PROSPECTUS
January 1, 1998
INVESCO INCOME FUNDS, INC.
INVESCO Select Income Fund
INVESCO High Yield Fund
INVESCO U.S. Government Securities Fund
INVESCO Short-Term Bond Fund
The four INVESCO Income Funds (the "Funds") described in this Prospectus
are actively managed to seek high current income through investments in
fixed-income securities. The INVESCO Select Income Fund (the "Select Income
Fund"), the INVESCO High Yield Fund (the "High Yield Fund"), the INVESCO U.S.
Government Securities Fund (the "U.S. Government Securities Fund") and the
INVESCO Short-Term Bond Fund (the "Short-Term Bond Fund") are diversified mutual
funds that seek as high a level of current income as is consistent with the risk
involved in investing in the types of securities in which each Fund invests. The
Select Income Fund, High Yield Fund and U.S. Government Securities Fund each
have a secondary objective of capital appreciation. The Short-Term Bond Fund is
a diversified mutual fund that seeks to achieve the highest level of current
income as is consistent with minimum fluctuation in principal value and with
maintaining liquidity.
This Prospectus provides you with the basic information you should know
before investing in a Fund. You should read it and keep it for future reference.
A Statement of Additional Information containing further information about the
Funds, dated January 1, 1998, has been filed with the Securities and Exchange
Commission and is incorporated by reference into this Prospectus. To obtain a
free copy, write to INVESCO Distributors, Inc., P.O. Box 173706, Denver,
Colorado 80217-3706; call 1-800-525-8085; or visit us on the world wide web:
http://www.invesco.com.
The Select Income Fund may invest up to 50% of its total assets in lower
rated bonds, commonly known as "high yield" or "junk bonds." The High Yield Fund
invests primarily in such bonds. These investments are subject to greater risks,
including the risk of default, than higher rated securities. You should
carefully assess the risks associated with an investment in these Funds. See
"Investment Objective and Strategy" and "Investment Policies and Risks."
<PAGE>
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. SHARES OF EACH FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK OR OTHER FINANCIAL INSTITUTION. THE SHARES
OF EACH FUND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
TABLE OF CONTENTS
ESSENTIAL INFORMATION........................................................2
ANNUAL FUND EXPENSES.........................................................3
FINANCIAL HIGHLIGHTS.........................................................5
INVESTMENT OBJECTIVE AND STRATEGY............................................9
INVESTMENT POLICIES AND RISKS...............................................11
THE FUNDS AND THEIR MANAGEMENT..............................................15
FUND PRICE AND PERFORMANCE..................................................17
HOW TO BUY SHARES...........................................................18
FUND SERVICES...............................................................20
HOW TO SELL SHARES..........................................................21
TAXES, DIVIDENDS AND OTHER DISTRIBUTIONS....................................22
ADDITIONAL INFORMATION......................................................23
APPENDIX -- RATINGS SERVICES................................................24
<PAGE>
ESSENTIAL INFORMATION
Investment Goals And Strategy: Select Income, High Yield and U.S.
Government Securities Funds are diversified mutual funds seeking high current
income. The High Yield Fund invests substantially all of its assets in bonds and
other debt securities and in preferred stocks. Such securities ordinarily
include those rated in lower categories by established ratings services. The
Select Income Fund invests in securities whose maturities will vary with
interest rates. The U.S. Government Securities Fund invests primarily in bonds
and other debt obligations issued or guaranteed by the U.S. government, its
agencies and instrumentalities, and in repurchase agreements and futures
contracts with respect to such securities. Capital appreciation is a secondary
objective for the Select Income, High Yield and U.S. Government Securities
Funds. Short-Term Bond Fund seeks the highest current income consistent with
minimum fluctuations in principal value and with maintaining liquidity; this
Fund's investments are primarily in government and government agency debt
securities, with a dollar-weighted average maturity of not more than three
years. There is no guarantee that the Funds will meet their investment
objective. See "Investment Objective And Strategy" and "Investment Policies And
Risks."
Designed For: The Select Income and the U.S. Government Securities Funds
are designed for investors seeking daily income, paid monthly. The High Yield
Fund is designed for investors seeking high daily income, paid monthly, who can
tolerate greater fluctuations in principal value than those associated with more
conservative bond funds. The Short-Term Bond Fund is designed for investors
seeking higher yields than those available from shorter-term, higher quality
money market funds and who can tolerate modest price fluctuations. While not a
complete investment program, one or more of these Funds may be a valuable
element of your investment portfolio. You may also wish to consider one of the
Funds as part of a Uniform Gifts/Transfers to Minors Act Account or systematic
investment strategy. Each Fund may be a suitable investment for tax-deferred
retirement programs such as various Individual Retirement Accounts ("IRAs"),
401(k), Profit Sharing, Money Purchase Pension, or 403(b) plans.
Time Horizon: The Funds are primarily managed for current income. The
Select Income, High Yield and U.S. Government Securities Funds also have a
secondary potential for capital growth. Investors should not consider each Fund
as a suitable investment for the portion of their savings devoted to capital
appreciation, or for that portion focused on liquidity and stable principal
value.
Risks: The Funds focus on fixed-income securities. Each Fund's investments
are subject to both credit risk and market risk, both of which are increased by
investing in lower rated securities. High Yield and Select Income Fund may
experience rapid portfolio turnover that may result in higher brokerage
<PAGE>
commissions and the acceleration of taxable capital gains. See "Investment
Policies And Risks" for specific risks associated with each Fund.
Organization and Management: Each Fund is a series of INVESCO Income Funds,
Inc. (the "Company"), a diversified, managed, no-load mutual fund. Each Fund is
owned by its shareholders. The Funds employ INVESCO Funds Group, Inc. ("IFG"),
founded in 1932, to serve as investment adviser, administrator and transfer
agent. INVESCO Trust Company ("INVESCO Trust"), founded in 1969, serves as
sub-adviser. Together, IFG and INVESCO Trust constitute "Fund Management." Prior
to September 30, 1997, IFG served as the Funds' distributor. Effective September
30, 1997, INVESCO Distributors, Inc. ("IDI"), founded in 1997 as a wholly-owned
subsidiary of IFG, became the Funds' distributor.
Each Fund's investments are selected by its portfolio manager or managers.
See "The Funds And Their Management."
IFG, INVESCO Trust and IDI are subsidiaries of AMVESCAP PLC, an
international investment management company that manages approximately $177.5
billion in assets. AMVESCAP PLC is based in London with money managers located
in Europe, North America, and the Far East.
The Funds offer all of the following services at no charge:
Telephone purchases
Telephone exchanges
Telephone redemptions
Automatic reinvestment of distributions
Regular investment plans such as EasiVest (the Fund's automatic monthly
investment program), Direct Payroll Purchase, and Automatic Monthly Exchange
Periodic withdrawal plans
See "How To Buy Shares" and "How To Sell Shares."
Minimum Initial Investment: $1,000 per Fund, which is waived for
regular investment plans, including EasiVest and Direct Payroll
Purchase, and certain retirement plans.
Minimum Subsequent Investment: $50 per Fund (Minimums are lower for
certain retirement plans).
ANNUAL FUND EXPENSES
Each Fund is no-load; there are no fees to purchase, exchange or redeem
shares. Each Fund is authorized to pay a Rule 12b-1 distribution fee of up to
one quarter of one percent of each Fund's average net assets each year. (See
"How To Buy Shares -- Distribution Expenses.")
<PAGE>
Like any company, each Fund has operating expenses -- such as portfolio
management, accounting, shareholder servicing, maintenance of shareholder
accounts, and other expenses. Theseexpenses are paid from each Fund's assets.
Lower expenses therefore benefit investors by increasing a Fund's investment
return.
We calculate annual operating expenses as a percentage of each Fund's
average annual net assets. To keep expenses competitive, the Funds' adviser
voluntarily reimburses the Select Income Fund, High Yield Fund and U.S.
Government Securities Fund for amounts in excess of 1.05%, 1.25% and 1.00%
(excluding excess amounts that have been offset by the expense offset
arrangements described below), respectively, of each Fund's average net assets.
The Short- Term Bond Fund's adviser and sub-adviser voluntarily reimburse the
Fund for amounts in excess of 0.85% (excluding excess amounts that have been
offset by the expense offset arrangements described below) of the Fund's average
net assets.
Annual Fund Operating Expenses
(as a percentage of average net assets)
Select Income Fund
Management Fee 0.55%
12b-1 Fees 0.25%
Other Expenses 0.23%
Total Fund Operating Expenses (1)(2) 1.03%
High Yield Fund
Management Fee 0.47%
12b-1 Fees 0.25%
Other Expenses 0.28%
Total Fund Operating Expenses(1) 1.00%
U.S. Government Securities Fund
Management Fee 0.55%
12b-1 Fees 0.25%
Other Expenses 0.21%
Total Fund Operating Expenses (1)(2) 1.01%
Short-Term Bond Fund
Management Fee 0.50%
12b-1 Fees 0.25%
Other Expenses 0.08%
Total Fund Operating Expenses (1)(3) 0.83%
(1) It should be noted that each Fund's actual total operating expenses were
lower than the figures shown because each Fund's custodian and pricing expenses
were reduced under an expense offset arrangement. However, as a result of an SEC
requirement, the figures shown above do not reflect these reductions. In
comparing expenses for different years, please note that the ratios of Expenses
to Average Net Assets shown under "Financial Highlights" do reflect reductions
for periods prior to the fiscal year ended August 31, 1996. See "The Funds And
Their Management."
<PAGE>
(2) Certain Fund expenses are being voluntarily absorbed by IFG. In the
absence of such absorbed expenses, "Other Expenses" and "Total Fund Operating
Expenses" for the fiscal year ended August 31, 1997 would have been 0.41% and
1.21%, respectively, for Select Income Fund, and 0.52% and 1.32%, respectively,
for U.S. Government Securities Fund. This is based on each Fund's actual
expenses for the fiscal year ended August 31, 1997. See "The Funds And Their
Management."
(3) Certain Fund expenses are being voluntarily absorbed by IFG and INVESCO
Trust. In the absence of such absorbed expenses, "Other Expenses" and "Total
Fund Operating Expenses" for the fiscal year ended August 31, 1997, would have
been 0.52% and 1.27%, respectively, for the Short-Term Bond Fund. This is based
on the Fund's actual expenses for the fiscal year ended August 31, 1997.
See "The Funds And Their Management."
Example
A shareholder would pay the following expenses on a $1,000 investment for
the periods shown, assuming a hypothetical 5% annual return and redemption at
the end of each time period. (Of course, actual operating expenses are paid from
each Fund's assets, and are deducted from the amount of income available for
distribution to shareholders; they are not charged directly to shareholder
accounts.)
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Select Income $11 $33 $57 $126
High Yield $11 $32 $55 $123
U.S. Government Securities $11 $32 $56 $124
Short-Term Bond $9 $27 $46 $103
The purpose of this table is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly. THE EXAMPLE SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE PERFORMANCE OR EXPENSES,
AND ACTUAL ANNUAL RETURNS AND EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
For more information on each Fund's expenses, see "The Funds and Their
Management" and "How To Buy Shares -- Distribution Expenses."
Because each Fund pays a distribution fee, investors who own shares of the
Funds for a long period of time may pay more than the economic equivalent of the
maximum front-end sales charge permitted for mutual funds by the National
Association of Securities Dealers, Inc.
<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 independent accountant's report thereon
appearing in the Fund's 1997 Annual Report to Shareholders, which is
incorporated by reference into the Statement of Additional Information. Both are
available without charge by contacting IDI at the address or telephone number on
the cover of this Prospectus. The Annual Report also contains more information
about each Fund's performance.
<TABLE>
<CAPTION>
Period
Ended
Year Ended August 31 August 31 Year Ended December 31
---------------------------------- ------- ---------------------------------------------------
1997 1996 1995 1994 1993^ 1992 1991 1990 1989 1988 1987
Select Income Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value -
Beginning of Period $6.35 $6.54 $6.18 $6.80 $6.53 $6.50 $5.96 $6.26 $6.39 $6.36 $7.10
----------------------------------- ------ ---------------------------------------------------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.45 0.47 0.47 0.47 0.33 0.52 0.53 0.59 0.63 0.61 0.63
Net Gains or (Losses)
on Securities (Both
Realized and
Unrealized) 0.34 (0.17) 0.36 (0.43) 0.27 0.13 0.53 (0.30) (0.13) 0.03 (0.74)
----------------------------------- ------ ---------------------------------------------------
Total from Investment
Operations 0.79 0.30 0.83 0.04 0.60 0.65 1.06 0.29 0.50 0.64 (0.11)
----------------------------------- ------ ---------------------------------------------------
LESS DISTRIBUTIONS
Dividends from Net
Investment Income 0.45 0.46 0.47 0.47 0.33 0.52 0.52 0.59 0.63 0.61 0.63
In Excess of Net
Investment Income+ 0.00 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distributions from
Capital Gains 0.03 0.02 0.00 0.09 0.00 0.10 0.00 0.00 0.00 0.00 0.00
<PAGE>
In Excess of Capital
Gains 0.00 0.00 0.00 0.10 0.00 0.00 0.00 0.00 0.00 0.00 0.00
----------------------------------- ------ ---------------------------------------------------
Total Distributions 0.48 0.49 0.47 0.66 0.33 0.62 0.52 0.59 0.63 0.61 0.63
----------------------------------- ------ ---------------------------------------------------
Net Asset Value -
End of Period $6.66 $6.35 $6.54 $6.18 $6.80 $6.53 $6.50 $5.96 $6.26 $6.39 $6.36
=================================== ====== ===================================================
TOTAL RETURN 12.89% 4.78% 14.01% 0.47% 9.42%* 10.38% 18.57% 4.86% 8.17% 10.52% (1.63%)
RATIOS
Net Assets - End of
Period
($000 Omitted) $287,618 $258,093 $216,597 $138,337 $158,780 $123,036 $93,827 $46,423 $32,783 $29,902 $19,751
Ratio of Expenses to
Average Net Assets# 1.03%@ 1.01%@ 1.00% 1.11% 1.15%~ 1.14% 1.15% 1.01% 0.99% 1.00% 0.99%
Ratio of Net
Investment Income
to Average
Net Assets# 6.98% 7.14% 7.38% 7.22% 7.40%~ 7.97% 8.57% 9.67% 9.92% 9.47% 9.36%
Portfolio Turnover Rate 263% 210% 181% 135% 105%* 178% 117% 38% 121% 143% 131%
^ From January 1, 1993 to August 31, 1993.
+ Distributions in excess of net investment income for the year ended August 31,
1995, aggregated less than $0.01 on a per share basis.
* Based on operations for the period shown and, accordingly, are not
representative of a full year.
<PAGE>
# Various expenses of the Fund were voluntarily absorbed by IFG for the years
ended August 31, 1997, 1996, 1995 and 1994. If such expenses had not been
voluntarily absorbed, ratio of expenses to average net assets would have been
1.21%, 1.16%, 1.22% and 1.15%, respectively, and ratio of net investment income
to average net assets would have been 6.80%, 6.99%, 7.16% and 7.18%,
respectively.
@ Ratio is based on Total Expenses of the Fund, less Expenses Absorbed by
Investment Adviser, which is before any expense offset arrangements.
~ Annualized
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Period
Ended
Year Ended August 31 August 31 Year Ended December 31
---------------------------------- ------- ---------------------------------------------------
1997 1996 1995 1994 1993^ 1992 1991 1990 1989 1988 1987
High Yield Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value -
Beginning of Period $6.84 $6.73 $6.73 $7.32 $6.97 $6.66 $6.00 $7.16 $7.82 $7.75 $8.38
---------------------------------- ------- ---------------------------------------------------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.62 0.63 0.66 0.62 0.39 0.64 0.70 0.83 0.95 0.93 0.94
Net Gains or (Losses)
on Securities (Both
Realized and
Unrealized) 0.64 0.11 0.03 (0.59) 0.36 0.30 0.64 (1.14) (0.66) 0.07 (0.63)
---------------------------------- ------- ---------------------------------------------------
Total from Investment
Operations 1.26 0.74 0.69 0.03 0.75 0.94 1.34 (0.31) 0.29 1.00 0.31
---------------------------------- ------- ---------------------------------------------------
LESS DISTRIBUTIONS
Dividends from Net
Investment Income+ 0.62 0.63 0.66 0.62 0.40 0.63 0.68 0.85 0.95 0.93 0.94
Distributions from
Capital Gains 0.03 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
In Excess of Capital
Gains 0.00 0.00 0.03 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
---------------------------------- ------- ---------------------------------------------------
Total Distributions 0.65 0.63 0.69 0.62 0.40 0.63 0.68 0.85 0.95 0.93 0.94
---------------------------------- ------- ---------------------------------------------------
Net Asset Value -
End of Period $7.45 $6.84 $6.73 $6.73 $7.32 $6.97 $6.66 $6.00 $7.16 $7.82 $7.75
================================== ======= ===================================================
TOTAL RETURN 19.27% 11.38% 11.12% 0.37% 11.01%* 14.53% 23.51% (4.57%) 3.72% 13.54% 3.52%
<PAGE>
RATIOS
Net Assets - End of
Period
($000 Omitted) $470,965 $375,201 $288,959 $243,773 $308,945 $212,172 $99,103 $40,380 $49,017 $60,470 $37,848
Ratio of Expenses to
Average Net Assets# 1.00% 0.99%@ 1.00% 0.97% 0.97%~ 1.00% 1.05% 0.94% 0.83% 0.82% 0.86%
Ratio of Net
Investment Income
to Average
Net Assets# 8.71% 9.13% 10.01% 8.70% 8.28%~ 9.29% 10.57% 12.57% 12.27% 11.72% 11.22%
Portfolio Turnover Rate 129% 266% 201% 195% 45%* 120% 64% 28% 53% 42% 89%
^ From January 1, 1993 to August 31, 1993.
+ Distributions in excess of net investment income for the year ended August 31,
1996, aggregated less than $0.01 on a per share basis.
* Based on operations for the period shown and, accordingly, are not
representative of a full year.
# Various expenses of the Fund were voluntarily absorbed by IFG for the years
ended August 31, 1996, 1995 and 1994. If such expenses had not been voluntarily
absorbed, ratio of expenses to average net assets would have been 0.99%, 1.07%
and 0.98%, respectively, and ratio of net investment income to average net
assets would have been 9.13%, 9.94% and 8.69%, respectively.
@ Ratio is based on Total Expenses of the Fund, less Expenses Absorbed by
Investment Adviser, if applicable, which is before any expense offset
arrangements.
~ Annualized
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Period
Ended
Year Ended August 31 August 31 Year Ended December 31
---------------------------------- ------ ---------------------------------------------------
1997 1996 1995 1994 1993^ 1992 1991 1990 1989 1988 1987
U.S. Government Securities Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value -
Beginning of Period $7.15 $7.49 $7.10 $8.19 $7.61 $7.65 $7.09 $7.14 $6.87 $6.98 $7.90
---------------------------------- ------- ---------------------------------------------------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.43 0.44 0.45 0.41 0.28 0.46 0.48 0.53 0.56 0.54 0.53
Net Gains or (Losses)
on Securities (Both
Realized and
Unrealized) 0.34 (0.34) 0.39 (0.93) 0.58 (0.04) 0.57 (0.05) 0.26 (0.11) (0.92)
---------------------------------- ------- ---------------------------------------------------
Total from Investment
Operations 0.77 0.10 0.84 (0.52) 0.86 0.42 1.05 0.48 0.82 0.43 (0.39)
---------------------------------- ------- ---------------------------------------------------
LESS DISTRIBUTIONS
Dividends from Net
Investment Income 0.43 0.43 0.45 0.41 0.28 0.46 0.49 0.53 0.55 0.54 0.53
In Excess of Net
Investment Income+ 0.00 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distributions from
Capital Gains 0.00 0.00 0.00 0.16 0.00 0.00 0.00 0.00 0.00 0.00 0.00
---------------------------------- ------- ---------------------------------------------------
Total Distributions 0.43 0.44 0.45 0.57 0.28 0.46 0.49 0.53 0.55 0.54 0.53
---------------------------------- ------- ---------------------------------------------------
Net Asset Value -
End of Period $7.49 $7.15 $7.49 $7.10 $8.19 $7.61 $7.65 $7.09 $7.14 $6.87 $6.98
================================== ======= ===================================================
TOTAL RETURN 11.01% 1.31% 12.37% (6.53%) 11.61%* 5.68% 15.56% 7.23% 12.40% 6.39% (5.10%)
<PAGE>
RATIOS
Net Assets - End of
Period
($000 Omitted) $51,581 $54,614 $38,087 $36,740 $36,391 $35,799 $29,229 $21,247 $19,293 $9,388 $7,848
Ratio of Expenses to
Average Net Assets# 1.01%@ 1.02%@ 1.00% 1.32% 1.40%~ 1.27% 1.27% 1.07% 1.04% 1.19% 1.29%
Ratio of Net
Investment Income
to Average
Net Assets# 5.78% 5.76% 6.24% 5.46% 5.36%~ 6.08% 6.78% 7.58% 7.98% 7.75% 7.06%
Portfolio Turnover Rate 139% 212% 99% 95% 100%* 115% 67% 38% 159% 221% 284%
^ From January 1, 1993 to August 31, 1993.
+ Distributions in excess of net investment income for the year ended August 31,
1995, aggregated less than $0.01 on a per share basis.
* Based on operations for the period shown and, accordingly, are not
representative of a full year.
# Various expenses of the Fund were voluntarily absorbed by IFG for the years
ended August 31, 1997, 1996, 1995 and 1994. If such expenses had not been
voluntarily absorbed, ratio of expenses to average net assets would have been
1.32%, 1.48%, 1.51% and 1.42%, respectively, and ratio of net investment income
to average net assets would have been 5.47%, 5.30%, 5.73% and 5.36%,
respectively.
@ Ratio is based on Total Expenses of the Fund, less Expenses Absorbed by
Investment Adviser, which is before any expense offset arrangements.
~ Annualized
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Period
Ended
Year Ended August 31 August 31
-------------------------------------------- ------------
1997 1996 1995 1994^
Short-Term Bond Fund
<S> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value - Beginning of Period $9.41 $9.54 $9.46 $10.00
-------------------------------------------- ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.50 0.56 0.57 0.47
Net Gains or (Losses) on Securities
(Both Realized and Unrealized) 0.15 (0.13) 0.08 (0.54)
-------------------------------------------- ------------
Total from Investment Operations 0.65 0.43 0.65 (0.07)
-------------------------------------------- ------------
LESS DISTRIBUTIONS
Dividends from Net Investment Income+ 0.55 0.56 0.57 0.47
-------------------------------------------- ------------
Net Asset Value - End of Period $9.51 $9.41 $9.54 $9.46
============================================ ============
TOTAL RETURN 7.08% 4.63% 7.16% (0.72%)*
RATIOS
Net Assets - End of Period ($000 Omitted) $12,344 $10,735 $8,979 $7,878
Ratio of Expenses to Average Net Assets# 0.83%@ 0.80%@ 0.46% 0.46%~
Ratio of Net Investment Income to
Average Net Assets# 5.82% 5.85% 6.05% 5.50%~
Portfolio Turnover Rate 331% 103% 68% 169%*
^ From September 30, 1993, commencement of investment operations, to August 31,
1994.
+ Distributions in excess of net investment income for the years ended August
31, 1996 and 1995, aggregated less than $0.01 on a per share basis.
^ Based on operations for the period shown and, accordingly, are not
representative of a full year.
<PAGE>
# Various expenses of the Fund were voluntarily absorbed by IFG and ITC for the
years ended August 31, 1997, 1996, 1995 and for the period ended August 31,
1994. If such expenses had not been voluntarily absorbed, ratio of expenses to
average net assets would have been 1.84%, 2.17%, 2.09% and 2.04%, respectively,
and ratio of net investment income to average net assets would have been 4.81%,
4.48%, 4.42% and 3.92%, respectively.
@ Ratio is based on Total Expenses of the Fund, less Expenses Absorbed by
Investment Adviser, which is before any expense offset arrangements.
~ Annualized
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE AND STRATEGY
The Select Income Fund seeks as high a level of current income as is
consistent with the risk involved in investing in the types of securities in
which it invests. The High Yield Fund seeks to achieve as high a level of
current income as is consistent with the risk involved in investing
substantially all of its assets in bonds and other debt securities and in
preferred stocks. The U.S. Government Securities Fund seeks a high level of
income by investing in bonds and other debt obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities, and in repurchase
agreements and futures contracts with respect to such securities. Potential
capital appreciation is a secondary factor in the selection of investments for
the Select Income, High Yield and U.S. Government Securities Funds. The
Short-Term Bond Fund seeks to achieve the highest level of current income as is
consistent with minimum fluctuation in principal value and with maintaining
liquidity. Each Fund's investment objective is fundamental and cannot be changed
without the approval of a Fund's shareholders. There is no assurance that a
Fund's investment objective will be met.
Portfolio Turnover. There are no fixed limitations regarding portfolio
turnover for the Funds; securities may be sold without regard to the time they
have been held when investment considerations warrant such action. Increased
turnover may result in greater brokerage commissions and acceleration of capital
gains that are taxable when distributed to shareholders. The Statement of
Additional Information includes an expanded discussion of each Fund's portfolio
turnover rate, its brokerage practices and certain federal income tax matters.
Select Income Fund
The Fund normally invests at least 90% of its assets in bonds and
marketable debt securities (including convertible issues) of established
companies which Fund Management believes may provide high current income and
which, consistent with this objective, may have the potential to provide capital
appreciation. Under normal circumstances, at least 50% of the Fund's assets are
invested in investment grade debt securities -- those rated Baa or higher by
Moody's Investors Service, Inc. ("Moody's") or BBB or higher by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). No more than 50%
of the Fund's assets may consist of corporate bonds rated below investment
grade. (See the Appendix to this Prospectus for a description of bond ratings.)
The Fund also may invest in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities (which may or may not be backed by
the full faith and credit of the United States) and bank certificates of
deposit. In addition, the Fund may invest in municipal obligations when we
believe that their potential returns are better than those that might be
achieved by investing in securities of corporate or U.S. governmental issuers.
<PAGE>
As a matter of policy, which may be changed without a vote of
shareholders, at least 65% of the Fund's total assets normally will be invested
in debt securities maturing at least three years after they are issued. However,
there are no limitations on the maturities of the securities held by the Fund,
and the Fund's average maturity will vary as Fund Management responds to changes
in interest rates.
High Yield Fund
The Fund invests primarily in higher yielding corporate bonds (including
convertible issues) and preferred stocks with medium to lower credit ratings.
These securities are generally rated Ba or lower by Moody's or BB or lower by
S&P. However, under no circumstances will the Fund invest in any issue rated
lower than Caa by Moody's or CCC by S&P, or any issue that is in default.
Potential capital appreciation is a factor in the selection of investments, but
is secondary to the Fund's primary objective. (See "Investment Policies and
Risks" below and the Appendix to this Prospectus for a description of bond
ratings.)
The Fund also may invest in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities (which may or may not be backed by
the full faith and credit of the United States) and bank certificates of
deposit. In addition, the Fund may invest in corporate short-term notes rated at
least A-1 by S&P or Prime-1 by Moody's. In addition, the Fund may invest in
municipal obligations, including municipal short-term notes rated at least SP-1
by S&P or MIG-1 by Moody's, when we believe that their potential returns are
better than those that might be achieved by investing in securities of corporate
or U.S. governmental issuers.
As a matter of policy, which may be changed without a vote of
shareholders, at least 65% of the Fund's total assets normally will be invested
in debt securities maturing at least three years after they are issued. However,
there are no limitations on the maturities of the securities held by the Fund,
and the Fund's average maturity will vary as Fund Management responds to changes
in interest rates.
U.S. Government Securities Fund
The Fund invests substantially all (and in no event less than 65%) of its
assets in government and government agency or government instrumentality debt
securities (including mortgage-backed securities issued or guaranteed by
government agencies or government-sponsored enterprises), government agency and
instrumentality securities. Some of these portfolio holdings -- Treasury bonds,
bills, and notes -- may be issued directly by the U.S. government and are backed
by the full faith and credit of the federal government. Similar protection is
offered by securities of certain agencies, which include, among others, the
Government National Mortgage Association (GNMA), the Department of Housing and
Urban Development, the Small Business Administration, and the Farmers' Home
<PAGE>
Administration. In addition, the Fund may hold U.S. government agency
securities not supported by the U.S. government, but only by the
creditworthiness of the government-related issuer. These include securities
issued by Fannie Mae (formerly, the Federal National Mortgage Association), the
Federal Home Loan Mortgage Corporation ("Freddie Mac"), the Federal Home Loan
Bank, the Resolution Fundings Corporation and the Student Loan Marketing
Association. The value of the Fund's shares is not guaranteed by the U.S.
government.
As a matter of policy, which may be changed without a vote of
shareholders, at least 65% of the Fund's total assets normally will be invested
in debt securities maturing at least three years after they are issued. However,
there are no limitations on the maturities of the securities held by the Fund,
and the Fund's average maturity will vary as Fund Management responds to changes
in interest rates.
Short-Term Bond Fund
The Fund normally invests at least 65% of its total assets in bonds and
debentures. The Fund may invest in all types of variable and fixed rate
corporate, government and government agency debt securities. The government and
government agency securities in which the Fund invests may or may not be backed
by the full faith and credit of the United States.
Holdings are selected primarily from two maturity ranges: short-term
(obligations maturing in under three years) and intermediate-term (obligations
maturing in three to 10 years). The Fund maintains a diversified portfolio with
a dollar-weighted average maturity of three years or less. This average is based
on the actual stated maturity dates of the debt securities in the Fund's
portfolio, except for debt securities having special features that give them the
characteristics of shorter-term obligations. For example, variable rate
securities, on which coupon rates of interest are adjusted on specified dates in
response to changes in interest rates, are deemed to mature at their next
interest rate adjustment date. In addition, debt securities with "put" features
entitling the Fund to repayment of principal on specified dates are deemed to
mature at the next put exercise date. When Fund Management deems it appropriate,
the Fund may invest in debt securities having maturities in excess of 10 years.
Debt securities will be selected based on Fund Management's assessment of
interest rate trends and the liquidity of various instruments under prevailing
market conditions. The potential for capital appreciation is an incidental
factor that also may be considered. When we believe market or economic
conditions are adverse, the Fund may seek to protect its assets by investing to
a greater extent in cash securities and shorter-term securities such as
commercial paper and notes, bank certificates of deposit and other financial
institution obligations and repurchase agreements.
<PAGE>
When we believe market or economic conditions are adverse, the Select
Income, High Yield and U.S. Government Funds may act defensively -- that is,
temporarily invest up to 100% of their respective assets in cash and debt
securities having maturities of less than three years at the time of issuance,
seeking to protect their assets until conditions stabilize.
INVESTMENT POLICIES AND RISKS
Investors should expect to see their price per share vary with moves in
the fixed-income market, economic conditions and other factors. With respect to
the Select Income and High Yield Funds, Fund Management seeks to temper
volatility by having each Fund invest in many different companies in a variety
of industries. With respect to the Short-Term Bond Fund, Fund Management seeks
to temper volatility through diversification and credit analysis, as well as by
maintaining an average dollar-weighted maturity of three years or less. These
strategies can help reduce, but not eliminate, market and credit risk.
Debt Securities. The Select Income, High Yield and Short-Term Bond Funds
may invest in corporate debt securities. The U.S. Government Securities Fund may
invest in debt securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities. When we assess an issuer's ability to meet its
interest rate obligations and repay its debt when due, we are referring to
"credit risk." Debt securities issued by the U.S. government, its agencies and
instrumentalities carry a low level of credit risk compared to higher yielding
corporate bonds. Corporate debt obligations are rated based on their credit risk
as estimated by independent services such as Moody's, S&P, Fitch Investors
Service, Inc. ("Fitch") or Duff & Phelps, Inc. ("D&P"). These ratings attempt to
evaluate the likelihood that principal and interest will be paid when due, but
do not evaluate the volatility of a debt obligation's value or its liquidity and
do not guarantee the performance of the issuer. "Market risk" refers to
sensitivity to changes in interest rates. For instance, when interest rates go
up, the market value of a previously issued bond generally declines; on the
other hand, when interest rates go down, bonds generally see their prices
increase. All bonds, including government, government agency and government
instrumentality securities, are subject to market risk.
The Select Income, High Yield and Short-Term Bond Funds may invest in
issues rated below investment grade quality (commonly called "junk bonds"), and
rated Ba or lower by Moody's or BB or lower by S&P, or, if unrated, are judged
by Fund Management to be of equivalent quality. These include issues which are
of poorer quality and may have some speculative characteristics according to the
ratings services.
Risks of Lower Rated Bonds. The lower a bond's quality, the more it is
believed by the rating service to be subject to credit risk and market risk and
the more speculative it becomes; this is also true of most unrated securities.
To reduce these risks, at least 50% of the Select Income Fund's assets normally
<PAGE>
are invested in debt securities rated Baa or above by Moody's or BBB or
above by S&P. In addition, the Select Income Fund may invest in corporate
short-term notes rated at least Prime-1 by Moody's or A-1 by S&P. Overall, these
bonds and notes enjoy strong to adequate capacity to pay principal and interest.
No more than 50% of the Select Income Fund's assets may be invested in
junk bonds. Investments in unrated securities may not exceed 25% of the Select
Income Fund's total assets. Never, under any circumstances, is the Select Income
Fund permitted to invest in bonds which are rated below B by Moody's or B- by
S&P. Bonds rated below B or B- generally lack characteristics of a desirable
investment and are deemed speculative with respect to the issuer's capacity to
pay interest and repay principal over a long period of time.
Because the High Yield Fund normally invests primarily in junk bonds, the
securities held by this Fund generally will be subject to greater credit and
market risks. Never, under any circumstances, is the High Yield Fund permitted
to invest in bonds that are in default or are rated below Caa by Moody's or CCC
by S&P or, if unrated, are judged by Fund Management to be of equivalent
quality. Bonds rated Caa or CCC are predominantly speculative and may be in
default or may have present elements of danger with respect to the repayment of
principal or interest.
The Short-Term Bond Fund does not invest in obligations it believes to be
highly speculative. As a result, the Fund invests primarily in corporate bonds
rated investment grade (BBB and above by S&P, Fitch or D&P or Baa and above by
Moody's) that are believed to enjoy strong to adequate capacity to pay principal
and interest. No more than 15% of this Fund's total assets may be invested in
junk bonds. Never, under any circumstances, does the Short-Term Bond Fund invest
in securities rated below B. Although bonds rated B are believed to have the
current capacity to meet principal and interest payments, they are believed to
be subject to a greater extent than higher rated instruments to the risk that
adverse business, financial or economic conditions will impair this capacity. In
addition, the Short-Term Bond Fund may invest in corporate short-term notes
rated at least Prime-1 by Moody's or A-1 by S&P and municipal short-term notes
rated at least MIG-1 by Moody's, SP-1 by S&P, F-1 by Fitch or Duff-1 by D&P (the
highest rating categories for such notes).
While Fund Management continuously monitors all of the corporate bonds in
each Fund's portfolio for the issuer's ability to make required principal and
interest payments and other quality factors, it may retain a bond whose rating
is changed to one below the minimum rating required for purchase of the
security. A Fund is not required to sell immediately debt securities that go
into default, but may continue to hold such securities until such time as Fund
Management determines it is in the best interests of the Fund to sell the
securities.
<PAGE>
Because investment in medium and lower rated securities involves both
greater credit risk and market risk, achievement of each Fund's investment
objective may be more dependent on Fund Management's own credit analysis than is
the case for funds investing in higher quality securities. In addition, the
share price and yield of each 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, there has been a significant increase in the
use of high yield corporate debt securities to fund highly leveraged corporate
acquisitions and restructurings. Past experience may not, therefore, provide an
accurate indication of future performance of the high yield bond market,
particularly during periods of economic recession. Furthermore, expenses
incurred to recover an investment in a defaulted security may adversely affect a
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 a Fund to value, particular securities at certain
times, thereby making it difficult to make specific valuation determinations.
For the fiscal year ended August 31, 1997, the following percentages of
Select Income, High Yield and Short-Term Bond Funds' total net assets were
invested in corporate bonds rated investment grade (Baa by Moody's or BBB by S&P
and above) at the time they were purchased: Aaa/AAA--0%; Aa/AA--2.07%; A--11.14%
and Baa/BBB-- 18.48% for the Select Income Fund; Aaa/AAA--0%; Aa/AA--0%; A--0%
and Baa/BBB--0.02% for the High Yield Fund; and Aaa/AAA--0%; Aa/AA--0.55%;
A--18.28% and Baa/BBB--2.30% for the Short-Term Bond Fund. The following
percentages were invested in corporate bonds rated below investment grade at the
time of purchase: Ba/BB-- 14.85%; B--22.13%; Caa/CCC--0% and D--0% for the
Select Income Fund; Ba/BB--8.47%; B--61.44%; Caa/CCC--7.23%; and D--0% for the
High Yield Fund; and Ba/BB--1.14%; B--9.69%; CCC--0% and D--0% for the
Short-Term Bond Fund. Finally, 3.81%, 9.61% and 1.53% of total assets were
invested in unrated corporate bonds for the Select Income, High Yield and
Short-Term Bond Funds, respectively. All of these percentages were determined on
a dollar-weighted basis, calculated by averaging each Fund's month-end portfolio
holdings during the fiscal year. Keep in mind that a Fund's holdings are
actively traded, and bond ratings are occasionally adjusted by ratings services,
so these figures do not represent each Fund's actual holdings or quality ratings
as of August 31, 1997.
<PAGE>
For a detailed description of corporate bond ratings, see the Appendix to
this Prospectus and the Statement of Additional Information.
Foreign Securities. Select Income, High Yield and Short-Term Bond Funds'
investments in debt obligations may include securities issued by foreign
governments and foreign corporations. As a matter of policy, which may be
changed without a vote of shareholders, up to 25% of each Fund's total assets,
measured at the time of purchase, may be invested directly in foreign debt
securities, provided that all such securities are denominated and pay interest
in U.S. dollars (such as Eurobonds and Yankee bonds). Securities of Canadian
issuers and American Depository Receipts ("ADRs") are not subject to this 25%
limitation. ADRs are receipts representing shares of a foreign corporation held
by a U.S. bank that entitles the holder to all dividends and capital gains. ADRs
are denominated in U.S. dollars and trade in the U.S. securities markets.
Investments in foreign debt securities involve certain risks.
For U.S. investors, the returns on foreign debt 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 a foreign currency, returns for
a U.S. investor on foreign securities may decrease. By contrast, in
a period when the U.S. dollar generally declines, those returns may
increase. Each Fund attempts to minimize these risks by limiting
its investments in foreign debt securities to those which are
denominated and pay interest in U.S. dollars.
Other aspects 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; 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
<PAGE>
the possibility of each Fund experiencing difficulties in pursuing legal
remedies and collecting judgments.
ADRs are subject to some of the same risks as direct investments in
foreign securities, including the risk that material information about the
issuer may not be disclosed in the United States and the risk that currency
fluctuations may adversely affect the value of the ADR.
Illiquid and Rule 144A Securities. The High Yield Fund may invest up to
15% of its net assets in securities that are illiquid because they are subject
to restrictions on resale ("restricted securities") or because they are not
readily marketable. The Fund may not be able to dispose of illiquid securities
at the time desired or at a reasonable price. In addition, if the securities are
not registered, their marketability and value could be adversely affected.
The Select Income and Short-Term Bond Funds may not purchase securities
that are not readily marketable. However, such Funds, in addition to the High
Yield Fund, may purchase certain securities that are not registered for sale to
the general public but that can be resold to institutional investors ("Rule 144A
Securities"), if a liquid trading market exists. 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.
In the event that a Rule 144A Security held by a Fund is subsequently determined
to be illiquid, the security will be sold as soon as that can be done in an
orderly fashion consistent with the best interests of such Fund's shareholders.
For more information concerning rule 144A Securities, see "Investment Policies
and Restrictions" in the Statement of Additional Information.
Zero Coupon Bonds, Pay-in-Kind Bonds, and Step-up Bonds. The Select Income
and High Yield Funds may invest in zero coupon bonds and payment-in-kind ("PIK")
bonds if Fund Management determines that the risk of a default on the security,
which could result in adverse tax consequences, is not significant. Zero coupon
bonds make no periodic interest payments. Instead, they are sold at a discount
from their face value. The buyer of the security receives the rate of return by
the gradual appreciation in the price of the security, which is redeemed at face
value at maturity. PIK bonds pay interest in cash or additional securities, at
the issuer's option, for a specified period. In addition to zero coupon bonds,
the Short-Term Bond Fund may invest in step-up bonds. Step-up bonds initially
make no (or low) cash interest payments, but begin paying interest (or a higher
rate of interest) at a fixed time after issuance of the bond. Zero coupon, PIK
and step-up bonds are more sensitive to changes in interest rates than bonds
that pay interest on a current basis in cash. When interest rates fall, the
value of these types of bonds will increase more rapidly, and when interest
rates rise, their value falls more dramatically. A Fund may be required to
<PAGE>
distribute income recognized on these bonds, even though no cash interest
payments are received, which could reduce the amount of cash available for
investment by such Fund.
Interest Rate Futures Contracts. The U.S. Government Securities and
Short-Term Bond Funds may buy and sell interest rate futures contracts relating
to the debt securities in which each Fund invests for the purpose of hedging the
value of their securities portfolio. These practices and their risks are
discussed under "Investment Policies and Restrictions" in the Statement of
Additional Information.
Mortgage-Backed and Asset-Backed Securities. The U.S. Government
Securities and Short-Term Bond Funds may invest in mortgage-backed securities
issued or guaranteed as to principal and interest by the U.S. government,
federal agencies or instrumentalities such as GNMA, Fannie Mae and Freddie Mac.
Some of these securities, such as GNMA certificates, are backed by the full
faith and credit of the U.S. Treasury while others, such as FHLMC certificates,
are not. Mortgage-backed securities represent interests in pools of mortgages
which have been purchased from loan institutions such as banks and savings and
loans, and packaged for resale in the secondary market. Interest and principal
are "passed through" to the holders of the securities. The timely payment of
interest and principal is guaranteed by a federal agency, but the market value
of the security is not guaranteed and will vary. When interest rates drop, many
home buyers choose to refinance their mortgages. These prepayments may shorten
the average weighted lives of mortgage-backed securities and may lower their
returns.
In addition to being able to invest in mortgage-backed securities, the
Short-Term Bond Fund may also invest in asset- backed securities which represent
interests in pools of consumer loans. As with mortgage-backed securities,
asset-backed securities are structured as pass-through securities. Interest and
principal payments ultimately depend on payment of the underlying loans,
although securities may be supported, at least in part, by letters of credit or
other credit enhancements. As with mortgage-backed securities, underlying loans
are subject to prepayments that may shorten the securities' weighted average
lives and may lower their return.
The Short-Term Bond Fund may invest in stripped mortgage- or asset-backed
securities, in which the principal and interest payments on the underlying pool
of loans are separated or "stripped" to create two classes of securities. In
general, the interest-only, or IO, class receives all of the interest payments
and the principal-only, or PO, class receives all of the principal payments. The
market prices of these securities generally are more sensitive to changes in
interest and prepayment rates than traditional mortgage- and asset-backed
securities. Such purchases are used to help the Short-Term Bond Fund maintain
stability.
<PAGE>
Delayed Delivery or When-Issued Purchases. Debt securities may at times be
purchased or sold by the Funds with settlement taking place in the future. Each
of the High Yield, Short-Term Bond and Select Income Funds may only invest up to
10% of their net assets in when-issued securities. The payment obligation and
the interest rate that will be received on the securities generally are fixed at
the time a Fund enters into the commitment to purchase a security on a
when-issued basis, although the Fund does not pay for or earn interest on the
security until it is delivered. Between the date of purchase and the settlement
date, however, the value of the securities is subject to market fluctuations.
Repurchase Agreements. Each Fund may invest money, for as short a time as
overnight, using repurchase agreements ("repos"). With a repo, a Fund buys a
debt instrument, agreeing simultaneously to sell it back to the prior owner at
an agreed-upon price and time. A Fund could incur costs or delays in seeking to
sell the security if the prior owner defaults on its repurchase obligation. To
reduce that risk, the securities underlying each repurchase agreement will be
maintained with a Fund's custodian in an amount at least equal to the repurchase
price under the agreement (including accrued interest). These agreements are
entered into only with member banks of the Federal Reserve System, registered
broker-dealers, and registered U.S. government securities dealers that are
deemed creditworthy under standards set by the Company's board of directors.
Securities Lending. Each Fund may seek to earn additional income by
lending securities to qualified brokers, dealers, banks, or other financial
institutions, on a fully collateralized basis. For further information on this
policy, see "Investment Policies and Restrictions" in the Statement of
Additional Information.
For a further discussion of risks associated with an investment in each
Fund, see "Investment Policies and Restrictions" and "Investment Practices" in
the Statement of Additional Information.
Investment Restrictions. Certain restrictions, which are identified in the
Statement of Additional Information, may not be altered without the approval of
each Fund's shareholders. For example, each Fund limits to 5% the portion of its
respective total assets that may be invested in any one issuer (other than cash
items and U.S. government securities). In addition, each Fund's ability to
borrow money is limited to borrowings from banks for temporary or emergency
purposes in amounts not exceeding 10% of net assets. Except where indicated to
the contrary, the investment objectives and policies described in this
prospectus are not fundamental and may be changed without a vote of the Fund's
shareholders.
THE FUNDS AND THEIR MANAGEMENT
The Company is a no-load mutual fund, registered with the Securities and
Exchange Commission as a diversified, open-end, management investment company.
<PAGE>
It was incorporated on August 20, 1976, under the laws of Colorado and was
reorganized as a Maryland corporation on April 2, 1993.
The Company's board of directors has responsibility for overall
supervision of the Funds, and reviews the services provided by the adviser and
sub-adviser. Under an agreement with the Company, IFG, 7800 E. Union Avenue,
Denver, Colorado 80237, serves as each Fund's investment adviser; it is
primarily responsible for providing the Funds with various administrative
services. IFG's wholly-owned subsidiary, INVESCO Trust, is each Fund's
sub-adviser and is primarily responsible for managing the Funds' investments.
The Funds are managed by members of the INVESCO Fixed Income Team, which
is headed by Donovan J. (Jerry) Paul. The following individuals are primarily
responsible for the day-to-day management of the Fund's portfolio holdings:
Donovan J.(Jerry) Paul, a Chartered Financial Analyst and Certified Public
Accountant, has been the portfolio manager of the Select Income Fund since
1994, the portfolio manager of the High Yield Fund since 1994, and a
co-portfolio manager of the Short-Term Bond Fund since 1994. Mr. Paul also
manages INVESCO VIF-High Yield Fund, INVESCO Industrial Income Fund,
INVESCO VIF-Industrial Income Fund, and INVESCO Balanced Fund. Mr. Paul is
also a senior vice president, portfolio manager, and director of
fixed-income research of INVESCO Trust. Mr. Paul was previously a 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 of Quixote Investment Management, Inc. (1993 to 1994). Mr. Paul
received an M.B.A. from the University of Northern Iowa and a B.B.A. from
the University of Iowa.
Richard R. Hinderlie has been the portfolio manager of the U.S. Government
Securities Fund since 1994 and a co-portfolio manager of the Short-Term
Bond Fund since 1993. Mr. Hinderlie also manages INVESCO U.S. Government
Money Fund and INVESCO Cash Reserves Fund and is a vice president of
INVESCO Trust. Mr. Hinderlie was previously a securities analyst with Bank
Western from 1987 to 1993. Mr. Hinderlie received an M.B.A. from Arizona
State University and a B.A. in Economics from Pacific Lutheran University.
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 Fund or Fund Management's other advisory clients. See
the Statement of Additional Information for more detailed information.
<PAGE>
Each Fund pays IFG a monthly management fee which is based upon a
percentage of each Fund's average net assets determined daily; in turn, IFG pays
INVESCO Trust a sub-advisory fee out of its management fee. With respect to the
Select Income and U.S. Government Securities Funds, the management fee is
computed at the annual rate of 0.55% on the first $300 million of the Fund's
average net assets; 0.45% on the next $200 million of the Fund's average net
assets; and 0.35% on the Fund's average net assets over $500 million. With
respect to the High Yield and Short-Term Bond Funds, the management fee is
computed at the annual rate of 0.50% on the first $300 million of the Fund's
average net assets; 0.40% on the next $200 million of the Fund's average net
assets; and 0.30% on the Fund's average net assets over $500 million. For the
fiscal year ended August 31, 1997, investment management fees paid by the Select
Income, High Yield, U.S. Government Securities, and Short-Term Bond Funds
amounted to 0.55%, 0.47%, 0.55% and 0.50%, respectively (prior to the voluntary
absorption of certain Fund expenses by IFG), of each Fund's average net assets.
Out of these advisory fees, IFG paid to INVESCO Trust as a sub-advisory fee an
amount equal to 0.24%, 0.22%, 0.25% and 0.25%, respectively, of the Select
Income, High Yield, U.S. Government Securities and Short-Term Bond Funds'
average net assets. No fee is paid by the Funds to INVESCO Trust.
Under a Transfer Agency Agreement, IFG acts as registrar, transfer agent,
and dividend disbursing agent for the Funds. Each Fund pays an annual fee of
$26.00 per shareholder account or where applicable, per participant in an
omnibus account. Registered broker-dealers, third party administrators of
tax-qualified retirement plans and other entities, including affiliates of IFG,
may provide equivalent services to the Funds. In these cases, IFG may pay, out
of the fee it receives from the Funds, an annual sub- transfer agency or
recordkeeping fee to the third party.
In addition, under an Administrative Services Agreement, IFG handles
additional administrative, recordkeeping and internal sub- accounting services
for the Funds. For such services, IFG was paid, for the fiscal year ended August
31, 1997, a fee equal to the following percentages of each Fund's average net
assets (prior to the absorption of certain Fund expenses): Select Income Fund,
0.02%; High Yield Fund, 0.02%; U.S. Government Securities Fund, 0.03% and
Short-Term Bond Fund, 0.10%.
Each Fund's expenses, which are accrued daily, are deducted from total
income before dividends are paid. Total expenses of each Fund (prior to any
expense offset) for the fiscal year ended August 31, 1997, including investment
management fees (but excluding brokerage commissions, which are a cost of
acquiring securities), amounted to the following percentages of each Fund's
average net assets: Select Income Fund, 1.03%; High Yield Fund, 1.00%; U.S.
Government Securities Fund, 1.01% and Short-Term Bond Fund, 0.83%. Certain
expenses of the Select Income, High Yield and U.S. Government Securities Funds
are absorbed voluntarily by IFG pursuant to a commitment to each Fund and
certain expenses of the Short-Term Bond Fund are absorbed voluntarily by IFG and
INVESCO Trust pursuant to a commitment to the Fund in order to ensure that
<PAGE>
each Fund's total operating expenses do not exceed the following percentages of
each Fund's average net assets: Select Income Fund, 1.05%; High Yield Fund,
1.25%, U.S. Government Securities Fund, 1.00% and Short-Term Bond Fund, 0.85%.
These commitments may be changed following consultation with the Company's board
of directors. In the absence of this voluntary expense limitation, each Fund's
total operating expenses would have been 1.21%, 1.84%, and 1.27% of their
average net assets for Select Income, U.S. Government Securities and Short-Term
Bond Funds, respectively.
Fund Management places orders for the purchase and sale of portfolio
securities with brokers and dealers based upon Fund Management's evaluation of
their financial responsibility coupled with their ability to effect transactions
at the best available prices. As discussed under "How To Buy Shares --
Distribution Expenses," each Fund may market its shares through intermediary
brokers or dealers that have entered into Dealer Agreements with IFG or IDI, as
the Fund's distributor. A Fund may place orders for portfolio transactions with
qualified broker-dealers that recommend the Fund, or sell shares of the Fund, to
clients, or act as agent in the purchase of Fund shares for clients, if Fund
Management believes that the quality of the execution of the transaction and
level of commission are comparable to those available from other qualified
brokerage firms. For further information, see "Investment Practices -- Placement
of Portfolio Brokerage" in the Statement of Additional Information.
IFG, INVESCO Trust and IDI are indirect wholly owned subsidiaries of
AMVESCAP PLC. AMVESCAP PLC is 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 and to AMVESCAP PLC on May 8, 1997, as part of a merger between a direct
subsidiary of INVESCO PLC and A I M Management Group Inc., that created one of
the largest independent investment management businesses in the world. IFG and
INVESCO Trust continued to operate under their existing names. AMVESCAP PLC has
approximately $177.5 billion in assets under management. IFG was established in
1932 and, as of August 31, 1997, managed 14 mutual funds, consisting of 46
separate portfolios, with combined assets of approximately $15.9 billion on
behalf of over 854,448 shareholders. INVESCO Trust (founded in 1969) served as
adviser or sub-adviser to 59 investment portfolios as of August 31, 1997,
including 32 portfolios in the INVESCO group. These 59 portfolios had aggregate
assets of approximately $14.7 billion as of August 31, 1997. 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. IDI was established in 1997 and is the distributor
for 14 mutual funds consisting of 46 separate portfolios.
<PAGE>
FUND PRICE AND PERFORMANCE
Determining Price. The value of your investment in the Funds will vary
daily. The price per share is also known as the Net Asset Value ("NAV"). IFG
prices each Fund every day that the New York Stock Exchange is open, as of the
close of regular trading (generally, 4:00 p.m., New York time). NAV is
calculated by adding together the current market value of all of the Fund's
assets, including accrued interest and dividends; then subtracting liabilities,
including accrued expenses; and finally dividing that dollar amount by the total
number of shares outstanding.
Performance Data. To keep shareholders and potential investors informed,
we will occasionally advertise each Fund's total return and yield. Total return
figures show the average annual rate of return on a $1,000 investment in a Fund,
assuming reinvestment of all dividends and capital gain distributions for one-,
five- and ten-year periods. Cumulative total return shows the actual rate of
return on an investment; average annual total return represents the average
annual percentage change in the value of an investment. Both cumulative and
average annual total returns tend to "smooth out" fluctuations in a Fund's
investment results, because they do not show the interim variations in
performance over the periods cited.
With respect to the Select Income, High Yield and Short-Term Bond Funds,
the yield 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. With respect to the U.S. Government Securities Fund, the yield is
computed by dividing the net investment income per share earned during the
period by the net asset value per share at the end of the period, then adjusting
the result to provide for semi-annual compounding. More information about each
Fund's recent and historical performance is contained in the Company's Annual
Report to Shareholders. You can get a free copy by calling or writing to IDI
using the telephone number or address on the cover of this Prospectus.
When we quote mutual fund rankings published by Lipper Analytical
Services, Inc., we may compare each Fund to others in their category of
Corporate Bond Funds -- BBB rated for the Select Income Fund, High Current Yield
Funds for the High Yield Fund, U.S. Government Funds for the U.S. Government
Securities Fund and Short Investment Grade Debt Funds for the Short-Term Bond
Fund, as well as the broad-based Lipper general fund groupings. These rankings
allow you to compare each Fund to its peers. Other independent financial media
also produce performance- or service-related comparisons, which you may see in
our promotional materials. For more information see "Fund Performance" in the
Statement of Additional Information.
Performance figures are based on historical investment results and are not
intended to suggest future performance.
<PAGE>
HOW TO BUY SHARES
The following chart shows several convenient ways to invest in a Fund.
Your new Fund shares will be priced at the NAV next determined after your order
is received in proper form. There is no charge to invest, exchange, or redeem
shares when you make transactions directly through IFG. However, if you invest
in a Fund through a securities broker, you may be charged a commission or
transaction fee. For all new accounts, please send a completed application form.
Please specify which fund's shares you wish to purchase.
Fund Management reserves the right to increase, reduce or waive the
minimum investment requirements in its sole discretion, when it determines this
action is in the best interests of a Fund. Further, Fund Management reserves the
right in its sole discretion to reject any order for the purchase of Fund shares
(including purchases by exchange) when, in its judgment, such rejection is in a
Fund's best interests.
<PAGE>
HOW TO BUY SHARES
================================================================================
Method Investment Minimum Please Remember
- --------------------------------------------------------------------------------
By Check
Mail to: INVESCO $1,000 for regular If your check does
Funds Group, Inc. account; $250 for not clear, you will
P.O. Box 173706 an IRA; $50 minimum be responsible for
Denver, CO 80217- for each subsequent any related loss a
3706. Or you may investment. Fund or IFG incurs.
send your check by If you are already
overnight courier a shareholder in
to: 7800 E. Union the INVESCO funds,
Ave., Denver, CO a Fund may seek
80237. reimbursement from
your existing
account(s) for any
loss incurred.
By Telephone or
Wire
Call 1-800-525-8085 $1,000. Payment must be
to request your received within 3
purchase. Then send business days, or
your check by the transaction may
overnight courier be canceled. If a
to our street purchase is
address: 7800 E. canceled due to
Union Ave., Denver, nonpayment, you
CO 80237. Or you will be responsible
may transmit your for any related
payment by bank loss a Fund or IFG
wire (call IFG for incurs. If you are
instructions). already a
shareholder in the
INVESCO funds, a
Fund may seek
reimbursement from
your existing
account(s) for any
loss incurred.
<PAGE>
- --------------------------------------------------------------------------------
With EasiVest or
Direct Payroll
Purchase
You may enroll on $50 per month for Like all regular
the fund EasiVest; $50 per investment plans,
application, or pay period for neither EasiVest
call us for the Direct Payroll nor Direct Payroll
correct form and Purchase. You may Purchase ensures a
more details. start or stop your profit or protects
Investing the same regular investment against loss in a
amount on a monthly plan at any time, falling market.
basis allows you to with two weeks' Because you'll
buy more shares notice to IFG. invest continually,
when prices are low regardless of
and fewer shares varying price
when prices are levels, consider
high. This "dollar- your financial
cost averaging" may ability to keep
help offset market buying through low
fluctuations. Over price levels. And
a period of time, remember that you
your average cost will lose money if
per share may be you redeem your
less than the shares when the
actual average market value of all
price per share. your shares is less
than their cost.
- --------------------------------------------------------------------------------
By PAL(R)
Your "Personal $1,000. Be sure to write
Account Line" is down the
available for confirmation number
subsequent provided by PAL(R).
purchases and Payment must be
exchanges 24-hours received within 3
a day. Simply call business days, or
1-800-424-8085. the transaction may
be canceled. If a
telephone purchase
is canceled due to
nonpayment, you
will be responsible
for any related
loss a Fund or IFG
incurs. If you are
already a shareholder in
the INVESCO funds, a Fund
may seek reimbursement
from your existing
account(s) for any loss
incurred.
<PAGE>
================================================================================
By Exchange
Between a Fund and $1,000 to open a See "Exchange
another of the new account; $50 Policy" below.
INVESCO funds. Call for written
1-800-525-8085 for requests to
prospectuses of purchase additional
other INVESCO shares for an
funds. You may also existing account.
establish an (The exchange
Automatic Monthly minimum is $250 for
Exchange service purchases requested
between two INVESCO by telephone.)
funds; call IFG for
further details and
the correct form.
================================================================================
Your order to purchase shares of a Fund will not begin earning dividends
or other distributions until either your payment can be converted into available
federal funds under regular banking procedures or, if you are acquiring shares
in an exchange from another INVESCO fund, the Fund receives the proceeds of the
exchange. Checks normally are converted into federal funds (moneys held on
deposit within the Federal Reserve System) within two or three business days
after we receive them, although this period may be longer for checks drawn on
banks that are not members of the Federal Reserve System.
Exchange Policy. You may exchange your shares in a Fund for those in
another INVESCO fund, on the basis of their respective net asset values at the
time of the exchange. Before making any exchange, be sure to review the
prospectuses of the funds involved and consider their differences.
Please note these policies regarding exchanges of fund shares:
(1) The fund accounts must be identically registered.
(2) You may make four exchanges out of each fund during each calendar
year.
(3) An exchange is the redemption of shares from one fund followed by the
purchase of shares in another. Therefore, any gain or loss realized on
the exchange is recognizable for federal income tax purposes (unless,
of course, your account is tax-deferred).
(4) The Funds reserve the right to reject any exchange request, or to
modify or terminate the exchange policy, when it is in the best
interests of the Fund and its shareholders. Notice of all such
modifications or termination will be given at least 60 days prior to
the effective date of the change in privilege, except in unusual
<PAGE>
instances (such as when redemptions of the exchanged shares are
suspended under Section 22(e) of the Investment Company Act of 1940,
or when sales of the fund into which you are exchanging are
temporarily stopped).
Distribution Expenses. Each Fund is authorized under a Plan and Agreement
of Distribution pursuant to Rule 12b-1 under the Investment Company Act of 1940
(the "Plan") to use its assets to finance certain activities relating to the
distribution of its shares to investors. Under the Plan, monthly payments may be
made by each Fund to IDI to permit IDI, at its discretion, to engage in certain
activities and provide certain services approved by the board of directors in
connection with the distribution of each Fund's shares to investors. These
activities and services may include the payment of compensation (including
incentive compensation and/or continuing compensation based on the amount of
customer assets maintained in a Fund) to securities dealers and other financial
institutions and organizations, which may include IDI-affiliated companies, to
obtain various distribution-related and/or administrative services for the
Funds. Such services may include, among other things, processing new shareholder
account applications, preparing and transmitting to the Fund's Transfer Agent
computer processable tapes of all transactions by customers, and serving as the
primary source of information to customers in answering questions concerning a
Fund and their transactions with a Fund.
In addition, other permissible activities and services include
advertising, the preparation, printing and distribution of sales literature,
printing and distribution of prospectuses to prospective investors and such
other services and promotional activities for the Funds as may from time to time
be agreed upon by the Company and its board of directors, including public
relations efforts and marketing programs to communicate with investors and
prospective investors. These services and activities may be conducted by the
staff of IDI or its affiliates or by third parties.
Under the Plan, the Company's payments to IDI on behalf of each Fund are
limited to an amount computed at an annual rate of 0.25% of each Fund's average
net assets. IDI is not entitled to payment for overhead expenses under the Plan,
but may be paid for all or a portion of the compensation paid for salaries and
other employee benefits for the personnel of IDI or IFG whose primary
responsibilities involve marketing shares of the INVESCO funds, including the
Funds. Payment amounts by each Fund under the Plan, for any month, may be made
to compensate IDI for permissible activities engaged in and services provided by
IDI during the rolling 12-month period in which that month falls. Therefore, any
obligations incurred by IDI in excess of the limitations described above will
not be paid by the Funds under the Plan, and will be borne by IDI. In addition,
IDI and its affiliates may from time to time make additional payments from its
revenues to securities dealers, financial advisors and financial institutions
that provide distribution-related and/or administrative services for the Funds.
<PAGE>
No further payments will be made by the Funds under the Plan in the event of its
termination. Payments made by the Funds may not be used to finance directly the
distribution of shares of any other fund of the Company or other mutual fund
advised by IFG. However, payments received by IDI which are not used to finance
the distribution of shares of the Fund become part of IDI's revenues and may be
used by IDI for any permissible activities for all of the mutual funds advised
by IFG subject to review by the Fund's directors. Payments made by each Fund
under the Plan for compensation of marketing personnel, as noted above, are
based on an allocation formula designed to ensure that all such payments are
appropriate. IDI will bear any distribution- and service-related expenses in
excess of the amounts which are compensated pursuant to the Plan. The Plan also
authorizes any financing of distribution which may result from IDI's use of its
own resources, including profits from investment advisory fees received from the
Fund, provided that such fees are legitimate and not excessive. For more
information see "How Shares Can Be Purchased -- Distribution Plan" in the
Statement of Additional Information.
FUND SERVICES
Shareholder Accounts. IFG will maintain a share account that reflects your
current holdings. Share certificates will be issued only upon specific request.
You will have greater flexibility to conduct transactions if you do not request
certificates.
Transaction Confirmations. You will receive detailed confirmations of
individual purchases, exchanges, and redemptions. If you choose certain
recurring transaction plans (for instance, EasiVest), your transactions will be
confirmed on your quarterly Investment Summary.
Investment Summaries. Each calendar quarter, shareholders receive a
written statement which consolidates and summarizes account activity and value
at the beginning and end of the period for each of their INVESCO funds.
Reinvestment of Distributions. Dividends and capital gain distributions
are automatically reinvested in additional fund shares at the NAV on the
ex-dividend or ex-distribution date, unless you choose to have dividends and/or
other distributions automatically reinvested in another INVESCO fund or paid by
check (minimum of $10.00).
Telephone Transactions. All shareholders may exchange and redeem shares of
the Funds by telephone, unless they expressly decline these privileges. By
signing the new account Application, a Telephone Transaction Authorization Form,
or otherwise using these privileges, the investor has agreed that, if a Fund has
followed reasonable procedures, such as recording telephone instructions and
sending written transaction confirmations, it will not be liable for following
telephoned instructions that it believes to be genuine. As a result of this
policy, the investor may bear the risk of any loss due to unauthorized or
fraudulent instructions.
<PAGE>
Retirement Plans and IRAs. Shares of the Funds may be purchased for IRAs
and many types of tax-deferred retirement plans. IFG can supply you with
information and forms to establish or transfer your existing plan or account.
HOW TO SELL SHARES
The following chart shows several convenient ways to redeem your Fund
shares. Shares of the Funds may be redeemed at any time at their current NAV
next determined after a request in proper form is received at the Fund's office.
The NAV at the time of the redemption may be more or less than the price you
paid to purchase your shares, depending primarily upon a Fund's investment
performance.
Please specify from which fund you wish to redeem shares. Shareholders
have a separate account for each fund in which they invest.
HOW TO SELL SHARES
================================================================================
Method Minimum Redemption Please Remember
- --------------------------------------------------------------------------------
By Telephone
Call us toll-free $250 (or, if less, This option is not
at 1-800-525-8085. full liquidation of available for
the account) for a shares held in
redemption check; IRAs.
$1,000 for a wire
to bank of record.
The maximum amount
which may be
redeemed by telephone
is generally $25,000.
These telephone redemption
privileges may be modified
or terminated in the
future at IFG's discretion.
- --------------------------------------------------------------------------------
In Writing
Mail your request Any amount. The If the shares to be
to INVESCO Funds redemption request redeemed are
Group, Inc., P.O. must be signed by represented by
Box 173706 all registered stock certificates,
Denver, CO 80217- owners of the the certificates
3706. You may also account. Payment must be sent to
send your request will be mailed to IFG.
by overnight your address of
courier to 7800 E. record or to a pre-
Union Ave., Denver, designated bank.
CO 80237.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
By Exchange
Between a Fund and $1,000 to open a See "Exchange
another of the new account; $50 Policy" page 18.
INVESCO funds. Call for written
1-800-525-8085 for requests to
prospectuses of purchase additional
other INVESCO shares for an
funds. You may also existing account.
establish an (The exchange
automatic monthly minimum is $250 for
exchange service exchanges requested
between two INVESCO by telephone.)
funds; call IFG for
further details and
the correct form.
- --------------------------------------------------------------------------------
Periodic Withdrawal
Plan
You may call us to $100 per payment, You must have at
request the on a monthly or least $10,000 total
appropriate form quarterly basis. invested with the
and more The redemption INVESCO funds, with
information at 1- check may be made at least $5,000 of
800-525-8085. payable to any that total invested
party you in the fund from
designate. which withdrawals
will be made.
- --------------------------------------------------------------------------------
Payment To Third
Party
Mail your request Any amount. All registered
to INVESCO Funds owners of the
Group, Inc., P.O. account must sign
Box 173706 the request, with a
Denver, CO 80217- signature guarantee
3706. from an eligible
guarantor financial
institution, such
as a commercial
bank or recognized
national or
regional securities
firm.
================================================================================
While the Funds will attempt to process telephone redemptions promptly,
there may be times -- particularly in periods of severe economic or market
disruption -- when you may experience delays in redeeming shares by phone.
Payments of redemption proceeds will be mailed within seven days following
receipt of the redemption request in proper form. However, payment may be
postponed under unusual circumstances -- for instance, if normal trading is not
<PAGE>
taking place on the New York Stock Exchange or during an emergency as
defined by the Securities and Exchange Commission. If your shares were purchased
by a check which has not yet cleared, payment will be made promptly upon
clearance of the purchase check (which will take up to 15 days).
If you participate in EasiVest, the Fund's automatic monthly investment
program, and redeem all of the shares in your account, we will terminate any
further EasiVest purchases unless you instruct us otherwise.
Because of the high relative costs of handling small accounts, should the
value of any shareholder's account fall below $250 as a result of shareholder
action, the Funds reserve the right to redeem all shares in such account, in
which case the account would be involuntarily liquidated and the proceeds
forwarded to the shareholder. Prior to any such redemption, a shareholder will
be notified and given 60 days to increase the value of the account to $250 or
more.
TAXES, DIVIDENDS AND OTHER DISTRIBUTIONS
Taxes. Each Fund intends to distribute to shareholders all of its net
investment income, net capital gains and net gains from foreign currency
transactions, if any, in order to continue to qualify for tax treatment as a
regulated investment company. Thus, the Funds do not expect to pay any federal
income or excise taxes.
Unless shareholders are exempt from income taxes, they must include all
dividends and other distributions in taxable income for federal, state and local
income tax purposes. Dividends and other distributions are taxable whether they
are received in cash or automatically reinvested in shares of the Fund or
another fund in the INVESCO group.
Net realized capital gains of the Fund are classified as short-term and
long-term gains depending upon how long the Fund held the security that gave
rise to the gains. Short-term capital gains are included in income from
dividends and interest as ordinary income and are taxed at the taxpayer's
marginal tax rate. The Taxpayer Relief Act of 1997 (the "Tax Act"), enacted in
August 1997, changed the taxation of long-term capital gains for individuals by
applying different capital gains rates depending on the taxpayer's holding
period and marginal rate of federal income tax. Long-term gains realized on the
sale of securities held for more than one year but not for more than 18 months
are taxable at a rate of 28%. This category of long-term gains is often referred
to as "mid-term" gains but is technically termed "28% rate gains". Long-term
gains realized on the sale of securities held for more than 18 months are
taxable at a rate of 20%. At the end of each year, information regarding the tax
status of dividends and other distributions is provided to shareholders.
Shareholders should consult their tax advisers as to the effect of the Tax Act
on distributions by the Funds of net capital gain.
<PAGE>
Shareholders also may realize capital gains or losses when they sell their
Fund shares at more or less than the price originally paid. Capital gain on
shares held for more than one year will be long-term capital gain, in which
event it will be subject to federal income tax at the rates indicated above.
The Fund may be subject to withholding of foreign taxes on dividends or
interest it receives on foreign securities. Foreign taxes withheld will be
treated as an expense of the Fund.
Individuals and certain other non-corporate shareholders may be subject to
backup withholding of 31% on dividends, capital gain and other distributions and
redemption proceeds. Unless you are subject to backup withholding for other
reasons, you can avoid backup withholding on your Fund account by ensuring that
we have a correct, certified tax identification number.
We encourage you to consult a tax adviser with respect to these matters.
For further information see "Dividends, Other Distributions and Taxes" in the
Statement of Additional Information.
Dividends and Other Distributions. Each Fund earns ordinary or net
investment income in the form of interest on its investments. Dividends paid by
each Fund will be based solely on the income earned by it. Each Fund's policy is
to distribute substantially all of this income, less Fund expenses, to
shareholders. Dividends from net investment income are declared daily and paid
monthly at the discretion of the Company's board of directors. Dividends are
automatically reinvested in additional shares of the Fund at the net asset value
on the payable date unless otherwise requested.
In addition, each Fund realizes capital gains and losses when it sells
securities for more or less than it paid. If total gains on sales exceed total
losses (including losses carried forward from previous years), the Fund has a
net realized capital gain. Net realized capital gains, if any, together with
gains, if any, realized on foreign currency transactions, are distributed to
shareholders at least annually, usually in December. Capital gain distributions
are automatically reinvested in additional shares of a Fund at the net asset
value on the payable date unless otherwise requested.
Dividends and other distributions are paid to holders of shares on the
record date of distribution regardless of how long the Fund shares have been
held by the shareholder. The Fund's share price will then drop on the
ex-dividend or ex-distribution date by the amount of the distribution. If a
shareholder purchases shares immediately prior to the distribution, the
shareholder will, in effect, have "bought" the distribution by paying the full
purchase price, a portion of which is then returned in the form of a taxable
distribution.
<PAGE>
ADDITIONAL INFORMATION
Voting Rights. All shares of the Company have equal voting rights based on
one vote for each share owned and a corresponding fractional vote for each
fractional share owned. The Company is not generally required and does not
expect to hold regular annual meetings of shareholders. However, 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 board of directors will call special meetings of
shareholders. Directors may be removed by action of the holders of a majority of
the outstanding shares of the Company. The Company will assist shareholders in
communicating with other shareholders as required by the Investment Company Act
of 1940.
<PAGE>
APPENDIX -- RATINGS SERVICES
There are several independent ratings services that analyze debt
obligations and preferred stock issued by corporations. The two most frequently
used services are Moody's and S&P.
The chart below shows the various ratings used by each service for the
categories of bonds and preferred stock in which the Funds may invest. There are
additional refinements to each rating system: Moody's may use the modifier 1 to
indicate that the security ranks in the higher end of its generic ratings
category; modifier 2 indicates a mid-range rank, and 3 indicates the issue ranks
at the lower end of its category. Similarly, S&P may use a + or - sign to
indicate a security's relative standing within its generic category. For a
further discussion of risks associated with the Funds, see "Investment Policies
and Risks" and "Investment Practices" in the Statement of Additional
Information.
================================================================================
Moody's S&P Bond Description
- --------------------------------------------------------------------------------
Aaa AAA Highest quality, often referred to as
"gilt edged." Carries the smallest
degree of investment risk: Interest
payments are protected by a larger or
exceptionally stable margin and
principal is secure.
- --------------------------------------------------------------------------------
Aa AA High quality or high grade. Margins of
protection may be smaller than those
above, or fluctuation of protective
elements may be of greater amplitude.
Other elements may be present which
make long-term risks somewhat larger
than in Aaa or AAA securities.
- --------------------------------------------------------------------------------
A A Upper medium-grade obligations.
Adequate to strong capacity to pay
principal and interest, but somewhat
more susceptible to adverse effects of
changes in circumstances and economic
conditions.
- --------------------------------------------------------------------------------
Baa BBB Medium-grade obligations. Neither
highly protected nor poorly secured.
Interest and principal security
currently appear adequate, but certain
protective elements may be lacking or
characteristically unreliable over the
longer-term. May have speculative
characteristics.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Ba BB Speculative, but less near-term
vulnerability to default than those
below. These bonds face major ongoing
uncertainties or exposure to adverse
business, financial or economic
conditions that could lead to
inadequate capacity to make timely
interest and principal payments.
- --------------------------------------------------------------------------------
B B Generally lack characteristics of a
desirable investment. Greater
vulnerability to default: currently
have capacity to meet timely interest
and principal payments, but assurance
of payments over any extended period of
time may be small, and/or other terms
of the bond contract may be in
jeopardy.
- --------------------------------------------------------------------------------
Caa CCC Bonds in poor standing. These bonds may be in
default or there may be present elements of
danger with respect to principal or interest.
- --------------------------------------------------------------------------------
aaa AAA Top-quality. Good asset protection and
extremely strong capacity for dividend
payment.
- --------------------------------------------------------------------------------
aa AA High-grade. Offers reasonable assurance
that earnings and asset protection will
remain relatively well-maintained in
the foreseeable future.
- --------------------------------------------------------------------------------
a A Upper medium-grade. Earnings and asset
protection are expected to remain at
adequate levels.
- --------------------------------------------------------------------------------
baa BBB Medium-grade. Neither highly protected
nor poorly secured. Backed by adequate
capacity to maintain dividend payments,
but susceptible to adverse economic
conditions or changing circumstances.
- --------------------------------------------------------------------------------
ba BB Has speculative elements and its future
is not well assured. Earnings and
asset protection may be very moderate
and not well safeguarded during adverse
periods.
- --------------------------------------------------------------------------------
b B Lacks the characteristics of a
desirable investment. Assurance of
dividend payments over any extended
period of time may be small.
================================================================================
<PAGE>
INVESCO INCOME FUNDS
Select Income Fund
High Yield Fund
U.S. Government Securities Fund
Short-Term Bond Fund
No-load mutual funds seeking a high level of
current income from investing in fixed-income
securities.
PROSPECTUS
January 1, 1998
INVESCO FUNDS
INVESCO Distributors, Inc.,
Distributor
Post Office Box 173706
Denver, Colorado 80217-3706
1-800-525-8085
PAL(R), 1-800-424-8085
http://www.invesco.com
In Denver, 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
January 1, 1998
INVESCO INCOME FUNDS, INC.
Four no-load portfolios seeking
a high level of current income
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 INCOME FUNDS, INC., (the "Company") is a diversified, managed,
no-load investment management company currently consisting of four separate
portfolios of investments: INVESCO Select Income Fund (the "Select Income
Fund"), INVESCO High Yield Fund (the "High Yield Fund"), INVESCO U.S. Government
Securities Fund (the "U.S. Government Securities Fund"), and INVESCO Short-Term
Bond Fund (the "Short-Term Bond Fund") (collectively, the "Funds" and
individually, a "Fund"). The investment objective of each Fund is to provide
investors with as high a level of current income as is consistent with the risk
involved in investing in the types of securities in which each Fund invests.
Potential capital appreciation is a factor in the selection of investments, but
is secondary to the Select Income, High Yield and U.S. Government Funds' primary
objective. Investors may purchase shares of any or all Funds. Additional Funds
may be added in the future.
INVESCO SELECT INCOME FUND
The Select Income Fund seeks to achieve its investment objective through
the investment of substantially all of its assets in bonds and other debt
securities. It is anticipated that at least 50% of such securities will be rated
in medium and higher categories by an established rating service.
INVESCO HIGH YIELD FUND
The High Yield Fund seeks to achieve its investment objective through the
investment of substantially all of its assets in bonds and other debt securities
and in preferred stock. Such securities ordinarily include those rated in lower
categories by established rating services.
<PAGE>
INVESCO U.S. GOVERNMENT SECURITIES FUND
The U.S. Government Securities Fund seeks to achieve its investment
objective by investing in bonds and other debt obligations issued or guaranteed
by the U.S. Government or its agencies or instrumentalities and in repurchase
agreements and futures contracts with respect thereto.
INVESCO SHORT-TERM BOND FUND
The Short-Term Bond Fund (the "Fund") seeks to achieve the highest level
of current income as is consistent with minimum fluctuation in principal
value and with liquidity. The Fund invests primarily in short-term debt
securities (having maturities of 3 years or less) and intermediate-term debt
securities (having maturities of 3 to 10 years) and maintains a diversified
portfolio with a dollar-weighted average maturity of not more than three years.
The Fund pursues its investment objective by investing in a variety of debt
securities consistent with the policies of this Fund.
A Prospectus for the Funds dated January 1, 1998 which provides the basic
information you should know before investing in the Funds may be obtained
without charge from INVESCO Distributors, Inc., P.O. Box 173706, Denver,
Colorado 80217-3706. This Statement of Additional Information is not a
Prospectus, but contains information in addition to and more detailed than that
set forth in the Prospectus. It is intended to provide you with additional
information regarding the activities and operations of the Fund and should be
read in conjunction with the Prospectus.
Investment Adviser: INVESCO FUNDS GROUP, INC.
Distributor: INVESCO DISTRIBUTORS, INC.
<PAGE>
TABLE OF CONTENTS Page
INVESTMENT POLICIES AND RESTRICTIONS.........................................4
THE FUNDS AND THEIR MANAGEMENT..............................................18
HOW SHARES CAN BE PURCHASED.................................................32
HOW SHARES ARE VALUED.......................................................36
FUND PERFORMANCE............................................................38
SERVICES PROVIDED BY THE FUND...............................................40
TAX-DEFERRED RETIREMENT PLANS...............................................41
HOW TO REDEEM SHARES........................................................41
DIVIDENDS,OTHER DISTRIBUTIONS AND TAXES.....................................42
INVESTMENT PRACTICES........................................................45
ADDITIONAL INFORMATION......................................................48
APPENDIX - GNMA CERTIFICATES AND FUTURES CONTRACTS..........................53
<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS
As discussed in the Prospectus in the sections entitled "Investment
Objective and Strategy" and "Investment Policies and Risks," the Select Income
Fund and High Yield Fund may invest in bonds and other debt securities. Such
securities include corporate bonds and debentures (including convertible
issues), equipment trust certificates and promissory notes, and, where the
yields are competitive with those of corporate debt securities, obligations
issued or guaranteed by the U.S. government or its agencies, and obligations of
any state, municipality or political subdivision thereof. Generally, corporate
bonds and equipment trust certificates are secured obligations, whereas
debentures and notes are unsecured. In addition, the High Yield Fund may invest
in preferred stock. Preferred stock generally entitles holders thereof to
certain preferences in payment of dividends and assets in priority to holders of
common stock. As discussed in the Prospectus, the Short-Term Bond Fund may
invest in investment-grade debt securities of all types in any proportion. The
U.S. Government Securities Fund may invest in government and government agency
or government instrumentality debt securities (including mortgage-backed
securities issued or guaranteed by government agencies or government-sponsored
enterprises).
Subject to complying with applicable investment policies, in recognition
of changing fiscal policies and economic conditions, each of the Funds may vary
the proportions of its holdings in intermediate, long-term, and short-term
obligations, and they may dispose of any such securities prior to maturity and
reinvest on the basis of yield disparities. The value of the debt securities in
each of the Funds will vary inversely with changes in prevailing interest rates.
Thus, when interest rates decline, the market value of a portfolio security
already invested at higher yields can be expected to rise if such security is
protected against early call. Conversely, when interest rates increase, the
market value of a portfolio security already invested at lower yields can be
expected to decline. When it appears to the Funds' investment adviser or
sub-adviser that interest rates may change, the composition of a Fund's
portfolio may be adjusted should such anticipated changes offer the opportunity
to further its investment objectives.
Foreign Securities. As discussed in the Prospectus in the section entitled
"Investment Policies And Risks -- Foreign Securities," the Select Income Fund,
Short-Term Bond Fund and High Yield Fund may invest up to 25% of their
respective total assets, at the time of purchase, in foreign securities;
securities of Canadian issuers are not subject to this limitation. There is
generally less publicly available information, reports and ratings about foreign
companies and other foreign issuers than that which is available about companies
and issuers in the United States. Foreign issuers are also generally subject to
<PAGE>
fewer uniform accounting and auditing and financial reporting standards,
practices, and requirements as compared to those applicable to United States
issuers.
For U.S. investors, the returns on foreign debt 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. The Select Income and High Yield Funds attempt to
minimize these risks by limiting their investments in foreign debt securities to
those which are denominated and pay interest in U.S.
dollars.
The investment adviser or sub-adviser will normally purchase foreign
securities in over-the-counter markets or on exchanges located in the countries
in which the respective principal offices of the issuers of the various debt
securities are located, as such markets or exchanges are generally the best
available market for foreign securities. Foreign securities markets are
generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign issuers are less liquid and more
volatile than securities of comparable United States issuers. Fixed commissions
on foreign exchanges are generally higher than negotiated commissions on United
States exchanges, although the Funds will endeavor to achieve the most favorable
net results on their portfolio transactions. There is generally less government
supervision and regulation of securities exchanges, brokers and listed issuers
in foreign countries than in the United States.
With respect to certain foreign countries, there is the possibility of
adverse changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitations on the removal of funds or other assets,
political or social instability, or diplomatic developments which could affect
the Funds' investments in those countries. Moreover, the economies of foreign
countries may differ favorably or unfavorably from the United States' economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payment position.
The interest payable on certain foreign debt securities may be subject to
foreign withholding taxes, thus reducing the net amount of income available for
distribution to the shareholders of these Funds.
Illiquid and 144A Securities. As discussed in the section of the
Prospectus entitled "Investment Policies and Risks," the High Yield Fund may
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, the
<PAGE>
High Yield Fund will not purchase any such security if the purchase would cause
the Fund to invest more than 15% of its net assets, measured at the time of
purchase, in illiquid securities. Repurchase agreements maturing in more than
seven days will be considered as illiquid for purposes of this restriction.
Investments in illiquid securities involve certain risks to the extent that the
High Yield 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,
the High Yield Fund might have to bear the expense and incur the delays
associated with effecting registration.
Each Fund also may invest in restricted securities that can be resold to
institutional investors pursuant to Rule 144A under the Securities Act of 1933,
as amended (the "1933 Act") (hereinafter referred to as "Rule 144A Securities"),
if a liquid institutional trading market exists. 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.
In recent years, a large institutional market has developed for Rule 144A
Securities. 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 Rule 144A 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.
Institutional markets for Rule 144A Securities may provide both readily
ascertainable values for Rule 144A 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 a Rule 144A Security
held by a Fund^ could adversely affect the marketability of such security and
the Fund might be unable to dispose of such security promptly or at reasonable
prices.
Euro/Yankee Bonds. The Select Income, High Yield and Short- Term Bond
Funds may invest in dollar-denominated bonds issued by foreign branches of
domestic banks ("Eurobonds") and dollar-denominated bonds issued by a U.S.
branch of a foreign bank and sold in the United States ("Yankee bonds").
Investments in Eurobonds and Yankee bonds entail certain risks similar to
investments in foreign securities in general. For information on these risks see
"Investment Policies and Risks" in the Prospectus.
When-Issued and Delayed Delivery Securities. As discussed in the section
of the Funds' Prospectus entitled "Investment Policies and Risks," 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
<PAGE>
or sold by the Funds with payment and delivery taking place in 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 the Funds engage in
when-issued and delayed delivery transactions, they rely on the seller or buyer,
as the case may be, to consummate the sale. Failure to do so may result in the
Funds 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 a transaction is entered into,
but in no event later than 90 days after the transaction date. No payment or
delivery is made by the Funds until they receive delivery or payment from the
other party to the transaction. However, when a Fund purchases a security on a
when- issued or delayed delivery basis, it assumes the risk that the market
price of the security may fluctuate between the date of purchase and the date of
delivery.
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 sets
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.
Repurchase Agreements. As discussed in the section of the Funds'
Prospectus entitled "Investment Policies And Risks," the Funds may invest in
repurchase agreements with commercial banks, registered brokers-dealers and
registered government securities dealers that are deemed creditworthy under
standards established by the Fund's board of directors. A repurchase agreement
is an agreement under which a 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) from a commercial bank, broker or
dealer, subject to resale to the seller at an agreed upon price and date
(normally, the next business day). A repurchase agreement may be considered a
loan collateralized by securities. The resale price reflects an agreed-upon
interest rate effective for the period the instrument is held by the Funds and
is unrelated to the interest rate on the underlying instrument. In these
transactions, the securities acquired by a Fund must have a total value at least
equal to the value of the repurchase agreement (including accrued interest
earned thereon) and are held as collateral by the Fund's custodian bank until
the repurchase agreement is completed. The High Yield Fund may enter into a
<PAGE>
repurchase agreement maturing in more than seven days if as a result no
more than 10% of the High Yield Fund's net assets would be invested in such
repurchase agreements and other illiquid securities.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Fund not within the control
of the Fund and therefore the obtainment by the Fund of such collateral may
automatically be stayed. Finally, it is possible that a Fund may not be able to
substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement. While Fund Management
acknowledges these risks, it is expected that they can be controlled through
careful monitoring procedures.
Lending of Securities. As described in the section of the Funds'
Prospectus entitled "Investment Policies And Risks," the Funds may lend their
portfolio securities to qualified brokers, dealers, banks, or other financial
institutions. This practice permits the Funds to earn income which, in turn, can
be invested in additional securities to pursue the Funds' investment objectives.
Loans of securities by the Funds will be collateralized by cash, letters of
credit or securities issued or guaranteed by the U. S. government or its
agencies equal to at least 100% of the current market value of the loaned
securities, determined on a daily basis. Lending securities involves certain
risks, the most significant of which is the risk that a borrower may fail to
return a portfolio security. The Adviser and Sub-Adviser monitor the
creditworthiness of borrowers in order to minimize such risks. A Fund will not
lend any security if, as a result of such loan, the aggregate value of
securities then on loan would exceed 33-1/3% of the Fund's net assets (taken at
market value). 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 a Fund will comply with all
applicable regulatory requirements.
At the present time, a Fund may pay reasonable negotiated finder fees in
connection with loaned securities, so long as such fees are set forth in a
written contract and are in compliance with guidelines with respect to such fees
established by the investment company's directors or trustees.
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
<PAGE>
bonds generally have maturities of more than ten years. As discussed in
each Fund's Prospectus, 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. 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, although
the underlying mortgage may be guaranteed as to principal and interest.
Obligations of Domestic Banks. These obligations consist of certificates
of deposit ("CDs") and bankers' acceptances issued by domestic banks (including
their foreign branches) having total assets in excess of $5 billion, which meet
the Funds' minimum rating requirements. CDs are issued against deposits in a
commercial bank for a specified period and rate and are normally negotiable.
Eurodollar CDs are certificates issued by a foreign branch (usually London) of a
U.S. Domestic bank, and, as such, the credit is deemed to be that of the
domestic bank.
Bankers' acceptances are short-term credit instruments evidencing the
promise of the bank (by virtue of the bank's "acceptance") to pay at maturity a
draft which has been drawn on it by a customer (the "drawer"). These instruments
are used to finance the import, export, transfer, or storage of goods and
reflect the obligation of both the bank and the drawer to pay the face amount.
<PAGE>
Commercial Paper. These obligations are short-term promissory notes issued
by domestic corporations to meet current working capital requirements. Such
paper may be unsecured or backed by a bank letter of credit. Commercial paper
issued with a letter of credit is, in effect, "two party paper," with the issuer
directly responsible for payment, plus a bank's guarantee that if the note is
not paid at maturity by the issuer, the bank will pay the principal and interest
to the buyer. Commercial paper is sold either as interest-bearing or on a
discounted basis, with maturities not exceeding 270 days.
Futures Contracts. As discussed in the Prospectus, the U.S. Government
Securities and Short-Term Bond Funds may engage in buying and selling interest
rate futures contracts; however, the U.S. Government Securities Fund may buy and
sell only interest rate futures contracts relating to U.S. government securities
("Government Securities Futures"). This limitation on this Fund's engaging in
interest rate futures contracts to those relating to U.S. government securities
is a fundamental policy which may be changed only by holders of a majority, as
defined in the Investment Company Act of 1940 (the "1940 Act"), of the Fund's
outstanding shares. The Short-Term Bond Fund may engage in buying and selling
interest rate futures contracts relating to the debt securities in which it
invests for the purpose of hedging the value of its securities portfolio. The
U.S. Government Securities and Short- Term Bond Funds have no other fundamental
policies as to their use of futures contracts and thus no fundamental policy as
to a percentage limit thereon; however, see below for limitations relating to
the Commodity Futures Trading Commission (the "CFTC") and a percentage
restriction adopted by the board of directors.
In connection with hedging (a "long futures position"), the U.S.
Government Securities and Short-Term Bond Funds, respectively, would take a long
futures position with the intention of doing so as a temporary substitute for
the purchase of long-term U.S. government securities, and any debt securities in
which the Short- Term Bond Fund invests, which may then be purchased in an
orderly fashion. These Funds expect that they would, in the ordinary course,
purchase such long-term securities upon termination of the long futures position
a substantial majority of the time, but under unusual market conditions, a long
futures position may be terminated without the corresponding purchase of
long-term U.S. government securities or other long-term debt securities. These
Funds will deposit in a segregated account with their custodian bank U.S.
government securities maturing in one year or less, or cash, in an amount equal
to the fluctuating market value of long futures contracts they have purchased,
less any margin deposited on their long position. They may hold cash or acquire
such government securities for the purpose of making these deposits.
The "sale" of a Government Securities Future by the U.S. Government
Securities Fund or "sale" of a debt security future by the Short-Term Bond Fund
means the acquisition by these Funds of an obligation to deliver the related
<PAGE>
U.S. government securities or other debt securities (i.e., those called for
by the contract) at a specified price on a specified date. The "purchase" of a
Government Securities Future by the U.S. Government Securities Fund or
"purchase" of a debt security future by the Short-Term Bond Fund means the
acquisition by these Funds of an obligation to acquire the related U.S.
government securities or other debt securities at a specified price on a
specified date.
Unlike when the U.S. Government Securities Fund purchases or sells a U.S.
government security, or when the Short-Term Bond Fund purchases or sells a debt
security, no price is paid or received by these Funds upon the purchase or sale
of a Government Securities Future or a debt security future. Initially, these
Funds will be required to deposit with the futures commission merchant (the
"broker") an amount of cash or U.S. Treasury Bills equal to a varying specified
percentage of the contract amount. This amount is known as initial margin.
Subsequent payments, called variation margin, to and from the broker, will be
made on a daily basis as the price of the underlying U.S. Government Securities
Future or debt securities future fluctuates, making the Government Securities
Future or debt security future more or less valuable, a process known as marking
to market. Changes in variation margin are recorded by these Funds as unrealized
gains or losses. Initial margin payments will be deposited in the Company's
custodian bank in an account registered in the broker's name; access to the
assets in that account may be made by the broker only under specified
conditions. At any time prior to expiration of the Government Securities Future
or debt security future, a Fund may elect to close the position by taking an
opposite position which will operate to terminate the Funds' position on the
Government Securities Future or debt security future. A final determination of
variation margin is then made, additional cash is required to be paid by or
released to these Funds, and the Funds realize a loss or a gain. Although
Government Securities Futures or debt security futures by their terms call for
the actual delivery or acquisition of the related U.S. government securities or
debt securities, in most cases the contractual obligation is so fulfilled
without having to make or take delivery of the related U.S. government
securities or debt securities. These Funds do not intend to make or take
delivery of these securities. All transactions in the futures markets, including
transactions in Government Securities Futures or debt security futures, are
made, offset or fulfilled through a clearing house associated with the exchange
on which the contracts are traded.
One risk in employing Government Securities Futures or debt security
futures to attempt to protect against the price volatility of the U.S.
government securities or debt securities held in the U.S. Government Securities
Fund or Short-Term Bond Fund is the prospect that the prices of Government
Securities Futures or debt security futures will correlate imperfectly with the
behavior of the cash (i.e., market value) prices of a Fund's U.S. government
securities or debt securities. For a hedge to be completely effective, the price
<PAGE>
change of the hedging instrument should equal the price change of the
security being hedged. Such equal price changes are not always possible because
the investment underlying the hedging instrument may not be the same investment
that is being hedged. The adviser or sub-adviser will attempt to create a
closely correlated hedge, but hedging activity may not be completely successful
in eliminating market value fluctuation. The ordinary spreads between prices in
the cash and futures markets, due to differences in the natures of those
markets, may be subject to distortions in the following manners. First, all
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close future contracts through offsetting transactions which could
distort the normal relationship between the cash and futures markets. Second,
the liquidity of the futures market depends on participants entering into
offsetting transactions rather than making or taking delivery. To the extent
participants decide to make or take delivery, liquidity in the futures market
could be reduced, thus producing distortion. Third, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of general
interest trends by the adviser may still not result in a successful transaction.
Another risk is that the adviser or sub-adviser would be incorrect in its
expectations as to the extent of various interest rate movements or the time
span within which the movements take place. For example, if the U.S. Government
Securities Fund sold a Government Securities Future, or the Short-Term Bond Fund
sold a debt security future in anticipation of an increase in interest rates,
and then interest rates went down instead, these Funds would lose money on the
sale. Any gains or losses on futures transactions will not be tax-exempt.
The use of futures to attempt to protect against the market risk of a
decline in the value of portfolio securities is referred to as having a "short
futures position." The use of futures to attempt to protect against the market
risk that portfolio securities are not fully included in an increase in value is
referred to as having a "long futures position." The U.S. Government Securities
and Short-Term Bond Fund must operate within certain restrictions as to their
long and short positions in futures under a rule (the "CFTC Rule") adopted by
the CFTC under the Commodity Exchange Act (the "CEA") to be eligible for the
exclusion provided by the CFTC Rule from registration by these Funds with the
CFTC as a "commodity pool operator" (as defined under the CEA), and they must
represent to the CFTC that they will operate within such restrictions. Under
these restrictions, these Funds will not, as to any positions, whether long,
short or a combination thereof, enter into futures for which the aggregate
initial margins exceed 5% of this fair market value of the Funds' assets.
<PAGE>
Although these Funds have no fundamental policy restricting the use of
futures, the Company's board of directors has adopted a restriction that the
aggregate market value of the Futures Contracts the U.S. Government Securities
Fund or the Short-Term Bond Fund holds cannot exceed 20% of the market value of
the respective Fund's total assets. This restriction would not be changed by the
Company's board of directors without considering the policies and concerns of
federal and state regulatory agencies.
Investment Restrictions
As described in the section of the Funds' Prospectus entitled "Investment
Policies And Risks," the Funds operate under investment restrictions. These
restrictions are fundamental and may not be changed with respect to a particular
Fund without the prior approval of the holders of a majority, as defined in the
1940 Act, of the outstanding voting securities of that Fund. For purposes of the
Funds' investment restrictions and their investment policies, 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.
Under these fundamental investment restrictions, each Fund may not:
(1) sell short or buy on margin;
(2) mortgage, pledge or hypothecate portfolio securities or borrow money,
except from banks for temporary or emergency purposes (but not for
investment) and then in an amount not exceeding 10% of the value of
its total net assets. A Fund will not purchase additional securities
while any borrowings on behalf of such Fund exist; provided, however,
that this restriction shall not be deemed to affect the U.S.
Government Securities Fund's entering into futures contracts in
accordance with that Fund's investment policies, or the Short-Term
Bond Fund's entering into futures contracts or options transactions in
accordance with that Fund's investment policies.
(3) invest in the securities of any other investment company except for a
purchase or acquisition in accordance with a plan of reorganization,
merger or consolidation;
(4) purchase securities if the purchase would cause the Fund to have at
the time more than 5% of the value of its total assets invested in
securities of any one issuer or to own more than 10% of the
outstanding voting securities of any one issuer (except obligations
issued or guaranteed by the U.S. government, its agencies or
instrumentalities*). For this purpose, all indebtedness of an issuer
shall be deemed a single class of security;
<PAGE>
(5) make loans to any person, except through the purchase of debt
securities in accordance with the investment policies of the Funds, or
the lending of portfolio securities to broker-dealers or other
institutional investors, or the entering into repurchase agreements
with member banks of the Federal Reserve System, registered
broker-dealers and registered government securities dealers. The
aggregate value of all portfolio securities loaned may not exceed
33-1/3% of a Fund's total net assets (taken at current value). [No
more than 10% of a Fund's total net assets may be invested in
repurchase agreements maturing in more than seven days;]
(6) other than the U.S. Government Securities Fund entering into futures
contracts or the Short-Term Bond Fund entering into futures contracts
or options transactions in accordance with those Funds' investment
policies, buy or sell commodities, commodity contracts or real estate
(however, securities of companies investing in real estate may be
purchased);
(7) invest in any company for the purpose of exercising control or
management;
(8) other than the High Yield Fund, buy other than readily marketable
securities;
(9) engage in the underwriting of any securities;
(10) purchase securities of any company in which any officer or director of
the Fund or of its investment adviser beneficially owns more than 1/2
of 1% of the outstanding securities or in which all of the officers or
directors of the Fund and its investment adviser, as a group, own more
than 5% of such securities;
(11) purchase equity securities; provided, however, that the High Yield
Fund may purchase convertible and non-convertible preferred stock.
This shall not be deemed to prohibit the acquisition of equity
securities resulting from the ownership of debt securities, as, for
example, the conversion of convertible bonds or an exchange in
connection with a corporate reorganization;
(12) other than the High Yield Fund, purchase the securities of any issuer
having a record, together with predecessors, of less than three years
continuous operation;
(13) buy or sell oil, gas or other mineral interest or exploration
programs;
(14) participate on a joint or joint and several basis in any securities
trading account, or purchase warrants, or,
<PAGE>
except for the Short-Term Bond Fund, write, purchase or sell puts,
calls, straddles or any other option contract or combination
thereof;
(15) other than the High Yield Fund, enter into repurchase agreements
maturing in more than seven days if, as a result, such repurchase
agreements, together with securities for which there are no readily
available market quotations, would constitute more than 10% of that
Fund's total net assets;
(16) invest more than 25% of that Fund's total assets in any one industry,
excluding government securities. Telephone utilities, water, gas, and
electric utilities shall be considered separate industries.
*If an entity, other than the U.S. government, its agencies or
instrumentalities, guarantees a security, such guarantee is considered a
separate security which must be valued and included in the five percent
limitation, subject to those exceptions allowed by Rule 5b-2 under the 1940 Act.
In addition to the above restrictions, a fundamental policy of each Fund
is not to invest more than 25% of its total assets (taken at market value at the
time of each investment) in the securities of issuers in any one industry. In
applying this restriction, the Funds use a modified S&P industry code
classification schema which uses various sources to classify.
In applying restriction (8) above, the Funds also include illiquid
securities (those which cannot be sold in the ordinary course of business within
seven days at approximately the valuation given to them by the Fund) among the
securities subject to the limitations of that paragraph. The Company's board of
directors has delegated to the Funds' investment adviser the authority to
determine that a liquid market exists for securities eligible for resale
pursuant to Rule 144A under the 1933 Act, or any successor to such rule, and
that such securities are not subject to the Funds' limitations on investing in
illiquid securities or securities that are not readily marketable. Under
guidelines established by the board of directors, the adviser 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).
<PAGE>
In applying restriction (11) above, the Funds consider acquisitions of
equity securities as components of units which consist primarily of debt
securities as permissible acquisitions resulting from the ownership of debt
securities.
In applying restriction (14) above, the Funds consider warrants acquired
as components of units consisting primarily of debt securities to be permissible
investments as contemplated by restriction (11) above.
The Short-Term Bond Fund does not currently intend to buy or sell put or
call options or option contracts, and will not do so until the Company's board
of directors adopts an investment policy governing such purchases or sales.
In addition to the foregoing, the Funds may not issue preference shares or
create any funded debt. "Fund shares," the only means of participating in the
ownership of a Fund, are all nonassessable, and have equal rights, within each
class, as to dividends, voting power and asset value. No shareholder of a Fund,
as such, has any preemptive right to purchase or subscribe for any Fund shares
which may be issued; however, the board of directors, in its discretion, may
extend purchase or subscription rights pro rata to all shareholders.
Additional investment restrictions adopted by the Company on behalf of the
Funds and which may be changed by the directors, at their discretion, without
shareholder approval, include the following:
(1) The High Yield Fund will not 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 that offered liquidity 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 that
are not registered under the Securities Act of 1933 but are
nevertheless 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.
With respect to the non-fundamental investment restriction (1) above,
the board of directors has delegated to the Fund's investment adviser
the authority to determine whether a liquid market exists for
securities eligible for resale pursuant to Rule 144A under the 1933
Act, or any successor to such rule, and whether such securities are
subject to the non-fundamental restriction (1) above. Under guidelines
<PAGE>
established by the board of directors, the adviser 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).
(2) The High Yield Fund will not purchase securities of any issuer (other
than the U.S. government, its agencies and instrumentalities or
instruments guaranteed by the U.S. government or any such agency or
instrumentality) 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 purchases.
<PAGE>
THE FUNDS AND THEIR MANAGEMENT
The Company. The Company was incorporated on April 2, 1993, under the laws
of Maryland.
The Investment Adviser. INVESCO Funds Group, Inc., a Delaware corporation
("IFG"), is employed as the Company's investment adviser. IFG was established in
1932 and also serves as an investment adviser to INVESCO Capital Appreciation
Funds, Inc. (formerly, INVESCO Dynamics Fund, Inc.), INVESCO Diversified Funds,
Inc., INVESCO Emerging Opportunity Funds, Inc., INVESCO Growth Fund, 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., INVESCO Value Trust, and INVESCO Variable Investment Funds, Inc.
The Sub-Adviser. IFG, as investment adviser, has contracted with INVESCO
Trust Company ("INVESCO Trust") to provide investment advisory and research
services to the Funds. INVESCO Trust has primary responsibility for providing
portfolio investment management services to the Funds. INVESCO Trust, a trust
company founded in 1969, is a wholly-owned subsidiary of INVESCO.
The Distributor. Effective September 30, 1997, INVESCO Distributors, Inc.
("IDI") became the Funds' distributor. IDI, established in 1997, is a registered
broker-dealer that acts as distributor for all retail mutual funds advised by
IFG. Prior to September 30, 1997, IFG served as the Funds' distributor.
IFG, INVESCO Trust and IDI are indirect wholly-owned subsidiaries of
AMVESCAP 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 and to AMVESCAP PLC
on May 8, 1997, as part of a merger between a direct subsidiary of INVESCO PLC
and A I M Management Group, Inc. that created one of the largest independent
management businesses in the world with approximately $177.5 billion in assets
under management. IFG was established in 1932 and as of August 31, 1997, managed
14 mutual funds, consisting of 46 separate portfolios, on behalf of over 854,448
shareholders. AMVESCAP PLC's 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 ^.
<PAGE>
--INVESCO Management & Research, Inc. of Boston, Massachusetts 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, Inc. of Dallas, Texas is responsible for
providing advisory services in the U.S. real estate markets for pension 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-adviser 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 AMVESCAP PLC are located at 11 Devonshire
Square, London, EC2M4YR, England.
As indicated in the Funds' Prospectus, IFG and INVESCO Trust permit
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 IFG, INVESCO Trust and their North American
affiliates. The policy requires officers, inside directors, investment and other
personnel of IFG, INVESCO Trust and their North American affiliates to pre-clear
all transactions in securities not otherwise exempt under the policy. Requests
for trading authority will be denied when, among other reasons, the proposed
personal transaction would be contrary to the provisions of the policy or would
be deemed to adversely affect any transaction then known to be under
consideration for or to have been effected on behalf of any client accounts,
including the Funds.
In addition to the pre-clearance requirement described above, the policy
subjects officers, inside directors, investment and other personnel of IFG,
INVESCO Trust and their North American affiliates to various trading
restrictions and reporting obligations. All reportable transactions are reviewed
for compliance with the policy. The provisions of the policy are administered by
and subject to exceptions authorized by IFG.
<PAGE>
Investment Advisory Agreement. IFG serves as investment adviser to the
Funds pursuant to an investment advisory agreement dated February 28, 1997 (the
"Agreement") with the Company which was approved by the board of directors on
November 6, 1996, 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 or IFG at a meeting called for such purpose. The Agreement was
approved by the Funds' shareholders on January 31, 1997, for an initial term
expiring February 28, 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 each Fund. Any such continuance also must be approved by a
majority of the Company's directors who are not parties to the Agreement or
interested persons (as defined in the 1940 Act) of any such party, 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, or by a
Fund with respect to that Fund, 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 Agreement provides that IFG shall manage the investment portfolios of
the Funds in conformity with the Funds' investment policies (either directly or
by delegation to a sub-adviser, which may be a party affiliated with IFG).
Further, IFG shall perform all administrative, internal accounting (including
computation of net asset value), clerical, statistical, secretarial and all
other services necessary or incidental to the administration of the affairs of
the Funds excluding, however, those services that are the subject of separate
agreement between the Company and IFG 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 IFG 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 IFG'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 IFG are borne by the Funds.
<PAGE>
As full compensation for its advisory services to the Company, IFG
receives a monthly fee. The fee with respect to the Select Income and U.S.
Government Securities Funds is calculated daily at an annual rate of: 0.55% of
average net assets of each such Fund up to $300 million; reduced to 0.45% of
average net assets of each such Fund exceeding $300 million but not exceeding
$500 million; and further reduced to 0.35% of average net assets of each such
Fund in excess of $500 million. The fees for the High Yield and Short-Term Bond
Funds also are calculated daily but are reduced by 0.05% at each level in the
above fee schedule.
Sub-Advisory Agreement. INVESCO Trust serves as sub-adviser to the Funds
pursuant to a sub-advisory agreement dated February 28, 1997 (the
"Sub-Agreement") with IFG which was approved by the board of directors on
November 6, 1996, 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, IFG or INVESCO Trust at a meeting called for such purpose.
Shareholders of the Funds approved the Sub-Advisory Agreement on January 31,
1997, for an initial term expiring February 28, 1999. Thereafter, the
Sub-Agreement may be continued from year to year as to each Fund as long as each
such continuance is specifically approved 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 each Fund. Any such continuance also must be
approved by a majority of the directors who are not parties to the Sub-Agreement
or interested persons (as defined in the 1940 Act) of any such party, cast in
person at a meeting called for the purpose of voting on such continuance. The
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-Agreement provides that INVESCO Trust, subject to the supervision
of IFG, shall manage the investment portfolios of the Funds in conformity with
each Fund's investment policies. These management services include: (a) managing
the investment and reinvestment of all the assets, now or hereafter acquired, of
the Funds, and executing all purchases and sales of portfolio securities; (b)
maintaining a continuous investment program for the Funds, consistent with (i)
each Fund's investment 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, as amended, 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, as amended, 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 each of the Funds,
unless otherwise directed by the directors of the Company or INVESCO, and
executing transactions accordingly; (d) providing the Funds the benefit of all
of the investment analysis and research, the reviews of current economic
<PAGE>
conditions and trends, and the consideration of long-range investment
policy now or hereafter generally available to investment advisory customers of
the Sub-Adviser; (e) determining what portion of each of the Funds should be
invested in the various types of securities authorized for purchase by each
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 each Fund shall be exercised.
The Sub-Agreement provides that with respect to the Select Income and U.S.
Government Securities Funds, as compensation for its services, INVESCO Trust
shall receive from IFG, at the end of each month, a fee based upon the average
daily value of each Fund's net assets at the following annual rates: prior to
January 1, 1998, 0.25% on each Fund's average net assets up to $200 million and
0.20% on each Fund's average net assets in excess of $200 million; and effective
January 1, 1998, 0.1833% on the first $300 million of each Fund's average net
assets, 0.1500% on the next $200 million of each Fund's average net assets and
0.1167% of each Fund's average net assets in excess of $500 million. With
respect to the High Yield Fund, as compensation for its services, INVESCO Trust
shall receive from IFG, at the end of each month, a fee based upon the average
daily value of the Fund's net assets at the following annual rates: prior to
January 1, 1998, 0.25% on the Fund's average net assets up to $200 million and
0.20% on the Fund's average net assets in excess of $200 million; and effective
January 1, 1998, 0.1667% ^ on the first $300 million of the Fund's average net
assets, 0.1333% on the next $200 million of the Fund's average net assets and
0.1000% of the Fund's average net assets in excess of $500 million. With respect
to the Short-Term Bond Fund, as compensation for its services, INVESCO Trust
shall receive from IFG, at the end of each month, a fee based upon the average
daily value of the Fund's net assets at the following annual rates: prior to
January 1, 1998, 0.25% on the first $300 million of the Fund's average net
assets, 0.20% on the next $200 million of the Fund's average net assets, and
0.15% of the Fund's average net assets in excess of $500 million; and effective
January 1, 1998, 0.1667% on the first $300 million of the Fund's average net
assets, 0.1333% on the next $200 million of the Fund's average net assets and
0.1000% of the Fund's average net assets in excess of $500 million.
Administrative Services Agreement. IFG, either directly or through
affiliated companies, provides certain administrative, sub-accounting, and
recordkeeping services to the Funds pursuant to an Administrative Services
Agreement dated February 28, 1997 (the "Administrative Agreement"). The
Administrative Agreement was approved by the board of directors on November 6,
1996, by a vote cast in person by all of the directors of the Company, including
all of the directors who are not "interested persons" of the Company or IFG at a
meeting called for such purpose. The Administrative Agreement is for an initial
term expiring February 28, 1998, and has been continued by action of the board
of directors until May 15, 1998. The Administrative Agreement may be continued
from year to year as long as each such continuance is specifically approved by
<PAGE>
the board of directors of the Company, including a majority of the
directors who are not parties to the Administrative Agreement or interested
persons (as defined in the 1940 Act) of any such party, 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 IFG 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 IFG shall provide the following
services to the Funds: (A) such sub-accounting and recordkeeping services and
functions as are reasonably necessary for the operation of the Funds; and (B)
such sub-accounting, recordkeeping, and administrative services and functions,
which may be provided by affiliates of INVESCO, as are reasonably necessary for
the operation of Fund shareholder accounts maintained by certain retirement
plans and employee benefit plans for the benefit of participants in such plans.
As full compensation for services provided under the Administrative
Agreement, each Fund pays a monthly fee to IFG 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.
Transfer Agency Agreement. IFG also performs transfer agent, dividend
disbursing agent, and registrar services for the Funds pursuant to a Transfer
Agency Agreement dated February 28, 1997, which was approved by the board of
directors of the Company, including a majority of the Company's directors who
are not parties to the Transfer Agency Agreement or "interested persons" of any
such party, on November 6, 1997, for an initial term expiring February 28, 1998
and has been extended by action of the board of directors until May 15, 1998.
Thereafter, the Transfer Agency Agreement may be continued 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 each Fund. Any such continuance also
must be approved by a majority of the Company's directors who are not parties to
the Transfer Agency Agreement or interested persons (as defined by the 1940 Act)
of any such party, 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 Funds will pay to INVESCO
an annual fee of $26.00 per shareholder account or, where applicable, per
participant in an omnibus account. This fee is paid monthly at a rate of 1/12 of
the annual fee and is based upon the number of shareholder accounts and omnibus
account participants in existence at any time during each month.
<PAGE>
Set forth below is a table showing the advisory fees, administrative
services fees, and transfer agency fees paid by each of the Funds for the
periods shown.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
August 31, 1997(1) August 31, 1996(1) August 31, 1995(1)
------------------ ----------------- ------------------
Adminis- Adminis- Adminis-
Transfer trative Transfer trative Transfer trative
Advisory Agency Services Advisory Agency Services Advisory Agency Services
Fees Fees Fees Fees Fees Fees Fees Fees Fees
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Select Income $1,477,302 $786,616 $50,289 $1,410,937 $614,471 $48,480 $946,146 $518,379 $35,804
High Yield 1,964,043 651,471 72,410 1,671,610 532,180 61,443 1,290,879 555,664 48,750
U.S. Government
Securities 312,851 178,192 18,532 233,025 177,086 16,355 219,925 177,310 15,998
Short-Term Bond 61,150 61,050 11,833 44,394 51,685 11,332 43,277 47,595 11,298
(1) These amounts do not reflect the voluntary expense limitations described in
the Funds' prospectus.
</TABLE>
<PAGE>
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 general investment policies and
programs of each of the Funds are carried out and that the Funds' portfolios are
properly administered. The officers of the Company, all of whom are officers and
employees of, and paid by, IFG, are responsible for the day-to-day
administration of the Company and each of the Funds. The investment adviser for
each Fund has the primary responsibility for making investment decisions on
behalf of that Fund. These investment decisions are reviewed by the investment
committee of IFG.
All of the officers and directors of the Company hold comparable positions
with INVESCO Capital Appreciation Funds, Inc. (formerly, INVESCO Dynamics Fund,
Inc.), INVESCO Diversified Funds, Inc., INVESCO Emerging Opportunity Funds,
Inc., INVESCO Growth Fund, 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 Variable Investment
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, with the
exception of Mr. Hesser, also serve as trustees of INVESCO Treasurer's Series
Trust. All of the officers of the Company also hold comparable positions with
INVESCO Value Trust. Set forth below is information with respect to each of the
Company's officers and directors. Unless otherwise indicated, the address of the
directors and officers is Post Office Box 173706, Denver, Colorado 80217-3706.
Their affiliations represent their principal occupations during the past five
years.
CHARLES W. BRADY,*+ Chairman of the Board. Chief Executive Officer and
Director of AMVESCAP PLC, London, England, and of various subsidiaries thereof.
Chairman of the Board of INVESCO Treasurer's Series Trust. Address: 1315
Peachtree Street, NE, Atlanta, Georgia. Born: May 11, 1935.
FRED A. DEERING,+# Vice Chairman of the Board. Vice Chairman of INVESCO
Treasurer's Series Trust. Trustee of INVESCO Global Health Sciences Fund.
Formerly, Chairman of the Executive Committee and Chairman of the Board of
Security Life of Denver Insurance Company, Denver, Colorado; Director of ING
America Life Insurance Company, Urbaine Life Insurance Company and Midwestern
United Life Insurance Company. Address: Security Life Center, 1290 Broadway,
Denver, Colorado. Born: January 12, 1928.
DAN J. HESSER,+* President, CEO and Director. Chairman of the Board,
President, and Chief Executive Officer of INVESCO Funds Group, Inc. and INVESCO
Distributors, Inc; President and Director of INVESCO Trust Company; President
and Chief Operating Officer of INVESCO Global Health Sciences Fund. Born:
December 27, 1939.
<PAGE>
VICTOR L. ANDREWS,** Director. Professor Emeritus, Chairman Emeritus and
Chairman of the CFO Roundtable of the Department of Finance at 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. Address: 19
Kingsbridge Way, Madison, Connecticut. Born: August 1, 1923.
WENDY L. GRAMM, Ph.D.,** Director. Self-employed (since 1993); Professor of
Economics and Public Administration, University of Texas at Arlington. Formerly,
Chairman, Commodity Futures Trading Commission from 1988 to 1993, administrator
for Information and Regulatory Affairs at the Office of Management and Budget
from 1985 to 1988, Executive Director of the Presidential Task Force on
Regulatory Relief and Director of the Federal Trade Commission's Bureau of
Economics. Dr. Gramm is also a director of the Chicago Mercantile Exchange,
Enron Corporation, IBP, Inc., State Farm Insurance Company, State Farm Life
Insurance Company, ^ Independant Women's Forum, International Republic
Institute, and the Republican Women's Federal Forum. Dr. Gramm is also a member
of the Board of Visitors, College of Business Administration, University of
Iowa, and a member of the Board of Visitors, Center for Study of Public Choice,
George Mason University. Address: 4201 Yuma Street, N.W., Washington, D.C. Born:
January 10, 1945.
HUBERT L. HARRIS, JR.,* Director. Chairman (since 1996) and President
(January 1990 to May 1996) of INVESCO Services, Inc.; Chief Executive Officer of
INVESCO Individual Services Group. Member of the Executive Committee of the
Alumni Board of Trustees of Georgia Institute of Technology. Address: 1315
Peachtree Street, NE, Atlanta, Georgia. Born: July 15, 1943.
<PAGE>
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 Corporation and
Citizens and Southern National Bank. Director of Golden Poultry Co., Inc.
Trustee of INVESCO Global Health Sciences Fund and Gables Residential Trust.
Address: 7 Piedmont Center, Suite 100, Atlanta, Georgia. Born: September 14,
1930.
LARRY SOLL, Ph.D., Director.** Formerly, Chairman of the Board (1987 to
1994), Chief Executive Officer (1982 to 1989 and 1993 to 1994) and President
(1982 to 1989) of Synergen Corp. Director of Synergen since incorporation in
1982. Director of ISD Pharmaceuticals, Inc.^; Trustee of INVESCO Global Health
Sciences Fund. Address: 345 Poorman Road, Boulder, Colorado. Born: April
26, 1942.
GLEN A. PAYNE, Secretary. Senior Vice President (since 1995), General
Counsel and Secretary of INVESCO Funds Group, Inc. and INVESCO Trust Company
(since 1989) and INVESCO Distributors, Inc. (since 1997); Vice President (May
1989 to April 1995), Secretary and General Counsel of INVESCO Funds Group, Inc.;
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 1988). Senior Vice President
and Treasurer of INVESCO Distributors, Inc. (since 1997). Born: October 1, 1946.
WILLIAM J. GALVIN, JR., Assistant Secretary. Senior Vice President of
INVESCO Funds Group, Inc. (since 1995) and of INVESCO Distributors, Inc. (since
1997) 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. (since 1984) and Trust Officer of INVESCO Trust Company. Born: September
14, 1941.
<PAGE>
JUDY P. WIESE, Assistant Treasurer. Vice President of INVESCO Funds Group,
Inc. (since 1984) and of INVESCO Distributors, Inc. (since 1997) and Trust
Officer of INVESCO Trust Company. Born: February 3, 1948.
#Member of the audit committee of the Company.
+Member of the executive committee of the Company. 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.
As of October 24, 1997, officers and directors of the Company, as a group,
beneficially owned less than 1% of the Company's outstanding shares and less
than 1% of the Funds' outstanding shares.
Director Compensation
The following table sets forth, for the fiscal year ended August 31,
1997^, the compensation paid by the Company to its eligible 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 IDI (including the Company), INVESCO
Advisor Funds, Inc., INVESCO Treasurer's Series Trust and INVESCO 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. Dr. Soll became an independent director of the Company
effective May 15, 1997. Dr. Gramm became an independent director of the Company
effective July 29, 1997.
Total
Compensa-
Benefits Estimated tion From
Aggregate Accrued As Annual INVESCO
Compensa- Part of Benefits Complex
tion From Company Upon Paid To
<PAGE>
Company(1) Expenses(2) Retirement(3) Directors(1)
Fred A.Deering, $6,153 $1,424 $1,386 $98,850
Vice Chairman of
the Board
Victor L. Andrews 6,117 1,345 1,605 84,350
Bob R. Baker 6,232 1,201 2,151 84,850
Lawrence H. Budner 5,983 1,345 1,605 80,350
Daniel D. Chabris 6,107 1,535 1,140 84,850
A. D. Frazier, Jr.4 1,356 0 0 81,500
Wendy L. Gramm 1,313 0 0 0
Kenneth T. King 5,530 1,478 1,257 71,350
John W. McIntyre 5,856 0 0 90,350
Larry Soll 2,578 0 0 17,500
------- ------ ------ --------
Total $47,225 $8,328 $9,144 $693,950
% of Net Assets 0.0057%5 0.0010%5 0.0045%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, and the members of specially ^ appointed task forces of
the board of directors 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 INVESCO 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, Gramm, McIntyre and Soll,
<PAGE>
each of these directors has served as a director/trustee of one or more of
the funds in the INVESCO Complex for the minimum five-year period required to be
eligible to participate in the Defined Benefit Deferred Compensation Plan.
(4)Effective February 28, 1997, Mr. Frazier resigned as a director of the
Company. Effective November 1, 1996, Mr. Frazier was employed by INVESCO PLC
(the predecessor to AMVESCAP PLC), a company affiliated with IFG, and did not
receive any director's fees or other compensation from the Company or other
funds in the INVESCO Complex for his service as a director.
(5)Total as a percentage of the Company's net assets as of August 31, 1997.
(6)Total as a percentage of the net assets of the INVESCO Complex as of
December 31, 1996.
Messrs. Brady, Harris and Hesser, as "interested persons" of the Company
and other funds in the INVESCO Complex, receive compensation as officers or
employees of IFG or its affiliated companies, and do not receive any director's
fees or other compensation from the Company or other funds in the INVESCO
Complex for their services as directors.
The boards of directors/trustees of the mutual funds managed by IFG 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 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 payment 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 or her 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 her or to his or her beneficiary or estate. If a qualified director
becomes disabled or dies either prior to age 72 or during his/her 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 or her beneficiary or estate. The plan is
administered by a committee of three directors who are also participants in the
<PAGE>
plan and one director who is not a plan participant. The cost of the plan
will be allocated among the INVESCO and Treasurer's Series Trust 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 that is comprised of five 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 IFG 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 CAN BE PURCHASED
Shares of each Fund are sold on a continuous basis at the respective net
asset value per share of the Fund next calculated after receipt of a purchase
order in good form. The net asset value per share is computed separately for
each Fund and is determined once each day that the New York Stock Exchange is
open as of the close of regular trading on that Exchange, but may also be
computed at other times. See "How Shares Are Valued." IDI acts as the Funds'
Distributor under a distribution agreement with the Company under which it
receives no compensation and bears all expenses, including the costs of printing
and distributing prospectuses, incident to marketing of the Funds' shares,
except for such distribution expenses which are paid out of Fund assets under
the Company's Plan of Distribution which has been adopted by the Company
pursuant to Rule 12b-1 under the 1940 Act.
Distribution Plan. As described in the section of the Funds' Prospectus
entitled "How To Buy Shares - Distribution Expenses," the Company has adopted a
Plan and Agreement of Distribution (the "Plan") pursuant to Rule 12b-1 under the
1940 Act. The initial Plan was approved on April 21, 1993, at a meeting called
for such purpose by a majority of the directors of the Company, including a
majority of the directors who neither are "interested persons" of the Company
nor have any financial interest in the operation of the Plan ("12b-1
directors"). The board of directors, on February 4, 1997, approved amending the
Plan to a compensation type 12b-1 plan. This amendment of the Plan will not
result in increasing the amount of the Funds' payments thereunder. The Plan was
<PAGE>
continued by action of the board of directors until May 15, 1998. Pursuant
to authorization granted by the Company's board of directors on September 2,
1997, a new Plan became effective on September 30, 1997, under which IDI assumed
all obligations related to distribution which were previously performed by IFG.
The Plan provides that the Funds may make monthly payments to IDI of
amounts computed at an annual rate no greater than 0.25% of each Fund's average
net assets to permit IDI, at its discretion, to engage in certain activities and
provide services in connection with the distribution of a Fund's shares to
investors. Payment amounts by a Fund under the Plan, for any month, may be made
to compensate IDI for permissible activities engaged in and services provided by
IDI during the rolling 12-month period in which that month falls. During the
fiscal year ended August 31 1997 the Select Income, High Yield, U.S. Government
Securities and Short-Term Bond Funds made payments to IFG (the predecessor of
IDI as distributor of shares of the Funds) under the 12b-1 Plan in the amount of
$666,209, $1,020,541, $140,631 and $30,227, respectively. In addition, as of
August 31, 1997, $62,454, $101,678, $13,184 and $2,674 of additional
distribution accruals had been incurred under the Plan for the Select Income,
High Yield, U.S. Government Securities and Short-Term Bond Funds, respectively,
and will be paid to IDI during the fiscal year ended August 31, 1998. As noted
in the Prospectus, one type of expenditure permitted by the Plan is the payment
of compensation to securities companies, and other financial institutions and
organizations, which may include IDI- affiliated companies, in order to obtain
various distribution-related and/or administrative services for the Funds. Each
Fund is authorized by the Plan to use its assets to finance the payments made to
obtain those services. Payments will be made by IDI to broker-dealers who sell
shares of a Fund and may be made to banks, savings and loan associations and
other depository institutions. Although the Glass-Steagall Act limits the
ability of certain banks to act as underwriters of mutual fund shares, the
Company does not believe that these limitations would affect the ability of such
banks to enter into arrangements with IDI, but can give no assurance in this
regard. However, to the extent it is determined otherwise in the future,
arrangements with banks might have to be modified or terminated, and, in that
case, the size of one or more of the Funds possibly could decrease to the extent
that the banks would no longer invest customer assets in a particular Fund.
Neither the Company nor its investment adviser will give any preference to banks
or other depository institutions which enter into such arrangements when
selecting investments to be made by each Fund.
For the fiscal year ended August 31, 1997, allocations of 12b-1 amounts
paid by the Select Income Fund for the following categories of expenses were:
advertising--$21,033; sales literature, printing, and postage--$92,889; direct
mail--$16,244 public relations/promotion--$19,721; compensation to securities
dealers and other organizations--$412,314; marketing personnel--$104,008 For the
<PAGE>
fiscal year ended August 31, 1997, allocations of 12b-1 amounts paid by the
High Yield Fund for the following categories of expenses were:
advertising--$40,473; sales literature, printing and postage--$157,687; direct
mail--$86,674; public relations/promotion--$22,301; compensation to securities
dealers and other organizations--$497,270; marketing personnel-- $216,136. For
the fiscal year ended August 31, 1997, allocations of 12b-1 amounts paid by the
U.S. Government Securities Fund were: advertising--$5,138; sales literature,
printing and postage--$18,414; direct mail--$3,834; public
relations/promotion--$2,723; compensation to securities dealers and other
organizations-- $86,117; marketing personnel--$24,405. For the fiscal year ended
August 31, 1997, allocation of 12b-1 amounts paid by the Short-Term Bond Fund
were: advertising--$1,878; sales literature, printing and postage--$11,964
direct mail--$1,370; public relations/promotion--$984; compensation to
securities dealers and other organizations--$7,121; marketing personnel--$6,910.
The nature and scope of services which are provided by securities dealers
and other organizations may vary by dealer but include, among other things,
processing new stockholder account applications, preparing and transmitting to
the Company's Transfer Agent computer-processable tapes of each Fund's
transactions by customers, serving as the primary source of information to
customers in answering questions concerning each Fund, and assisting in other
customer transactions with each Fund.
The Plan provides that it shall continue in effect with respect to each
Fund for so long as such continuance is approved at least annually by the vote
of the board of directors of the Company cast in person at a meeting called for
the purpose of voting on such continuance. The Plan can also be terminated at
any time with respect to any Fund, without penalty, if a majority of the 12b-1
directors, or shareholders of such Fund, vote to terminate the Plan. The Company
may, in its absolute discretion, suspend, discontinue or limit the offering of
the shares of any Fund at any time. In determining whether any such action
should be taken, the board of directors intends to consider all relevant factors
including, without limitation, the size of the Funds, the investment climate for
any particular Fund, general market conditions, and the volume of sales and
redemptions of Fund shares. The Plan may continue in effect and payments may be
made under the Plan following any such temporary suspension or limitation of the
offering of a Fund's shares; however, the Company is not contractually obligated
to continue the Plan for any particular period of time. Suspension of the
offering of a Fund's shares would not, of course, affect a shareholder's ability
to redeem his or her shares. So long as the Plan is in effect, the selection and
nomination of persons to serve as independent directors of the Company shall be
committed to the independent directors then in office at the time of such
selection or nomination. The Plan may not be amended to increase materially the
amount of any Fund's payments thereunder without approval of the shareholders of
that Fund, and all material amendments to the Plan must be approved by the board
<PAGE>
of directors of the Company, including a majority of the 12b-1 directors.
Under the agreement implementing the Plan, INVESCO or the Funds, the latter by
vote of a majority of the 12b-1 directors or of the holders of a majority of a
Fund's outstanding voting securities, may terminate such agreement as to that
Fund without penalty upon 30 days' written notice to the other party. No further
payments will be made by a Fund under the Plan in the event of its termination
as to that Fund.
To the extent that the Plan constitutes a plan of distribution adopted
pursuant to Rule 12b-1 under the 1940 Act, it shall remain in effect as such, so
as to authorize the use of each Fund's assets in the amounts and for the
purposes set forth therein, notwithstanding the occurrence of an assignment, as
defined by the 1940 Act, and rules thereunder. To the extent it constitutes an
agreement pursuant to a plan, each Fund's obligation to make payments to IDI
shall terminate automatically, in the event of such "assignment," in which case
the Funds may continue to make payments, pursuant to the Plan, to IDI or another
organization only upon the approval of new arrangements, which may or may not be
with IDI, regarding the use of the amounts authorized to be paid by it under the
Plan, by the directors, including a majority of the 12b-1 directors, by a vote
cast in person at a meeting called for such purpose.
Information regarding the services rendered under the Plan and the amounts
paid therefor by each Fund are provided to, and reviewed by, the directors on a
quarterly basis. On an annual basis, the directors consider the continued
appropriateness of the Plan at the level of compensation provided therein.
The only directors or interested persons, as that term is defined in
Section 2(a)(19) of the 1940 Act, of the Company who have a direct or indirect
financial interest in the operation of the Plan are the officers and directors
of the Company listed herein under the section entitled "The Funds and Their
Management -Officers and Directors of the Company" who are also officers either
of IDI or companies affiliated with IDI. The benefits which the Company believes
will be reasonably likely to flow to the Funds and their shareholders under the
Plan include the following:
(1) Enhanced marketing efforts, if successful, should result in an
increase in net assets through the sale of additional shares and
afford greater resources with which to pursue the investment
objectives of the Funds;
(2) The sale of additional shares reduces the likelihood that redemption
of shares will require the liquidation of securities of the Funds in
amounts and at times that are disadvantageous for investment
purposes;
(3) The positive effect which increased Fund assets will have on its
revenues could allow IFG and its affiliated companies:
<PAGE>
(a) To have greater resources to make the financial commitments
necessary to improve the quality and level of each Fund's
shareholder services (in both systems and personnel),
(b) To increase the number and type of mutual funds available to
investors from IFG and its affiliated companies (and support
them in their infancy), and thereby expand the investment
choices available to all shareholders, and
(c) To acquire and retain talented employees who desire
to be associated with a growing organization; and
(4) Increased Fund assets may result in reducing each investor's share
of certain expenses through economies of scale (e.g. exceeding
established breakpoints in the advisory fee schedule and allocating
fixed expenses over a larger asset base), thereby partially
offsetting the costs of the Plan.
HOW SHARES ARE VALUED
As described in the section of the Funds' Prospectus entitled "How To Buy
Shares," 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 (generally 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 of such Fund might be materially affected by changes in the
value of the securities held, but only if on such day that Fund receives a
request to purchase or redeem shares. 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, Martin Luther King, Jr. 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 that Fund plus its other assets (including
dividends and interest accrued but not collected), less that Fund's liabilities
(including accrued expenses), by the number of outstanding shares of the Fund.
Securities traded on national securities exchanges, the NASDAQ National
Market System, the NASDAQ Small Cap Market and foreign markets are valued at
their last sale prices on the exchanges or markets where such securities are
primarily traded. Securities traded in the over-the-counter market for which
last sale prices are not available, and listed securities for which no sales
were reported on a particular date, are valued at their highest closing bid
prices (or, for debt securities, yield equivalents thereof) obtained from one or
<PAGE>
more dealers making markets for such securities. If market quotations are
not readily available, securities will be valued at their 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 Company's board of
directors 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 value of securities held by each Fund, and other assets used in
computing net asset value, generally is 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 a
Fund's net asset value on a particular day. 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 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 rates of such currencies against U.S.
dollars provided by an approved pricing service.
FUND PERFORMANCE
As discussed in the section of the Funds' Prospectus entitled "Fund Price
and Performance," the Company advertises the yield and total return performance
of the Funds. In calculating yield quotations for the Funds, except for
asset-backed securities, such as GNMA certificates, interest earned is
determined by computing yield to maturity (or yield to call, if applicable) of
each obligation held by a Fund, based upon market value of each obligation
(including actual accrued interest) at the close of business on the last
business day of each 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 preferred stocks held by
the High Yield Fund are recognized, for purposes of yield calculations, on a
daily accrual basis. As discussed in the Prospectus, and in the Appendix of this
<PAGE>
Statement of Additional Information, the GNMA Certificates held by the U.S.
Government Securities and Select Income Funds are generally subject to monthly
payments of principal and interest ("paydowns"). In computing these Funds'
yields, gain or loss attributable to actual monthly paydowns is accounted for as
an increase or decrease to interest income during the period. The Funds amortize
the discount and premium on the remaining security, based on the cost of the
security, to the weighted average maturity date, if such information is
available, or to the remaining term of the GNMA Certificate, if the weighted
average maturity date is not available. Yield quotations for each Fund for the
30 days ended August 31, 1997, were as follows: Select Income Fund, 6.09%; High
Yield Fund, 8.40%; U.S. Government Securities Fund, 5.28%; and Short-Term Bond
Fund, 5.62%.
Average annual total return performance for each of the Funds for the
indicated periods ended August 31, 1997, was as follows:
1 3 5 10
Fund Year Years Years Years
- ---- ---- ----- ----- -----
INVESCO Select Income 12.89% 10.48 8.72% 9.35%
INVESCO High Yield 19.27% 13.86 11.12% 9.82%
INVESCO U.S.
Government Securities 11.01% 8.12% 6.05% 7.48%
INVESCO Short-Term
Bond 7.08% 6.29% 4.59%(1) N/A
- ---------------------------
(1) Inception date: September 30, 1993.
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.
In conjunction with performance reports and/or analyses for the Funds,
comparative data between a Fund's performance for a given period and recognized
indices of investment results for the same period, and/or assessments of the
quality of shareholder service, may be provided to shareholders. Such indices
include indices provided by Dow Jones & Company, Standard & Poor's, Lipper
Analytical Services, Inc., Lehman Brothers, National Association of Securities
Dealers Automated Quotations, Frank Russell Company, Value Line Investment
<PAGE>
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 Deutcher Aktienindex, all of which are
unmanaged market indicators. In addition, rankings, ratings, and comparisons of
investment performance and/or assessments of the quality of shareholder service
made by independent sources may be used in advertisements, sales literature or
shareholder reports, including reprints of, or selections from, editorials or
articles about the Funds. These sources utilize information compiled (i)
internally; (ii) by Lipper Analytical Services, Inc.; or (iii) by other
recognized analytical services. The Lipper Analytical Services, Inc. mutual fund
rankings and comparisons which may be used by the Funds in performance reports
will be drawn from the mutual fund groupings listed in each Fund's prospectus,
in addition to the broad-based Lipper general fund groupings. Sources for Fund
performance information and articles about the Funds include, but are not
limited to, the following:
American Association of Individual Investors' Journal
Banxquote
Barron's
Business Week
CDA Investment Technologies
CNBC
CNN
Consumer Digest
Financial Times
Financial World
Forbes
Fortune
Ibbotson Associates, Inc.
Institutional Investor
Investment Company Data, Inc.
Investor's Business Daily
Kiplinger's Personal Finance
Lipper Analytical Services, Inc.'s Mutual Fund Performance
Analysis
Money
Morningstar
Mutual Fund Forecaster
No-Load Analyst
No-Load Fund X
Personal Investor
Smart Money
The New York Times
The No-Load Fund Investor
U.S. News and World Report
United Mutual Fund Selector
USA Today
Wall Street Journal
Wiesenberger Investment Companies Services
Working Woman
Worth
<PAGE>
SERVICES PROVIDED BY THE FUND
Periodic Withdrawal Plan. As described in the section of the Funds'
Prospectus entitled "How To Sell Shares," each Fund offers a Periodic Withdrawal
Plan. All dividends and distributions on shares owned by shareholders
participating in this Plan are reinvested in additional shares. Because
withdrawal payments represent the proceeds from sales of shares, the amount of
shareholders' investments in a Fund will be reduced to the extent that
withdrawal payments exceed dividends and other distributions paid and
reinvested. Any gain or loss on such redemptions must be reported for tax
purposes. In each case, shares will be redeemed at the close of business on or
about the 20th day of each month preceding payment and payments will be mailed
within five business days thereafter.
The Periodic Withdrawal Plan involves the use of principal and is not a
guaranteed annuity. Payments under such Plan do not represent income or a return
on investment.
Participation in the Periodic Withdrawal Plan may be terminated at any
time by sending a written request to IFG. Upon termination, all future dividends
and capital gain distributions will be reinvested in additional shares unless a
shareholder requests otherwise.
Exchange Policy. As discussed in the section of the Funds' Prospectus
entitled "How To Buy Shares - Exchange Policy," each Fund offers shareholders
the privilege of exchanging shares of the Funds for shares of another Fund or
for shares of certain other no-load mutual funds advised by IFG. Exchange
requests may be made either by telephone or by written request to IFG, using the
telephone number or address on the cover of this Statement of Additional
Information. Exchanges made by telephone must be in an amount of at least $250,
if the exchange is being made into an existing account of one of the INVESCO
funds. All exchanges that have established a new account must meet the fund's
applicable minimum initial investment requirements. Written exchange requests
into an existing account have no minimum requirements other than the fund's
applicable minimum subsequent investment requirements. Any gain or loss realized
on such an exchange is recognized for federal income tax purposes. This
privilege is not an option or right to purchase securities, but is a revocable
privilege permitted under the present policies of each of the funds and is not
available in any state or other jurisdiction where the shares of the mutual fund
into which transfer is to be made are not qualified for sale, or when the net
asset value of the shares presented for exchange is less than the minimum dollar
purchase required by the appropriate prospectus.
<PAGE>
TAX-DEFERRED RETIREMENT PLANS
As described in the section of the Funds' Prospectus entitled "Fund
Services," shares of a Fund may be purchased as the investment medium for
various tax-deferred retirement plans. Persons who request information regarding
these plans from IFG will be provided with prototype documents and other
supporting information regarding the type of Plan requested. Each of these plans
involves a long-term commitment of assets and is subject to possible regulatory
penalties for excess contributions, premature distributions or for insufficient
distributions after age 70-1/2. The legal and tax implications may vary
according to the circumstances of the individual investor. Therefore, the
investor is urged to consult with an attorney or tax adviser prior to the
establishment of such a plan.
HOW TO REDEEM SHARES
Normally, payments for shares redeemed will be mailed within seven (7)
days following receipt of the required documents as described in the section of
the Funds' Prospectus entitled "How To Sell Shares." The right of redemption may
be suspended and payment postponed when: (a) the New York Stock Exchange is
closed for other than customary weekends and holidays; (b) trading on that
exchange is restricted; (c) an emergency exists as a result of which disposal by
a Fund of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Fund fairly to determine the value of its net
assets; or (d) the SEC by order so permits.
It is possible that in the future conditions may exist which would, in the
opinion of the Company's investment adviser, make it undesirable for a Fund to
pay for redeemed shares in cash. In such cases, the investment adviser may
authorize payment to be made in portfolio securities or other property of the
Fund. However, the Company is obligated under the 1940 Act 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 Fund's net assets if that is less) in any
90-day period. Securities delivered in payment of redemptions are selected
entirely by the investment adviser based on what is in the best interests of the
Fund and its shareholders, and are valued at the value assigned to them in
computing the Fund's net asset value per share. Shareholders receiving such
securities are likely to incur brokerage costs on their subsequent sales of the
securities.
DIVIDENDS,OTHER DISTRIBUTIONS AND TAXES
Each Fund intends to continue to conduct its business and satisfy the
applicable diversification of assets and source of income requirements to
qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). Each Fund so qualified for the
taxable year ended August 31, 1997, and intends to continue to qualify during
its current taxable year. As a result, because each Fund intends to distribute
all of its income and recognized gains, it is anticipated that the Funds will
<PAGE>
pay no federal income or excise taxes and will be accorded conduit or "pass
through" treatment for federal income tax purposes.
Dividends paid by the Funds from net investment income as well as
distributions of net realized short-term capital gains and net realized gains
from certain foreign currency transactions are, for federal income tax purposes,
taxable as ordinary income to shareholders. After the end of each calendar year,
each Fund sends shareholders information regarding the amount and character of
dividends paid in the year.
Distributions by the Funds of net capital gain (the excess of net
long-term capital gain over net short-term capital loss) are, for federal income
tax purposes, taxable to the shareholder as long-term capital gains regardless
how long a shareholder has held shares of a Fund. The Taxpayer Relief Act of
1997 (the "Tax Act"), enacted in August 1997, changed the taxation of long-term
capital gains by applying different capital gains rates depending on the
taxpayer's holding period and marginal rate of federal income tax. Long-term
gains realized on the sale of securities held for more than one year but not for
more than 18 months are taxable at a rate of 28%. This category of long-term
gains is often referred to as "mid-term" gains but is technically termed "28%
rate gains". Long- term gains realized on the sale of securities held for more
than 18 months are taxable at a rate of 20%. The Tax Act, however, does not
address the application of these rules to distributions of net capital gain
(excess of long-term capital gain over short-term capital losses) by a regulated
investment company, including whether such distributions may be treated by its
shareholders in accordance with the Fund's holding period for the assets it sold
that generated the gain. The application of the new capital gain rules must be
determined by further legislation or future regulations that are not available
as this Prospectus is being prepared. At the end of each year, information
regarding the tax status of dividends and other distributions is provided to
shareholders. Shareholders should consult their tax advisers as to the effect of
the Tax Act on distributions by the Fund of net capital gain.
All dividends and other distributions are regarded as taxable to the
investor, regardless whether such dividends and distributions are reinvested in
additional shares of a Fund. The net asset value of Fund shares reflects accrued
net investment income and undistributed realized capital and foreign currency
gains; therefore, when a distribution is made, the net asset value is reduced by
the amount of the distribution. If the net asset value of Fund shares were
reduced below a shareholder's cost as a result of a distribution, such
distribution would be taxable to the shareholder although a portion would be, in
effect, a return of invested capital. However, the net asset value per share
will be reduced by the amount of the distribution, which would reduce any gain
or increase any loss for tax purposes on any subsequent redemption of shares by
the shareholder.
<PAGE>
IFG may provide Fund shareholders with information concerning the average
cost basis of their shares in order to help them prepare their tax returns. This
information is intended as a convenience to shareholders and will not be
reported to the Internal Revenue Service (the "IRS"). The IRS permits the use of
several methods to determine the cost basis of mutual fund shares. The cost
basis information provided by IFG will be computed using the single-category
average cost method, although neither IFG nor the Fund recommends any particular
method of determining cost basis. Other methods may result in different tax
consequences. If a shareholder has reported gains or losses with respect to
shares of a Fund in past years, the shareholder must continue to use the cost
basis method previously used unless the shareholder applies to the IRS for
permission to change the method.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be treated as a long-term, instead of short-term, capital loss to
the extent of any capital gain distributions received on those shares.
Each Fund will be subject to a non-deductible 4% excise tax to the extent
it fails to distribute by the end of any calendar year substantially all of its
ordinary income for that year and net capital gains for the one-year period
ending on October 31 of that year, plus certain other amounts.
Dividends and interest received by each Fund may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not imposes taxes on capital gains in
respect of investments by foreign investors. Foreign taxes withheld will be
treated as an expense of the Fund.
The Fund may invest in the stock of "passive foreign investment companies"
(PFICs). A PFIC is a foreign corporation (other than a controlled foreign
corporation) that, in general, meets either of the following tests: (1) at least
75% of its gross income is passive or (2) an average of at least 50% of its
assets produce, or are held for the production of, passive income. Under certain
circumstances, a Fund will be subject to federal income tax on a portion of any
"excess distribution" received on the stock of a PFIC or of any gain on
disposition of the stock (collectively "PFIC income"), plus interest thereon,
even if the Fund distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the Fund's
investment company taxable income and, accordingly, will not be taxable to the
Fund to the extent that income is distributed to its shareholders.
Each Fund may elect to "mark-to-market" its stock in any PFIC.
Marking-to-market, in this context, means including in ordinary income for each
<PAGE>
taxable year the excess, if any, of the fair market value of the PFIC stock
over a Fund's adjusted tax basis therein as of the end of that year. Once the
election has been made, a Fund also will be allowed to deduct from ordinary
income the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the end of the year, but only to the extent of any
net mark-to-market gains with respect to that PFIC stock included by the Fund
for prior taxable years. A Fund's adjusted tax basis in each PFIC's stock with
respect to which it makes this election will be adjusted to reflect the amounts
of income included and deductions taken under the election.
Gains or losses (1) from the disposition of foreign currencies, (2) from
the disposition of debt securities denominated in foreign currency that are
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of each security and the date of disposition, and (3) that
are attributable to fluctuations in exchange rates that occur between the time
the Fund accrues interest, dividends or other receivables or accrues expenses or
other liabilities denominated in a foreign currency and the time the Fund
actually collects the receivables or pays the liabilities, generally will be
treated as ordinary income or loss. These gains or losses may increase or
decrease the amount of the Fund's investment company taxable income to be
distributed to its shareholders.
Shareholders should consult their own tax advisers regarding specific
questions as to federal, state and local taxes. Dividends and other
distributions generally will be subject to applicable state and local taxes.
Qualification as a regulated investment company under the Code for federal
income tax purposes does not entail government supervision of management or
investment policies.
INVESTMENT PRACTICES
Portfolio Turnover. There are no fixed limitations regarding the portfolio
turnover of the Funds. The rate of portfolio turnover has fluctuated under
constantly changing economic conditions and market circumstances. During the
fiscal years ended August 31, 1997, 1996 and 1995, the Select Income Fund's
portfolio turnover rates were 263%, 210% and 181%, respectively, the High Yield
Fund's turnover rates were 129%, 266% and 201%, respectively, and the U.S.
Government Securities Fund's portfolio turnover rates were 139%, 212% and 99%,
respectively and the Short-Term Bond Fund's portfolio turnover rates were 331%,
103% and 68%, respectively. Securities initially satisfying the basic policies
and objectives of a Fund may be disposed of when they are no longer suitable.
Brokerage costs to these Funds are commensurate with the rate of portfolio
activity. In computing the above 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 was calculated by
dividing (A) the lesser of purchases or sales of portfolio securities for the
<PAGE>
fiscal year by (B) the monthly average of the value of portfolio securities
owned by the Fund during the fiscal year.
Placement of Portfolio Brokerage. Either IFG, as the Company's investment
adviser, or INVESCO Trust, as the Company's sub-adviser, places orders for the
purchase and sale of securities with brokers and dealers based upon IFG's or
INVESCO Trust's evaluation of their financial responsibility, subject to their
ability to effect transactions at the best available prices. IFG or INVESCO
Trust evaluates the overall reasonableness of brokerage commissions or
underwriting discounts (the difference between the full acquisition price to
acquire the new offering and the discount offered to members of the underwriting
syndicate) 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 or discounts
charged the Fund are consistent with prevailing and reasonable commissions or
discounts, IFG or INVESCO Trust also endeavors to monitor brokerage industry
practices with regard to the commissions or discounts charged by brokers and
dealers on transactions effected for other comparable institutional investors.
While IFG or INVESCO Trust seeks reasonably competitive rates, the Funds do not
necessarily pay the lowest commission, spread or discount available.
Consistent with the standard of seeking to obtain the best execution on
portfolio transactions, IFG or INVESCO Trust 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 IFG or
INVESCO Trust in making informed investment decisions. Research services
prepared and furnished by brokers through which the Funds effect securities
transactions may be used by IFG or INVESCO Trust in servicing all of their
respective accounts and not all such services may be used by IFG or INVESCO
Trust in connection with the Funds.
In recognition of the value of the above-described brokerage and research
services provided by certain brokers, IFG or INVESCO Trust, consistent with the
standard of seeking to obtain the best execution on portfolio transactions, may
place orders with such brokers for the execution of transactions for the Funds
on which the commissions or discounts are in excess of those which other brokers
might have charged for effecting the same transactions.
Portfolio transactions may be effected through qualified broker-dealers
who recommend the Funds to their clients, or who act as agent in the purchase of
any of the Fund's shares for their clients. When a number of brokers and dealers
can provide comparable best price and execution on a particular transaction, the
Company's adviser may consider the sale of Fund shares by a broker or dealer in
selecting among qualified broker-dealers.
<PAGE>
Certain financial institutions (including brokers who may sell shares of
the Funds, or affiliates of such brokers) are paid a fee (the "Services Fee")
for recordkeeping, shareholder communications and other services provided by the
brokers to investors purchasing shares of the Funds through no transaction fee
programs ("NTF Programs") offered by the financial institution or its affiliated
broker (an "NTF Program Sponsor"). The Services Fee is based on the average
daily value of the investments in each Fund made in the name of such NTF Program
Sponsor and held in omnibus accounts maintained on behalf of investors
participating in the NTF Program. With respect to certain NTF Programs, the
directors of the Company have authorized the Funds to apply dollars generated
from the Company's Plan and Agreement of Distribution pursuant to Rule 12b-1
under the 1940 Act (the "Plan") to pay the entire Services Fee, subject to the
maximum Rule 12b-1 fee permitted by the Plan. With respect to other NTF
Programs, the Company's directors have authorized the Funds to pay transfer
agency fees to IFG based on the number of investors who have beneficial
interests in the NTF Program Sponsor's omnibus accounts in the Funds. IFG, in
turn, pays these transfer agency fees to the NTF Program Sponsor as a
sub-transfer agency or recordkeeping fee in payment of all or a portion of the
Services Fee. In the event that the sub-transfer agency or recordkeeping fee is
insufficient to pay all of the Services Fee with respect to these NTF Programs,
the directors of the Company have authorized the Company to apply dollars
generated from the Plan to pay the remainder of the Services Fee, subject to the
maximum Rule 12b-1 fee permitted by the Plan. IFG itself pays the portion of
each Fund's Services Fee, if any, that exceeds the sum of the sub-transfer
agency or recordkeeping fee and Rule 12b-1 fee. The Company's directors have
further authorized IDI to place a portion of each Fund's brokerage transactions
with certain NTF Program Sponsors or their affiliated brokers, if IFG reasonably
believes that, in effecting the Fund's transactions in portfolio securities, the
broker is able to provide the best execution of orders at the most favorable
prices. A portion of the commissions earned by such a broker from executing
portfolio transactions on behalf of the Funds may be credited by the NTF Program
Sponsor against its Services Fee. Such credit shall be applied first against any
sub-transfer agency or recordkeeping fee payable with respect to the Funds, and
second against any Rule 12b-1 fees used to pay a portion of the Services Fee, on
a basis which has resulted from negotiations between IFG or IDI and the NTF
Program Sponsor. Thus, the Funds pay sub-transfer agency or recordkeeping fees
to the NTF Program Sponsor in payment of the Services Fee only to the extent
that such fees are not offset by a Fund's credits. In the event that the
transfer agency fee paid by the Funds to IFG with respect to investors who have
beneficial interests in a particular NTF Program Sponsor's omnibus accounts in a
Fund exceeds the Services Fee applicable to the Fund, after application of
credits, IFG may carry forward the excess and apply it to future Services Fees
payable to that NTF Program Sponsor with respect to that Fund. The amount of
excess transfer agency fees carried forward will be reviewed for possible
adjustment by IFG prior to each fiscal year-end of the Funds. The Company's
<PAGE>
board of directors has also authorized the Funds to pay to IDI the full
Rule 12b-1 fees contemplated by the Plan in compensate IDI for expenses incurred
by IDI in engaging in the activities and providing the services on behalf of the
Funds contemplated by the Plan, subject to the maximum Rule 12b-1 fee permitted
by the Plan, notwithstanding that credits have been applied to reduce the
portion of the 12b-1 fee that would have been used to compensate IDI for
payments to such NTF Program Sponsor absent such credits.
The aggregate dollar amount of underwriting discounts and brokerage
commissions paid by the Company for the fiscal years ended August 31, 1997, 1996
and 1995 were $4,191,369, $3,611,046 and $1,481,550, respectively. For the
fiscal year ended August 31, 1997, brokers providing research services received
$2,500 in commissions on portfolio transactions effected for the Funds. On a
Fund-by-Fund basis this figure breaks down as follows: Select Income Fund, $0;
High Yield Fund, $2,500; U.S. Government Securities Fund, $0; and Short-Term
Bond Fund, $0. The aggregate dollar amount of such portfolio transactions was
$1,070,950. As a result of selling shares of the Fund, brokers received $0 in
commissions on portfolio transactions effected for the Funds during the fiscal
year ended August 31, 1997.
At August 31, 1997, the Funds held securities of their regular brokers or
dealers, or their parents, as follows:
Value of
Securities
Fund Broker or Dealer at 08/31/97
- ---- ---------------- -----------
Select Income Fund GE Capital Services $11,127,000.00
High Yield Fund Associates Corp. of $8,503,000.00
North America
U.S. Government State Street Bank $255,000.00
Securities Fund & Trust
Short-Term Bond Fund State Street Bank $1,304,000.00
& Trust
Neither IFG nor INVESCO Trust receives any brokerage commissions on
portfolio transactions effected on behalf of the Funds, and there is no
affiliation between IFG, INVESCO Trust, or any person affiliated with IFG,
INVESCO Trust, or the Funds and any broker or dealer that executes transactions
for the Funds.
ADDITIONAL INFORMATION
Common Stock. The Company has 600,000,000 authorized shares of common
stock with a par value of $0.01 per share. Of the Company's authorized shares,
100,000,000 shares have been allocated to each of four classes, representing the
Company's four Funds. As of August 31, 1997, 43,176,748 shares of the Select
Income Fund;
<PAGE>
63,206,605 shares of the High Yield Fund; 6,882,696 shares of the U.S.
Government Securities Fund; and 1,297,795 shares of the Short- Term Bond Fund
were outstanding. All shares issued and outstanding are, and all shares offered
hereby, when issued, will be fully paid and nonassessable. The board of
directors has the authority to designate additional classes of common stock
without seeking the approval of shareholders, and may classify and reclassify
any authorized but unissued shares.
Shares of each series represent the interests of the shareholders of such
series in a particular portfolio of investments of the Company. Each series of
the Company's shares is preferred over all other series with respect to the
assets specifically allocated to that series, and all income, earnings, profits
and proceeds from such assets, subject only to the rights of creditors, are
allocated to shares of that series. The assets of each series 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 series 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 series. In the unlikely event that a
liability allocable to one series exceeds the assets belonging to the series,
all or a portion of such liability may have to be borne by the holders of shares
of the Company's other series.
All dividends on shares of a particular series shall be paid only out of
the income belonging to that series, pro rata to the holders of that series. In
the event of the liquidation or dissolution of the Company or of a particular
series, the shareholders of each series that is being liquidated shall be
entitled to receive, as a series, when and as declared by the board of
directors, the excess of the assets belonging to that series over the
liabilities belonging to that series. The holders of shares of any series shall
not be entitled to any distribution upon liquidation of any other series. The
assets so distributable to the shareholders of any particular series shall be
distributed among such shareholders in proportion to the number of shares of
that series held by them and recorded on the books of the Company.
All Fund shares, regardless of series, have equal voting rights. Voting
with respect to certain matters, such as ratification of independent accountants
or election of directors, will be by all series of the Company. When not all
series 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 series 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
<PAGE>
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.
They 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 will call annual or special meetings of shareholders for action by
shareholder vote as may be required by the 1940 Act or the Company's Articles of
Incorporation, or at their discretion.
Principal Shareholders. As of October 1, 1997, the following entities held
more than 5% of the outstanding securities of the Funds listed below.
Amount and Nature Percent
Name and Address of Ownership of Class
- ---------------- ----------------- --------
Select Income Fund
Charles Schwab & Co., Inc. 7,235,278.2650 16.168
Special Custody Acct. For The
Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104
Resources Trust Co. Cust. For 4,575,068.9000 10.224
The Exclusive Benefit of The
Various Customers of IMS
P.O. Box 3865
Englewood, CO 80155
High Yield Fund
Charles Schwab & Co., Inc. 25,662,163.4090 38.118
Special Custody Acct. For The
Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104
U.S. Government Securities Fund
Resources Trust Co. Cust. For 3,299,049.6150 48.643
The Exclusive Benefit of The
Various Customers of IMS
P.O. Box 3865
Englewood, CO 80155
Charles Schwab & Co., Inc. 405,170.3780 5.974
Special Custody Acct. For The
Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104
<PAGE>
Short-Term Bond Fund
Charles Schwab & Co., Inc. 207,875.8470 15.199
Special Custody Acct. For The
Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104
Amalgamated Bank of NY Cust. 153,202.9620 11.202
TMU Private Busline
Pension Trust
Amivest Discretionary Inv. Mgr.
P.O. Box 370
Cooper Station
New York, NY 10276
Amalgamated Bank of NY Cust. 85,649.1140 6.262
Local 917 Pension Annuity &
Health Funds Amivest Corp.
DIS Inv. Management
P.O. Box 370
Cooper Station
New York, NY 10276
INVESCO Trust Co. Cust. 69,814.3670 5.105
Charles Halff
SEEC 4028 Plan 10/25/76
Christian-Jew Foundation
4105 Shady Oak Dr.
San Antonio, TX 78229
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 Company. The bank is also responsible for, among other things,
receipt and delivery of the investment securities of the Company's Funds in
accordance with procedures and conditions specified in the custody agreement.
Under its contract with the Company, the custodian is authorized to establish
separate accounts in foreign countries and to cause foreign securities owned by
the Funds to be held outside the United States in branches of U.S. banks and, to
the extent permitted by applicable regulations, in certain foreign banks and
securities depositories.
Transfer Agent. The Company is provided with transfer agent, registrar,
and dividend disbursing agent services by INVESCO Funds Group, Inc., 7800 E.
Union Avenue, Denver, Colorado 80237, pursuant to the Transfer Agency Agreement
described herein. Such services include the issuance, cancellation and transfer
<PAGE>
of shares of the Funds, and the maintenance of records regarding the
ownership of such shares.
Reports to Shareholders. The Company's fiscal year ends on August 31. 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 August 31, 1997, 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 August 31, 1997.
Prospectus. The Company will furnish, without charge, a copy of the Funds'
Prospectus upon request. Such requests should be made to the Company at the
mailing address or telephone number set forth on the first page of this
Statement of Additional Information.
Registration Statement. This Statement of Additional Information and the
Prospectus do not contain all of the information set forth in the Registration
Statement the Company has filed with the SEC. The complete Registration
Statement may be obtained from the SEC upon payment of the fee prescribed by the
rules and regulations of the SEC.
<PAGE>
APPENDIX - GNMA CERTIFICATES AND FUTURES CONTRACTS
GNMA Certificates
Government National Mortgage Association. The Government National Mortgage
Association is a wholly-owned corporate instrumentality of the United States
within the U.S. Department of Housing and Urban Development. GNMA's principal
programs involve its guarantees of privately issued securities backed by pools
of mortgages.
Nature of GNMA Certificates. GNMA Certificates are mortgage-backed
securities. The Certificates evidence part ownership of a pool of mortgage
loans. The Certificates which the Company purchases are of the modified
pass-through type. Modified pass-through Certificates entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
fees paid to the GNMA Certificate issuer and GNMA, regardless of whether or not
the mortgagor actually makes the payment.
GNMA Certificates are backed by mortgages and, unlike most bonds, their
principal amount is paid back by the borrower over the length of the loan rather
than in a lump sum at maturity. Principal payments received by the Company will
be reinvested in additional GNMA Certificates or in other permissible
investments.
GNMA Guarantee. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal of and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration or the Farmers Home
Administration or guaranteed by the Veterans Administration. The GNMA guarantee
is backed by the full faith and credit of the United States. GNMA is also
empowered to borrow without limitation from the U.S. Treasury if necessary to
make any payments required under its guarantee.
Life of GNMA Certificates. The average life of a GNMA Certificate is likely
to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will result in the return of a portion of principal invested before
the maturity of the mortgages in the pool.
As prepayment of individual mortgage pools will vary widely, it is not
possible to predict accurately the average life of a particular issue of GNMA
Certificates. However, statistics published by the Federal Housing
Administration are normally used as an indicator of the expected average life of
GNMA Certificates. These statistics indicate that the average life of
single-family dwelling mortgages with 25-30 year maturities (the type of
mortgages backing the vast majority of GNMA Certificates) is approximately 12
years. For this reason, it is customary for pricing purposes to consider GNMA
Certificates as 30-year mortgage-backed securities which prepay fully in the
twelfth year.
<PAGE>
Yield Characteristics of GNMA Certificates. The coupon rate of interest of
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates, but only by the amount of the
fees paid to GNMA and the GNMA Certificate issuer. For the most common type of
mortgage pool, containing single-family dwelling mortgages, GNMA receives an
annual fee of 0.06 of 1% of the outstanding principal for providing its
guarantee, and the GNMA Certificate issuer is paid an annual servicing fee of
0.44 of 1% for assembling the mortgage pool and for passing through monthly
payments of interest and principal to Certificate holders.
The coupon rate by itself, however, does not indicate the yield which will
be earned on the Certificates for the following reasons:
1. Certificates are usually issued at a premium or discount, rather than at
par.
2. After issuance, Certificates usually trade in the secondary market at a
premium or discount.
3. Interest is paid monthly rather than semiannually as is the case for
traditional bonds. Monthly compounding has the effect of raising the effective
yield earned on GNMA Certificates.
4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificate. If
mortgagors prepay their mortgages, the principal returned to Certificate holders
may be reinvested at higher or lower rates.
In quoting yields for GNMA Certificates, the customary practice is to
assume that the Certificates will have a 12-year life. Compared on this basis,
GNMA Certificates have historically yielded roughly 1/4 of 1% more than high
grade corporate bonds and 1/2 of 1% more than U.S. Government and U.S.
Government agency bonds. As the life of individual pools may vary widely,
however, the actual yield earned on any issue of GNMA Certificates may differ
significantly from the yield estimated on the assumption of a 12-year life.
Market for GNMA Certificates. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make GNMA Certificates highly liquid instruments. Quotes for GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificates' coupon rates and the
prepayment experience of the pool of mortgages backing each Certificate.
<PAGE>
Futures Contracts
A futures contract is an agreement between two parties for the future
acquisition or delivery of fixed income securities. A "sale" of a futures
contract means the acquisition of a contractual obligation to deliver the
securities called for by the contract at a specified price on a specified date.
A "purchase" of a futures contract means the acquisition of a contractual
obligation to acquire the securities called for by the contract at a specified
price on a specified date. The purpose of the acquisition or sale of a futures
contract, in the case of a Fund holding long-term debt securities, is to protect
the portfolio from fluctuations in interest rates without actually buying or
selling long-term debt securities. For example, when a Fund owns long-term U.S.
treasury bonds, if interest rates were expected to increase, the Fund might
enter into futures contracts for the sale of such bonds. Such a sale would have
much the same effect as selling some of the long-term U.S. treasury bonds owned
by the Fund. If interest rates did increase, the value of the bonds in the Fund
would decline, but the value of the Fund's futures contracts would increase at
approximately the same rate, thereby keeping the net asset value of the Fund
from declining as much as it otherwise would have. Similarly, when it is
expected that interest rates may decline, futures contracts may be purchased to
hedge against anticipated purchases of long-term bonds at higher prices. Since
fluctuations in the value of futures contracts should be similar to that of
long-term bonds, the Fund could take advantage of the anticipated rise in the
value of long-term bonds without actually buying them until the market had
stabilized. At that time, the futures contracts could be liquidated and the
Fund's cash reserves could then be used to buy long-term bonds on the cash
market. The Fund could accomplish similar results by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase. However, since the futures contract market is more liquid
than the cash market, the use of futures contracts as an investment technique
allows the Fund to maintain a defensive position without having to sell its
portfolio securities.