign security is not available in time to calculate a Fund's net asset value
on a particular day, the Company's board of directors has authorized the use of
<PAGE>
the market price for the security obtained from an approved pricing service
at an established time during the day which may be prior to the close of regular
trading in the security. The value of all assets and liabilities initially
expressed in foreign currencies will be converted into U.S. dollars at the spot
rate of such currencies against U.S. dollars provided by an approved pricing
service.
PERFORMANCE
As discussed in the section of the Prospectus entitled "Performance
Information," average annual total return and/or yield data for each of the
Funds may from time to time be included in advertisements, sales literature or
shareholder reports. All presentations of Fund total return and yield data will
conform to applicable requirements of the Securities and Exchange Commission and
the National Association of Securities Dealers, Inc.
Total Return Calculations
Average annual total return performance for the indicated periods ended
December 31, 1995, for each Fund that had commenced operations by that date were
as follows:
Fund 1 Year Life of Fund(1)
---- ------ ---------------
Industrial Income Fund 29.25% 20.89%
Total Return Fund 22.79% 15.10%
High Yield Fund 19.76% 11.83%
Utilities Fund 9.08% 9.08%
(1) The dates on which the Industrial Income Fund, Total Return Fund, High Yield
Fund and Utilities Fund commenced operations were August 10, 1994, June 2, 1994,
May 27, 1994 and January 1, 1995, respectively.
Average annual total return performance for each of the periods indicated
was computed by finding the average annual compounded rates of return that would
equate the initial amount invested to the ending redeemable value, according to
the following formula:
P(1 + T)n = ERV where:
P = initial payment of $1000 T = average annual total return n =
number of years
ERV = ending redeemable value of initial payment
The average annual total return performance figures shown above were
determined by solving the above formula for "T" for each time period and Fund
indicated.
<PAGE>
Yield Calculations
The yields of the Industrial Income Fund, Total Return Fund, High Yield
Fund and Utilities Fund for the month ended December 31, 1995 were 3.00%, 3.15%,
9.83% and 2.86%, respectively. In calculating yield quotations for a Fund,
interest earned is deter mined by computing the yield to maturity (or yield to
call, if applicable) of each obligation held by the Fund, based upon the market
value of each obligation (including actual accrued interest) at the close of
business on the last business day of the month or, with respect to an obligation
purchased during the month, the purchase price plus accrued interest. The
resultant yield to maturity is divided by 360 and multiplied by the market value
of the obligation (including actual accrued interest), and the result is
multiplied by the number of days in the subsequent month that the obligation is
in the Fund (assuming that each month has 30 days). Dividends received on the
stocks held by the Funds are recognized, for purposes of yield calculations, on
a daily accrual basis.
Comparison of Fund Performance
In conjunction with performance reports, comparative data between a Fund's
performance for a given period and other types of investment vehicles may be
provided to prospective investors and shareholders. A Fund's performance is
based upon amounts available for investment under variable annuity or variable
life insurance contracts of Participating Insurance Companies rather than upon
premiums paid for variable annuity or variable life insurance contracts. Thus,
the Fund's total return data does not reflect the impact of sales loads (whether
front-end or deferred) or contract charges deducted from premiums or from the
assets of the Participating Insurance Companies' separate accounts that invest
in the Fund. Such sales loads and contract charges may be substantial and may
vary widely among Participating Insurance Companies. Accordingly, the total
return data for the Funds is most useful for comparison with comparable data for
other investment options under the same variable annuity or variable life
insurance contract.
Comparisons of the Funds' total returns to those of other investment
vehicles are useful in evaluating the historical portfolio management
performance of the Funds' investment adviser and sub-advisers. However, such
comparisons should not be mistaken for comparisons of the returns on a purchase
of a variable annuity or variable life insurance contract of a Participating
Insurance Company and a purchase of another investment vehicle. Owners or
prospective owners of variable annuity contracts of Participating Insurance
Companies should review performance data for the Funds in conjunction with
comparable total return data for the associated variable annuity separate
account to be provided with the Fund data. Owners or prospective owners of
variable life insurance contracts of Participating Insurance Companies should
review the performance data for the Funds in conjunction with data (such as
<PAGE>
the data contained in personalized, hypothetical illustrations of variable life
insurance contracts) that permits an evaluation of the magnitude of variable
life insurance charges and expenses and the life insurance benefits not
reflected in the Funds' total return data.
From time to time, evaluations of performance made by independent sources
may also be used in advertisements, sales literature or shareholder reports,
including reprints of, or selections from, editorials or articles about the
Funds. Sources for Fund performance information and articles about the Funds
include, but are not limited to the following:
American Association of Individual Investors' Journal
Banxquote
Barron's
Business Week
CDA Investment Technologies
CNBC
CNN
Consumer Digest
Financial Times
Financial World
Forbes
Fortune
Ibbotson Associates, Inc.
Institutional Investor
Investment Company Data, Inc.
Investor's Business Daily
Kiplinger's Personal Finance
Lipper Analytical Services, Inc.'s Mutual Fund Performance
Analysis
Money
Morningstar
Mutual Fund Forecaster
The New York Times
No-Load Analyst
The No-Load Fund Investor
No-Load Fund*X
Personal Investor
Smart Money
United Mutual Fund Selector
USA Today
U.S. News and World Report
Wall Street Journal
Wiesenberger Investment Companies Services
Working Woman
Worth
PORTFOLIO TURNOVER
There are no fixed limitations regarding portfolio turnover for any of the
Funds. Brokerage costs to the Funds are commensu rate with the rate of portfolio
activity. Portfolio turnover rates for the fiscal year ended December 31, 1995
and the fiscal period ended December 31, 1994 were as follows:
<PAGE>
Fund 1995 1994
---- ---- ----
Industrial Income Fund 97% 0%
Total Return Fund 5% 0%
High Yield Fund 310% 23%
Utilities Fund 24% 0%
Dynamics Fund NA NA
Small Company Growth Fund NA NA
Health Science Fund NA NA
Technology Fund NA NA
In computing these portfolio turnover rates, all investment with
maturities or expiration dates at the time of acquisition of one year or less
were excluded. Subject to this exclusion, the turnover rate is calculated by
dividing (a) the lesser of purchases or sales of portfolio securities for the
fiscal year by (b) the monthly average of the value of portfolio securities
owned by the Fund during the fiscal year. The primary reason for the increases
in the Funds' portfolio turnover rates in 1995 was the fact that 1995 was the
Funds' first full year of operations.
PORTFOLIO BROKERAGE
Fund Management places orders for the purchase and sale of securities with
brokers and dealers based upon its evaluation of the broker-dealers' financial
responsibility subject to the broker-dealers' ability to effect transactions at
the best available prices. Fund Management evaluates the overall reason ableness
of brokerage commissions paid by reviewing the quality of executions obtained on
each Fund's portfolio transactions, viewed in terms of the size of transactions,
prevailing market conditions in the security purchased or sold, and general
economic and market conditions. In seeking to ensure that the commissions
charged the Funds are consistent with prevailing and reasonable commissions,
Fund Management also endeavors to monitor brokerage industry practices with
regard to the commissions charged by brokers and dealers on transactions
effected for other comparable institutional investors. While Fund Management
seeks reasonably competitive rates, the Funds do not necessarily pay the lowest
commissions or spread available.
Consistent with the standard of seeking to obtain the best execution on
portfolio transactions, Fund Management may select brokers that provide research
services to effect such transactions. Research services consist of statistical
and analytical reports relating to issuers, industries, securities and economic
factors and trends, which may be of assistance or value to Fund Management in
making informed investment decisions. Research services prepared and furnished
by brokers through which the Funds effect securities transactions may be used by
Fund Management in servicing all of their respective accounts and not all such
services may be used by Fund Management in connection with the Funds.
<PAGE>
In recognition of the value of the above-described brokerage and research
services provided by certain brokers, Fund Management, consistent with the
standard of seeking to obtain the best execution on portfolio transactions, may
place orders with such brokers for the execution of Fund transactions on which
the commissions are in excess of those which other brokers might have charged
for effecting the same transactions.
Fund transactions may be effected through qualified bro ker/dealers who
recommend the variable annuity or variable life insurance contracts of
Participating Insurance Companies to their clients, or who act as agent in the
purchase of such contracts for their clients. When a number of brokers and
dealers can provide comparable best price and execution on a particular
transaction, Fund Management may consider the sale of such contracts by a broker
or dealer in selecting among qualified broker/dealers.
The aggregate dollar amounts of brokerage commissions paid by the Company
for the fiscal year ended December 31, 1995 and the fiscal period ended December
31, 1994, were $94,602 and $2,388, respectively. This increase was primarily due
to the increased size of the Funds. On a Fund basis, the aggregate amount of
brokerage commissions paid in 1995 breaks down as follows: Industrial Income
Fund, $55,370; Total Return Fund, $7,661; High Yield Fund, $30,966; and
Utilities Fund, $605. For the year ended December 31, 1995, brokers providing
research services received $6,257, $1,321, $98 and $350 in commissions on
portfolio transactions effected for the Industrial Income Fund, Total Return
Fund, High Yield Fund and Utilities Fund, respectively, on aggregate portfolio
transactions of $37,401, $3,140,502, $550,389 and $124,542, respectively. The
Company paid $107 in compensation to brokers for the sale of Participating Life
Insurance Company's variable annuity and variable life insurance contracts
utilizing the Funds during the fiscal year ended December 31, 1995.
At December 31, 1995, the Funds then in operation held securities of their
regular brokers or dealers, or their parents, as follows:
Value of Securities
Fund Broker or Dealer at 12/31/95
- ---- ---------------- -------------------
Industrial Income Fund State Street Bank and
Trust $150,000.00
Ford Motor 66,700.00
Morgan Stanley Group 56,437.50
Total Return Fund None
High Yield Fund None
Utilities Fund None
<PAGE>
Neither INVESCO, INVESCO Trust nor ICM receives any brokerage commissions
on portfolio transactions effected on behalf of any of the Funds, and there is
no affiliation between INVESCO, INVESCO Trust, ICM, or any person affiliated
with INVESCO, INVESCO Trust, ICM, or the Company and any broker or dealer that
executes transactions for the Funds.
REDEMPTIONS
It is possible that in the future conditions may exist which would, in the
opinion of INVESCO, make it undesirable for one or more of the Funds to pay for
redeemed shares in cash. In such cases, INVESCO may authorize payment to be made
in portfolio securities or other property of the Fund. However, the Company is
obligated under the Investment Company Act of 1940 to redeem for cash all shares
of a Fund presented for redemption by any one shareholder having a value up to
$250,000 (or 1% of the applicable Fund's net assets if that is less) in any
90-day period. Securities delivered in payment of redemptions are selected
entirely by Fund Management based on what is in the best interests of the
Company and its shareholders, and are valued at the value assigned to them in
computing the Fund's net asset value per share. Shareholders receiving such
securities are likely to incur brokerage costs on their subsequent sales of the
securities.
ADDITIONAL INFORMATION
Common Stock
The Company was incorporated under the laws of the state of Maryland on
August 19, 1993. The authorized capital stock of the Company consists of [900]
million shares of common stock, par value of $0.01 per share. The shares of
common stock are currently divided into eight classes (or series), INVESCO VIF -
Total Return Portfolio common stock, INVESCO VIF - Industrial Income Portfolio
common stock, INVESCO VIF - High Yield Portfolio common stock, INVESCO VIF -
Utilities Portfolio common stock, INVESCO VIF Dynamics Portfolio common stock,
INVESCO VIF - Emerging Growth Portfolio common stock, INVESCO VIF - Health
Sciences Portfolio common stock and INVESCO VIF - Technology Portfolio common
stock. As of December 31, 1995, 664,722 shares of the Industrial Income Fund,
539,662 shares of the Total Return Fund, 473,935 shares of the High Yield Fund
and 26,744 shares of the Utilities Fund were outstanding. Each class consists of
[100] million shares. The Company reserves the right to issue additional classes
of shares without the consent of shareholders, and may allocate its 100 million
unclassified shares either to such new classes or to one or more of the four
existing classes. All shares issued and outstanding are, and all shares offered
hereby, when issued, will be, fully paid and nonassessable.
Shares of each class represent the interests of the shareholders of that
class in a particular portfolio of investments of the Company. Each class of the
Company's shares is preferred over all other classes with respect to the assets
specifically allocated to that class, and all income, earnings, profits and
proceeds from those assets, subject only to the rights of creditors, are
allocated to shares of that class. The assets of each class are segregated on
the books of account and are charged with the liabilities of that class and with
a share of the Company's general liabilities. The board of directors determines
<PAGE>
those assets and liabilities deemed to be general assets or liabilities of the
Company and those items are allocated among classes in a manner deemed by the
board to be fair and equitable. Generally, such allocation will be made based
upon the relative total net assets of each class. In the unlikely event that a
liability allocable to one class exceeds the assets belonging to the class, all
or a portion of such liability may have to be borne by the holders of shares of
the Company's other classes.
All dividends on shares of a particular class shall be paid only out of the
income belonging to that class, pro rata to the holders of that class. In the
event of the liquidation or dissolution of the Company or of a particular class,
the shareholders of each class that is being liquidated shall be entitled to
receive, as a class, when and as declared by the board of directors, the excess
of the assets belonging to that class over the liabilities belonging to that
class. The holders of shares of any class shall not be entitled to any
distribution upon liquidation of any other class. The assets so distributable to
the shareholders of any particular class shall be distributed among those
shareholders in proportion to the number of shares of that class held by them
and recorded on the books of the Company.
All Fund shares, regardless of class, have equal voting rights. Voting
with respect to certain matters, such as ratifica tion of independent
accountants or election of directors, will be by all classes of the Company.
When not all classes are affected by a matter to be voted upon, such as approval
of an investment advisory contract or changes in a Fund's investment policies,
only shareholders of the class affected by the matter will be entitled to vote.
Company shares have noncumulative voting rights, which means that the holders of
a majority of the shares voting for the election of directors of the Company can
elect 100% of the directors if they choose to do so. In such event, the holders
of the remaining shares voting for the election of directors will not be able to
elect any person or persons to the board of directors. After they have been
elected by shareholders, the directors will continue to serve until their
successors are elected and have qualified or they are removed from office, in
either case by a shareholder vote, or until death, resignation, or retirement.
Directors may appoint their own successors, provided that always at least a
majority of the directors have been elected by the Company's shareholders. It is
the intention of the Company not to hold annual meetings of shareholders. The
directors may call annual or special meetings of shareholders for action by
shareholder vote as may be required by the 1940 Act or the Company's Articles of
Incorporation, or at their discretion.
Principal Shareholders
As of October 1, 1996, the following persons held more than 5% of the
Funds' outstanding equity securities.
<PAGE>
Amount and Nature
Name and Address of Ownership Percent of Class
- ---------------- ----------------- ----------------
Industrial Income Fund
Separate Account VA-5 of 846,164.7960 68.035%
Transamerica Occidental Record
Life Insurance Company
Variable Annuity Dept B-100
1150 S. Olive
Los Angeles, CA 90015
Security Life
Separate Account A1 271,739.0600 21.849%
Unit Valuations 2T2 Record
8515 E. Orchard Road
Englewood, CO 80111
Total Return Fund
Separate Account VA-5 of 654,918.3720 71.554%
Transamerica Occidental Record
Life Insurance Company
Variable Annuity Dept B-100
1150 S. Olive
Los Angeles, CA 90015
Security Life 194,838.8940 21.287%
Separate Account A1 Record
Unit Valuations 2T2
8515 E. Orchard Road
Englewood, CO 80111
Security Life 46,058.1170 5.032%
Separate Account L1 Record
Attn: Debra Bachtel
Unit Valuations 2T2
8515 E. Orchard Rd.
Englewood, CO 80111
High Yield Fund
Separate Account VA-5 of 574,000.1520 63.218%
Transamerica Occidental Record
Life Insurance Company
Variable Annuity Dept B-100
1150 S. Olive
Los Angeles, CA 90015
Security Life 219,818.4990 24.210%
Separate Account A1 Record
Unit Valuations 2T2
8515 E. Orchard Road
Englewood, CO 80111
<PAGE>
Security Life 76,098.5160 8.381%
Separate Account L1 Record
Unit Valuations 2T2
8515 E. Orchard Road
Englewood, CO 80111
Utilities Fund
Security Life 87,464.0810 84.769%
Separate Account A1 Record
Unit Valuations 2T2
8515 E. Orchard Road
Englewood, CO 80111
Security Life 13,199.0090 12.792%
Separate Account L1 Record
Unit Valuations 2T2
8515 E. Orchard Road
Englewood, CO 80111
Independent Accountants
Price Waterhouse LLP, 950 Seventeenth Street, Denver, Colorado, has been
selected as the independent accountants of the Company. The independent
accountants are responsible for auditing the financial statements of the
Company.
Custodian
State Street Bank and Trust Company, P.O. Box 351, Boston, Massachusetts,
has been designated as custodian of the cash and investment securities of the
Funds. The custodian bank is also responsible for, among other things, receipt
and delivery of the Funds' investment securities in accordance with procedures
and conditions specified in the custody agreement.
Transfer Agent
INVESCO, 7800 E. Union Avenue, Denver, Colorado 80237, acts as registrar,
dividend disbursing agent, and transfer agent for the Company pursuant to the
Transfer Agency Agreement described above under the caption, "Management." Such
services include the issuance, cancellation and transfer of shares of the
Company and the maintenance of records regarding the ownership of such shares.
Reports to Shareholders
The Company's fiscal year ends on December 31 of each year. The Company
distributes reports at least semiannually to its shareholders. Financial
statements regarding the Company, audited by the independent accountants, are
sent to shareholders annually.
Legal Counsel
The firm of Kirkpatrick & Lockhart LLP, Washington, D.C., is legal counsel
for the Company. The firm of Moye, Giles, O'Keefe, Vermeire & Gorrell, Denver,
Colorado, acts as special counsel to the Company.
<PAGE>
Financial Statements
The Company's audited financial statements and the notes thereto for the
fiscal year ended December 31, 1995, and the report of Price Waterhouse LLP with
respect to such financial statements, are incorporated herein by reference from
the Company's Annual Report to Shareholders for the fiscal year ended December
31, 1995.
Prospectus
The Company will furnish, without charge, a copy of the Prospectus upon
request. Such requests should be made to the Company at the mailing address or
telephone number set forth on the first page of this Statement of Additional
Information.
Registration Statement
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Company has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by the rules and regulations of the Commission.
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APPENDIX A
DESCRIPTION OF FUTURES AND OPTIONS CONTRACTS
Options on Securities
An option on a security provides the purchaser, or "holder," with the
right, but not the obligation, to purchase, in the case of a "call" option, or
sell, in the case of a "put" option, the security or securities underlying the
option, for a fixed exercise price up to a stated expiration date. The holder
pays a non-refundable purchase price for the option, known as the "premium." The
maximum amount of risk the purchaser of the option assumes is equal to the
premium plus related transaction costs, although the entire amount may be lost.
The risk of the seller, or "writer," however, is potentially unlimited, unless
the option is "covered," which is generally accomplished through the writer's
ownership of the underlying security, in the case of a call option, or the
writer's segregation of an amount of cash or securities equal to the exercise
price, in the case of a put option. If the writer's obligation is not so
covered, it is subject to the risk of the full change in value of the underlying
security from the time the option is written until exercise.
Upon exercise of the option, the holder is required to pay the purchase
price of the underlying security, in the case of a call option, or to deliver
the security in return for the purchase price, in the case of a put option.
Conversely, the writer is required to deliver the security, in the case of a
call option, or to purchase the security, in the case of a put option. Options
on securities which have been purchased or written may be closed out prior to
exercise or expiration by entering into an offsetting transaction on the
exchange on which the initial position was established, subject to the
availability of a liquid secondary market.
Options on securities are traded on national securities exchanges, such as
the Chicago Board of Options Exchange and the New York Stock Exchange, which are
regulated by the Securities and Exchange Commission. The Options Clearing
Corporation ("OCC") guarantees the performance of each party to an
exchange-traded option, by in effect taking the opposite side of each such
option. A holder or writer may engage in transactions in exchange-traded options
on securities and options on indices of securities only through a registered
broker/dealer which is a member of the exchange on which the option is traded.
An option position in an exchange-traded option may be closed out only on
an exchange which provides a secondary market for an option of the same series.
Although the Funds generally will 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 at
any particular time. In such event it might not be possible to effect closing
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transactions in a particular option with the result that a Fund would have
to exercise the option in order to realize any profit. This would result in the
Fund incurring brokerage commissions upon the disposition of underlying
securities acquired through the exercise of a call option or upon the purchase
of underlying securities upon the exercise of a put option. If the Fund, as a
covered call option writer, is unable to effect a closing purchase transaction
in a secondary market, unless the Fund is required to deliver the securities
pursuant to the assignment of an exercise notice, it will not be able to sell
the underlying security until the option expires.
Reasons for the potential absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient trading interest
in certain options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the facilities
of an exchange or a clearing corporation may not at all times be adequate to
handle current trading volume; or (vi) one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of options (or particular class or series of options) in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on that exchange which had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at a particular time, render certain of the facilities of any of the
clearing corporations inadequate and thereby result in the institution by an
exchange of special procedures which may interfere with the timely execution of
customers' orders. However, the OCC, based on forecasts provided by the U.S.
exchanges, believes that its facilities are adequate to handle the volume of
reasonably anticipated options transactions, and such exchanges have advised
such clearing corporation that they believe their facilities will also be
adequate to handle reasonably anticipated volume.
In addition, options on securities may be traded over-the-counter ("OTC")
through financial institutions dealing in such options as well as the underlying
instruments. OTC options are purchased from or sold (written) to dealers or
financial institutions which have entered into direct agreements with the
Company on behalf of a Fund. With OTC options, such variables as expiration
date, exercise price and premium will be agreed upon between the Fund and the
transacting dealer, without the intermedi- ation of a third party such as the
OCC. If the transacting dealer fails to make or take delivery of the securities
underlying an option it has written, in accordance with the terms of that option
as written, the Fund would lose the premium paid for the option as well as any
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anticipated benefit of the transaction. The Fund will engage in OTC option
transactions only with primary U.S. government securities dealers recognized by
the Federal Reserve Bank of New York.
Futures Contracts
A futures contract is a bilateral agreement providing for the purchase and
sale of a specified type and amount of a financial instrument or foreign
currency, or for the making and acceptance of a cash settlement, at a stated
time in the future, for a fixed price. By its terms, a futures contract provides
for a specified settlement date on which, in the case of the majority of
interest rate and foreign currency futures contracts, the fixed income
securities or currency underlying the contract are delivered by the seller and
paid for by the purchaser, or on which, in the case of stock index futures
contracts and certain interest rate and foreign currency futures contracts, the
difference between the price at which the contract was entered into and the
contract's closing value is settled between the purchaser and seller in cash.
Futures Contracts differ from options in that they are bilateral agreements,
with both the purchaser and the seller equally obligated to complete the
transaction. In addition, futures contracts call for settlement only on the
expiration date, and cannot be "exercised" at any other time during their term.
The purchase or sale of a futures contract also differs from the purchase
or sale of a security or the purchase of an option in that no purchase price is
paid or received. Instead, an amount of cash or cash equivalents, which varies
but may be as low as 5% or less of the value of the contract, must be deposited
with the broker as "initial margin." Subsequent payments to and from the broker,
referred to as "variation margin," are made on a daily basis as the value of the
index or instrument underlying the futures contract fluctuates, making positions
in the futures contract more or less valuable, a process known as "marking to
market."
A futures contract may be purchased or sold only on an exchange, known as
a "contract market," designated by the Commodity Futures Trading Commission for
the trading of such contract, and only through a registered futures commission
merchant which is a member of such contract market. A commission must be paid on
each completed purchase and sale transaction. The contract market clearing house
guarantees the performance of each party to a futures contract, by in effect
taking the opposite side of such contract. At any time prior to the expiration
of a futures contract, a trader may elect to close out its position by taking an
opposite position on the contract market on which the position was entered into,
subject to the availability of a secondary market, which will operate to
terminate the initial position. At that time, a final determination of variation
margin is made and any loss experienced by the trader is required to be paid to
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the contract market clearing house while any profit due to the trader must
be delivered to it.
Interest rate futures contracts currently are traded on a variety of fixed
income securities, including long-term U.S. Treasury Bonds, Treasury Notes,
Government National Mortgage Association modified pass-through mortgage-backed
securities, U.S. Treasury Bills, bank certificates of deposit and commercial
paper. In addition, interest rate futures contracts include contracts on indices
of municipal securities. Foreign currency futures contracts currently are traded
on the British pound, Canadian dollar, Japanese yen, Swiss franc, West German
mark and on Eurodollar deposits.
Options on Futures Contracts
An option on a futures contract provides the holder with the right to
enter into a "long" position in the underlying futures contract, in the case of
a call option, or a "short" position in the underlying futures contract, in the
case of a put option, at a fixed exercise price to a stated expiration date.
Upon exercise of the option by the holder, the contract market clearing house
establishes a corresponding short position for the writer of the option, in the
case of a call option, or a corresponding long position, in the case of a put
option. In the event that an option is exercised, the parties will be subject to
all the risks associated with the trading of Futures Contracts, such as payment
of variation margin deposits. In addition, the writer of an option on a futures
contract, unlike the holder, is subject to initial and variation margin
requirements on the option position.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's profit
or loss on the transaction.
An option, whether based on a futures contract, a stock index or a
security, becomes worthless to the holder when it expires. Upon exercise of an
option, the exchange or contract market clearing house assigns exercise notices
on a random basis to those of its members which have written options of the same
series and with the same expiration date. A brokerage firm receiving such
notices then assigns them on a random basis to those of its customers which have
written options of the same series and expiration date. A writer therefore has
no control over whether an option will be exercised against it, nor over the
time of such exercise.
