Prospectus
May 1, 1997
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 nine 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 - Growth Portfolio (the "Growth 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"), 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
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 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 small-capitalization 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 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.
Growth Fund:^ to seek long-term capital growth. The Fund also seeks, as a
secondary objective, to obtain investment income through the purchase of
securities of carefully selected companies representing major fields of business
and industrial activity. In pursuing its objectives, the Fund invests primarily
in common stocks, but may also invest in other kinds of securities, including
convertible and straight issues of debentures and preferred stock.
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 May 1, 1997, 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....................................................... ^ 11
INVESTMENT RESTRICTIONS............................................ ^ 16
MANAGEMENT......................................................... ^ 16
PURCHASES AND REDEMPTIONS.......................................... ^ 20
TAX STATUS, DIVIDENDS AND DISTRIBUTIONS............................ ^ 21
PERFORMANCE INFORMATION............................................ ^ 21
ADDITIONAL INFORMATION............................................. ^ 22
APPENDIX........................................................... ^ 23
<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 nine 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, the INVESCO VIF - Utilities
Portfolio and the INVESCO VIF - Growth 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
<PAGE>
over-the-counter. The 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. The Growth Fund seeks to attain its investment
objective by investing primarily in common stocks, but may also invest in other
kinds of securities, including convertible and straight issues of debentures and
preferred stock. 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% of its total assets, 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 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 1996 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 ^ Health Sciences, Small Company
Growth, Technology, Dynamics and Growth Funds had not commenced operations ^ as
of May 1, 1997, no financial information is provided for ^ those Funds.
<TABLE>
<CAPTION>
High Yield Fund Industrial Income Fund
------------------------------------------ -------------------------------------------
Period Period
Ended Ended
Year Ended December 31 December 31 Year Ended 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 0.72 0.55 0.05 0.28 0.19 0.03
Net Gains on Securities (Both
Realized and Unrealized) 1.11 1.43 0.01 2.52 2.76 0.09
-------------------------- --------------- -------------------------- ----------------
Total from Investment
Operations 1.83 1.98 0.06 2.80 2.95 0.12
-------------------------- --------------- -------------------------- ----------------
LESS DISTRIBUTIONS
Dividends from Net
Investment Income 0.71+ 0.55 0.05 0.28 0.20 0.03
Distributions from
Capital Gains 0.38 0.40 0.00 0.77 0.26 0.00
-------------------------- --------------- -------------------------- ----------------
<PAGE>
Total Distributions 1.09 0.95 0.05 1.05 0.46 0.03
-------------------------- ---------------- -------------------------- -----------------
Net Asset Value -
End of Period $ 11.78 $ 11.04 $ 10.01 $ 14.33 $ 12.58 $ 10.09
========================== ================ ========================== =================
TOTAL RETURN>> 16.59% 19.76% 0.60%* 22.28% 29.25% 1.23%*
RATIOS
Net Assets - End of
Period ($000 Omitted) $14,033 $ 5,233 $ 624 $22,342 $ 8,362 $ 525
Ratio of Expenses to Average
Net Assets# 0.87%@ 0.97%@ 0.74%~ 0.95%@ 1.03%@ 0.79%~
Ratio of Net Investment Income
to Average Net Assets# 9.19% 8.79% 2.72%~ 2.87% 3.50% 1.69%~
Portfolio Turnover Rate 380% 310% 23%* 93% 97% 0%*
Average Commission
Rate Paid^^ $0.0867 - - $0.0867 - -
</TABLE>
^ For the High Yield and Industrial Income Funds, from May 27, 1994 and August
10, 1994, respectively,^ commencement of operations, to December 31, 1994.
+ Distributions in excess of net investment income for the year ended December
31, 1996, aggregated less than $0.01 on a per share basis.
>> 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 the High Yield and Industrial Income Funds were
voluntarily absorbed by INVESCO for the years ended December 31, 1996 and 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
1.32%, 2.71% and 30.38% for the High Yield Fund and 1.19%, 2.31% and 32.55% for
the Industrial Income Fund, respectively, and ratio of net investment income to
average net assets would have been 8.74%, 7.05% and (26.92%) for the High Yield
Fund and 2.63%, 2.22% and (30.07%) for the Industrial Income Fund, respectively.
@ Ratio is based on Total Expenses of the Fund, less Expenses Absorbed by
Investment Adviser, which is before any expense offset arrangements.
<PAGE>
~ Annualized
^^ The average commission rate paid is the total brokerage commissions paid on
applicable purchases and sales of securities for the period divided by the total
number of related shares purchased or sold which is required to be disclosed for
fiscal years beginning September 1, 1995 and thereafter.
<PAGE>
^ Financial Highlights (continued)
^(For a Fund Share Outstanding Throughout Each Period)
<TABLE>
<CAPTION>
Total Return Fund Utilities Fund
--------------------------------------------- ------------------------------------------
Period Period
Ended Ended
Year Ended December 31 December 31 Year Ended December 31 December 31
--------------------------------------------- ------------------------------------------
1996 1995 1994 1996 1995 1994+
<C> <S> <S> <S> <S> <S> <S>
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 0.36 0.25 0.09 0.13 0.07 0.00
Net Gains on Securities (Both
Realized and Unrealized) 1.12 2.05 0.09 1.26 0.84 0.00
--------------------------------------------- ------------------------------------------
Total from Investment
Operations 1.48 2.30 0.18 1.39 0.91 0.00
--------------------------------------------- ------------------------------------------
LESS DISTRIBUTIONS
Dividends from Net
Investment Income 0.36 0.24 0.09 0.13 0.07 0.00
In Excess of Net
Investment Income 0.05 0.00 0.00 0.01 0.00 0.00
Distributions from
Capital Gains 0.00 0.01 0.00 0.14 0.00 0.00
--------------------------------------------- ------------------------------------------
Total Distributions 0.41 0.25 0.09 0.28 0.07 0.00
--------------------------------------------- ------------------------------------------
Net Asset Value -
End of Period $13.21 $12.14 $10.09 $11.95 $10.84 $10.00
============================================= ==========================================
TOTAL RETURN> 12.18% 22.79% 1.75%* 12.76% 9.08% 0.00%
RATIOS
Net Assets - End of
Period ($000 Omitted) $13,513 $6,553 $1,055 $2,660 $290 $25
Ratio of Expenses to
Average Net Assets# 0.94%@ 1.01%@ 0.86%~ 1.16%@ 1.80%@ 0.00%
<PAGE>
Ratio of Net Investment
Income to Average
Net Assets# 3.44% 3.91% 3.86%~ 2.92% 2.47% 0.00%
Portfolio Turnover Rate 12% 5% 0%* 48% 24% 0%
Average Commission
Rate Paid^^ $0.0890 - - $0.1055 - -
</TABLE>
^ From June 2, 1994, commencement of operations, to December 31, 1994.
+ All expenses for the Utilities Fund were voluntarily absorbed by INVESCO 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 the ^ Total Return and Utilities Funds were voluntarily
absorbed by ^ INVESCO for the years ended December 31, 1996 and 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 1.30%, 2.51%
and 16.44% for the Total Return Fund and 5.36% and 57.13% for the Utilities
Fund, respectively, and ratio of net investment income to average net assets
would have been 3.08%, 2.41% and (11.72%) for the Total Return Fund and (1.28%)
and (52.86%) for the Utilities Fund, respectively.
@ Ratio is based on Total Expenses of the ^ Fund, less Expenses Absorbed by
Investment Adviser, which is before any expense offset arrangements.
~ Annualized
^^ The average commission rate paid is the total brokerage commissions paid on
applicable purchases and sales of securities for the period divided by the total
number of related shares purchased or sold which is required to be disclosed for
fiscal years beginning September 1, 1995 and thereafter.
<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.
Because prices of stocks fluctuate from day to day, the value of an
investment in any of the Funds will vary based upon the specific Fund's
investment performance. Many of the Funds invest in different companies in a
variety of industries in order to attempt to reduce its overall exposure to
investment and market risks. There is no assurance that any Fund will attain its
objectives.
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 securities, 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.
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 The 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
<PAGE>
rated lower than BBB by Standard & Poor's or Baa by Moody's are discussed
below under the caption "Risk Factors." See the Appendix to this Prospectus for
a specific description of each corporate bond rating category.
Dynamics Fund
The investment objective of the Dynamics Fund ^ is to seek appreciation of
capital through aggressive investment policies. ^ 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
<PAGE>
U.S. government, 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 investment objective of the Small Company Growth Fund ^ is to seek
long-term capital growth. ^ 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>
stages 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 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 investment objective of the Health Sciences Fund ^ is to seek 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
<PAGE>
in 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
Investors Service, Inc., and repurchase agreements) and cash.
Technology Fund
The investment objective of the Technology Fund ^ is to seek 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 Investors Service, Inc., 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,
<PAGE>
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
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 in 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.
Growth Fund
The investment objective of the Growth Fund is to seek long-term
capital growth. The Fund also seeks, as a secondary objective, to obtain
investment income through the purchase of securities of carefully selected
companies representing major fields of business and industrial activity. The
Fund normally holds common stocks (including securities convertible into common
<PAGE>
stocks) although it may invest in the following other types of securities:
commercial paper and convertible debentures and straight debt securities having
an investment grade rating (Baa or above by Moody's or BBB or above by Standard
& Poor's) and preferred stocks. In each instance, the Fund endeavors to invest
in securities offering the possibility of capital enhancement and some current
income. 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.
In selecting securities for investment, Fund Management will seek to
identify companies that have a better than average earnings growth potential and
those industries that stand to enjoy the greatest benefit from the predicted
economic environment. The Growth Fund seeks to purchase the securities of
companies that are thought to be best situated in those industry groupings.
While dividends are of secondary consideration, dividend payment records of
companies are also considered.
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.
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.
<PAGE>
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 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 government 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
<PAGE>
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 ^ the
High Yield, Industrial Income, Total Return and Utilities Funds are set forth
under "Financial Highlights." Each of 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
<PAGE>
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.
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
<PAGE>
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 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
<PAGE>
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 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. Further-
<PAGE>
more, 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. 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, ^ 1996. 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, 1996, 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 11.69% 0.00%
AA 0.00% 0.00%
A 0.69% 0.00%
BBB 2.59% 0.53%
BB 3.92% 15.62%
B 2.18% 62.16%
CCC 0.21% 6.98%
Unrated 0.00% 3.40%
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
<PAGE>
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.
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
<PAGE>
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.
For hedging or other non-speculative purposes, 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.
<PAGE>
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
Funds, 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.
MANAGEMENT
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 AMVESCO PLC, a
publicly-traded holding company that, through its subsidiaries, engages in the
business of investment management on an international basis. INVESCO PLC changed
its name to AMVESCO PLC on ^ March 3, 1997 as a part of a merger between INVESCO
PLC and ^ A I M Management Group^ Inc., thus creating one of the largest
independent investment management businesses in the world. Subject to obtaining
shareholder approval at its regular Annual Shareholder Meeting, the board of
directors of AMVESCO PLC has concluded that the corporate name should be changed
to AMVESCAP PLC effective May 8, 1997. INVESCO, INVESCO Trust and ICM will
continue to operate under their existing names. AMVESCO PLC has approximately ^
$165 billion in assets under management. INVESCO was established in 1932 and, as
of December 31, 1996, managed 14 mutual funds, consisting of 44 separate
portfolios, with combined assets of approximately $13.8 billion on behalf of
over 826,000 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, Technology and Growth Funds and ICM serves as
the sub-adviser of the Total Return Fund. Although the Company is not a party to
any sub-advisory agreement, the agreements have 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 shareholders 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
<PAGE>
managing the investments of the Industrial Income, Dynamics, High Yield, Small
Company Growth, Health Sciences, Technology, Utilities and Growth Funds and ICM
is primarily responsible for selecting and
managing the investments of the Total Return Fund.
INVESCO Trust, a trust company founded in 1969, is a wholly-owned
subsidiary of INVESCO that served as adviser or sub-adviser to 55 investment
portfolios as of December 31, 1996, including 31 portfolios in the INVESCO
group. These 55 portfolios had aggregate assets of approximately $12.7 billion
as of December 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.
ICM is an indirect, wholly-owned subsidiary of AMVESCO PLC that currently
manages in excess of $39 billion of assets on behalf of tax-exempt accounts
(such as pension and profit-sharing funds for corporations and state and local
governments) and investment companies.
The following persons serve as portfolio managers of the respective Funds:
Industrial Income Fund
Charles P. Mayer - Co-portfolio manager of the ^ Fund since 1994;
co-portfolio manager of the INVESCO Industrial Income Fund ^ since 1993;
co-portfolio manager of the INVESCO Balanced Fund since 1996; director (since
1997), portfolio manager (since 1993), senior vice president (since 1994) and
vice president (1993 to 1994) of INVESCO Trust; director of INVESCO since 1997;
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 ^ Fund since 1994;
co-portfolio manager of the INVESCO Industrial Income Fund since 1994, INVESCO
Balanced Fund since 1996 and INVESCO Short-Term Bond Fund since 1996; portfolio
manager of the INVESCO VIF - High Yield Portfolio since 1994, INVESCO High Yield
Fund since 1994 and INVESCO Select Income Fund since 1994; 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.
Dynamics Fund
Timothy J. Miller ^- Portfolio manager of the Fund since 1996; portfolio
manager for the INVESCO Dynamics Fund since 1993; co- portfolio manager of the
INVESCO Growth Fund since 1996; co-portfolio manager of the INVESCO Growth Fund
<PAGE>
since 1996 and the INVESCO Small Company Growth Fund since 1997; 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 ^ Fund since 1994;
portfolio manager of the INVESCO High Yield Fund and the INVESCO Select Income
Fund since 1994; co-portfolio manager of INVESCO Industrial Income Fund since
1994, INVESCO VIF - Industrial Income ^ Fund since 1994, INVESCO Balanced Fund
since 1994 and INVESCO Short-Term Bond Fund since 1996; 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 ^ Fund
^ Timothy J. Miller - Co-portfolio manager of the Fund since 1997;
co-portfolio manager of the INVESCO Small Company Growth ^ Fund since 1997; the
INVESCO Growth Fund, Inc. since 1996 and the INVESCO VIF - Growth Fund since
1997; portfolio manager of INVESCO ^ Dynamics Fund, Inc. since 1993; senior vice
president (since 1995), vice president (1993 to 1995) and portfolio manager
(since 1992) of INVESCO Trust Company. 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. He is a Chartered Financial Analyst.
Trent E. May - Co-portfolio manager of the Fund since 1997; co-portfolio
manager of the INVESCO Small Company Growth Fund since 1997 and of the INVESCO
Growth Fund, Inc. since 1996; portfolio manager (since 1996) and vice president
(since 1997) of INVESCO Trust Company. Formerly, senior equity fund
manager/equity analyst at Munder Capital Management in Detroit. B.S.,
Engineering, Florida Institute of Technology, M.B.A., Rollins College. He is a
Chartered Financial Analyst.
Stacie Cowell - Co-portfolio manager of the Fund since 1997; co-portfolio
manager of the INVESCO Small Company Growth Fund since 1997; portfolio manager
(since 1996) of INVESCO Trust Company. Formerly, senior equity analyst with
Founders Asset Management; capital markets and trading analyst with Chase
Manhattan Bank in New York. B.A., Economics, Colgate University. She is a
Chartered Financial Analyst.
<PAGE>
Health Sciences Fund
John Schroer - Co-portfolio manager of the Fund since 1996; portfolio
manager of the INVESCO Strategic Health Sciences Portfolio ^ since 1996 and
co-portfolio manager of that Portfolio from 1994 to 1996; 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.
Carol A. Werther - Co-portfolio manager of the Fund since 1996
and co-portfolio manager of the INVESCO Strategic Health Sciences
Portfolio since 1996. Previously, Ms. Werther was a portfolio
manager specializing in biotechnology stock with Rothschild Asset
Management Ltd. (1995 to 1996); a vice president and biotechnology
analyst with Cowen & Company (1992 to 1994); and an analyst with
Lehman Brothers (1990 to 1992). Ms. Werther earned an M.B.A. from
New York University, an M.S. from the University of Alabama in
Birmingham and a B.S. from Cornell University.
Technology Fund
Daniel B. Leonard - Co-portfolio manager of ^ the Fund since 1996;
co-portfolio manager (since 1996) and formerly portfolio manager (1985-1996) of
the INVESCO Strategic Technology Portfolio ^; co-portfolio manager of ^ the
INVESCO Strategic Financial Services Portfolio since 1997 and portfolio manager
of that Fund from 1996 to 1997; portfolio manager of the INVESCO Strategic Gold
Portfolio 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 ^ the Fund since 1996;
co-portfolio manager ^ of the INVESCO Strategic Technology Portfolio ^ since
1996; portfolio manager of the INVESCO Strategic ^ Environmental Portfolio since
1996; joined INVESCO Trust Company in 1994, served as a research analyst from
1994 to 1995 and became a vice president in 1995; formerly, 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.
Utilities Fund
Jeffrey G. Morris - Portfolio manager of the ^ Fund since 1996; portfolio
manager of the INVESCO Strategic Utilities Portfolio ^ since 1996 and INVESCO
<PAGE>
Strategic Environmental Services Portfolio since 1996; co-portfolio manager
of the INVESCO Strategic Financial Services Portfolio since 1997; 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.
Total Return Fund
Edward C. Mitchell, Jr. - Portfolio manager of the ^ Fund since 1993;
portfolio manager of INVESCO Value Trust Total Return Fund since 1987 and of the
^ INVESCO Advisors Funds 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 ^ Fund since 1993;
co-portfolio manager of the INVESCO Value Trust Total Return Fund and of the ^
INVESCO Advisor Funds 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.
Growth Fund
^ Timothy J. Miller - Co-portfolio manager of the ^ Fund since 1997;
co-portfolio manager of the INVESCO Growth Fund, Inc. since ^ October 1996 and
portfolio manager of ^ that Fund from June to October 1996; co-portfolio manager
of the INVESCO Small Company Growth Fund since 1997 and of the INVESCO VIF -
Small Company Growth Fund since 1997; portfolio manager of the INVESCO Dynamics
Fund, Inc. since 1993; senior vice president (since 1995), vice president (1993
to ^ 1995) and portfolio manager ^ (since 1992) of INVESCO Trust Company.
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. He
is a Chartered Financial Analyst.
Trent E. May - Co-portfolio manager of the Fund since 1997; co-portfolio
manager of the INVESCO VIF - Growth Fund since 1996, the INVESCO Small Company
Growth Fund since 1997 and the INVESCO VIF - Small Company Growth Fund since
1997; portfolio manager (since 1996) of INVESCO Trust company. Formerly, senior
equity fund manager/equity analyst at Munder Capital Management in Detroit. B.S.
in Engineering, Florida Institute of Technology; M.B.A., Rollins College. He is
a Chartered Financial Analyst.
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 rates of 0.75% on the first $500 million of the Fund's average net
<PAGE>
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 annual rates 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 rates 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 rates 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. For the Growth Fund, the advisory fees are computed at the annual rate
of .85% of the Fund's average net assets. For the fiscal period ended December
31, 1996, 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. No advisory fees are
provided for the Health Sciences, Small Company Growth, Technology, Dynamics and
Growth Funds as they had not commenced operations as of the date of this
prospectus.
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 rates 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 rates 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 sub-advisory fee for the Growth Fund is
0.25% of the Fund's average net assets.
The Company also has entered into an Administrative Services Agreement
with INVESCO dated February 28, 1997 (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
<PAGE>
consisting of a base 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, 1996, including
investment advisory fees (but excluding brokerage commissions, which are a cost
of acquiring securities), amounted to 0.95%, 0.94%, 0.87% and 1.16%,
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, 1996, would have been 1.19%, 1.30%, 1.32%, and 5.36%,
respectively. Total Operating Expenses are not provided for the Health Sciences,
Small Company Growth, Technology, Dynamics and Growth Funds as they had not
commenced operations as of the date of this prospectus.
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. 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
<PAGE>
revenues to Participating Insurance Companies, broker dealers and other
financial institutions that provide administrative services for the Funds.
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 investments, 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
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
<PAGE>
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, 1996, was 22.28%, 12.18%, 16.59% and 12.76%, respectively.
The yield of the Fund is calculated by utilizing the Fund's calculated
income, expenses and average outstanding shares for the most recent 30-day or
one-month period, dividing it by the month end net asset value and annualizing
the resulting number.
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 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,
<PAGE>
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 "Growth Funds" grouping for the Growth 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 shareholders 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
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
<PAGE>
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 ^ and Moody's bond
rating categories:
Standard & Poor's 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.
<PAGE>
Moody's ^ 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 exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa - Bonds 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>
Prospectus
May 1, 1997
INVESCO VARIABLE INVESTMENT FUNDS, INC.
INVESCO VIF - Industrial Income ^ Fund
INVESCO VIF - Health Sciences ^ Fund
INVESCO VIF - Small Company Growth ^ Fund
INVESCO VIF - Total Return ^ Fund
INVESCO VIF - Technology ^ Fund
INVESCO VIF - High Yield ^ Fund
INVESCO VIF - Utilities ^ Fund
INVESCO VIF - Dynamics ^ Fund
INVESCO VIF - Growth Fund ^
To receive additional information ^ and prospectuses on any of INVESCO's funds
or retirement plans, or to obtain current account or price information, call
toll-free: 1-800-525-8085.
^ To reach PAL(R), your 24-hour Personal Account Line, call:
^ 1-800-424-8085.
You can find us on the World Wide Web:
http://www.invesco.com
Or write to:
INVESCO Funds Group^. Inc.(SM), Distributor
Post Office Box 173706
Denver, Colorado 80217-3706
If you're in Denver, please visit one of our convenient Investor
Centers:
Cherry Creek, 155-B Fillmore Street
Denver Tech Center,
7800 East Union Avenue, Lobby Level
In addition, all documents filed by the Company with the Securities and Exchange
Commission can be located on a web site maintained by the Commission at
http://www.sec.gov.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1997
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 nine 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"), the INVESCO VIF - Utilities
Portfolio (the "Utilities Fund") and the INVESCO VIF - Growth Portfolio (the
"Growth Fund"). 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 ^ 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 equity securities of small-
capitalization 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.
Growth Fund:
to seek long-term capital growth. The Fund also seeks, as a secondary
objective, to obtain investment income through the purchase of securities
of carefully selected companies representing major fields of business and
industrial activity. In pursuing its objectives, the Fund invests
primarily in common stocks, but may also invest in other kinds of
<PAGE>
securities, including convertible and straight issues of debentures and
preferred stock.
A prospectus for the Company dated May 1, 1997 (the "Prospec tus"), 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 a prospectus,
but contains informa tion 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.................................. ^ 22
Transfer Agency Agreement.......................................... ^ 25
Officers and Directors of the Company.............................. ^ 25
HOW SHARES ARE VALUED.................................................... ^ 31
PERFORMANCE.............................................................. ^ 32
Total Return Calculations.......................................... ^ 33
Yield Calculations................................................. ^ 33
Comparison of Fund Performance..................................... ^ 34
PORTFOLIO TURNOVER....................................................... ^ 35
PORTFOLIO BROKERAGE...................................................... ^ 36
REDEMPTIONS.............................................................. ^ 37
ADDITIONAL INFORMATION................................................... ^ 38
Common Stock....................................................... ^ 38
Principal Shareholders............................................. ^ 40
Independent Accountants............................................ ^ 42
Custodian................................................................ ^ 42
Transfer Agent..................................................... ^ 42
Reports to Shareholders............................................ ^ 42
Legal Counsel...................................................... ^ 42
Prospectus......................................................... ^ 42
Registration Statement............................................. ^ 43
APPENDIX A............................................................... ^ 44
<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
<PAGE>
adhere to 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 liquid securities 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
segregated account with the Funds' custodian to collateralize the position.
<PAGE>
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 ^ contracts 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
<PAGE>
the future in order to secure what is considered to be an advantageous
price and 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 or liquid securities 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
and backed by the full faith and credit of the United States government.
<PAGE>
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
<PAGE>
or forward 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.
<PAGE>
(g) The Fund does not currently intend to purchase securities
of any issuer (other than U.S. government agencies and
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
<PAGE>
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 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.
<PAGE>
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
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 other Funds. INVESCO Trust,
a trust company founded in 1969, is a wholly-owned subsidiary of INVESCO that,
as of December 31, 1996, managed 55 other investment portfolios, including 31
portfolios in the INVESCO group.
ICM is an indirect wholly-owned subsidiary of AMVESCO 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 AMVESCO PLC, a publicly
traded holding company that, through its subsidiaries, engages ^ in the business
of investment management on an international basis. INVESCO PLC ^ changed its
name to AMVESCO PLC on ^ March 3, 1997, as part of a merger between a direct
subsidiary of INVESCO PLC and ^ A I M Management Group^ Inc., thus creating one
of the largest independent investment management businesses in the world^.
Subject to obtaining shareholder approval at its Regular Annual Shareholder
Meeting, the board of directors of AMVESCO PLC has concluded that the corporate
name should be changed to AMVESCAP PLC effective May 8, 1997. INVESCO, INVESCO
Trust and ICM will continue to operate under their existing names. AMVESCO has
approximately $165 billion in assets under management. INVESCO was established
in 1932 and, as of December 31, 1996, managed 14 mutual funds, consisting of 44
separate portfolios, with combined assets of approximately $13.8 billion on
behalf of over 826,000 shareholders.
<PAGE>
AMVESCO 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.
--INVESCO Realty Advisors of Dallas, Texas, is responsible for providing
advisory services in the U.S. real estate markets for AMVESCO PLC's clients
worldwide. Clients include corporate plans and public pension funds as well as
endowment and foundation accounts.
--A I M Advisors, Inc. of Houston, Texas provides investment
advisory and administrative services for retail and institutional
mutual funds.
--A I M Capital Management, Inc. of Houston, Texas provides investment
advisory services to individuals, corporations, pension plans and other private
investment advisory accounts and also serves as a sub-advisor to certain retail
and institutional mutual funds, one Canadian mutual fund and one portfolio of an
open-end registered investment company that is offered to separate accounts of
variable insurance companies.
--A I M Distributors, Inc. and Fund Management Company of
Houston, Texas are registered broker-dealers that act as the
principal underwriters for retail and institutional mutual funds.
The corporate headquarters of AMVESCO 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
<PAGE>
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 ^ by the board
of directors on November 6, 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. Shareholders
of the Industrial Income, Total Return, High Yield and Utilities Funds approved
the Agreement on January 31, 1997 for an initial term expiring February 28,
1999. The initial shareholder of the Dynamics, Small Company Growth, Health
Sciences and Technology Funds approved the Agreement on January 31, 1997 for an
initial term expiring February 28, 1999, and the initial shareholder of the
Growth Fund approved the Agreement on May 1, 1997, for an initial term expiring
^ May 1, 1999. 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 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,
notwithstanding 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),
<PAGE>
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 rates 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 rates 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 rates 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 Dynamics Fund, the advisory fees are computed at
the annual rates 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. For the Growth Fund, the advisory fees are
computed at the annual rate of 0.85% of the Fund's average net assets.
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
<PAGE>
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 sub-advisory agreements
with INVESCO (the "INVESCO Trust Sub-Agreement,") collectively with the ICM
Sub-Agreement, the "Sub-Agreements"). Each Sub-Agreement initially was approved
by the board of directors on November 6, 1996, in each case by a vote cast in
person by a majority of the Independent Directors at a meeting called for such
purpose. Shareholders of the Industrial Income, Total Return, High Yield and
Utilities Funds approved the applicable INVESCO Trust Agreement on January 31,
1997. The initial shareholder of the Dynamics, Small Company, Growth, Health
Sciences and Technology Funds approved the INVESCO Trust Agreement, on December
9, 1996, for an initial term expiring December 9, 1999, and the initial
shareholder of the Growth Fund approved the INVESCO Trust Agreement on May 1,
1997, for an initial term expiring ^ May 1, 1999. 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
reinvestment 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
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)
<PAGE>
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
rates 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 rates 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 rates 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 fee for the Growth Fund is computed at the annual
rate of 0.25% of the Fund's average net assets.
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
<PAGE>
pursuant to an Administrative Services Agreement dated February 28, 1997
(the "Administrative Agreement"). The Administrative Agreement was approved on
November 6, 1996, 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 Agreements were for an initial term expiring February 28, 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.
<PAGE>
For the fiscal years ended December 31, 1996 and 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:
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
December 31, 1996 December 31, 1995 December 31, 1994
-------------------------- ------------------------- -------------------------
Adminis- Adminis- Adminis-
trative trative trative
Advisory Services Advisory Services Advisory Services
Fees Fees Fees Fees Fees Fees
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Industrial Income Fund $105,932 $12,119 $27,073 $10,541 $848 $10,017
Total Return Fund $77,890 $11,558 $24,649 $10,493 $1,753 $10,035
High Yield Fund $50,693 $11,267 $16,298 $10,407 $735 $10,018
Utilities Fund $5,716 $10,143 $467 $10,011 $0(1) $0(1)
Dynamics Fund(2) $0 $0 $0 $0 $0 $0
Health Sciences Fund(2) $0 $0 $0 $0 $0 $0
Small Company Growth Fund(2) $0 $0 $0 $0 $0 $0
Technology Fund(2) $0 $0 $0 $0 $0 $0
Growth Fund(2) $0 $0 $0 $0 $0 $0
</TABLE>
(1) The Utilities Fund did not commence operations until January 1, 1995.
(2) The Dynamics, Health Sciences, Small Company Growth and Technology Funds had
not commenced operations as of the date of this Statement of Additional
Information.
<PAGE>
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 November 6, 1996, for an initial term expiring
February 28, 1998. 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.
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 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
<PAGE>
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 AMVESCO 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 ^ American Holdings Company and First ING Life
Insurance Company^ of New York. Address: Security Life Center,
1290 Broadway, Denver, Colorado. Born: January 12, 1928.
^
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.
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. Director of the INVESCO Advisor Funds, Inc. and
Trustee of INVESCO Treasurers Series Trust. Address: 15 Sterling
Road, Armonk, New York. Born: August 1, 1923.
<PAGE>
^ DAN J. HESSER,+* President, CEO and Director. Chairman of
the Board, President, and Chief Executive Officer of INVESCO Funds
Group, Inc.; Director and President of INVESCO Trust Company and
INVESCO Advisor Funds, Inc. Trustee of The Global Health Sciences
Fund^ and INVESCO Treasurer's Series Trust. Born: December 27,
1939.
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.
GLEN A. PAYNE, Secretary. Senior Vice President (since 1995),
General Counsel and Secretary of INVESCO Funds Group, Inc. and
INVESCO Trust Company; Vice President (May 1980 to April 1995), 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. Formerly, 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.
<PAGE>
#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 January 31, 1997, officers and directors of the Company, as a group,
beneficially owned 0% of each Fund's outstanding shares.
Director Compensation
The following table sets forth, for the fiscal period ended December 31,
1996: 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, 1996. As of December 31, 1996, there were 49
funds in the INVESCO Complex.
<PAGE>
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, $ 4,096 $ 83 $ 81 $ 98,850
Vice Chairman of
the Board
Victor L. Andrews 4,089 78 93 84,350
Bob R. Baker 4,091 70 125 84,850
Lawrence H. Budner 4,080 78 93 80,350
Daniel D. Chabris 4,091 89 66 84,850
A. D. Frazier, Jr.(4) 4,057 0 0 81,500
Kenneth T. King 4,051 86 73 71,350
John W. McIntyre 4,078 0 0 90,350
------ --- --- -------
Total $32,633 $484 $531 $676,450
% of Net Assets 0.0621%(5) 0.0009%(5) 0.0044%(6)
(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.
(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
<PAGE>
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)Mr. Frazier resigned as a Trustee of the Trust effective February 4,
1997. Effective November 1, 1996 Mr. Frazier was employed by AMVESCO PLC, a
company affiliated with INVESCO. Because it was possible that Mr. Frazier would
become employed with AMVESCO PLC ^, 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 ^ ceased to receive any director's
fees or other compensation from the Company or other funds in the INVESCO
Complex for his services as a director.
(5)Totals as a percentage of the Company's net assets as of December 31,
1996.
(6)Total as a percentage of the net assets of the INVESCO Complex as of
December 31, 1996.
Messrs. Brady^ and Hesser, ^ 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 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 40% 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
<PAGE>
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.
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
<PAGE>
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
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.
<PAGE>
Total Return Calculations
Average annual total return performance for the indicated periods ended
December 31, 1996, for each Fund that had commenced operations by that date were
as follows:
Portfolio 1 Year Life of Fund
- ---------- ------ ------------
Industrial Income Portfolio 22.28% 21.46%
Total Return Portfolio 12.18% 13.96%
High Yield Portfolio 16.59% 13.59%
Utilities Portfolio 12.76% 10.90%
(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.
Yield Calculations
The yields of the Industrial Income Fund, Total Return Fund, High Yield
Fund and Utilities Fund for the month ended December 31, 1996 were 2.38%, 3.20%,
9.70% and 2.87%, 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.
<PAGE>
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 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
<PAGE>
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 years ended December 31, 1996
and 1995 and the fiscal period ended December 31, 1994 were as follows:
Fund 1996 1995 1994
---- ---- ---- ----
Industrial Income Fund 93% 97% 0%
Total Return Fund 12% 5% 0%
High Yield Fund 380% 310% 23%
Utilities Fund 48% 24% 0%
In computing these portfolio turnover rates, all investments 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 increase in
the High Yield Fund's portfolio turnover rate in 1996 was primarily due to a
doubling in size of the Fund and an effort to take advantage of attractive
opportunities in the bond market. The primary reason for the increase in all of
the Funds' portfolio
<PAGE>
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.
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 broker-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 years ended December 31, 1996 and 1995 and the fiscal period
ended December 31, 1994 were ^ $283,949, $94,602 and $2,388, respectively. This
increase was primarily due to the increased size of the Funds. On a Fund basis,
<PAGE>
the aggregate amount of brokerage commissions paid in 1996 breaks down as
follows: Industrial Income Fund, $151,867; Total Return Fund, $7,686; High Yield
Fund, $114,443; and Utilities Fund, $9,953. for the year ended December 31,
1996, brokers providing research services received $16,378, $0, $0, and $3,274
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 $11,104,765, $0, $0, and $1,811,519,
respectively. The Company paid $7 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, 1996.
At December 31, 1996, 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 12/31/96
- ---- ---------------- --------------------
Industrial Income Fund None
Total Return Fund Morgan Stanley Group,
Incorporated 108,537.50
State Street Boston
Corporation 135,450.00
High Yield Fund None
Utilities Fund None
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.
<PAGE>
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 nine 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 - Small Company Growth Portfolio common stock, INVESCO VIF - Health
Sciences Portfolio common stock INVESCO VIF - Technology Portfolio common stock
and INVESCO VIF - Growth Portfolio common stock. As of December 31, 1996,
1,559,051 shares of the Industrial Income Fund, 1,023,019 shares of the Total
Return Fund, 1,191,508 shares of the High Yield Fund, 222,570 shares of the
Utilities Fund, -0- shares of the Technology Fund, -0- shares of the Small
Company Growth Fund, -0- of the Health Sciences Fund, -0- shares of the Dynamics
Fund and -0- of the Growth 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. 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
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
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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 January 31, 1997, the following persons held more than 5% of the
Funds' outstanding equity securities.
Amount and Nature
Name and Address of Ownership Percent of Class
- ---------------- ----------------- ----------------
Industrial Income Fund
- ----------------------
Separate Account VA-5 of 859,763.9160 57.998%
Transamerica Occidental Record
Life Insurance Company
Variable Annuity Dept B-100
1150 S. Olive
Los Angeles, CA 90015
Security Life 318,482.2190 21.48%
Separate Account A1 Record
Unit Valuations 2T2
8515 E. Orchard Road
Englewood, CO 80111
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Security Life 118,498.6110 7.994%
Separate Account L1 Record
Attn: Debra Bechtel
Unit Valuations 272
8515 E. Orchard Road
Englewood, CO 80111
Separate Account VA-5NLNY 82,794.2260 5.585%
of First Transamerica Record
Life Insurance Company
Attn: Variable Annuity Dept.
P.O. Box 33849
Charlotte, NC 28233
Great West Life & Annuity 77,586.2200 5.234%
Unit Valuations 2T2
8515 e. Orchard Road
Englewood, CO 80111
Total Return Fund
- -----------------
Separate Account VA-5 of 703,173.4310 66.552%
Transamerica Occidental Record
Life Insurance Company
Variable Annuity Dept B-100
1150 S. Olive
Los Angeles, CA 90015
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Security Life 225,140.6560 21.309%
Separate Account A1 Record
Unit Valuations 2T2
8515 E. Orchard Road
Englewood, CO 80111
Security Life 81,135.8840 7.679%
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 597,317.9310 50.552%
Transamerica Occidental Record
Life Insurance Company
Variable Annuity Dept B-100
1150 S. Olive
Los Angeles, CA 90015
Security Life 330,025.8410 27.930%
Separate Account A1 Record
Unit Valuations 2T2
8515 E. Orchard Road
Englewood, CO 80111
Security Life 127,102.7110 10.757%
Separate Account L1 Record
Unit Valuations 2T2
8515 E. Orchard Road
Englewood, CO 80111
Great-West Life & Annuity 75,014.2530 6.349%
Unit Valuations 2T2
8515 E. Orchard Road
Englewood, CO 80111
Utilities Fund
- --------------
Security Life 206,505.6210 88.547%
Separate Account A1 Record
Unit Valuations 2T2
8515 E. Orchard Road
Englewood, CO 80111
Security Life 24,137.9860 10.350%
Separate Account L1 Record
Unit Valuations 2T2
8515 E. Orchard Road
Englewood, CO 80111
<PAGE>
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.
Financial Statements
The Company's audited financial statements and the notes thereto for the
fiscal year ended December 31, 1996, 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, 1996.
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.
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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.
<PAGE>
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
transactions in a particular option with the result that a Fund would have to
exercise the option in order
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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 intermediation 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
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.
<PAGE>
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
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
<PAGE>
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.
