PROSPECTUS | October 31, 1999
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YOU SHOULD KNOW WHAT INVESCO KNOWS (TM)
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INVESCO BOND
FUNDS, INC.
INVESCO HIGH YIELD FUND
INVESCO SELECT INCOME FUND
INVESCO TAX-FREE BOND FUND
INVESCO U.S. GOVERNMENT SECURITIES FUND
FOUR NO-LOAD MUTUAL FUNDS SEEKING A HIGH LEVEL OF CURRENT INCOME.
TABLE OF CONTENTS
Investment Goals, Strategies And Risks...................2
Fund Performance.........................................4
Fees And Expenses........................................6
Investment Risks.........................................7
Risks Associated With Particular Investments.............8
Temporary Defensive Positions...........................12
Portfolio Turnover......................................12
Fund Management.........................................13
Portfolio Managers......................................13
Potential Rewards.......................................14
Share Price.............................................14
How To Buy Shares.......................................15
Your Account Services...................................19
How To Sell Shares......................................19
Taxes...................................................22
Dividends And Capital Gain Distributions................23
Financial Highlights....................................24
[INVESCO ICON]
INVESCO
The Securities and Exchange Commission has not approved or disapproved the
shares of these Funds. Likewise, the Commission has not determined if this
Prospectus is truthful or complete. Anyone who tells you otherwise is committing
a federal crime.
<PAGE>
This Prospectus will tell you more about:
[KEY ICON] Investment Objectives & Strategies
[ARROW ICON] Potential Investment Risks
[GRAPH ICON] Past Performance
[INVESCO ICON] Working With INVESCO
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[KEY ICON][ARROW ICON] INVESTMENT GOALS, STRATEGIES AND RISKS
FACTORS COMMON TO ALL THE FUNDS
INVESCO Funds Group, Inc. ("INVESCO") is the investment adviser for the
Funds. Together with our affiliated companies, we at INVESCO direct all aspects
of the management and sale of the Funds.
FOR MORE DETAILS ABOUT EACH FUND'S CURRENT INVESTMENTS AND MARKET OUTLOOK,
PLEASE SEE THE MOST RECENT ANNUAL OR SEMIANNUAL REPORT.
The Funds attempt to provide you with a high level of current income through
investments in debt securities. High Yield, Select Income and U.S. Government
Securities Funds also seek capital appreciation. The Funds invest in bonds and
other debt securities, as well as in preferred stocks. Often, but not always,
when stock markets are up, debt markets are down and vice versa.
[ARROW ICON] Although the Funds are subject to a number of risks that could
affect their performance, their principal risk is interest rate risk -- that is,
the value of the securities in a portfolio will rise and fall due to changes in
interest rates. In general, as interest rates rise, the resale value of debt
securities decreases; as interest rates decline, the resale value of debt
securities generally increases. Debt securities with longer maturities are
usually more sensitive to interest rate movements.
Other principal risks involved in investing in the funds are interest rate,
credit, debt securities, foreign securities, duration, liquidity, counterparty
and lack of timely information risks. These risks are described and discussed
later in the Prospectus under the headings "Investment Risks" and "Risks
Associated With Particular Investments." As with any other mutual fund, there is
always a risk that you can lose money on your investment in a Fund.
[KEY ICON] INVESCO HIGH YIELD FUND
The Fund invests primarily in a diversified portfolio of high yield
corporate bonds rated below investment grade, commonly known as "junk bonds,"
and preferred stocks with medium to lower credit ratings. These investments
generally offer higher rates of return, but are riskier than investments in
securities of issuers with higher credit ratings.
<PAGE>
The rest of the Fund's assets are invested in securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities, bank CDs,
corporate short-term notes and municipal obligations. Normally, at least 65% of
the Fund's total assets will be invested in debt securities maturing at least
three years after they are issued. There are no limitations on the maturities of
the securities held by the Fund, and the Fund's average maturity will vary as
INVESCO responds to changes in interest rates.
[KEY ICON] INVESCO SELECT INCOME FUND
The Fund invests primarily in bonds and marketable debt securities of
established companies. Normally, at least 50% of the Fund's assets are invested
in investment grade securities. While an investment grade rating does not
guarantee that a security will be profitable, such securities generally carry
less risk than securities that are not investment grade. No more than 50% of the
Fund's assets may consist of corporate bonds rated below investment grade ("junk
bonds").
The rest of the Fund's assets are invested in securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities, bank CDs,
and municipal obligations. Normally, the Fund's total assets will be invested
primarily in debt securities maturing at least three years after they are
issued. There are no limitations on the maturities of the securities held by the
Fund, and the Fund's average maturity will vary as INVESCO responds to changes
in interest rates.
[KEY ICON] INVESCO TAX-FREE BOND FUND
The Fund invests primarily in municipal securities issued by state, county,
and city governments, including industrial development obligations and private
activity bonds which generally are not guaranteed by the governmental entity
that issues them. The interest on these securities is generally exempt from
federal income tax, although the interest may be included in your income if you
are subject to the federal alternative minimum tax. The interest on these
securities may be subject to state and/ or local income taxes. Portions of
capital gains distributions made by the Fund may be taxable. These securities
include municipal notes, short-term municipal bonds, and variable rate debt
obligations. Municipal obligations may be purchased or sold on a delayed
delivery or a when-issued basis with settlement taking place in the future. The
Fund may purchase securities together with the right to resell them to the
seller at an agreed-upon price or yield within a specific time period prior to
the maturity date of the securities. This is commonly known as a "demand
feature" or a "put."
The rest of the Fund's investment portfolio may be invested in short-term
taxable instruments. These may include corporate debt securities, bank
obligations, commercial paper, U.S. government debt, and repurchase agreements.
The circumstances under which the Fund will invest in taxable securities include
but are not limited to: (a) pending investment of proceeds of sales of portfolio
securities; (b) pending settlement of purchases of portfolio securities; and (c)
maintaining liquidity to meet the need for anticipated redemptions. We seek to
manage the Fund so that substantially all of the income produced is exempt from
federal income tax when paid to you, although we cannot guarantee this result.
<PAGE>
[KEY ICON] INVESCO U.S. GOVERNMENT SECURITIES FUND
The Fund invests primarily in debt securities issued or guaranteed by the
U.S. government or its agencies. Direct U.S. government obligations include
Treasury bonds, bills and notes, and are backed by the full faith and credit of
the U.S. Treasury. Federal agency securities are direct obligations of the
issuing agency, such as GNMA, FNMA and FHLMC, and may or may not be guaranteed
by the U.S. government. Treasury bills, notes, bonds and some agency securities
are exempt from state income tax.
In addition to U.S. government debt, the Fund may invest in bank CDs and
municipal obligations. Normally, the Fund invests primarily in debt securities
maturing at least three years after they are issued. There are no limitations on
the maturities of the securities held by the Fund, and the Fund's average
maturity will vary as INVESCO responds to changes in interest rates.
[GRAPH ICON] FUND PERFORMANCE
The bar charts below show the Funds' actual yearly performance for the
years ended December 31 (commonly known as their "total return") over the past
decade. The table below shows average annual total return for various periods
ended December 31 for each Fund compared to the Merrill Lynch High Yield Master,
Lehman Government/Corporate Bond, Lehman Municipal Bond and Lehman Government
Long Bond Indexes. The information in the charts and table illustrates the
variability of each Fund's return and how its performance compared to a broad
measure of market performance. Remember, past performance does not indicate how
a Fund will perform in the future.
<TABLE>
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HIGH YIELD FUND
ACTUAL ANNUAL TOTAL RETURN(1),(2)
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<CAPTION>
'89 '90 '91 '92 '93 '94 '95 '96 '97 '98
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
3.72% (4.57%) 23.51% 14.53% 15.81% (4.98%) 17.90% 14.08% 17.10% 0.15%
Best Calendar Qtr. 3/91 7.85%
Worst Calendar Qtr. 9/98 (7.12%)
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SELECT INCOME FUND
ACTUAL ANNUAL TOTAL RETURN(1),(2)
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<CAPTION>
'89 '90 '91 '92 '93 '94 '95 '96 '97 '98
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
8.17% 4.86% 18.57% 10.38% 11.43% (1.20%) 20.61% 4.87% 11.72% 7.13%
Best Calendar Qtr. 6/95 6.75%
Worst Calendar Qtr. 3/94 (2.01%)
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</TABLE>
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<TABLE>
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TAX-FREE BOND FUND
ACTUAL ANNUAL TOTAL RETURN(1),(2)
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<CAPTION>
'89 '90 '91 '92 '93 '94 '95 '96 '97 '98
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11.70% 7.10% 12.53% 8.77% 12.11% (5.52%) 15.64% 2.36% 8.67% 4.72%
Best Calendar Qtr. 6/89 8.29%
Worst Calendar Qtr. 3/94 (5.76%)
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U.S. GOVERNMENT SECURITIES FUND
ACTUAL ANNUAL TOTAL RETURN(1),(2)
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<CAPTION>
'89 '90 '91 '92 '93 '94 '95 '96 '97 '98
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
12.40% 7.23% 15.56% 5.68% 10.28% (7.20%) 22.13% 0.47% 1.226% 10.11%
Best Calendar Qtr. 6/95 7.68%
Worst Calendar Qtr. 3/94 (4.53%)
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AVERAGE ANNUAL TOTAL RETURN(1)
As of 12/31/98
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1 YEAR 5 YEARS 10 YEARS
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High Yield Fund 0.15% 8.43% 9.29%
Select Income Fund 7.13% 8.38% 9.48%
Tax-Free Bond Fund 4.72% 4.94% 7.65%
U.S. Government Securities Fund 10.11% 7.08% 8.61%
Merrill Lynch High Yield 3.66% 9.11% 9.01%
Master Index(3)
Lehman Government/Corporate 9.47% 7.33% 7.30%
Bond Index(3)
Lehman Municipal Bond 5.84% 6.47% 6.10%
Index(3)
Lehman Government Long 13.41% 8.99% 9.35%
Bond Index(3)
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(1) Total return figures for the Funds include reinvested dividends and
capital gain distributions, and include the effect of the Fund's expenses.
(2) Year-to-date return for High Yield Fund, Select Income Fund, Tax-Free
Bond Fund and U.S. Government Securities Fund were 5.36%, (1.83%), (2.38%) and
(4.74%), respectively, as of the calendar quarter ended September 30, 1999.
(3) The Merrill Lynch High Yield Master Index, Lehman Government/Corporate
Bond Index, Lehman Municipal Bond Index and Lehman Government Long Bond Index
are unmanaged indexes indicative of the high yield bond, broad domestic
fixed-income, municipal government bond and longer-term government bond markets.
Please keep in mind that the indexes do not pay brokerage, management,
administrative or distribution expenses, all of which are paid by the Funds and
are reflected in their annual returns.
<PAGE>
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the Funds:
SHAREHOLDER FEES PAID DIRECTLY FROM YOUR ACCOUNT
HIGH YIELD FUND
Maximum Sales Charge (Load) Imposed on Purchases
(as a percentage of offering price) None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends and Other Distributions None
Redemption Fee (as a percentage of amount redeemed) 2.00%*
Exchange Fee None
Maximum Account Fee None
* A 2% fee is charged on redemptions or exchanges of shares held three
months or less, other then shares acquired through reinvestment of dividends and
other distributions.
ANNUAL FUND OPERATING EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS
HIGH YIELD FUND
Management Fees 0.40%
Distribution and Service (12b-1) Fees(1) 0.25%
Other Expenses(2)(3) 0.36%
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Total Annual Fund Operating Expenses(2)(3) 1.01%
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SELECT INCOME FUND
Management Fees 0.50%
Distribution and Service (12b-1) Fees(1) 0.25%
Other Expenses (2)(3) 0.43%
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Total Annual Fund Operating Expenses(2)(3)(4) 1.18%
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TAX-FREE BOND FUND
Management Fees 0.55%
Distribution and Service (12b-1) Fees(1) 0.25%
Other Expenses(2)(3) 0.28%
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Total Annual Fund Operating Expenses(2)(3)(4) 1.08%
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U.S. GOVERNMENT SECURITIES FUND
Management Fee 0.55%
Distribution and Services (12b-1) Fees (1) 0.25%
Other Expenses(2)(3) 0.81%
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Total Annual Fund Operating Expenses(2)(3)(4) 1.61%
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(1) Because the Funds pay 12b-1 distribution fees which are based upon each
Fund's assets, if you own shares of a Fund for a long period of time,
you 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.
(2) Each Fund's actual Total Annual Fund Operating Expenses were lower than
the figures shown, because their custodian fees were reduced under an
expense offset arrangement.
(3) The expense information presented in the table has been restated from
the financials to reflect a change in the administrative services fee.
<PAGE>
(4) Certain advisory fees of each Fund were voluntarily absorbed by INVESCO
pursuant to a commitment to the Funds. After absorption, Select Income
Fund's Other Expenses and Total Annual Fund Operating Expenses were
0.33% and 1.08%, respectively, Tax-Free Bond Fund's Other Expenses and
Total Annual Fund Operating Expenses were 0.13% and 0.93%, respectively,
and U.S. Government Securities Fund's Other Expenses and Total Annual
Fund Operating Expenses were 0.22% and 1.02%, respectively.
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Funds to the cost of investing in other mutual funds.
The Example assumes that you invested $10,000 in a Fund for the time
periods indicated and redeemed all of your shares at the end of each period. The
Example also assumes that your investment had a hypothetical 5% return each
year, and assumes that a Fund's expenses remained the same. Although a Fund's
actual costs and performance may be higher or lower, based on these assumptions
your costs would have been:
1 year 3 years 5 years 10 years
High Yield Fund $103 $321 $556 $1,233
Select Income Fund $120 $374 $649 $1,431
Tax-Free Bond Fund $110 $344 $597 $1,320
U.S. Government Securities Fund $163 $507 $874 $1,907
[ARROW ICON] INVESTMENT RISKS
You should determine the level of risk with which you are comfortable
before you invest. The principal risks of investing in any mutual fund,
including these Funds, are:
BEFORE INVESTING IN A FUND, YOU SHOULD DETERMINE THE LEVEL OF RISK WITH
WHICH YOU ARE COMFORTABLE. TAKE INTO ACCOUNT FACTORS LIKE YOUR AGE, CAREER,
INCOME LEVEL, AND TIME HORIZON.
NOT INSURED. Mutual funds are not insured by the FDIC or any other agency,
unlike bank deposits such as CDs or savings accounts.
NO GUARANTEE. No mutual fund can guarantee that it will meet its investment
objectives.
POSSIBLE LOSS OF INVESTMENT. A mutual fund cannot guarantee its
performance, nor assure you that the market value of your investment will
increase. You may lose the money you invest, and the Funds will not reimburse
you for any of these losses.
VOLATILITY. The price of your mutual fund shares will increase or decrease
with changes in the value of a Fund's underlying investments and changes in the
debt markets as a whole.
NOT A COMPLETE INVESTMENT PLAN. An investment in any mutual fund does not
constitute a complete investment plan. The Funds are designed to be only a part
of your personal investment plan.
YEAR 2000. Many computer systems in use today may not be able to recognize
any date after December 31, 1999. If these systems are not fixed by that date,
it is possible that they could generate erroneous information or fail
altogether. INVESCO has committed substantial resources in an effort to make
sure that its own major computer systems will continue to function on and after
January 1, 2000. Of course, INVESCO cannot fix systems that are beyond its
<PAGE>
control. If INVESCO's own systems, or the systems of third parties upon which it
relies, do not perform properly after December 31, 1999, the Funds could be
adversely affected.
In addition, the markets for, or values of, securities in which the Funds
invest may possibly be hurt by computer failures affecting portfolio investments
or trading of securities beginning January 1, 2000. For example, improperly
functioning computer systems could result in securities trade settlement
problems and liquidity issues, production issues for individual companies and
overall economic uncertainties. Individual issuers may incur increased costs in
making their own systems Year 2000 compliant. The combination of market
uncertainty and increased costs means that there is a possibility that Year 2000
computer issues may adversely affect the Funds' investments. At this time, it is
generally believed that foreign issuers, particularly those in emerging and
other markets, may be more vulnerable to Year 2000 problems than issuers in the
U.S.
[ARROW ICON] RISKS ASSOCIATED WITH PARTICULAR INVESTMENTS
You should consider the special factors associated with the policies
discussed below in determining the appropriateness of investing in a Fund. See
the Statement of Additional Information for a discussion of additional risk
factors.
INTEREST RATE RISK
Changes in interest rates will affect the resale value of debt securities
held in a Fund's portfolio. In general, as interest rates rise, the resale value
of debt securities decreases; as interest rates decline, the resale value of
debt securities generally increases. Debt securities with longer maturities
usually are more sensitive to interest rate movements.
CREDIT RISK
The Funds invest in debt instruments, such as notes, bonds and commercial
paper. There is a possibility that the issuers of these instruments will be
unable to meet interest payments or repay principal. Changes in the financial
strength of an issuer may reduce the credit rating of its debt instruments and
may affect their value.
DEBT SECURITIES RISKS
Debt securities include bonds, notes and other securities that give the
holder the right to receive fixed amounts of principal, interest, or both on a
date in the future or on demand. Debt securities also are often referred to as
fixed income securities, even if the rate of interest varies over the life of
the security.
Debt securities are generally subject to credit risk and market risk.
Credit risk is the risk that the issuer of the security may be unable to meet
interest or principal payments or both as they come due. Market risk is the risk
that the market value of the security may decline for a variety of reasons,
including interest rate risk.
Moody's Investor Services, Inc. ("Moody's") and Standard & Poor's ("S&P")
ratings provide a useful but not certain guide to the credit risk of many debt
securities. The lower the rating of a debt security, the greater the credit risk
the rating service assigns to the security. To compensate investors for
accepting that greater risk, lower-rated securities tend to offer higher
<PAGE>
interest rates. Lower-rated debt securities are often referred to as "junk
bonds." A debt security is considered lower grade if it is rated Ba or less by
Moody's or BB or less by S&P.
Lower-rated and non-rated debt securities of comparable quality are subject
to wider fluctuations in yields and market values than higher-rated debt
securities and may be considered speculative. Junk bonds are perceived by
independent rating agencies as having a greater risk that their issuers will not
be able to pay the interest and principal as they become due over the life of
the bond. In addition to the loss of interest payments, the market value of a
defaulted bond would likely drop, and a Fund would be forced to sell it at a
loss. Debt securities rated lower than B by either S&P or Moody's are usually
considered to be highly speculative.
In addition to poor individual company performance in the marketplace or in
its internal management, a significant economic downturn or increase in interest
rates may cause issuers of debt securities to experience increased financial
problems which could hurt their ability to pay principal and interest
obligations, to meet projected business goals, and to obtain additional
financing. These conditions more severely impact issuers of lower-rated debt
securities. The market for lower-rated straight debt securities may not be as
liquid as the market for higher-rated straight debt securities. Therefore,
INVESCO attempts to limit purchases of lower-rated securities to securities
having an established secondary market.
Debt securities rated Caa by Moody's may be in default or may present risks
of non-payment of principal or interest. Lower-rated securities by S&P
(categories BB, B and CCC) include those which are predominantly speculative
because of the issuer's perceived capacity to pay interest and repay principal
in accordance with their terms; BB indicates the lowest degree of speculation
and CCC a high degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are usually outweighed by large
uncertainties or major risk exposures to adverse conditions.
FOREIGN SECURITIES RISKS
Investments in foreign and emerging markets carry special risks, including
currency, political, regulatory and diplomatic risks. High Yield and Select
Income Funds may invest up to 25% of their assets 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 are not subject to this 25% limitation.
CURRENCY RISK. A change in the exchange rate between U.S. dollars and a
foreign currency may reduce the value of a Fund's investment in a security
valued in the foreign currency, or based on that currency value.
POLITICAL RISK. Political actions, events or instability may result in
unfavorable changes in the value of a security.
REGULATORY RISK. Government regulations may affect the value of a security.
In foreign countries, securities markets that are less regulated than those
in the U.S. may permit trading practices that are not allowed in the U.S.
DIPLOMATIC RISK. A change in diplomatic relations between the U.S. and a
foreign country could affect the value or liquidity of investments.
<PAGE>
EUROPEAN ECONOMIC AND MONETARY UNION. Austria, Belgium, Finland,
France, Germany, Ireland, Italy, Luxembourg, The Netherlands, Portugal
and Spain are presently members of the European Economic and Monetary
Union (the "EMU") which as of January 1, 1999, adopted the euro as a
common currency. The national currencies will be sub-currencies of the
euro until July 1, 2002, at which time these currencies will disappear
entirely. Other European countries may adopt the euro in the future.
The introduction of the euro presents some uncertainties and possible
risks, which could adversely affect the value of securities held by the
Funds.
EMU countries, as a single market, may affect future investment
decisions of the Funds. As the euro is implemented, there may be
changes in the relative strength and value of the U.S. dollar and other
major currencies, as well as possible adverse tax consequences. The
euro transition by EMU countries - present and future - may affect the
fiscal and monetary levels of those participating countries. There may
be increased levels of price competition among business firms within
EMU countries and between businesses in EMU and non-EMU countries. The
outcome of these uncertainties could have unpredictable effects on
trade and commerce and result in increased volatility for all financial
markets.
DURATION RISK
Duration is a measure of a debt security's sensitivity to interest rate
changes. Duration is usually expressed in terms of years, with longer durations
usually more sensitive to interest rate fluctuations.
LIQUIDITY RISK
A Fund's portfolio is liquid if the Fund is able to sell the securities it
owns at a fair price within a reasonable time. Liquidity is generally related to
the market trading volume for a particular security. Investments in smaller
companies or in foreign companies or companies in emerging markets are subject
to a variety of risks, including potential lack of liquidity.
COUNTERPARTY RISK
This is a risk associated primarily with repurchase agreements and some
derivatives transactions. It is the risk that the other party in the transaction
will not fulfill its contractual obligation to complete the transaction with a
Fund.
LACK OF TIMELY INFORMATION RISK
Timely information about a security or its issuer may be unavailable,
incomplete or inaccurate. This risk is more common to securities issued by
foreign companies and companies in emerging markets than it is to the securities
of U.S.-based companies.
______________________________________________
The Funds generally invest in debt securities. However, in an effort to
diversify their holdings and provide some protection against the risk of other
investments, the Funds also may invest in other types of securities and other
financial instruments, as indicated in the chart below. These investments, which
at any given time may constitute a significant portion of a Fund's portfolio,
have their own risks.
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
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SELECT TAX-FREE U.S. GOVERNMENT
INVESMENT RISKS HIGH YIELD INCOME BOND SECURITIES
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<S> <C> <C> <C> <C> <C>
AMERICAN DEPOSITORY Market
RECEIPTS (ADRS) Information,
These are securities Politi-
issued by U.S. banks cal,
that represent shares Regulatory,
of foreign Diplomatic, X X
corporations held by Liquidity
those banks. Although and Cur-
traded in U.S. securi- rency
ties markets and Risks
valued in U.S.
dollars, ADRs carry
most of the risks of
investing directly in
foreign securities.
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DEBT SECURITIES Market,
Securities issued by Credit, Inter-
private companies or est Rate and
governments Duration
representing an Risks X X X X
obligation to pay
interest and to repay
principal when the
security matures.
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EUROBONDS AND YANKEE Market,
BONDS Informa-
Bonds issued by tion, Cur-
foreign branches of rency,
U.S. banks ("Euro Political,
bonds") and bonds Diplomatic,
issued by a U.S. Regulatory, X X
branch of a foreign Liquidity,
bank and sold in the Credit,
United States ("Yankee Interest
bonds"). These bonds Rate and
are bought and sold in Duration
U.S. dollars, but Risks
generally carry with
them the same risks as
investing in foreign
securities.
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JUNK BONDS Market,
Debt securities that Credit,
are rated BB or lower Interest Rate
by S&P or Ba or lower and X X X
by Moody's. Tend to Duration
pay higher interest Risks
rates than
higher-rated debt
securities, but carry
a higher credit risk.
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<PAGE>
[ARROW ICON] TEMPORARY DEFENSIVE POSITIONS
When securities markets or economic conditions are unfavorable or
unsettled, we might try to protect the assets of a Fund by investing in
securities that are highly liquid, such as high quality money market instruments
like short-term U.S. government obligations, commercial paper or repurchase
agreements, even though that is not the normal investment strategy of any Fund.
We have the right to invest up to 100% of a Fund's assets in these securities,
although we are unlikely to do so. Even though the securities purchased for
defensive purposes often are considered the equivalent of cash, they also have
their own risks. Investments that are highly liquid or comparatively safe tend
to offer lower returns. Therefore, a Fund's performance could be comparatively
lower if it concentrates in defensive holdings.
[ARROW ICON] PORTFOLIO TURNOVER
We actively manage and trade the Funds' portfolios. Therefore, the Funds
may have a higher portfolio turnover rate compared to many other mutual funds.
The Funds with higher than average portfolio turnover rates for the year ended
August 31, 1999 were:
INVESCO High Yield Fund 154%
INVESCO Select Income Fund 135%
INVESCO U.S. Government Securities Fund 114%
A portfolio turnover rate of 200%, for example, is equivalent to a Fund
buying and selling all of the securities in its portfolio two times in the
course of a year. A comparatively high turnover rate may result in higher
brokerage commissions and taxable capital gain distributions to a Fund's
shareholders.
<PAGE>
[INVESCO ICON] FUND MANAGEMENT
INVESTMENT ADVISER
INVESCO IS A SUBSIDIARY OF AMVESCAP PLC, AN INTERNATIONAL INVESTMENT
MANAGEMENT COMPANY THAT MANAGES MORE THAN $296 BILLION IN ASSETS WORLDWIDE.
AMVESCAP IS BASED IN LONDON, WITH MONEY MANAGERS LOCATED IN EUROPE, NORTH AND
SOUTH AMERICA, AND THE FAR EAST.
INVESCO, located at 7800 East Union Avenue, Denver, Colorado, is the investment
adviser of the Funds. INVESCO was founded in 1932 and manages over $24.1 billion
for more than 930,000 shareholders of 44 INVESCO mutual funds. INVESCO performs
a wide variety of other services for the Funds, including administrative and
transfer agency functions (the processing of purchases, sales and exchanges of
Fund shares).
A wholly owned subsidiary of INVESCO, INVESCO Distributors, Inc.
("IDI"), is the Funds' distributor and is responsible for the sale of the Funds'
shares.
INVESCO and IDI are subsidiaries of AMVESCAP PLC.
The following table shows the fees the Funds paid to INVESCO for its
advisory services in the fiscal year ended August 31, 1999:
- --------------------------------------------------------------------------------
ADVISORY FEE AS A PERCENTAGE OF AVERAGE
FUND ANNUAL NET ASSETS UNDER MANAGEMENT
- --------------------------------------------------------------------------------
INVESCO High Yield Fund 0.40%
INVESCO Select Income Fund 0.50%
INVESCO Tax-Free Bond Fund 0.55%(a)
INVESCO U.S. Government Securities Fund 0.55%
- --------------------------------------------------------------------------------
(a) Annualized, for the period of July 1, 1999 to August 31, 1999, the Fund's
current fiscal year end.
[INVESCO ICON] PORTFOLIO MANAGERS
The following individuals are primarily responsible for the day-to-day
management of each Fund's portfolio holdings:
FUND PORTFOLIO MANAGER(S)
High Yield Donovan J. (Jerry) Paul
Select Income Donovan J. (Jerry) Paul
Tax-Free Bond Dawn Daggy-Mangerson
U.S. Government Securities Richard R. Hinderlie
DONOVAN J. (JERRY) PAUL heads INVESCO's Fixed-Income Team. He is the
portfolio manager of High Yield and Select Income Funds and a senior vice
president of INVESCO. Jerry manages several other fixed-income INVESCO Funds. He
is a Chartered Financial Analyst and a Certified Public Accountant. Before
joining INVESCO in 1994, he was with Stein, Roe & Farnham, Inc. and Quixote
Investment Management. Jerry received his M.B.A. from the University of Northern
Iowa and his B.B.A. from the University of Iowa.
<PAGE>
RICHARD R. HINDERLIE is the portfolio manager of U.S. Government Securities
Fund and a vice president of INVESCO. Dick has been a portfolio manager with
INVESCO since 1993. Dick received his M.B.A. from Arizona State University and
his B.A. in Economics from Pacific Lutheran University.
DAWN DAGGY-MANGERSON is the portfolio manager of Tax-Free Bond Fund and a
vice president of INVESCO. Before joining INVESCO in 1998, she was a portfolio
manager with Nations Bank/Tradestreet Investment Associates, Inc., Boatmen's
Trust Company, and Stein, Roe & Farnham. She received her B.S. in Commerce with
a concentration in Finance from DePaul University.
Dick Hinderlie and Dawn Daggy-Mangerson are each members of the INVESCO
Fixed-Income Team, which is led by Jerry Paul.
[INVESCO ICON] POTENTIAL REWARDS
NO SINGLE FUND SHOULD REPRESENT YOUR COMPLETE INVESTMENT PROGRAM NOR SHOULD
YOU ATTEMPT TO USE THE FUNDS FOR SHORT-TERM TRADING PURPOSES.
The Funds offer shareholders the opportunity for current income. Like most
mutual funds, each Fund seeks to provide higher returns than the market or its
competitors, but cannot guarantee that performance. Each Fund seeks to minimize
risk by investing in debt securities of a variety of issuers.
SUITABILITY FOR INVESTORS
Only you can determine if an investment in a Fund is right for you based
upon your own economic situation, the risk level with which you are comfortable
and other factors. In general, the Funds are most suitable for investors who:
o are primarily seeking higher current income; and, for High Yield, Select
Income and U.S. Government Securities Funds, a secondary opportunity for
capital growth.
o understand that shares of a Fund can, and likely will, have daily price
fluctuations.
o are investing in tax-deferred retirement accounts, such as Traditional and
Roth Individual Retirement Accounts ("IRAs"), as well as employer-sponsored
qualified retirement plans, including 401(k)s and 403(b)s, all of which
have longer investment horizons.
You probably do not want to invest in the Funds if you are:
o primarily seeking high rates of capital appreciation or total return.
o unwilling to accept potential daily changes in the price of Fund shares.
o speculating on short-term fluctuations in the securities markets.
[INVESCO ICON] SHARE PRICE
CURRENT MARKET VALUE OF FUND
ASSETS + ACCRUED INTEREST AND
DIVIDENDS - FUND DEBTS,
INCLUDING ACCRUED EXPENSES
- -------------------------------
/ NUMBER OF SHARES
= YOUR SHARE PRICE (NAV).
The value of your Fund shares is likely to change daily. This value is known as
the Net Asset Value per share, or NAV. INVESCO determines the market value of
each investment in each Fund's portfolio each day that the New York Stock
Exchange ("NYSE") is open, at the close of trading on that exchange (normally
4:00 p.m. Eastern time). Therefore, shares of the Funds are not priced on days
when the NYSE is closed, which generally is on weekends and national holidays in
the U.S.
<PAGE>
NAV is calculated by adding together the current market price of all of a
Fund's investments and other assets, including accrued interest and dividends;
subtracting the Fund's debts, including accrued expenses; and dividing that
dollar amount by the total number of the Fund's outstanding shares.
All purchases, sales and exchanges of Fund shares are made by INVESCO at
the NAV next calculated after INVESCO receives proper instructions from you to
purchase, redeem or exchange shares of a Fund. Your instructions must be
received by INVESCO no later than the close of the NYSE to effect transactions
at that day's NAV. If INVESCO hears from you after that time, your instructions
will be processed at the NAV calculated at the end of the next day that the NYSE
is open.
Foreign securities exchanges, which set the prices for foreign securities
held by the Funds, are not always open the same days as the NYSE, and may be
open for business on days the NYSE is not. For example, Thanksgiving Day is a
holiday observed by the NYSE and not by overseas exchanges. In this situation,
the Funds would not calculate NAV on Thanksgiving Day (and INVESCO would not
buy, sell or exchange shares for you on that day), even though activity on
foreign exchanges could result in changes in the value of investments held by a
Fund on that day.
[INVESCO ICON] HOW TO BUY SHARES
TO BUY SHARES AT THAT DAY'S CLOSING PRICE, YOU MUST CONTACT US BEFORE THE
CLOSE OF THE NYSE, NORMALLY, 4:00 P.M. EASTERN TIME.
The following chart shows several convenient ways to invest in the Funds.
There is no charge to invest directly through INVESCO. With regard to all Funds,
except High Yield Fund, there is no charge to exchange or redeem shares when you
make transactions directly through INVESCO. However, with respect to High Yield
Fund, upon a redemption or an exchange of shares held three months or less
(other than shares acquired through reinvestment of dividends or other
distributions), a fee of 2% of the current net asset value of the shares being
exchanged will be assessed and retained by that Fund for the benefit of the
remaining shareholders. If you invest in a Fund through a securities broker, you
may be charged a commission or transaction fee for either purchases or sales of
Fund shares. For all new accounts, please send a completed application form, and
specify the fund or funds you wish to purchase.
INVESCO reserves the right to increase, reduce or waive each Fund's minimum
investment requirements in its sole discretion, if it determines this action is
in the best interests of that Fund's shareholders. INVESCO also reserves the
right in its sole discretion to reject any order to buy Fund shares, including
purchases by exchange.
MINIMUM INITIAL INVESTMENT. $1,000, which is waived for regular investment
plans, including EasiVest and Direct Payroll Purchase, and certain retirement
plans, including IRAs.
MINIMUM SUBSEQUENT INVESTMENT. $50 (Minimums are lower for certain
retirement plans.)
EXCHANGE POLICY. You may exchange your shares in any of the Funds for those
in another INVESCO mutual fund on the basis of their respective NAVs at the time
of the exchange.
<PAGE>
FUND EXCHANGES CAN BE A CONVENIENT WAY FOR YOU TO DIVERSIFY YOUR
INVESTMENTS, OR TO REALLOCATE YOUR INVESTMENTS WHEN YOUR OBJECTIVES CHANGE.
Before making any exchange, be sure to review the prospectuses of the funds
involved and consider the differences between the funds. Also, be certain that
you qualify to purchase certain classes of shares in the new fund. An exchange
is the sale of shares from one fund immediately followed by the purchase of
shares in another. Therefore, any gain or loss realized on the exchange is
recognizable for federal income tax purposes Fund exchanges can be a convenient
way for you to diversify your investments, or to reallocate your investments
when your objectives change. (unless, of course, you or your account qualifies
as tax-deferred under the Internal Revenue Code). If the shares of the fund you
are selling have gone up in value since you bought them, the sale portion of an
exchange may result in taxable income to you.
We have the following policies governing exchanges:
o Both fund accounts involved in the exchange must be registered in exactly
the same name(s) and Social Security or federal tax I.D. number(s).
o You may make up to four exchanges out of each Fund per 12-month period.
o Each Fund reserves the right to reject any exchange request, or to modify
or terminate the exchange policy, if it is in the best interests of the
Fund and its shareholders. Notice of all such modifications or termination
that affect all shareholders of the Fund will be given at least 60 days
prior to the effective date of the change, except in unusual instances,
including a suspension of redemption of the exchanged security under
Section 22(e) of the Investment Company Act of 1940.
In addition, the ability to exchange may be temporarily suspended at any
time that sales of the Fund into which you wish to exchange are temporarily
stopped.
REDEMPTION FEE (HIGH YIELD FUND ONLY). If you exchange or redeem shares of
High Yield Fund after holding them three months or less (other than shares
acquired through reinvestment of dividends or other distributions), a fee of 2%
of the current net asset value of the shares being exchanged will be assessed
and retained by the Fund for the benefit of the remaining shareholders. This fee
is intended to encourage long-term investment in High Yield Fund, to avoid
transaction and other expenses caused by early redemptions, and to facilitate
portfolio management. The fee is currently waived for institutional, qualified
retirement plan and other shareholders investing through omnibus accounts, due
to certain economies associated with these accounts. However, High Yield Fund
reserves the right to impose redemption fees on shares held by such shareholders
at any time if warranted by the Fund's future cost of processing redemptions.
The redemption fee may be modified or discontinued at any time or from time to
time. This fee is not a deferred sales charge, is not a commission paid to
INVESCO and does not benefit INVESCO in any way. The fee applies to redemptions
from the Fund and exchanges into any of the other no-load mutual funds which are
also advised by INVESCO and distributed by IDI. High Yield Fund will use the
"first-in, first-out" method to determine your holding period. Under this
method, the date of redemption or exchange will be compared with the earliest
purchase date of shares held in your account. If your holding period is less
than three months, the redemption/exchange fee will be assessed on the current
net asset value of those shares.
Please remember that if you pay by check or wire and your funds do not
clear, you will be responsible for any related loss to a Fund or INVESCO. If you
are already an INVESCO funds shareholder, the Fund may seek reimbursement for
any loss from your existing account(s).
<PAGE>
INTERNET TRANSACTIONS. Investors may open new accounts, exchange and redeem
shares of any INVESCO Fund through the INVESCO Web site. To utilize this
service, you will need a web browser (presently Netscape version 1.2 or higher,
or Internet Explorer version 2.0 or higher) and utilize the INVESCO Web site.
INVESCO will accept Internet purchase instructions only for exchanges or if the
purchase price is paid to INVESCO through debiting your bank account, and any
Internet cash redemptions will be paid only to the same bank account from which
the payment to INVESCO originated. INVESCO imposes a limit of $25,000 on
Internet purchase and redemption transactions. You may also download an
application to open an account from the Web site, complete it by hand, and mail
it to INVESCO, along with a check.
INVESCO employs reasonable procedures to confirm that transactions entered
into over the Internet are genuine. These procedures include the use of
alphanumeric passwords, secure socket layering, encryption and other precautions
reasonably designed to protect the integrity, confidentiality and security of
shareholder information. If INVESCO follows these procedures, neither INVESCO,
its affiliates nor any Fund will be liable for any loss, liability, cost or
expense for following instructions communicated via the Internet that are
reasonably believed to be genuine or that follow INVESCO's security
procedures. In order to enter into a transaction on the INVESCO Web site, you
will need an account number, your Social Security Number and an alphanumeric
password. By entering into the user's agreement with INVESCO to open an account
through our Web site, you lose certain rights if someone gives fraudulent or
unauthorized instructions to INVESCO that result in a loss to you.
METHOD INVESTMENT MINIMUM PLEASE REMEMBER
- --------------------------------------------------------------------------------
BY CHECK $1,000 for regular
Mail to: accounts;
INVESCO Funds Group, $250 for an IRA;
Inc., $50 minimum for
P.O. Box 173706, each subsequent
Denver, CO 80217-3706. investment.
You may send your check
by overnight courier to:
7800 E. Union Ave.
Denver, CO 80237.
- --------------------------------------------------------------------------------
BY WIRE $1,000
You may send your
payment by bank wire
(call INVESCO for
instructions).
- --------------------------------------------------------------------------------
BY TELEPHONE WITH ACH $50 You must forward your
Call 1-800-525-8085 to bank account
request your purchase. information to
INVESCO will move money INVESCO prior to
from your designated using this option.
bank/credit union
checking or savings
account in order to
purchase shares, upon
your telephone instructions,
whenever you wish.
<PAGE>
METHOD INVESTMENT MINIMUM PLEASE REMEMBER
BY INTERNET $1,000 for regular You will need a web
Go to the INVESCO Web accounts; $250 for browser to utilize
site an IRA; $50 this service.
at www.invesco.com minimum for each Internet purchase
subsequent invest- transactions are
ment. limited to $25,000.
- --------------------------------------------------------------------------------
REGULAR INVESTING WITH $50 per month for EasiVest; $50 Like all regular
EASIVEST OR DIRECT per pay period for Direct plans, neither Easi-
PAYROLL PURCHASE Payroll Purchase. you may Vest nor Direct
You may enroll on your start or stop your regular Payroll Purchase en-
fund application, or investment plan at any time, sures a profit or pro-
call us for a a with two weeks' notice to tects against loss in
separate form and more INVESCO. a falling market.
details. Investing the Because you'll invest
same amount on a monthly continually,
basis allows you to buy regardless of varying
more shares when prices price levels.
are low and fewer shares Remember that you will
when prices are high. lose money if you
This "dollar cost redeem your shares
averaging" may help when the market value
offset market of all your shares is
fluctuations. Over a less than their cost.
period of time, your
average cost per share
may be less than the
actual average value
per share.
- --------------------------------------------------------------------------------
BY PAL(R) $1,000 (The Be sure to write down
Your "Personal Account exchange minimum the confirmation
Line" is is $250 for number provided by
available for subsequent subsequent PAL(R). You must
purchases purchases forward your bank
and exchanges 24 hours a requested by tele- account information to
day. phone.) INVESCO prior to using
Simply call this option.
1-800-424-8085.
- --------------------------------------------------------------------------------
BY EXCHANGE $1,000 to open a See "Exchange Policy."
Between two INVESCO new account; $50
funds. Call for written
1-800-525-8085 for requests to pur
prospectuses of chase additional
other INVESCO funds. shares for an
Exchanges existing account.
may be made by phone or (The exchange
at our minimum is $250
Web site at for exchanges
www.invesco.com. You requested by tele
may also establish an phone.)
automatic monthly
exchange service between
two INVESCO funds; call
us for further details
and the correct form.
DISTRIBUTION EXPENSES. We have adopted a Plan and Agreement of Distribution
(commonly known as a "12b-1 Plan") for the Funds. The 12b-1 fees paid by each
Fund are used to defray all or part of the cost of preparing and distributing
prospectuses and promotional materials, as well as to pay for certain
distribution-related and other services. These services include compensation to
third party brokers, financial advisers and financial services companies that
sell Fund shares and/or service shareholder accounts.
Under the Plan, each Fund's payments are limited to an amount computed at
an annual rate of 0.25% of the Fund's average net assets. If distribution
expenses for a Fund exceed these computed amounts, INVESCO pays the difference.
<PAGE>
[INVESCO ICON] YOUR ACCOUNT SERVICES
INVESCO PROVIDES YOU WITH SERVICES DESIGNED TO MAKE IT SIMPLE FOR YOU TO BUY,
SELL OR EXCHANGE YOUR SHARES OF ANY INVESCO MUTUAL FUND.
SHAREHOLDER ACCOUNTS. INVESCO maintains your share account, which contains
your current Fund holdings. The Funds do not issue share certificates.
QUARTERLY INVESTMENT SUMMARIES. Each calendar quarter, you receive a
written statement which consolidates and summarizes account activity and value
at the beginning and end of the period for each of your INVESCO funds.
TRANSACTION CONFIRMATIONS. You receive detailed confirmations of individual
purchases, exchanges and sales. If you choose certain recurring transaction
plans (for instance, EasiVest), your transactions are confirmed on your
quarterly Investment Summaries.
TELEPHONE TRANSACTIONS. You may buy, exchange and sell Fund shares by
telephone, unless you specifically decline these privileges when you fill out
the INVESCO new account Application.
YOU CAN CONDUCT MOST TRANSACTIONS AND CHECK ON YOUR ACCOUNT THROUGH OUR
TOLL-FREE TELEPHONE NUMBER . YOU MAY ALSO ACCESS PERSONAL ACCOUNT INFORMATION AT
OUR WEB SITE, WWW.INVESCO.COM.
Unless you decline the telephone transaction privileges, when you fill out
and sign the new account Application, a Telephone Transaction Authorization
Form, or use your telephone transaction privileges, you lose certain rights if
someone gives fraudulent or unauthorized instructions to INVESCO that result in
a loss to you. In general, if INVESCO has followed reasonable procedures, such
as recording telephone instructions and sending written transaction
confirmations, INVESCO is not liable for following telephone instructions that
it believes to be genuine. Therefore, you have the risk of loss due to
unauthorized or fraudulent instructions.
IRAS AND OTHER RETIREMENT PLANS. Shares of any INVESCO mutual fund may be
purchased for IRAs and many other types of tax-deferred retirement plans. Please
call INVESCO for information and forms to establish or transfer your existing
retirement plan or account.
[INVESCO ICON] HOW TO SELL SHARES
The following chart shows several convenient ways to sell your Fund shares.
Shares of the Funds may be sold at any time at the next NAV calculated after
your request to sell in proper form is received by INVESCO. Depending on Fund
performance, the NAV at the time you sell your shares may be more or less than
the price you paid to purchase your shares.
TO SELL SHARES AT THAT DAY'S CLOSING PRICE, YOU MUST CONTACT US BEFORE 4:00
P.M. EASTERN TIME.
If you own shares in more than one INVESCO fund, please specify the fund whose
shares you wish to sell. Remember that any sale or exchange of shares in a
non-retirement account will likely result in a taxable gain or loss.
<PAGE>
While INVESCO attempts 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.
INVESCO usually mails you the proceeds from the sale of Fund shares within
seven days after we receive your request to sell in proper form. However,
payment may be postponed under unusual circumstances -- for instance, if normal
trading is not taking place on the NYSE, or during an emergency as defined by
the Securities and Exchange Commission. If your INVESCO fund shares were
purchased by a check which has not yet cleared, payment will be made promptly
when your purchase check does clear; that can take up to 15 days.
If you participate in EasiVest, the Funds' automatic monthly investment
program, and sell all of the shares in your account, we will not make any
additional EasiVest purchases unless you give us other instructions.
Because of the Funds' expense structure, it costs as much to handle a small
account as it does to handle a large one. If the value of your account in any
Fund falls below $250 as a result of your actions (for example, sale of your
Fund shares), each Fund reserves the right to sell all of your shares, send the
proceeds of the sale to you and close your account. Before this is done, you
will be notified and given 60 days to increase the value of your account to $250
or more.
<PAGE>
METHOD REDEMPTION MINIMUM PLEASE REMEMBER
- --------------------------------------------------------------------------------
BY TELEPHONE $250 (or, if less, INVESCO's telephone
Call us toll-free at: full liquidation of redemption privileges
1-800-525-8085. the account) for a may be modified or
redemption check; terminated in the
$1,000 for a wire to future at INVESCO's
your bank of record. discretion.
The maximum amount
which may be redeemed
by telephone is
generally $25,000.
- --------------------------------------------------------------------------------
IN WRITING Any amount. The redemption
Mail your request to request must be
INVESCO Funds Group, signed by all
Inc., P.O. Box registered account
173706, Denver, CO owners. Payment will
80217-3706. You may be mailed to your
also send your address as it appears
request by overnight on INVESCO's records,
courier to 7800 E. or to a bank
Union Ave., designated by you in
Denver, CO 80237. writing.
- --------------------------------------------------------------------------------
BY TELEPHONE WITH ACH $50 You must forward your
Call 1-800-525-8085 bank account
to request your information to
redemption. INVESCO INVESCO prior to
will automatically using this option.
pay the proceeds into
your designated bank
account.
- --------------------------------------------------------------------------------
BY INTERNET None; no IRA You will need a web
Go to the INVESCO Web redemptions. browser to utilize
site this service.
at www.invesco.com Internet redemption
transactions are
limited to $25,000.
- --------------------------------------------------------------------------------
BY EXCHANGE $250 for exchanges See "Exchange Policy."
Between two INVESCO requested When opening a new
funds. Call by telephone. account, investment
1-800-525-8085 for minimums apply.
prospectuses of other
INVESCO funds.
Exchanges may be
made by phone or
at our Web site at
www.invesco.com. You
may also establish an
automatic monthly
exchange service
between two INVESCO
funds; call us for
further details and
the correct form.
- --------------------------------------------------------------------------------
PERIODIC WITHDRAWAL $100 per payment on a You must have at
PLAN monthly or quarterly least $10,000 total
You may call us to basis. The redemption invested with the
request the check may be made INVESCO funds with at
appropriate form and payable to any party least $5,000 of that
more informa tion at you designate. total invested in the
1-800-525-8085. fund from which
withdrawals will be
made.
- --------------------------------------------------------------------------------
PAYMENT TO THIRD Any amount. All registered
PARTY account owners must
Mail your request to sign the request,
INVESCO with signature
Funds Group, Inc., guarantees from an
P.O. Box 173706, eligible guarantor
Denver, CO 80217-3706. financial
institution, such as
a commercial bank or a
recognized national or
regional securities
firm.
<PAGE>
[GRAPH ICON] TAXES
Everyone's tax status is unique. We encourage you to consult your own tax
adviser on the tax impact to you of investing in the Funds.
TO AVOID BACKUP WITHHOLDING, BE SURE WE HAVE YOUR CORRECT SOCIAL SECURITY OR
TAXPAYER IDENTIFICATION NUMBER.
Each Fund customarily distributes to its shareholders substantially all of
its net investment income, net capital gains and net gains from foreign currency
transactions, if any. You receive a proportionate part of these distributions,
depending on the percentage of each Fund's shares that you own. These
distributions are required under federal tax laws governing mutual funds. It is
the policy of each Fund to distribute all investment company taxable income and
net capital gains. As a result of this policy and each Fund's qualification as a
regulated investment company, it is anticipated that none of the Funds will pay
any federal income or excise taxes. Instead, each Fund will be accorded conduit
or "pass through" treatment for federal income tax purposes.
However, unless you are (or your account is) exempt from income taxes, you
must include all dividends and capital gain distributions paid to you by a Fund
in your taxable income for federal, state and local income tax purposes. You
also may realize capital gains or losses when you sell shares of a Fund at more
or less than the price you originally paid. An exchange is treated as a sale,
and is a taxable event. Dividends and other distributions usually are taxable
whether you receive them in cash or automatically reinvest them in shares of the
distributing Fund(s) or other INVESCO funds.
If you have not provided INVESCO with complete, correct tax information, a
Fund is required by law to withhold 31% of your distributions and any money that
you receive from the sale of shares of the Fund as a backup withholding tax.
We will provide you with detailed information every year about your
dividends and capital gain distributions. Depending on the activity in your
individual account, we may also be able to assist with cost basis figures for
shares you sell.
<PAGE>
[GRAPH ICON] DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
The Funds earn ordinary or investment income from dividends and interest on
their investments. The Funds expect to distribute substantially all of this
investment 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.
NET INVESTMENT INCOME AND NET REALIZED CAPITAL GAINS ARE DISTRIBUTED TO
SHAREHOLDERS AT LEAST ANNUALLY. DISTRIBUTIONS ARE TAXABLE WHETHER REINVESTED IN
ADDITIONAL SHARES OR PAID TO YOU IN CASH (EXCEPT FOR TAX-EXEMPT ACCOUNTS).
A Fund also realizes capital gains and losses when it sells securities in its
portfolio for more or less than it had paid for them. If total gains on sales
exceed total losses (including losses carried forward from previous years), a
Fund has a net realized capital gain. Net realized capital gains, if any, are
distributed to shareholders at (PP) least annually, usually in December.
Under present federal income tax laws, capital gains may be taxable at
different rates, depending on how long a Fund has held the underlying
investment. Short-term capital gains which are derived from the sale of assets
held one year or less are taxed as ordinary income. Long-term capital gains
which are derived from the sale of assets held for more than one year are taxed
at up to the maximum capital gains rate, currently 20% for individuals.
Dividends and capital gain distributions are paid to you if you hold shares
on the record date of the distribution regardless of how long you have held your
shares. A Fund's NAV will drop by the amount of the distribution on the day the
distribution is declared. If you buy shares of a Fund just before a distribution
is declared, you may wind up "buying a distribution." This means that if the
Fund makes a capital gain distribution shortly after you buy, you will receive
some of your investment back as a taxable distribution. Most shareholders want
to avoid this. And, if you sell your shares at a loss for tax purposes and
purchase a substantially identical investment within 30 days before or after
that sale, the transaction is usually considered a "wash sale" and you will not
be able to claim a tax loss.
Dividends and capital gain distributions paid by each Fund are
automatically reinvested in additional Fund shares at the NAV on the ex-dividend
date, unless you choose to have them automatically reinvested in another INVESCO
fund or paid to you by check or electronic funds transfer. If you choose to be
paid by check, the minimum amount of the check must be at least $10; amounts
less than that will be automatically reinvested. Dividends and other
distributions, whether received in cash or reinvested in additional Fund shares,
may be subject to federal income tax.
<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand a Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by PricewaterhouseCoopers LLP, independent
accountants, whose report, along with the financial statements, is included in
INVESCO Bond Funds, Inc.'s 1999 Annual Report to Shareholders, which is
incorporated by reference into the Statement of Additional Information. This
report is available without charge by contacting IDI at the address or telephone
number on the back cover of this Prospectus.
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
- --------------------------------------------------------------------------------------
HIGH YIELD FUND 1999 1998 1997 1996 1995
PER SHARE DATA <C> <C> <C> <C> <C>
Net Asset Value-Beginning of Period $6.76 $7.45 $6.84 $6.73 $6.73
- --------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.60 0.64 0.62 0.63 0.66
Net Gains or (Losses) on Securities
(Both Realized and Unrealized) (0.19) (0.29) 0.64 0.11 0.03
- --------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.41 0.35 1.26 0.74 0.69
- --------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from Net Investment 0.60 0.64 0.62 0.63 0.66
Income(a)
Distributions from Capital Gains 0.00 0.40 0.03 0.00 0.00
In Excess of Capital Gains 0.17 0.00 0.00 0.00 0.03
- --------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS 0.77 1.04 0.65 0.63 0.69
- --------------------------------------------------------------------------------------
Net Asset Value -- End of Period $6.40 $6.76 $7.45 $6.84 $6.73
======================================================================================
TOTAL RETURN 6.53% 4.44% 19.27% 11.38% 11.12%
RATIOS
Net Assets-End of Period $793,337 $641,39 $470,96 $375,20 $288,959
($000 Omitted)
Ratio of Expenses to 0.99%(c) 0.86%(c) 1.00%(c) 0.99%(c) 1.00%
Average Net Assets(b)
Ratio of Net Investment Income to 9.13% 8.72% 8.71% 9.13% 10.01%
Average Net Assets(b)
Portfolio Turnover Rate 154% 282% 129% 266% 201%
(a) Distributions in excess of net investment income for the year ended August
31, 1996, aggregated less than $0.01 on a per share basis.
(b) Various expenses of the Fund were voluntarily absorbed by INVESCO for the
years ended August 31, 1996 and 1995. If such expenses had not been
voluntarily absorbed, ratio of expenses to average net assets would have
been 0.99% and 1.07%, respectively, and ratio of net investment income to
average net assets would have been 9.13% and 9.94%, respectively.
(c) Ratio is based on Total Expenses of the Fund, less Expenses Absorbed by
INVESCO, if applicable, which is before any expense offset arrangements.
<PAGE>
Financial Highlights (continued)
YEAR ENDED AUGUST 31
- --------------------------------------------------------------------------------------
SELECT INCOME FUND 1999 1998 1997 1996 1995
PER SHARE DATA <C> <C> <C> <C> <C>
Net Asset Value-Beginning of Period $6.68 $6.66 $6.35 $6.54 $6.18
- --------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.43 0.43 0.45 0.47 0.47
Net Gains or (Losses) on Securities
(Both Realized and Unrealized) (0.41) 0.19 0.34 (0.17) 0.36
- --------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 0.02 0.62 0.79 0.30 0.83
- --------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income 0.43 0.43 0.45 0.46 0.47
In Excess of Net Investment
Income(a) 0.00 0.00 0.00 0.01 0.00
Distributions from Capital Gains 0.02 0.17 0.03 0.02 0.00
In Excess of Capital Gains 0.10 0.00 0.00 0.00 0.00
- --------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS 0.55 0.60 0.48 0.49 0.47
- --------------------------------------------------------------------------------------
Net Asset Value -- End of Period $6.15 $6.68 $6.66 $6.35 $6.54
======================================================================================
TOTAL RETURN 0.15% 9.58% 12.89% 4.78% 14.01%
RATIOS
Net Assets-End of Period $549,438 $502,624 $287,618 $258,093 $216,597
($000 Omitted)
Ratio of Expenses to 1.06%(c) 1.06%(c) 1.03%(c) 1.01%(c) 1.00%
Average Net Assets(b)
Ratio of Net Investment Income to 6.56% 6.36% 6.98% 7.14% 7.38%
Average Net Assets(b)
Portfolio Turnover Rate 135% 140% 263% 210% 181%
(a) Distributions in excess of net investment income for the year ended August
31, 1995, aggregated less than $0.01 on a per share basis.
(b) Various expenses of the Fund were voluntarily absorbed by INVESCO for the
years ended August 31, 1999, 1998, 1997, 1996 and 1995. If such expenses had
not been voluntarily absorbed, ratio of expenses to average net assets would
have been 1.16%, 1.10%, 1.21%, 1.16% and 1.22%, respectively, and ratio of
net investment income to average net assets would have been 6.46%, 6.32%,
6.80%, 6.99% and 7.16%, respectively.
(c) Ratio is based on Total Expenses of the Fund, less Expenses Absorbed by
INVESCO, if applicable, which is before any expense offset arrangements.
<PAGE>
Financial Highlights (continued)
Period Ended
August 31 YEAR ENDED JUNE 30
- -----------------------------------------------------------------------------------------------
TAX-FREE BOND FUND 1999(a) 1999 1998 1997 1996 1995
PER SHARE DATA <C> <C> <C> <C> <C> <C>
Net Asset Value-Beginning of Period $14.71 $15.57 $15.34 $15.20 $15.07 $15.29
- -----------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.10 0.62 0.63 0.66 0.73 0.80
Net Gains or (Losses) on Securities
(Both Realized and Unrealized) (0.18) (0.40) 0.40 0.38 0.32 0.09
- -----------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS (0.08) 0.22 1.03 1.04 1.05 0.89
- -----------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income 0.10 0.62 0.63 0.66 0.73 0.80
In Excess of Net Investment 0.00 0.01 0.00 0.01 0.00 0.00
Income
Distributions from Capital Gains 0.00 0.46 0.17 0.23 0.19 0.31
- -----------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS 0.10 1.08 0.80 0.90 0.92 1.11
- -----------------------------------------------------------------------------------------------
Net Asset Value -- End of Period $14.53 $14.71 $15.57 $15.34 $15.20 $15.07
===============================================================================================
TOTAL RETURN (0.53%)(b) 1.30% 6.87% 7.05% 7.01% 6.16%
RATIOS
Net Assets-End of Period $191,836 $201,791 $211,471 $220,410 $250,890 $254,584
($000 Omitted)
Ratio of Expenses to
Average Net Assets(c) 0.90%(d)(e) 0.91%(d) 0.91%(d) 0.90%(d) 0.91%(d) 0.92%
Ratio of Net Investment Income 4.08% 4.03% 4.06% 4.36% 4.76% 5.31%
to Average Net Assets(c)
Portfolio Turnover Rate 3% 66% 173% 123% 146% 99%
(a) From July 1, 1999 to August 31, 1999, the Fund's new fiscal year end.
(b) Based on operations for the period shown and, accordingly, are not
representative of a full year.
(c) Various expenses of the Fund were voluntarily absorbed by INVESCO for the
period ended August 31, 1999 and for the years ended June 30, 1999, 1998,
1997, 1996 and 1995. If such expenses had not been voluntarily absorbed,
ratio of expenses to average net assets would have been 1.14% (annualized),
1.06%, 1.04%, 1.05%, 1.04%, and 1.05%, respectively, and ratio of net
investment income to average net assets would have been 3.84% (annualized),
3.88%, 3.93%, 4.21%, 4.63% and 5.18%, respectively.
(d) Ratio is based on Total Expenses of the Fund, less Expenses Absorbed by
INVESCO, which is before any expense offset arrangements.
(e) Annualized.
<PAGE>
Financial Highlights (continued)
YEAR ENDED AUGUST 31
- --------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES FUND 1999 1998 1997 1996 1995
PER SHARE DATA <C> <C> <C> <C> <C>
Net Asset Value-Beginning of Period $7.99 $7.49 $7.15 $7.49 $7.10
- --------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.35 0.40 0.43 0.44 0.45
Net Gains or (Losses) on Securities
(Both Realized and Unrealized) (0.58) 0.67 0.34 (0.34) 0.39
- --------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS (0.23) 1.07 0.77 0.10 0.84
- --------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from Net Investment
Income 0.35 0.40 0.43 0.43 0.45
In Excess of Net Investment
Income(a) 0.00 0.00 0.00 0.01 0.00
Distributions from Capital Gains 0.56 0.17 0.00 0.00 0.00
In Excess of Capital Gains 0.04 0.00 0.00 0.00 0.00
- --------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS 0.95 0.57 0.43 0.44 0.45
- --------------------------------------------------------------------------------------
Net Asset Value -- End of Period $6.81 $7.99 $7.49 $7.15 $7.49
======================================================================================
TOTAL RETURN (3.40%) 14.75% 11.01% 1.31% 12.37%
RATIOS
Net Assets-End of Period $79,899 $79,485 $51,581 $54,614 $38,087
($000 Omitted)
Ratio of Expenses to 1.01%(c) 1.01%(c) 1.01%(c) 1.02%(c) 1.00%
Average Net Assets(b)
Ratio of Net Investment Income to 4.80% 5.22% 5.78% 5.76% 6.24%
Average Net Assets(b)
Portfolio Turnover Rate 114% 323% 139% 212% 99%
(a) Distributions in excess of net investment income for the year ended August
31, 1995, aggregated less than $0.01 on a per share basis.
(b) Various expenses of the Fund were voluntarily absorbed by INVESCO for the
years ended August 31, 1999, 1998, 1997, 1996 and 1995. If such expenses had
not been voluntarily absorbed, ratio of expenses to average net assets
would have been 1.60%, 1.41%, 1.32%, 1.48% and 1.51%, respectively, and
ratio of net investment income to average net assets would have been 4.21%,
4.82%, 5.47%, 5.30% and 5.73%, respectively.
(c) Ratio is based on Total Expenses of the Fund, less Expenses Absorbed by
INVESCO, which is before any expense offset arrangements.
</TABLE>
<PAGE>
October 31, 1999
INVESCO BOND FUNDS, INC.
INVESCO HIGH YIELD FUND INVESCO SELECT
INCOME FUND INVESCO TAX-FREE BOND FUND
INVESCO U.S. GOVERNMENT SECURITIES FUND
You may obtain additional information about the Funds from several sources:
FINANCIAL REPORTS. Although this Prospectus describes the Funds'
anticipated investments and operations, the Funds also prepare annual and
semiannual reports that detail the Funds' actual investments at the report date.
These reports include discussion of each Fund's recent performance, as well as
market and general economic trends affecting each Fund's performance. The annual
report also includes the report of the Funds' independent accountants.
STATEMENT OF ADDITIONAL INFORMATION. The SAI, dated October 31, 1999, is a
supplement to this Prospectus and has detailed information about the Funds and
their investment policies and practices. A current SAI for the Funds is on file
with the Securities and Exchange Commission and is incorporated into this
Prospectus by reference; in other words, the SAI is legally a part of this
Prospectus, and you are considered to be aware of the contents of the SAI.
INTERNET. The current Prospectus of the Funds may be accessed through the
INVESCO Web site at www.invesco.com. In addition, the Prospectus, SAI, annual
report and semiannual report of the Funds are available on the SEC Web site at
www.sec.gov.
To obtain a free copy of the current Prospectus, SAI, annual report or
semiannual report, write to INVESCO Distributors, Inc., P.O. Box 173706, Denver,
Colorado 80217-3706; or call 1-800-525-8085. Copies of these materials are also
available (with a copying charge) from the SEC's Public Reference Section at 450
Fifth Street, N.W., Washington, D.C. Information on the Public Reference Section
can be obtained by calling 1-800-SEC-0330. The SEC file numbers for the Funds
are 811-2674 and 002-57151.
811-2674
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
INVESCO BOND FUNDS, INC.
INVESCO High Yield Fund
INVESCO Select Income Fund
INVESCO Tax-Free Bond Fund
INVESCO U.S. Government Securities Fund
Address: Mailing Address:
7800 E. Union Ave., Denver, CO 80237 P.O. Box 173706, Denver, CO 80217-3706
Telephone:
In continental U.S., 1-800-525-8085
October 31, 1999
- --------------------------------------------------------------------------------
A Prospectus for INVESCO High Yield Fund, INVESCO Select Income Fund, INVESCO
Tax-Free Bond Fund (formerly INVESCO Tax-Free Long-Term Bond Fund), and INVESCO
U.S. Government Securities Fund dated October 31, 1999 provides the basic
information you should know before investing in a Fund. This Statement of
Additional Information ("SAI") is incorporated by reference into the Funds'
Prospectus, in other words, this SAI is legally part of the Funds' Prospectus.
Although this SAI is not a prospectus, it contains information in addition to
that set forth in the Prospectus. It is intended to provide additional
information regarding the activities and operations of the Funds and should be
read in conjunction with the Prospectus.
You may obtain, without charge, copies of the current Prospectus of the Funds,
SAI and current annual and semiannual reports by writing to INVESCO
Distributors, Inc., P.O. Box 173706, Denver, CO 80217-3706 , or by calling
1-800-525-8085. Copies of the current Prospectus also are available through the
INVESCO Web site at www.invesco.com.
<PAGE>
TABLE OF CONTENTS
The Company..........................................................31
Investments, Policies and Risks......................................31
Investments Restrictions.............................................50
Management of the Funds..............................................53
Other Service Providers..............................................76
Brokerage Allocation and Other Practices.............................77
Capital Stock........................................................80
Tax Consequences of Owning Shares of a Fund..........................80
Performance..........................................................83
Financial Statements.................................................86
Appendix A...........................................................87
<PAGE>
THE COMPANY
The Company was incorporated under the laws of Colorado on August 20, 1976 and
was reorganized as a Maryland corporation on April 2, 1993. On October 29, 1998,
the name of the Company was changed to INVESCO Bond Funds, Inc. On August 16,
1999, the Company assumed all of the assets and liabilities of INVESCO Tax-Free
Bond Fund (formerly, INVESCO Tax-Free Long-Term Bond Fund), a series of INVESCO
Tax-Free Income Funds, Inc.
The Company is an open-end, diversified, no-load management investment company
currently consisting of four portfolios of investments: INVESCO High Yield Fund,
INVESCO Select Income Fund, INVESCO Tax-Free Bond Fund and INVESCO U.S.
Government Securities Fund (each a "Fund" and collectively the "Funds").
Additional funds may be offered in the future.
"Open-end" means that each Fund issues an indefinite number of shares which it
continuously offers to redeem at net asset value per share ("NAV"). A
"management" investment company actively buys and sells securities for the
portfolio of each Fund at the direction of a professional manager. Open-end
management investment companies (or one or more series of such companies, such
as the Funds) are commonly referred to as mutual funds. The Funds do not charge
sales fees to purchase their shares. However, the Funds do pay a 12b-1
distribution fee which is computed and paid monthly at an annual rate of 0.25%
of each Fund's average net assets.
INVESTMENTS, POLICIES AND RISKS
The principal investments and policies of the Funds are discussed in the
Prospectus of the Funds. The Funds also may invest in the following securities
and engage in the following practices.
ADRS (HIGH YIELD AND SELECT INCOME FUNDS ONLY) -- American Depository Receipts,
or ADRs, are securities issued by American banks. ADRs are receipts for the
shares of foreign corporations that are held by the bank issuing the receipt. An
ADR entitles its holder to all dividends and capital gains on the underlying
foreign securities, less any fees paid to the bank. Purchasing ADRs gives a Fund
the ability to purchase the functional equivalent of foreign securities without
going to the foreign securities markets to do so. ADRs are bought and sold in
U.S. dollars, not foreign currencies. An ADR that is "sponsored" means that the
foreign corporation whose shares are represented by the ADR is actively involved
in the issuance of the ADR, and generally provides material information about
the corporation to the U.S. market. An "unsponsored" ADR program means that the
foreign corporation whose shares are held by the bank is not obligated to
disclose material information in the United States, and, therefore, the market
value of the ADR may not reflect important facts known only to the foreign
company. Since they mirror their underlying foreign securities, ADRs generally
have the same risks as investing directly in the underlying foreign securities.
AMT BONDS (TAX-FREE BOND FUND ONLY) -- These are "private activity bonds" issued
after August 7, 1986; the proceeds are directed in full or in part to private,
for-profit organizations. The income from AMT Bonds is exempt from federal
income tax, but may be subject to the alternative minimum tax - a special tax
that applies to taxpayers who have certain adjustments to income or tax
preference items.
<PAGE>
CERTIFICATES OF DEPOSIT IN FOREIGN BANKS AND U.S. BRANCHES OF FOREIGN BANKS --
The Funds may maintain time deposits in and invest in U.S. dollar denominated
CDs issued by foreign banks and U.S. branches of foreign banks. The Funds limit
investments in foreign bank obligations to U.S. dollar denominated obligations
of foreign banks which have more than $10 billion in assets, have branches or
agencies in the U.S., and meet other criteria established by the board of
directors. Investments in foreign securities involve special considerations.
There is generally less publicly available information about foreign issuers
since many foreign countries do not have the same disclosure and reporting
requirements as are imposed by the U.S. securities laws. Moreover, foreign
issuers are generally not bound by uniform accounting and auditing and financial
reporting requirements and standards of practice comparable to those applicable
to domestic issuers. Such investments may also entail the risks of possible
imposition of dividend withholding or confiscatory taxes, possible currency
blockage or transfer restrictions, expropriation, nationalization or other
adverse political or economic developments, and the difficulty of enforcing
obligations in other countries.
The Funds may also invest in bankers' acceptances, time deposits and
certificates of deposit of U.S. branches of foreign banks and foreign branches
of U.S. banks. Investments in instruments of U.S. branches of foreign banks will
be made only with branches that are subject to the same regulations as U.S.
banks. Investments in instruments issued by a foreign branch of a U.S. bank will
be made only if the investment risk associated with such investment is the same
as that involving an investment in instruments issued by the U.S. parent, with
the U.S. parent unconditionally liable in the event that the foreign branch
fails to pay on the investment for any reason.
COMMERCIAL PAPER -- Commercial paper is the term for short-term promissory notes
issued by domestic corporations to meet current working capital needs.
Commercial paper may be unsecured by the corporation's assets but may be backed
by a letter of credit from a bank or other financial institution. The letter of
credit enhances the paper's creditworthiness. The issuer is directly responsible
for payment but the bank "guarantees" that if the note is not paid at maturity
by the issuer, the bank will pay the principal and interest to the buyer.
INVESCO Funds Group, Inc. ("INVESCO"), investment adviser to the Funds, will
consider the creditworthiness of the institution issuing the letter of credit,
as well as the creditworthiness of the issuer of the commercial paper, when
purchasing paper enhanced by a letter of credit. Commercial paper is sold either
as interest-bearing or on a discounted basis, with maturities not exceeding 270
days.
DEBT SECURITIES -- Debt securities include bonds, notes and other securities
that give the holder the right to receive fixed amounts of principal, interest,
or both on a date in the future or on demand. Debt securities also are often
referred to as fixed income securities, even if the rate of interest varies over
the life of the security.
Debt securities are generally subject to credit risk and market risk. Credit
risk is the risk that the issuer of the security may be unable to meet interest
or principal payments or both as they come due. Market risk is the risk that the
market value of the security may decline for a variety of reasons, including
changes in interest rates. An increase in interest rates tends to reduce the
market values of debt securities in which a Fund has invested. A decline in
interest rates tends to increase the market values of debt securities in which a
Fund has invested.
<PAGE>
Moody's Investor Services, Inc. ("Moody's") and Standard & Poor's ("S&P")
ratings provide a useful guide to the credit risk of many debt securities. The
lower the rating of a debt security, the greater the credit risk the rating
service assigns to the security. To compensate investors for accepting that
greater risk, lower-rated debt securities tend to offer higher interest rates.
High Yield invests primarily in lower-rated securities commonly known as junk
bonds, Select Income may invest up to 50% of its portfolio and Tax-Free Bond
Fund may invest up to 10% of its portfolio in such securities. Although Tax-Free
Bond Fund may invest in debt securities assigned lower grade ratings by S&P or
Moody's at the time of purchase, the Fund's investments are generally
concentrated in debt securities rated BBB or higher by S&P or Baa or higher by
Moody's. U.S. Government Securities Fund may invest only in investment grade
debt securities, which are those rated BBB or higher by S&P or Baa or higher by
Moody's, or if unrated, are judged by INVESCO to be of equivalent quality.
Increasing the amount of Fund assets invested in unrated or lower-grade straight
debt securities may increase the yield produced by the Fund's debt securities
but will also increase the credit risk of those securities. A debt security is
considered lower-grade if it is rated Ba or less by Moody's or BB or less by
S&P. Lower-rated and non-rated debt securities of comparable quality are subject
to wider fluctuations in yields and market values than higher-rated debt
securities and may be considered speculative.
A significant economic downturn or increase in interest rates may cause issuers
of debt securities to experience increased financial problems which could
adversely affect their ability to pay principal and interest obligations, to
meet projected business goals, and to obtain additional financing. These
conditions more severely impact issuers of lower-rated debt securities. The
market for lower-rated straight debt securities may not be as liquid as the
market for higher-rated straight debt securities.
Lower-rated securities by S&P (categories BB, B, CCC) include those which are
predominantly speculative because of the issuer's perceived capacity to pay
interest and repay principal in accordance with their terms; BB indicates the
lowest degree of speculation and CCC a high degree of speculation. While such
bonds will likely have some quality and protective characteristics, these are
usually outweighed by large uncertainties or major risk exposures to adverse
conditions.
Although bonds in the lowest investment grade debt category (those rated BBB by
S&P, Baa by Moody's or the equivalent) are regarded as having adequate
capability to pay principal and interest, they have speculative characteristics.
Adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than is the case for
higher-rated bonds. Lower-rated bonds by Moody's (categories Ba, B, Caa) are of
poorer quality and also have speculative characteristics. Bonds having
equivalent ratings from other ratings services will have characteristics similar
to those of the corresponding S&P and Moody's ratings. For a specific
description of S&P and Moody's corporate bond rating categories, please refer to
Appendix A.
The Funds may invest in zero coupon bonds, step-up bonds, mortgage-backed
securities and asset-backed securities. Zero coupon bonds do not make regular
interest payments. Zero coupon bonds are sold at a discount from face value.
Principal and accrued discount (representing interest earned but not paid) are
paid at maturity in the amount of the face value. Step-up bonds initially make
no (or low) cash interest payments but begin paying interest (or a higher rate
<PAGE>
of interest) at a fixed time after issuance of the bond. The market values of
zero coupon and step-up bonds generally fluctuate more in response to changes in
interest rates than interest-paying securities of comparable term and quality. A
Fund may be required to distribute income recognized on these bonds, even though
no cash may be paid to a Fund until the maturity or call date of a bond, in
order for a Fund to maintain its qualification as a regulated investment
company. These required distributions could reduce the amount of cash available
for investment by a Fund. Mortgage-backed securities represent interests in
pools of mortgages while asset-backed securities generally represent interests
in pools of consumer loans. Both of these are usually set up as pass-through
securities. Interest and principal payments ultimately depend on payment of the
underlying loans, although the securities may be supported, at least in part, by
letters of credit or other credit enhancements or, in the case of
mortgage-backed securities, guarantees by the U.S. government, its agencies or
instrumentalities. The underlying loans are subject to prepayments that may
shorten the securities' weighted average lives and may lower their returns.
DOMESTIC BANK OBLIGATIONS -- U.S. banks (including their foreign branches) issue
certificates of deposit (CDs) and bankers' acceptances which may be purchased by
the Funds if an issuing bank has total assets in excess of $5 billion and the
bank otherwise meets a Fund's credit 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").
Bankers' acceptances 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. Both types of securities are subject to the ability of the
issuing bank to meet its obligations, and are subject to risks common to all
debt securities. In addition, banker's acceptances may be subject to foreign
currency risk and certain other risks of investment in foreign securities.
FOREIGN SECURITIES (HIGH YIELD AND SELECT INCOME FUNDS) -- Investments in the
securities of foreign companies, or companies that have their principal business
activities outside the United States, involve certain risks not associated with
investment in U.S. companies. Non-U.S. companies generally are not subject to
the same uniform accounting, auditing and financial reporting standards that
apply to U.S. companies. Therefore, financial information about foreign
companies may be incomplete, or may not be comparable to the information
available on U.S. companies. There may also be less publicly available
information about a foreign company.
Although the volume of trading in foreign securities markets is growing,
securities of many non-U.S. companies may be less liquid and have greater swings
in price than securities of comparable U.S. companies. The costs of buying and
selling securities on foreign securities exchanges is generally significantly
higher than similar costs in the United States. There is generally less
government supervision and regulation of exchanges, brokers and issuers in
foreign countries than there is in the United States. Investment in non-U.S.
securities may also be subject to other risks different from those affecting
U.S. investments, including local political or economic developments,
expropriation or nationalization of assets, confiscatory taxation, and
imposition of withholding taxes on dividends or interest payments. If it becomes
necessary, it may be more difficult for a Fund to obtain or to enforce a
judgment against a foreign issuer than against a domestic issuer.
<PAGE>
Securities traded on foreign markets are usually bought and sold in local
currencies, not in U.S. dollars. Therefore, the market value of foreign
securities acquired by a Fund can be affected -- favorably or unfavorably -- by
changes in currency rates and exchange control regulations. Costs are incurred
in converting money from one currency to another. Foreign currency exchange
rates are determined by supply and demand on the foreign exchange markets.
Foreign exchange markets are affected by the international balance of payments
and other economic and financial conditions, government intervention,
speculation and other factors, all of which are outside the control of each
Fund. Generally, a Fund's foreign currency exchange transactions will be
conducted on a cash or "spot" basis at the spot rate for purchasing or selling
currency in the foreign currency exchange markets.
FUTURES, OPTIONS AND OTHER FINANCIAL INSTRUMENTS
GENERAL. As discussed in the Prospectus, the adviser may use various types of
financial instruments, some of which are derivatives, to attempt to manage the
risk of a Fund's investments or, in certain circumstances, for investment (e.g.,
as a substitute for investing in securities). These financial instruments
include options, futures contracts (sometimes referred to as "futures"), forward
contracts, swaps, caps, floors and collars (collectively, "Financial
Instruments"). The policies in this section do not apply to other types of
instruments sometimes referred to as derivatives, such as indexed securities,
mortgage-backed and other asset-backed securities, and stripped interest and
principal of debt.
Hedging strategies can be broadly categorized as "short" hedges and "long" or
"anticipatory" hedges. A short hedge involves the use of a Financial Instrument
in order to partially or fully offset potential variations in the value of one
or more investments held in a Fund's portfolio. A long or anticipatory hedge
involves the use of a Financial Instrument in order to partially or fully offset
potential increases in the acquisition cost of one or more investments that the
Fund intends to acquire. In an anticipatory hedge transaction, the Fund does not
already own a corresponding security. Rather, it relates to a security or type
of security that the Fund intends to acquire. If the Fund does not eliminate the
hedge by purchasing the security as anticipated, the effect on the Fund's
portfolio is the same as if a long position were entered into. Financial
Instruments may also be used, in certain circumstances, for investment (e.g., as
a substitute for investing in securities).
Financial Instruments on individual securities generally are used to attempt to
hedge against price movements in one or more particular securities positions
that a Fund already owns or intends to acquire. Financial Instruments on
indexes, in contrast, generally are used to attempt to hedge all or a portion of
a portfolio against price movements of the securities within a market sector in
which the Fund has invested or expects to invest.
The use of Financial Instruments is subject to applicable regulations of the
Securities and Exchange Commission ("SEC"), the several exchanges upon which
they are traded, and the Commodity Futures Trading Commission ("CFTC"). In
addition, the Funds' ability to use Financial Instruments will be limited by tax
considerations. See "Tax Consequences of Owning Shares of the Funds."
<PAGE>
In addition to the instruments and strategies described below, the adviser may
use other similar or related techniques to the extent that they are consistent
with a Fund's investment objective and permitted by its investment limitations
and applicable regulatory authorities. The Funds' Prospectus or Statement of
Additional Information ("SAI") will be supplemented to the extent that new
products or techniques become employed involving materially different risks than
those described below or in the Prospectus.
Special Risks. Financial Instruments and their use involve special
considerations and risks, certain of which are described below.
(1) Financial Instruments may increase the volatility of a Fund. If the adviser
employs a Financial Instrument that correlates imperfectly with a Fund's
investments, a loss could result, regardless of whether or not the intent was to
manage risk. In addition, these techniques could result in a loss if there is
not a liquid market to close out a position that a Fund has entered.
(2) There might be imperfect correlation between price movements of a Financial
Instrument and price movement of the investment(s) being hedged. For example, if
the value of a Financial Instrument used in a short hedge increased by less than
the decline in value of the hedged investment(s), the hedge would not be fully
successful. This might be caused by certain kinds of trading activity that
distorts the normal price relationship between the security being hedged and the
Financial Instrument. Similarly, the effectiveness of hedges using Financial
Instruments on indexes will depend on the degree of correlation between price
movements in the index and price movements in the securities being hedged.
The Funds are authorized to use options and futures contracts related to
securities with issuers, maturities or other characteristics different from the
securities in which it typically invests. This involves a risk that the options
or futures position will not track the performance of a Fund's portfolio
investments.
The direction of options and futures price movements can also diverge from the
direction of the movements of the prices of their underlying instruments, even
if the underlying instruments match a Fund's investments well. Options and
futures prices are affected by such factors as current and anticipated
short-term interest rates, changes in volatility of the underlying instrument,
and the time remaining until expiration of the contract, which may not affect
security prices the same way. Imperfect correlation may also result from
differing levels of demand in the options and futures markets and the securities
markets, from structural differences in how options and futures and securities
are traded, or from imposition of daily price fluctuation limits or trading
halts. The Funds may take positions in options and futures contracts with a
greater or lesser face value than the securities it wishes to hedge or intends
to purchase in order to attempt to compensate for differences in volatility
between the contract and the securities, although this may not be successful in
all cases.
(3) If successful, the above-discussed hedging strategies can reduce risk of
loss by wholly or partially offsetting the negative effect of unfavorable price
movements of portfolio securities. However, such strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements. For example, if a Fund entered into a short hedge because the adviser
<PAGE>
projected a decline in the price of a security in the Fund's portfolio, and the
price of that security increased instead, the gain from that increase would
likely be wholly or partially offset by a decline in the value of the short
position in the Financial Instrument. Moreover, if the price of the Financial
Instrument declined by more than the increase in the price of the security, the
Fund could suffer a loss.
(4) A Fund's ability to close out a position in a Financial Instrument prior to
expiration or maturity depends on the degree of liquidity of the market or, in
the absence of such a market, the ability and willingness of the other party to
the transaction (the "counterparty") to enter into a transaction closing out the
position. Therefore, there is no assurance that any position can be closed out
at a time and price that is favorable to a Fund.
(5) As described below, the Funds are required to maintain assets as "cover,"
maintain segregated accounts or make margin payments when they take positions in
Financial Instruments involving obligations to third parties (i.e., Financial
Instruments other than purchased options). If a Fund is unable to close out its
positions in such Financial Instruments, it might be required to continue to
maintain such assets or segregated accounts or make such payments until the
position expired. These requirements might impair a Fund's ability to sell a
portfolio security or make an investment at a time when it would otherwise be
favorable to do so, or require that the Fund sell a portfolio security at a
disadvantageous time.
Cover. Positions in Financial Instruments, other than purchased options, expose
the Funds to an obligation to another party. A Fund will not enter into any such
transaction unless it owns (1) an offsetting ("covered") position in securities,
currencies or other options, futures contracts or forward contracts, or (2) cash
and liquid assets with a value, marked-to-market daily, sufficient to cover its
obligations to the extent not covered as provided in (1) above. The Funds will
comply with SEC guidelines regarding cover for these instruments and will, if
the guidelines so require, designate cash or liquid assets as segregated in the
prescribed amount as determined daily.
Assets used as cover or held as segregated cannot be sold while the position in
the corresponding Financial Instrument is open unless they are replaced with
other appropriate assets. As a result, the commitment of a large portion of a
Fund's assets to cover or to hold as segregated could
impede portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
Options. Each Fund may engage in certain strategies involving options to attempt
to manage the risk of its investments or, in certain circumstances, for
investment (e.g., as a substitute for investing in securities). A call option
gives the purchaser the right to buy, and obligates the writer to sell the
underlying investment at the agreed-upon exercise price during the option
period. A put option gives the purchaser the right to sell, and obligates the
writer to buy the underlying investment at the agreed-upon exercise price during
the option period. Purchasers of options pay an amount, known as a premium, to
the option writer in exchange for the right under the option contract. See
"Options on Indexes" below with regard to cash settlement of option contracts on
index values.
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The purchase of call options can serve as a hedge against a price rise of the
underlier and the purchase of put options can serve as a hedge against a price
decline of the underlier. Writing call options can serve as a limited short
hedge because declines in the value of the hedged investment would be offset to
the extent of the premium received for writing the option. However, if the
security or currency appreciates to a price higher than the exercise price of
the call option, it can be expected that the option will be exercised and a Fund
will be obligated to sell the security or currency at less than its market
value.
Writing put options can serve as a limited long or anticipatory hedge because
increases in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security or
currency depreciates to a price lower than the exercise price of the put option,
it can be expected that the put option will be exercised and a Fund will be
obligated to purchase the security or currency at more than its market value.
The value of an option position will reflect, among other things, the current
market value of the underlying investment, the time remaining until expiration,
the relationship of the exercise price to the market price of the underlying
investment, the price volatility of the underlying investment and general market
and interest rate conditions. Options that expire unexercised have no value.
A Fund may effectively terminate its right or obligation under an option by
entering into a closing transaction. For example, the Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option, which is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option, which is known as a
closing sale transaction. Closing transactions permit a Fund to realize profits
or limit losses on an option position prior to its exercise or expiration.
Risks of Options on Securities. Options embody the possibility of large amounts
of exposure, which will result in a Fund's net asset value being more sensitive
to changes in the value of the related investment. A Fund may purchase or write
both exchange-traded and OTC options. Exchange-traded options in the United
States are issued by a clearing organization affiliated with the exchange on
which the option is listed that, in effect, guarantees completion of every
exchange-traded option transaction. In contrast, OTC options are contracts
between a Fund and its counterparty (usually a securities dealer or a bank) with
no clearing organization guarantee. Thus, when a Fund purchases an OTC option,
it relies on the counterparty from whom it purchased the option to make or take
delivery of the underlying investment upon exercise of the option. Failure by
the counterparty to do so would result in the loss of any premium paid by a Fund
as well as the loss of any expected benefit of the transaction.
The Funds' ability to establish and close out positions in options depends on
the existence of a liquid market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the counterparty, or by a
transaction in the secondary market if any such market exists. There can be no
assurance that a Fund will in fact be able to close out an OTC option position
at a favorable price prior to expiration. In the event of insolvency of the
counterparty, a Fund might be unable to close out an OTC option position at any
time prior to the option's expiration. If a Fund is not able to enter into an
<PAGE>
offsetting closing transaction on an option it has written, it will be required
to maintain the securities subject to the call or the liquid assets underlying
the put until a closing purchase transaction can be entered into or the option
expires. However, there can be no assurance that such a market will exist at any
particular time.
If a Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit. The
inability to enter into a closing purchase transaction for a covered call option
written by a Fund could cause material losses because the Fund would be unable
to sell the investment used as cover for the written option until the option
expires or is exercised.
Options on Indexes. Puts and calls on indexes are similar to puts and calls on
securities or futures contracts except that all settlements are in cash and
changes in value depend on changes in the index in question. When a Fund writes
a call on an index, it receives a premium and agrees that, prior to the
expiration date, upon exercise of the call, the purchaser will receive from the
Fund an amount of cash equal to the positive difference between the closing
price of the index and the exercise price of the call times a specified multiple
("multiplier"), which determines the total dollar value for each point of such
difference. When a Fund buys a call on an index, it pays a premium and has the
same rights as to such call as are indicated above. When a Fund buys a put on an
index, it pays a premium and has the right, prior to the expiration date, to
require the seller of the put to deliver to the Fund an amount of cash equal to
the positive difference between the exercise price of the put and the closing
price of the index times the multiplier. When a Fund writes a put on an index,
it receives a premium and the purchaser of the put has the right, prior to the
expiration date, to require the Fund to deliver to it an amount of cash equal to
the positive difference between the exercise price of the put and the closing
level of the index times the multiplier.
The risks of purchasing and selling options on indexes may be greater than
options on securities. Because index options are settled in cash, when a Fund
writes a call on an index it cannot fulfill its potential settlement obligations
by delivering the underlying securities. A Fund can offset some of the risk of
writing a call index option by holding a diversified portfolio of securities
similar to those on which the underlying index is based. However, a Fund cannot,
as a practical matter, acquire and hold a portfolio containing exactly the same
securities as underlie the index and, as a result, bears a risk that the value
of the securities held will vary from the value of the index.
Even if a Fund could assemble a portfolio that exactly reproduced the
composition of the underlying index, it still would not be fully covered from a
risk standpoint because of the "timing risk" inherent in writing index options.
When an index option is exercised, the amount of cash that the holder is
entitled to receive is determined by the difference between the exercise price
and the closing index level. As with other kinds of options, a Fund as the call
writer will not learn what it has been assigned until the next business day. The
time lag between exercise and notice of assignment poses no risk for the writer
of a covered call on a specific underlying security, such as common stock,
because in that case the writer's obligation is to deliver the underlying
security, not to pay its value as of a moment in the past. In contrast, the
writer of an index call will be required to pay cash in an amount based on the
difference between the closing index value on the exercise date and the exercise
price. By the time a Fund learns what it has been assigned, the index may have
declined. This "timing risk" is an inherent limitation on the ability of index
call writers to cover their risk exposure.
<PAGE>
If a Fund has purchased an index option and exercises it before the closing
index value for that day is available, it runs the risk that the level of the
underlying index may subsequently change. If such a change causes the exercised
option to fall out-of-the-money, the Fund nevertheless will be required to pay
the difference between the closing index value and the exercise price of the
option (times the applicable multiplier) to the assigned writer.
OTC Options. Unlike exchange-traded options, which are standardized with respect
to the underlying instrument, expiration date, contract size, and strike price,
the terms of OTC options (options not traded on exchanges) generally are
established through negotiation with the other party to the option contract.
While this type of arrangement allows a Fund great flexibility to tailor the
option to its needs, OTC options generally involve greater risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchange where they are traded.
Generally, OTC foreign currency options used by a Fund are European-style
options. This means that the option is only exercisable immediately prior to its
expiration. This is in contrast to American-style options, which are exercisable
at any time prior to the expiration date of the option.
Futures Contracts and Options on Futures Contracts. When a Fund purchases or
sells a futures contract, it incurs an obligation respectively to take or make
delivery of a specified amount of the obligation underlying the contract at a
specified time and price. When a Fund writes an option on a futures contract, it
becomes obligated to assume a position in the futures contract at a specified
exercise price at any time during the term of the option. If a Fund writes a
call, on exercise it assumes a short futures position. If it writes a put, on
exercise it assumes a long futures position.
The purchase of futures or call options on futures can serve as a long or an
anticipatory hedge, and the sale of futures or the purchase of put options on
futures can serve as a short hedge. Writing call options on futures contracts
can serve as a limited short hedge, using a strategy similar to that used for
writing call options on securities or indexes. Similarly, writing put options on
futures contracts can serve as a limited long or anticipatory hedge.
In addition, futures strategies can be used to manage the "duration" (a measure
of anticipated sensitivity to changes in interest rates, which is sometimes
related to the weighted average maturity of a portfolio) and associated interest
rate risk of a Fund's fixed-income portfolio. If the adviser wishes to shorten
the duration of a Fund's fixed-income portfolio (i.e., reduce anticipated
sensitivity), the Fund may sell an appropriate debt futures contract or a call
option thereon, or purchase a put option on that futures contract. If the
adviser wishes to lengthen the duration of a Fund's fixed-income portfolio
(i.e., increase anticipated sensitivity), the Fund may buy an appropriate debt
futures contract or a call option thereon, or sell a put option thereon.
At the inception of a futures contract, a Fund is required to deposit "initial
margin" in an amount generally equal to 10% or less of the contract value.
Initial margin must also be deposited when writing a call or put option on a
futures contract, in accordance with applicable exchange rules. Subsequent
"variation margin" payments are made to and from the futures broker daily as the
value of the futures or written option position varies, a process known as
<PAGE>
"marking-to-market." Unlike margin in securities transactions, initial margin on
futures contracts and written options on futures contracts does not represent a
borrowing on margin, but rather is in the nature of a performance bond or
good-faith deposit that is returned to the Fund at the termination of the
transaction if all contractual obligations have been satisfied. Under certain
circumstances, such as periods of high volatility, a Fund may be required to
increase the level of initial margin deposits. If the Fund has insufficient cash
to meet daily variation margin requirements, it might need to sell securities in
order to do so at a time when such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. However, there can be no assurance that a liquid
market will exist for a particular contract at a particular time. In such event,
it may not be possible to close a futures contract or options position.
Under certain circumstances, futures exchanges may establish daily limits on the
amount that the price of a futures contract or an option on a futures contract
can vary from the previous day's settlement price; once that limit is reached,
no trades may be made that day at a price beyond the limit. Daily price limits
do not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
If a Fund were unable to liquidate a futures contract or an option on a futures
contract position due to the absence of a liquid market or the imposition of
price limits, it could incur substantial losses. The Fund would continue to be
subject to market risk with respect to the position. In addition, except in the
case of purchased options, the Fund would continue to be required to make daily
variation margin payments and might be required to continue to maintain the
position being hedged by the futures contract or option or to continue to
maintain cash or securities in a segregated account.
To the extent that a Fund enters into futures contracts, options on futures
contracts and options on foreign currencies traded on a CFTC-regulated exchange,
in each case that is not for bona fide hedging purposes (as defined by the
CFTC), the aggregate initial margin and premiums required to establish these
positions (excluding the amount by which options are "in-the-money" at the time
of purchase) may not exceed 5% of the liquidation value of the Fund's portfolio,
after taking into account unrealized profits and unrealized losses on any
contracts the Fund has entered into. This policy does not limit to 5% the
percentage of the Fund's assets that are at risk in futures contracts, options
on futures contracts and currency options.
Risks of Futures Contracts and Options Thereon. The ordinary spreads at a given
time between prices in the cash and futures markets (including the options on
futures markets), due to differences in the natures of those markets, are
subject to the following factors. 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 futures 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
<PAGE>
delivery, liquidity in the futures market could be reduced, thus producing
distortion. Due to the possibility of distortion, a hedge may not be successful.
Although stock index futures contracts do not require physical delivery, under
ordinary market conditions, liquidity of such futures contracts also could be
reduced. Additionally, the adviser may be incorrect in its expectations as to
the extent of various interest rates, currency exchange rates or stock market
movements or the time span within which the movements take place.
Index Futures. The risk of imperfect correlation between movements in the price
of index futures and movements in the price of the securities that are the
subject of a hedge increases as the composition of a Fund's portfolio diverges
from the index. The price of the index futures may move proportionately more
than or less than the price of the securities being hedged. If the price of the
index futures moves proportionately less than the price of the securities that
are the subject of the hedge, the hedge will not be fully effective. Assuming
the price of the securities being hedged has moved in an unfavorable direction,
as anticipated when the hedge was put into place, the Fund would be in a better
position than if it had not hedged at all, but not as good as if the price of
the index futures moved in full proportion to that of the hedged securities.
However, if the price of the securities being hedged has moved in a favorable
direction, this advantage will be partially offset by movement of the price of
the futures contract. If the price of the futures contract moves more than the
price of the securities, the Fund will experience either a loss or a gain on the
futures contract that will not be completely offset by movements in the price of
the securities that are the subject of the hedge.
Where index futures are purchased in an anticipatory hedge, it is possible that
the market may decline instead. If a Fund then decides not to invest in the
securities at that time because of concern as to possible further market decline
or for other reasons, it will realize a loss on the futures contract that is not
offset by a reduction in the price of the securities it had anticipated
purchasing.
Foreign Currency Hedging Strategies--Special Considerations. A Fund may use
options and futures contracts on foreign currencies, as mentioned previously,
and forward currency contracts, as described below, to attempt to hedge against
movements in the values of the foreign currencies in which the Fund's securities
are denominated or, in certain circumstances, for investment (e.g., as a
substitute for investing in securities denominated in foreign currency).
Currency hedges can protect against price movements in a security that a Fund
owns or intends to acquire that are attributable to changes in the value of the
currency in which it is denominated.
A Fund might seek to hedge against changes in the value of a particular currency
when no Financial Instruments on that currency are available or such Financial
Instruments are more expensive than certain other Financial Instruments. In such
cases, a Fund may seek to hedge against price movements in that currency by
entering into transactions using Financial Instruments on another currency or a
basket of currencies, the value of which the adviser believes will have a high
degree of positive correlation to the value of the currency being hedged. The
risk that movements in the price of the Financial Instrument will not correlate
perfectly with movements in the price of the currency subject to the hedging
transaction may be increased when this strategy is used.
The value of Financial Instruments on foreign currencies depends on the value of
the underlying currency relative to the U.S. dollar. Because foreign currency
transactions occurring in the interbank market might involve substantially
<PAGE>
larger amounts than those involved in the use of such Financial Instruments, a
Fund could be disadvantaged by having to deal in the odd-lot market (generally
consisting of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign currencies
or any regulatory requirement that quotations available through dealers or other
market sources be firm or revised on a timely basis. Quotation information
generally is representative of very large transactions in the interbank market
and thus might not reflect odd-lot transactions where rates might be less
favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. options or futures markets are
closed while the markets for the underlying currencies remain open, significant
price and rate movements might take place in the underlying markets that cannot
be reflected in the markets for the Financial Instruments until they reopen.
Settlement of hedging transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
a Fund might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
Forward Currency Contracts and Foreign Currency Deposits. The Funds may enter
into forward currency contracts to purchase or sell foreign currencies for a
fixed amount of U.S. dollars or another foreign currency. A forward currency
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days (term) from the date of the
forward currency contract agreed upon by the parties, at a price set at the time
the forward currency contract is entered. Forward currency contracts are
negotiated directly between currency traders (usually large commercial banks)
and their customers.
Such transactions may serve as long or anticipatory hedges. For example, a Fund
may purchase a forward currency contract to lock in the U.S. dollar price of a
security denominated in a foreign currency that the Fund intends to acquire.
Forward currency contracts may also serve as short hedges. For example, a Fund
may sell a forward currency contract to lock in the U.S. dollar equivalent of
the proceeds from the anticipated sale of a security or a dividend or interest
payment denominated in a foreign currency.
The Funds may also use forward currency contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. Such a hedge
would tend to offset both positive and negative currency fluctuations, but would
not offset changes in security values caused by other factors. A Fund could also
hedge the position by entering into a forward currency contract to sell another
currency expected to perform similarly to the currency in which the Fund's
existing investments are denominated. This type of hedge could offer advantages
in terms of cost, yield or efficiency, but may not hedge currency exposure as
effectively as a simple hedge against U.S. dollars. This type of hedge may
result in losses if the currency used to hedge does not perform similarly to the
currency in which the hedged securities are denominated.
<PAGE>
The Funds may also use forward currency contracts in one currency or a basket of
currencies to attempt to hedge against fluctuations in the value of securities
denominated in a different currency if the adviser anticipates that there will
be a positive correlation between the two currencies.
The cost to a Fund of engaging in forward currency contracts varies with factors
such as the currency involved, the length of the contract period and the market
conditions then prevailing. Because forward currency contracts are usually
entered into on a principal basis, no fees or commissions are involved. When a
Fund enters into a forward currency contract, it relies on the counterparty to
make or take delivery of the underlying currency at the maturity of the
contract. Failure by the counterparty to do so would result in the loss of some
or all of any expected benefit of the transaction.
As is the case with futures contracts, purchasers and sellers of forward
currency contracts can enter into offsetting closing transactions, similar to
closing transactions on futures contracts, by selling or purchasing,
respectively, an instrument identical to the instrument purchased or sold.
Secondary markets generally do not exist for forward currency contracts, with
the result that closing transactions generally can be made for forward currency
contracts only by negotiating directly with the counterparty. Thus, there can be
no assurance that a Fund will in fact be able to close out a forward currency
contract at a favorable price prior to maturity. In addition, in the event of
insolvency of the counterparty, the Fund might be unable to close out a forward
currency contract. In either event, the Fund would continue to be subject to
market risk with respect to the position, and would continue to be required to
maintain a position in securities denominated in the foreign currency or to
segregate cash or liquid assets.
The precise matching of forward currency contract amounts and the value of the
securities, dividends or interest payments involved generally will not be
possible because the value of such securities, dividends or interest payments,
measured in the foreign currency, will change after the forward currency
contract has been established. Thus, a Fund might need to purchase or sell
foreign currencies in the spot (cash) market to the extent such foreign
currencies are not covered by forward currency contracts. The projection of
short-term currency market movements is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain.
Forward currency contracts may substantially change a Fund's investment exposure
to changes in currency exchange rates and could result in losses to the Fund if
currencies do not perform as the adviser anticipates. There is no assurance that
the adviser's use of forward currency contracts will be advantageous to a Fund
or that it will hedge at an appropriate time.
The Funds may also purchase and sell foreign currency and invest in foreign
currency deposits. Currency conversion involves dealer spreads and other costs,
although commissions usually are not charged.
Combined Positions. A Fund may purchase and write options or futures in
combination with each other, or in combination with futures or forward currency
contracts, to manage the risk and return characteristics of its overall
position. For example, a Fund may purchase a put option and write a call option
on the same underlying instrument, in order to construct a combined position
<PAGE>
whose risk and return characteristics are similar to selling a futures contract.
Another possible combined position would involve writing a call option at one
strike price and buying a call option at a lower price, in order to reduce the
risk of the written call option in the event of a substantial price increase.
Because combined options positions involve multiple trades, they result in
higher transaction costs.
Turnover. The Funds' options and futures activities may affect their turnover
rates and brokerage commission payments. The exercise of calls or puts written
by a Fund, and the sale or purchase of futures contracts, may cause it to sell
or purchase related investments, thus increasing its turnover rate. Once a Fund
has received an exercise notice on an option it has written, it cannot effect a
closing transaction in order to terminate its obligation under the option and
must deliver or receive the underlying securities at the exercise price. The
exercise of puts purchased by a Fund may also cause the sale of related
investments, increasing turnover. Although such exercise is within the Fund's
control, holding a protective put might cause it to sell the related investments
for reasons that would not exist in the absence of the put. A Fund will pay a
brokerage commission each time it buys or sells a put or call or purchases or
sells a futures contract. Such commissions may be higher than those that would
apply to direct purchases or sales.
Swaps, Caps, Floors and Collars. The Funds are authorized to enter into swaps,
caps, floors and collars. Swaps involve the exchange by one party with another
party of their respective commitments to pay or receive cash flows, e.g., an
exchange of floating rate payments for fixed rate payments. The purchase of a
cap or a floor entitles the purchaser, to the extent that a specified index
exceeds in the case of a cap, or falls below in the case of a floor, a
predetermined value, to receive payments on a notional principal amount from the
party selling such instrument. A collar combines elements of buying a cap and
selling a floor.
ILLIQUID SECURITIES -- Securities which do not trade on stock exchanges or in
the over the counter market, or have restrictions on when and how they may be
sold, are generally considered to be "illiquid." An illiquid security is one
that a Fund may have difficulty -- or may even be legally precluded from --
selling at any particular time. The Funds may invest in illiquid securities,
including restricted securities and other investments which are not readily
marketable. A 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 are considered illiquid for purposes of this restriction.
The principal risk of investing in illiquid securities is that a Fund may be
unable to dispose of them at the time desired or at a reasonable price. In
addition, in order to resell a restricted security, a Fund might have to bear
the expense and incur the delays associated with registering the security with
the SEC, and otherwise obtaining listing on a securities exchange or in the over
the counter market.
INVESTMENT COMPANY SECURITIES -- To manage their daily cash positions, the Funds
may invest in securities issued by other investment companies that invest in
short-term debt securities and seek to maintain a net asset value of $1.00 per
share ("money market funds"). The Funds also may invest in Standard & Poor's
Depository Receipts ("SPDRs") and shares of other investment companies. SPDRs
are investment companies whose portfolios mirror the compositions of specific
<PAGE>
S&P indices, such as the S&P 500 and the S&P 400. SPDRs are traded on the
American Stock Exchange. SPDR holders such as a Fund are paid a "Dividend
Equivalent Amount" that corresponds to the amount of cash dividends accruing to
the securities held by the SPDR Trust, net of certain fees and expenses. The
Investment Company Act of 1940, as amended (the "1940 Act"), limits investments
in securities of other investment companies, such as the SPDR Trust. These
limitations include, among others, that, subject to certain exceptions, no more
than 10% of a Fund's total assets may be invested in securities of other
investment companies and no more than 5% of its total assets may be invested in
the securities of any one investment company. As a shareholder of another
investment company, a Fund would bear its pro rata portion of the other
investment company's expenses, including advisory fees, in addition to the
expenses the Fund bears directly in connection with its own operations.
MUNICIPAL OBLIGATIONS -- Municipal debt securities including municipal bonds,
notes and commercial paper. It is a policy of the Tax-Free Bond Fund that, under
normal market conditions, it will have at least 80% of its net assets invested
in municipal obligations that, based on the opinion of counsel to the issuer,
pay interest free from federal income tax. It is the Fund's present intention to
invest its assets so that substantially all of its annual income will be
tax-exempt. The Fund may invest in municipal obligations whose interest income
may be specially treated as a tax preference item under the alternative minimum
tax ("AMT"). Securities that generate income that is a tax preference item may
not be counted towards the 80% tax exempt threshold described above. Tax-exempt
income may result in an indirect tax preference item for corporations, which may
subject an investor to liability under the AMT depending on its particular
situation. Tax-Free Bond Fund, however, will not invest more than 20% of its net
assets in obligations the interest from which gives rise to a preference item
for the purpose of the AMT and in other investments subject to federal income
tax. Distributions from this Fund may be subject to state and local taxes. The
other Funds may invest in municipal obligations, but under normal circumstances
do not intend to make significant investment in these securities.
The Funds may invest in the following types of municipal obligations:
Municipal Bonds -- Municipal bonds are classified as general obligation or
revenue bonds. General obligations bonds are secured by the issuer's
pledge of its full faith, credit and unlimited taxing power for the
payment of principal and interest. Revenue bonds are payable only from the
revenues generated by a particular facility or class of facility, or in
some cases from the proceeds of a special excise tax or specific revenue
source. Industrial development obligations are a particular kind of
municipal bond which are issued by or on behalf of public authorities to
obtain funds for many kinds of local, privately operated facilities. Such
obligations are, in most cases, revenue bonds that generally are secured
by a lease with a particular private corporation.
Municipal Notes -- Municipal notes are short-term debt obligations issued
by municipalities which normally have a maturity at the time of issuance
of six months to three years. Such notes include tax anticipation notes,
bond anticipation notes, revenue anticipation notes and project notes.
Notes sold in anticipation of collection of taxes, a bond sale or receipt
of other revenues are normally obligations of the issuing municipality or
agency.
<PAGE>
Municipal Commercial Paper -- Municipal commercial paper is short-term
debt obligations issued by municipalities which may be issued at a
discount (sometimes referred to as Short-Term Discount Notes). These
obligations are issued to meet seasonal working capital needs of a
municipality or interim construction financing and are paid from a
municipality's general revenues or refinanced with long-term debt.
Although the availability of municipal commercial paper has been limited,
from time to time the amounts of such debt obligations offered have
increased, and INVESCO believes that this increase may continue.
Variable Rate Obligations -- The interest rate payable on a variable rate
municipal obligation is adjusted either at predetermined periodic
intervals or whenever there is a change in the market rate of interest
upon which the interest rate payable is based. A variable rate obligation
may include a demand feature pursuant to which the Fund would have the
right to demand prepayment of the principal amount of the obligation prior
to its stated maturity. The issuer of the variable rate obligation may
retain the right to prepay the principal amount prior to maturity.
Municipal obligations purchased by a Fund must be rated by at least two
NRSROs - generally S&P and Moody's - in the highest rating category (AAA, AA, A
or BBB by S&P or Aaa, Aa, A or Baa by Moody's), or by one NRSRO in the highest
rating category if such obligations are rated by only one NRSRO. No more than
10% of Tax-Free Bond Fund's total assets may be invested in junk bonds. Never
under any circumstances will Tax-Free Bond Fund invest in bonds which are rated
below B- or B by S&P or Moody's, respectively. Municipal notes or municipal
commercial paper must be rated in the two highest rating categories by at least
two NRSROs, or where the note or paper is rated only by one NRSRO, in the two
highest rating categories by that NRSRO. If a security is unrated, the Fund may
invest in such security if INVESCO determines, in an analysis similar to that
performed by Moody's or S&P in rating similar securities and issuers, that the
security is comparable to that eligible for investment by the Fund. After the
Fund has purchased an issue of municipal obligations, such issue might cease to
be rated or its rating might be reduced below the minimum required for purchase.
If a security originally rated in the highest rating category by a NRSRO has
been downgraded to the second highest rating category, INVESCO must assess
promptly whether the security presents minimal credit risk and must take such
action with respect to the security as it determines to be in the best interest
of the Fund. If a security is downgraded below the second highest rating of an
NRSRO, is in default, or no longer presents a minimal credit risk, the security
must be disposed of either within five business days of INVESCO becoming aware
of the new rating, the default or the credit risk, or as soon as practicable
consistent with achieving an orderly disposition of the security, whichever is
the first to occur, unless the executive committee of the Company's board of
directors determines within the aforesaid five business days that holding the
security is in the best interest of a Fund.
REITS -- Real Estate Investment Trusts are investment trusts that invest
primarily in real estate and securities of businesses connected to the real
estate industry.
REPURCHASE AGREEMENTS -- A Fund may enter into repurchase agreements, or REPOs,
on debt securities that the Fund is allowed to hold in its portfolio. This is a
way to invest money for short periods. A REPO is an agreement under which the
Fund acquires a debt security and then resells it to the seller at an
<PAGE>
agreed-upon price and date (normally, the next business day). The repurchase
price represents an interest rate effective for the short period the debt
security is held by the Fund, and is unrelated to the interest rate on the
underlying debt security. A repurchase agreement is often considered as a loan
collateralized by securities. The collateral securities acquired by the Fund
(including accrued interest earned thereon) must have a total value in excess of
the value of the repurchase agreement. The collateral securities are held by the
Fund's custodian bank until the repurchase agreement is completed.
The Funds may enter into repurchase agreements with commercial banks, registered
broker-dealers or registered government securities dealers that are creditworthy
under standards established by the Company's board of directors. The Company's
board of directors has established standards that the investment adviser must
use to review the creditworthiness of any bank, broker or dealer that is a party
to a REPO. REPOs maturing in more than seven days are considered illiquid
securities. A Fund will not enter into repurchase agreements maturing in more
than seven days if as a result more than 15% of the Fund's net assets would be
invested in these repurchase agreements and other illiquid securities.
As noted above, the Funds use REPOs as a means of investing cash for short
periods of time. Although REPOs are considered to be highly liquid and
comparatively low-risk, the use of REPOs does involve some 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 on the sale of the collateral 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 realization by the Fund on such collateral may
automatically be stayed. Finally, it is possible that the 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.
RULE 144A SECURITIES -- A Fund also may invest in securities that can be resold
to institutional investors pursuant to Rule 144A under the Securities Act of
1933, as amended (the "1933 Act"). In recent years, a large institutional market
has developed for many Rule 144A Securities. Institutional investors generally
cannot sell these securities to the general public but instead will often depend
on an efficient institutional market in which Rule 144A Securities can readily
be resold to other institutional investors, 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 does not
necessarily mean that a Rule 144A Security is illiquid. Institutional markets
for Rule 144A Securities may provide both reliable market values for Rule 144A
Securities and enable a Fund to sell a Rule 144A investment when appropriate.
For this reason, the Company's board of directors has concluded that if a
sufficient institutional trading market exists for a given Rule 144A security,
it may be considered "liquid," and not subject to a Fund's limitations on
investment in restricted securities. The Company's board of directors has given
INVESCO the day-to-day authority to determine the liquidity of Rule 144A
Securities, according to guidelines approved by the board. The principal risk of
investing in Rule 144A Securities is that there may be an insufficient number of
qualified institutional buyers interested in purchasing a Rule 144A Security
held by a Fund, and the Fund might be unable to dispose of such security
promptly or at reasonable prices.
<PAGE>
SECURITIES LENDING -- Each Fund may lend its portfolio securities. The advantage
of lending portfolio securities is that a Fund continues to have the benefits
(and risks) of ownership of the loaned securities, while at the same time
receiving interest from the borrower of the securities. The primary risk in
lending portfolio securities is that a borrower may fail to return a portfolio
security.
TEMPORARY INVESTMENTS (TAX-FREE BOND FUND ONLY) -- Tax-Free Bond Fund may from
time to time invest a portion of its assets on a temporary basis in "temporary
investments," the income from which may be subject to federal income tax. These
investments include AMT Bonds, short-term or taxable securities (the income from
which may be subject to federal income tax), junk bonds and cash. Short-term
taxable investments normally will consist of notes having quality ratings within
the two highest grades of Moody's, S&P, Fitch or D&P; obligations of the U.S.
government, its agencies or instrumentalities; commercial paper rated at least
P-2 by Moody's and A-2 by S&P; certificates of deposit of U.S. domestic banks,
including foreign branches of domestic banks, with assets of $1 billion or more;
time deposits, bankers acceptances and other short-term bank obligations; and
repurchase agreements. Temporary taxable investment normally will consist of
corporate bonds and other debt obligations. Any net interest income on taxable
temporary investments will be taxable to shareholders as ordinary income when
distributed.
U.S. GOVERNMENT SECURITIES -- Each Fund may, from time to time, purchase debt
securities issued by the U.S. government. These securities include Treasury
bills, notes and bonds. Treasury bills have a maturity of one year or less,
Treasury notes generally have a maturity of one to ten years, and Treasury bonds
generally have maturities of more than ten years.
U.S. government debt securities also include securities issued or guaranteed by
agencies or instrumentalities of the U.S. government. Some obligations of U.S.
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
U.S. 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 U.S. government. The market value of GNMA Certificates is not guaranteed.
GNMA Certificates are different from bonds because principal is paid back
monthly by the borrower over the term of the loan rather than returned in a lump
sum at maturity, as is the case with a bond. GNMA Certificates are called
"pass-through" securities because both interest and principal payments
(including prepayments) are passed through to the holder of the GNMA
Certificate.
Other United States government debt securities, such as securities of the
Federal Home Loan Banks, are supported by the right of the issuer to borrow from
the Treasury. Others, such as bonds issued by Fannie Mae, a federally chartered
private corporation, are supported only by the credit of the corporation. In the
<PAGE>
case of securities not backed by the full faith and credit of the United States,
a Fund must look principally to the agency issuing or guaranteeing the
obligation in the event the agency or instrumentality does not meet its
commitments. A Fund will invest in securities of such instrumentalities only
when INVESCO is satisfied that the credit risk with respect to any such
instrumentality is comparatively minimal.
WHEN-ISSUED/DELAYED DELIVERY -- Ordinarily, the Funds buy and sell securities on
an ordinary settlement basis. That means that the buy or sell order is sent, and
a Fund actually takes delivery or gives up physical possession of the security
on the "settlement date," which is three business days later. However, the Funds
also may purchase and sell securities on a when-issued or delayed delivery
basis.
When-issued or delayed delivery transactions occur when securities are purchased
or sold by a Fund and payment and delivery take place at an agreed-upon time in
the future. The Funds may engage in this practice in an effort to secure an
advantageous price and yield. However, the yield on a comparable security
available when delivery actually takes place may vary from the yield on the
security at the time the when-issued or delayed delivery transaction was entered
into. When a Fund engages in when-issued and delayed delivery transactions, it
relies on the seller or buyer to consummate the sale at the future date. If the
seller or buyer fails to act as promised, that failure may result in the Fund
missing the opportunity of obtaining a price or yield considered to be
advantageous. No payment or delivery is made by a Fund until it receives
delivery or payment from the other party to the transaction. However,
fluctuation in the value of the security from the time of commitment until
delivery could adversely affect a Fund.
INVESTMENT RESTRICTIONS
The Funds operate under certain investment restrictions. For purposes of the
following restrictions, 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.
The following restrictions are fundamental and may not be changed without prior
approval of a majority of the outstanding voting securities of a Fund, as
defined in the 1940 Act. Each Fund may not:
1. purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities or municipal securities) if, as a result, more than 25%
of the Fund's total assets would be invested in the securities of
companies whose principal business activities are in the same industry;
2. with respect to 75% of the Fund's total assets, purchase the securities
of any issuer (other than securities issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities, or securities of
other investment companies) if, as a result, (i) more than 5% of a Fund's
total assets would be invested in the securities of that issuer, or (ii) a
Fund would hold more than 10% of the outstanding voting securities of that
issuer;
<PAGE>
3. underwrite securities of other issuers, except insofar as it may be
deemed to be an underwriter under the 1933 Act, as amended, in connection
with the disposition of the Fund's portfolio securities;
4. borrow money, except that the Fund may borrow money in an amount not
exceeding 33 1/3% of its total assets (including the amount borrowed) less
liabilities (other than borrowings);
5. issue senior securities, except as permitted under the 1940 Act;
6. lend any security or make any loan if, as a result, more than 33 1/3%
of its total assets would be lent to other parties, but this limitation
does not apply to the purchase of debt securities or to repurchase
agreements;
7. purchase or sell physical commodities; however, this policy shall not
prevent the Fund from purchasing and selling foreign currency, futures
contracts, options, forward contracts, swaps, caps, floors, collars and
other financial instruments; or
8. purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the Fund
from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business).
9. Each Fund may, notwithstanding any other fundamental investment policy
or limitation, invest all of its assets in the securities of a single
open-end management investment company managed by INVESCO or an affiliate
or a successor thereof, with substantially the same fundamental investment
objective, policies and limitations as the Fund.
In addition, each Fund has the following non-fundamental policies, which may be
changed without shareholder approval:
A. The Fund may not sell securities short (unless it owns or has the right
to obtain securities equivalent in kind and amount to the securities sold
short) or purchase securities on margin, except that (i) this policy does
not prevent the Fund from entering into short positions in foreign
currency, futures contracts, options, forward contracts, swaps, caps,
floors, collars and other financial instruments, (ii) the Fund may obtain
such short-term credits as are necessary for the clearance of
transactions, and (iii) the Fund may make margin payments in connection
with futures contracts, options, forward contracts, swaps, caps, floors,
collars and other financial instruments.
B. The Fund may borrow money only from a bank or from an open-end
management investment company managed by INVESCO or an affiliate or a
successor thereof for temporary or emergency purposes (not for leveraging
or investing) or by engaging in reverse repurchase agreements with any
party (reverse repurchase agreements will be treated as borrowings for
purposes of fundamental limitation (4)).
<PAGE>
C. The Fund does not currently intend to purchase any security if, as a
result, more than 15% of its net assets would be invested in securities
that are deemed to be illiquid because they are subject to legal or
contractual restrictions on resale or because they cannot be sold or
disposed of in the ordinary course of business at approximately the prices
at which they are valued.
D. The Fund may invest in securities issued by other investment companies
to the extent that such investments are consistent with the Fund's
investment objective and policies and permissible under the 1940 Act.
E. With respect to fundamental limitation (1), domestic and foreign
banking will be considered to be different industries.
In addition, with respect to a Fund that may invest in municipal obligations,
the following non-fundamental policy applies, which may be changed without
shareholder approval:
Each state (including the District of Columbia and Puerto Rico), territory
and possession of the United States, each political subdivision, agency,
instrumentality and authority thereof, and each multi-state agency of
which a state is a member is a separate "issuer." When the assets and
revenues of an agency, authority, instrumentality or other political
subdivision are separate from the government creating the subdivision and
the security is backed only by assets and revenues of the subdivision,
such subdivision would be deemed to be the sole issuer. Similarly, in the
case of an Industrial Development Bond or Private Activity bond, if that
bond is backed only by the assets and revenues of the non-governmental
user, then that non-governmental user would be deemed to be the sole
issuer. However, if the creating government or another entity guarantees a
security, then to the extent that the value of all securities issued or
guaranteed by that government or entity and owned by a Fund exceeds 10% of
the Fund's total assets, the guarantee would be considered a separate
security and would be treated as issued by that government or entity.
Following is a chart outlining some of the limitations pursuant to
non-fundamental investment policies set by the board of directors. These
non-fundamental policies may be changed by the board of directors without
shareholder approval:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
SELECT TAX-FREE U.S.GOVERNMENT
INVESTMENT HIGH YIELD INCOME BOND SECURITIES
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FOREIGN DEBT SECURITIES Up to 25% Up to 25%
if
denominated
and pay
interest
in U.S. dollars
- -----------------------------------------------------------------------------------------------
Normally,
DEBT SECURITIES at least 90%
Corporate Debt
- -----------------------------------------------------------------------------------------------
<PAGE>
- -----------------------------------------------------------------------------------------------
SELECT TAX-FREE U.S.GOVERNMENT
INVESTMENT HIGH YIELD INCOME BOND SECURITIES
- -----------------------------------------------------------------------------------------------
Those maturing at At least 65% At least 65% At least 65%
least three years
after issuance
- -----------------------------------------------------------------------------------------------
Investment Grade At least 50%
- -----------------------------------------------------------------------------------------------
Junk Bonds Primarily, Up to 50% Up to 10%;
but never never below
below Caa Caa by
by Moody's Moody's or
or CCC by CCC by S&P
S&P
- -----------------------------------------------------------------------------------------------
TEMPORARY TAXABLE Up to 100%
- -----------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS At least 65%
- -----------------------------------------------------------------------------------------------
MUNICIPAL BONDS Normally,
at least 80%
- -----------------------------------------------------------------------------------------------
ALTERNATIVE MINIMUM No more
TAX BONDS than 20%
- -----------------------------------------------------------------------------------------------
</TABLE>
MANAGEMENT OF THE FUNDS
THE INVESTMENT ADVISER
INVESCO, located at 7800 East Union Avenue, Denver, Colorado, is the Company's
investment adviser. INVESCO was founded in 1932 and serves as an investment
adviser to:
INVESCO Bond Funds, Inc. (formerly, INVESCO Income Funds, Inc.)
INVESCO Combination Stock & Bond Funds, Inc. (formerly, INVESCO Flexible
Funds, Inc.)
IINVESCO International Funds, Inc.
INVESCO Money Market Funds, Inc.
INVESCO Sector Funds, Inc. (formerly, INVESCO Strategic Portfolios, Inc.)
INVESCO Specialty Funds, Inc.
INVESCO Stock Funds, Inc. (formerly, INVESCO Equity Funds, Inc.)
INVESCO Treasurer's Series Funds, Inc. (formerly, INVESCO Treasurer's
Series Trust)
INVESCO Variable Investment Funds, Inc.
As of September 30, 1999, INVESCO managed 44 mutual funds having combined assets
of $24.1 billion, on behalf of more than 930,000 shareholders.
INVESCO is an indirect wholly owned subsidiary of AMVESCAP PLC, a publicly
traded holding company. Through its subsidiaries, AMVESCAP PLC engages in the
business of investment management on an international basis. AMVESCAP PLC is one
of the largest independent investment management businesses in the world, with
approximately $296 billion in assets under management on June 30, 1999.
<PAGE>
AMVESCAP PLC's North American subsidiaries include:
INVESCO Retirement and Benefit Services, Inc. ("IRBS"), Atlanta, Georgia,
develops and provides domestic and international defined contribution
retirement plan services to plan sponsors, institutional retirement plan
sponsors, institutional plan providers and foreign governments.
INVESCO Retirement Plan Services ("IRPS"), Atlanta, Georgia, a division of
IRBS, provides recordkeeping and investment selection services to defined
contribution plan sponsors of plans with between $2 million and $200 million
in assets. Additionally, IRPS provides investment consulting services to
institutions seeking to provide retirement plan products and services.
Institutional Trust Company, doing business as INVESCO Trust Company
("ITC"), Denver, Colorado, a division of IRBS, provides retirement account
custodian and/or trust services for individual retirement accounts ("IRAs")
and other retirement plan accounts. This includes services such as
recordkeeping, tax reporting and compliance. ITC acts as trustee or
custodian to these plans. ITC accepts contributions and provides complete
transfer agency functions: correspondence, sub-accounting, telephone
communications and processing of distributions.
INVESCO Capital Management, Inc., Atlanta, Georgia, manages institutional
investment portfolios, consisting primarily of discretionary employee
benefit plans for corporations and state and local governments, and
endowment funds.
INVESCO Management & Research, Inc., Boston, Massachusetts, primarily
manages pension and endowment accounts.
PRIMCO Capital Management, Inc., Louisville, Kentucky, specializes in
managing stable return investments, principally on behalf of Section 401(k)
retirement plans.
INVESCO Realty Advisors, Inc., Dallas, Texas, is responsible for providing
advisory services in the U.S. real estate markets for AMVESCAP PLC's clients
worldwide. Clients include corporate pension plans and public pension funds
as well as endowment and foundation accounts.
INVESCO (NY), Inc., New York, is an investment adviser for separately
managed accounts, such as corporate and municipal pension plans,
Taft-Hartley Plans, insurance companies, charitable institutions and private
individuals. INVESCO NY further serves as investment adviser to several
closed-end investment companies, and as sub-adviser with respect to certain
commingled employee benefit trusts.
A I M Advisors, Inc., Houston, Texas, provides investment advisory and
administrative services for retail and institutional mutual funds.
A I M Capital Management, Inc., Houston, Texas, provides investment
<PAGE>
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, 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.
THE INVESTMENT ADVISORY AGREEMENT
INVESCO serves as investment adviser to the Funds under an investment advisory
agreement dated February 28, 1997 (the "Agreement") with the Company.
The Agreement requires that INVESCO manage the investment portfolio of each Fund
in a way that conforms with the Fund's investment policies. INVESCO may directly
manage a Fund itself, or may hire a sub-adviser, which may be an affiliate of
INVESCO, to do so. Specifically, INVESCO is responsible for:
o managing the investment and reinvestment of all the assets of the Funds,
and executing all purchases and sales of portfolio securities;
o 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, and in any prospectus and/or statement of
additional information of the Funds, as from time to time amended and in
use under the 1933 Act, and (ii) the Company's status as a regulated
investment company under the Internal Revenue Code of 1986, as amended;
o determining what securities are to be purchased or sold for the Funds,
unless otherwise directed by the directors of the Company, and executing
transactions accordingly;
o providing the Funds the benefit of all of the investment analysis and
research, the reviews of current economic conditions and trends, and the
consideration of a long-range investment policy now or hereafter generally
available to the investment advisory customers of the adviser or any
sub-adviser;
o determining what portion of each Fund's assets should be invested in the
various types of securities authorized for purchase by the Fund; and
o making recommendations as to the manner in which voting rights, rights to
consent to Fund action and any other rights pertaining to a Fund's
portfolio securities shall be exercised.
INVESCO also performs all of the following services for the Funds:
<PAGE>
o administrative
o internal accounting (including computation of net asset
value)
o clerical and statistical
o secretarial
o all other services necessary or incidental to the
administration of the affairs of the Funds
o supplying the Company with officers, clerical staff and
other employees
o furnishing office space, facilities, equipment, and supplies; providing
personnel and facilities required to respond to inquiries related to
shareholder accounts
o conducting periodic compliance reviews of the Funds' operations;
preparation and review of required documents, reports and filings by
INVESCO's in-house legal and accounting staff or in conjunction with
independent attorneys and accountants (including the prospectus, statement
of additional information, proxy statements, shareholder reports, tax
returns, reports to the SEC, and other corporate documents of the Funds)
o supplying basic telephone service and other utilities
o preparing and maintaining certain of the books and records required to be
prepared and maintained by the Funds under the 1940 Act
Expenses not assumed by INVESCO are borne by the Funds. As full compensation for
its advisory services to the Company, INVESCO receives a monthly fee from each
Fund. The fee is calculated at the annual rate of:
High Yield Fund
o 0.50% on the first $300 million of the Fund's average net
assets;
o 0.40% on the next $200 million of the Fund's average net
assets;
o 0.30% of the Fund's average net assets from $500 million;
Select Income, Tax-Free Bond and U.S. Government Securities Funds
o 0.55% on the first $300 million of each Fund's average
net assets;
o 0.45% on the next $200 million of each Fund's average net
assets; and
o 0.35% of each Fund's average net assets from $500 million.
<PAGE>
During the periods outlined in the table below, the Funds paid INVESCO advisory
fees in the dollar amounts shown below. If applicable, the advisory fees were
offset by credits in the amounts shown below, so that INVESCO's fees were not in
excess of the expense limitations shown below, which have been voluntarily
agreed to by the Company and INVESCO.
Advisory Total Expense Total Expense
Fee Dollars Reimbursements Limitations
High Yield Fund
August 31, 1999 $3,245,140 $0 1.25%
August 31, 1998 2,842,990 0 1.25%
August 31, 1997 1,964,043 0 1.25%
Select Income Fund
August 31, 1999 $2,670,224 $536,940 1.05%
August 31, 1998 2,023,679 151,971 1.05%
August 31, 1997 1,477,302 490,039 1.05%
Tax-Free Bond Fund
August 31, 1999(a) $ 185,151 $ 80,439 0.90%
June 30, 1999 1,149,834 310,487 0.90%
June 30, 1998 1,195,773 282,742 0.90%
June 30, 1997 1,275,473 348,199 0.90%
U.S. Government Securities Fund
August 31, 1999 $ 395,611 $422,317 1.00%
August 31, 1998 284,609 207,740 1.00%
August 31, 1997 312,851 176,398 1.00%
(a) For the period July 1, 1999 through August 31, 1999.
ADMINISTRATIVE SERVICES AGREEMENT
INVESCO, either directly or through affiliated companies, provides certain
administrative, sub-accounting, and recordkeeping services to the Funds pursuant
to an Administrative Services Agreement.
The Administrative Services Agreement requires INVESCO to provide the following
services to the Funds:
o such sub-accounting and recordkeeping services and functions as are
reasonably necessary for the operation of the Funds; and
<PAGE>
o 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 Services
Agreement, each Fund pays a monthly fee to INVESCO consisting of a base fee of
$10,000 per year, plus an additional incremental fee computed daily and paid
monthly at an annual rate of 0.015% per year of the average net assets of each
Fund prior to May 13, 1999, and 0.045% per year of the average net assets of
each Fund effective May 13, 1999.
TRANSFER AGENCY AGREEMENT
INVESCO also performs transfer agent, dividend disbursing agent and registrar
services for the Funds pursuant to a Transfer Agency Agreement.
The Transfer Agency Agreement provides that each Fund pay 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 the rate of 1/12 of the annual fee
and is based upon the actual number of shareholder accounts and omnibus account
participants in each Fund at any time during each month.
FEES PAID TO INVESCO
For the periods outlined in the table below for each Fund, the Funds paid the
following fees to INVESCO (prior to the absorption of certain Fund expenses by
INVESCO):
<TABLE>
<CAPTION>
High Yield Fund
Year Ended August 31,
Type of Fee 1999 1998 1997
- ----------- ---- ---- ----
<S> <C> <C> <C>
Advisory $3,245,140 $2,842,990 $1,964,043
Administrative Services 204,752 112,212 72,410
Transfer Agency 1,560,584 778,174 651,471
Select Income Fund
Year Ended August 31,
Type of Fee 1999 1998 1997
- ----------- ---- ---- ----
Advisory $2,670,224 $2,023,679 $1,477,302
Administrative Services 140,510 67,475 50,289
Transfer Agency 1,519,741 895,360 786,616
<PAGE>
Tax-Free Bond Fund
Period Ended
August 31 Year Ended June 30,
Type of Fee 1999(a) 1999 1998 1997
- ----------- ------------ ---- ---- ----
Advisory $185,151 $1,149,834 $1,195,773 $1,275,473
Administrative Services 16,815 49,494 42,612 44,786
Transfer Agency 43,473 252,005 266,096 317,800
U.S. Government Securities Fund
Year Ended August 31,
Type of Fee 1999 1998 1997
- ----------- ---- ---- ----
Advisory $ 395,611 $ 284,609 $ 312,851
Administrative Services 27,813 17,762 18,532
Transfer Agency 333,566 186,705 178,192
(a) For the period July 1, 1999 through August 31, 1999.
DIRECTORS AND OFFICERS OF THE COMPANY
The overall direction and supervision of the Company come from the board of
directors. The board of directors is responsible for making sure that the Funds'
general investment policies and programs are carried out and that the Funds are
properly administered.
The board of directors has an audit committee comprised of four of the directors
who are not affiliated with INVESCO (the "Independent Directors"). The committee
meets quarterly 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 has a management liaison committee which meets quarterly with
various management personnel of INVESCO in order to facilitate better
understanding of management and operations of the Company, and 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.
The Company has a soft dollar brokerage committee. The committee meets
periodically to review soft dollar and other brokerage transactions by the
Funds, and to review policies and procedures of INVESCO with respect to
brokerage transactions. It reports on these matters to the Company's board of
directors.
The Company has a derivatives committee. The committee meets periodically to
review derivatives investments made by the Funds. It monitors derivatives usage
by the Funds and the procedures utilized by INVESCO to ensure that the use of
such instruments follows the policies on such instruments adopted by the
Company's board of directors. It reports on these matters to the Company's board
of directors.
The officers of the Company, all of whom are officers and employees of INVESCO,
are responsible for the day-to-day administration of the Company and the Funds.
The officers of the Company receive no direct compensation from the Company or
<PAGE>
the Funds for their services as officers. INVESCO has the primary responsibility
for making investment decisions on behalf of the Funds. These investment
decisions are reviewed by the investment committee of INVESCO.
All of the officers and directors of the Company hold comparable positions with
the following funds, which, with the Company, are collectively referred to as
the "INVESCO Funds":
INVESCO Bond Funds, Inc. (formerly, INVESCO Income Funds, Inc.)
INVESCO Combination Stock & Bond Funds, Inc. (formerly, INVESCO Flexible
Funds, Inc.)
INVESCO International Funds, Inc.
INVESCO Money Market Funds, Inc.
INVESCO Sector Funds, Inc. (formerly, INVESCO Strategic Portfolios, Inc.)
INVESCO Specialty Funds, Inc.
INVESCO Stock Funds, Inc. (formerly, INVESCO Equity Funds, Inc.)
INVESCO Treasurer's Series Funds, Inc. (formerly, INVESCO Treasurer's
Series Trust)
INVESCO Variable Investment Funds, Inc.
The table below provides information about each of the Company's directors
and officers. Their affiliations represent their principal occupations.
Position(s) Held Principal
Name, Address, and Age With Company Occupation(s) During
Past Five Years
Charles W. Brady *+ Director and Chairman of the Board
1315 Peachtree St., N.E. Chairman of the Board of INVESCO Global
Atlanta, Georgia Health Sciences Fund;
Age: 64 Chief Executive Officer
and Director of AMVESCAP
PLC, London, England and
various subsidiaries of
AMVESCAP PLC.
<PAGE>
Position(s) Held Principal
Name, Address, and Age With Company Occupation(s) During
Past Five Years
Fred A. Deering +# Director and Vice Trustee of INVESCO Glo-
Security Life Center Chairman of the Board bal Health Sciences
1290 Broadway Fund; formerly,
Denver, Colorado Chairman of the
Age: 71 Executive Committee and
Chairman of the Board of
Security Life of Denver
Insurance Company;
Director of ING American
Holdings Company and First
ING Life Insurance
Company of New York.
Mark H. Williamson *+ President, Chief President, Chief Execu-
7800 E. Union Avenue Executive Officer tive Officer and
Denver, Colorado and Director Director of INVESCO
Age: 48 Funds Group, Inc.;
President, Chief Executive
Officer and Director of
INVESCO Distributors,
Inc.; President, Chief
Operating Officer and
Trustee of INVESCO Global
Health Sciences Fund;
formerly, Chairman and
Chief Executive Officer
of NationsBanc Advisors,
Inc.; formerly, Chairman
of NationsBanc
Investments, Inc.
<PAGE>
Position(s) Held Principal
Name, Address, and Age With Company Occupation(s) During
Past Five Years
Victor L. Andrews, Ph.D. Director Professor Emeritus,
**! Chairman Emeritus and
34 Seawatch Drive Roundtable of the
Savannah, Georgia Department of Finance of
Age: 69 Georgia State University;
President, Andrews Finan-
cial Associates, Inc.(con-
sulting firm); formerly,
member of the faculties of
the Harvard Business
School and the Sloan
School of Management of
MIT; Director of The
Sheffield Funds, Inc.
Bob R. Baker +** Director President and Chief
AMC Cancer Research Center Executive Officer of
1600 Pierce Street AMC Cancer Research
Denver, Colorado Center, Denver,
Age: 62 Colorado, since January
1989; until mid-December
1988, Vice Chairman of the
Board of First Columbia
Financial Corporation,
Englewood, Colorado;
formerly, Chairman of the
Board and Chief Executive
Officer of First Columbia
Financial Corporation.
Lawrence H. Budner # @ Director Trust Consultant;
7608 Glen Albens Circle prior to June 30,
Dallas, Texas 1987, Senior Vice
Age: 69 President and Senior
Trust Officer of
InterFirst Bank,
Dallas, Texas.
<PAGE>
Position(s) Held Principal
Name, Address, and Age With Company Occupation(s) During
Past Five Years
Wendy L. Gramm, Ph.D.**! Director Self-employed (since
4201 Yuma Street, N.W. 1993); Professor of
Washington, DC Economics and Public
Age: 54 Administration,
University of Texas at
Arlington; formerly,
Chairman, Commodity
Futures Trading
Commission; Administrator
for Information and
Regulatory Affairs at the
Office of Management and
Budget; Executive Direc-
tor of the Presidential
Task Force on Regulatory
Relief; and Director of
the Federal Trade Commis-
sion's Bureau of Econom-
ics; also, Director of
Chicago Mercantile
Exchange, Enron Corpora-
tion, IBP, Inc., State
Farm Insurance Company,
Independent Women's
Forum, International
Republic Institute, and
the Republican Women's
Federal Forum. Also,
Member of Board of
Visitors, College of
Business Administration,
University of Iowa, and
Member of Board of
Visitors, Center for Study
of Public Choice, George
Mason University.
<PAGE>
Position(s) Held Principal
Name, Address, and Age With Company Occupation(s) During
Past Five Years
Kenneth T. King +#@ Director Retired. Formerly,
4080 North Circulo Chairman of the Board
Manzanillo Tucson, of The Capitol Life
Tucson, Arizona Insurance Company,
Age: 73 Providence Washington
Insurance Company and
Director of numerous U.S.
subsidiaries thereof;
formerly, Chairman of the
Board of The Providence
Capitol Companies in the
United Kingdom and
Guernsey; Chairman of the
Board of the Symbion
Corporation until 1987.
John W. McIntyre + #@ Director Retired. Formerly,
7 Piedmont Center Vice Chairman of the
Suite 100 Board of Directors of
Atlanta, Georgia the Citizens and
Age: 68 Southern Corporation and
Chairman of the Board and
Chief Executive Officer
of the Citizens and
Southern Georgia Corp. and
the Citizens and Southern
National Bank; Trustee of
INVESCO Global Health
Sciences Fund, Gables
Residential Trust,
Employee's Retirement
System of GA, Emory
University and J.M. Tull
Charitable Foundation;
Director of Kaiser Foun-
dation Health Plans of
Georgia, Inc.
<PAGE>
Position(s) Held Principal
Name, Address, and Age With Company Occupation(s) During
Past Five Years
Larry Soll, Ph.D.!** Director Retired. Formerly,
345 Poorman Road Chairman of the Board
Boulder, Colorado (1987 to 1994), Chief
Age: 57 Executive Officer (1982 to
1989 and 1993 to 1994) and
President (1982 to 1989)
of Synergen Inc.; Director
of Synergen since
incorporation in 1982;
Director of Isis
Pharmaceuticals, Inc.;
Trustee of INVESCO Global
Health Sciences Fund.
Glen A. Payne Secretary Senior Vice President,
7800 E. Union Avenue General Counsel and
Denver, Colorado Secretary of INVESCO
Age: 51 Funds Group, Inc.; Senior
Vice President, Secretary
and General Counsel of
INVESCO Distributors,
Inc.; Secretary, INVESCO
Global Health Sciences
Fund; formerly, General
Counsel of INVESCO Trust
Company (1989 to1998);
formerly, employee of a
U.S. regulatory agency,
Washington, D.C. (1973 to
1989).
<PAGE>
Position(s) Held Principal
Name, Address, and Age With Company Occupation(s) During
Past Five Years
Ronald L. Grooms Chief Accounting Senior Vice President,
7800 E. Union Avenue Officer, Chief Finan- Treasurer and Director
Denver, Colorado cial Officer and of INVESCO Funds
Age: 52 Treasurer Group, Inc.; Senior
Vice President,
Treasurer and Direc-
tor of INVESCO
Distributors, Inc.;
Treasurer, Principal
Financial and
Accounting Officer of
INVESCO Global Health
Sciences Fund;
formerly, Senior Vice
President and
Treasurer of INVESCO
Trust Company (1988 to
1998).
William J. Galvin, Jr. Assistant Secretary Senior Vice President
7800 E. Union Avenue and Assistant
Denver, Colorado Secretary of INVESCO
Age: 42 Funds Group, Inc.;
Senior Vice President
and Assistant
Secretary of INVESCO
Distributors, Inc.;
formerly, Trust
Officer of INVESCO
Trust Company.
Pamela J. Piro Assistant Treasurer Vice President and
7800 E. Union Avenue Assistant Treasurer
Denver, Colorado of INVESCO Funds
Age: 39 Group, Inc.; Assistant
Treasurer of INVESCO
Distributors, Inc.;
formerly, Assistant
Vice President (1996
to 1997), Director -
Portfolio Accounting
(1994 to 1996),
Portfolio Accounting
Manager (1993 to 1994)
and Assistant
Accounting Manager
(1990 to 1993).
<PAGE>
Position(s) Held Principal
Name, Address, and Age With Company Occupation(s) During
Past Five Years
Alan I. Watson Assistant Secretary Vice President of
7800 E. Union Avenue INVESCO Funds Group,
Denver, Colorado Inc.; formerly, Trust
Age: 57 Officer of INVESCO
Trust Company.
Judy P. Wiese Assistant Secretary Vice President and
7800 E. Union Avenue Assistant Secretary
Denver, Colorado of INVESCO Funds
Age: 51 Group, Inc.; Assistant
Secretary of INVESCO
Distributors, Inc.;
formerly, Trust Officer of
INVESCO Trust Company.
# 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
1940 Act.
** Member of the management liaison committee of the Company.
@ Member of the soft dollar brokerage committee of the Company.
! Member of the derivatives committee of the Company.
The following table shows the compensation paid by the Company to its
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, all for the fiscal year ended August 31, 1999.
In addition, the table sets forth the total compensation paid by all of the
INVESCO Funds and INVESCO Global Health Sciences Fund (collectively, the
"INVESCO Complex") to these directors or trustees for services rendered in their
capacities as directors or trustees during the year ended December 31, 1998. As
of December 31, 1998, there were 53 funds in the INVESCO Complex.
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Name of Person Aggregate Compen- Benefits Accrued Estimated Annual Total Compensation
and Position satio From Company(1) As Part of Company Benefits Upon From INVESCO Complex
Expenses(2) Retirement(3) Paid To Directors(6)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fred A. Deering, Vice $6,717 $4,641 $3,135 $103,700
Chairman of the Board
- --------------------------------------------------------------------------------------------------------------
Victor L. Andrews 6,254 4,440 3,456 80,350
- --------------------------------------------------------------------------------------------------------------
Bob R. Baker 6,343 3,965 4,631 84,000
- --------------------------------------------------------------------------------------------------------------
Lawrence H. Budner 6,162 4,440 3,456 79,350
- --------------------------------------------------------------------------------------------------------------
Daniel D. Chabris(4) 2,049 4,537 2,843 70,000
- --------------------------------------------------------------------------------------------------------------
Wendy L. Gramm 6,133 0 0 79,000
- --------------------------------------------------------------------------------------------------------------
Kenneth T. King 6,509 4,737 2,843 77,050
- --------------------------------------------------------------------------------------------------------------
John W. McIntyre 6,595 0 0 98,500
- --------------------------------------------------------------------------------------------------------------
Larry Soll 6,133 0 0 96,000
- --------------------------------------------------------------------------------------------------------------
Total $52,895 $26,760 $20,364 $767,950
- --------------------------------------------------------------------------------------------------------------
% of Net Assets 0.0033%(5) 0.0017%(5) 0.0035%(6)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The vice chairman of the board, the chairmen of the Funds' committees
who are Independent Directors, and the members of the Funds' committees who are
Independent Directors, each receive compensation for serving in such capacities
in addition to the compensation paid to all Independent Directors.
(2) Represents estimated 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 amounts represent the Company's share of the estimated annual
benefits payable by the INVESCO Funds upon the directors' retirement, calculated
using the current method of allocating director compensation among the INVESCO
Funds. 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 Funds, 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 Drs. Soll and Gramm, each of
<PAGE>
these directors has served as a director or trustee of one or more of the funds
in the INVESCO Funds for the minimum five-year period required to be eligible to
participate in the Defined Benefit Deferred Compensation Plan. Although Mr.
McIntyre became eligible to participate in the Defined Benefit Deferred
Compensation Plan as of November 1, 1998, he will not be included in the
calculation of retirement benefits until November 1, 1999.
(4) Mr. Chabris retired as a director of the Company on September 30, 1998.
(5) Totals as a percentage of the Company's net assets as of August 31, 1999.
(6) Total as a percentage of the net assets of the INVESCO Complex as of
December 31, 1998.
Messrs. Brady and Williamson, as "interested persons" of the Company and the
other INVESCO Funds, receive compensation as officers or employees of INVESCO or
its affiliated companies, and do not receive any director's fees or other
compensation from the Company or the other funds in the INVESCO Funds for their
service as directors.
The boards of directors of the mutual funds in the INVESCO Funds have adopted a
Defined Benefit Deferred Compensation Plan (the "Plan") for the Independent
Directors of the funds. Under this Plan, each director who is not an interested
person of the funds (as defined in Section 2(a)(19) of the 1940 Act) and who has
served for at least five years (a "Qualified Director") is entitled to receive,
upon termination of service as a director (normally, at the retirement age of 72
or the retirement age of 73 or 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
and annualized board meeting fees payable by the funds to the Qualified Director
at the time of his/her retirement (the "Basic Benefit"). Commencing with any
such director's second year of retirement, and commencing with the first year of
retirement of any 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 50% of the Basic Benefit. These payments will continue for the
remainder of the Qualified Director's life or ten years, whichever is longer
(the "Reduced Benefit 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 Reduced Benefit Payments will be made to
him/her or to his/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 Benefit Payments will be made to
his/her beneficiary or estate. The Plan is administered by a committee of three
directors who are also participants in the Plan and one director who is not a
Plan participant. The cost of the Plan will be allocated among the INVESCO Funds
in a manner determined to be fair and equitable by the committee. The Company
began making payments under the Plan to Mr. Chabris as of October 1, 1998. 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. A
similar plan has been adopted by INVESCO Global Health Sciences Fund's board of
trustees. All trustees of INVESCO Global Health Sciences Fund are also directors
of the INVESCO Funds.
<PAGE>
The Independent Directors have contributed to a deferred compensation plan,
pursuant to which they have deferred receipt of a portion of the compensation
which they would otherwise have been paid as directors of certain of the INVESCO
Funds. Certain of the deferred amounts have been invested in the shares of all
INVESCO Funds, except Funds offered by INVESCO Variable Investment Funds, Inc.,
in which the directors are legally precluded from investing. Each Independent
Director may, therefore, be deemed to have an indirect interest in shares of
each such INVESCO Fund, in addition to any INVESCO Fund shares the Independent
Director may own either directly or beneficially.
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
As of September 30, 1999, the following persons owned more than 5% of the
outstanding shares of the Funds indicated below. This level of share ownership
is considered to be a "principal shareholder" relationship with a Fund under the
1940 Act. Shares that are owned "of record" are held in the name of the person
indicated. Shares that are owned "beneficially" are held in another name, but
the owner has the full economic benefit of ownership of those shares:
<TABLE>
High Yield Fund
<CAPTION>
- --------------------------------------------------------------------------------
Name and Address Basis of Ownership Percentage Owned
(Record/Beneficial)
- --------------------------------------------------------------------------------
<S> <C> <C>
Charles Schwab & Co. Inc. Record 35.20%
Special Custody Acct for the
Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery St
San Francisco, CA 94104-4122
- --------------------------------------------------------------------------------
Nat'l Financial Services Corp Record
The Exclusive Benefit of Cust 8.76%
One World Financial Center
200 Liberty Street, 5th Floor
Attn: Kate Recon
New York, NY 10281-1003
- --------------------------------------------------------------------------------
<PAGE>
Select Income Fund
- --------------------------------------------------------------------------------
Name and Address Basis of Ownership Percentage Owned
(Record/Beneficial)
- --------------------------------------------------------------------------------
Charles Schwab & Co. Inc. Record 15.34%
Special Custody Acct for the
Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery St
San Francisco, CA 94104-4122
- --------------------------------------------------------------------------------
Nat'l Financial Services Corp Record 6.59%
The Exclusive Benefit of Cust
One World Financial Center
200 Liberty Street, 5th Floor
Attn: Kate Recon
New York, NY 10281-1003
- --------------------------------------------------------------------------------
INVESCO Trust Company TR Record 6.30%
Morris Communications Corp
Employees' Profit Sharing Ret
Plan
725 Broad Street
Augusta, GA 30901-1336
- --------------------------------------------------------------------------------
Prudential Securities Inc. Record 5.42%
Acct 910-404559-000
Attn: Mutual Funds
1 New York Plaza
New York, NY 10004-1901
- --------------------------------------------------------------------------------
Tax-Free Bond Fund
- --------------------------------------------------------------------------------
Name and Address Basis of Ownership Percentage Owned
(Record/Beneficial)
- --------------------------------------------------------------------------------
None
- --------------------------------------------------------------------------------
<PAGE>
U.S. Government Securities Fund
- --------------------------------------------------------------------------------
Name and Address Basis of Ownership Percentage Owned
(Record/Beneficial)
- --------------------------------------------------------------------------------
Charles Schwab & Co. Inc. Record 16.22%
Special Custody Acct for the
Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery St
- --------------------------------------------------------------------------------
Resources Trust Co Cust For Record 8.47%
The Exclusive Benefit of The
Various Customers of IMS
P.O. Box 3865
Englewood, CO 80155-3865
- --------------------------------------------------------------------------------
</TABLE>
As of October 19, 1999, officers and directors of the Company, as a group,
beneficially owned less than 1% of any Fund's outstanding shares.
DISTRIBUTOR
INVESCO Distributors, Inc. ("IDI"), a wholly owned subsidiary of INVESCO, is the
distributor of the Funds. IDI receives no compensation and bears all expenses,
including the cost of printing and distributing prospectuses, incident to
marketing of the Funds' shares, except for such distribution expenses as are
paid out of Fund assets under the Company's plan of distribution which has been
adopted by each Fund pursuant to Rule 12b-1 under the 1940 Act.
The Company has adopted a Plan and Agreement of Distribution (the "Plan") which
provides that each Fund will make monthly payments to IDI computed at an annual
rate no greater than 0.25% of a Fund's average net assets. These payments 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. Payments by a
Fund under the Plan, for any month, may be made to compensate IDI for
permissible activities engaged in and services provided during the rolling
12-month period in which that month falls.
A significant expenditure under the Plan is compensation paid to securities
companies and other financial institutions and organizations, which may include
INVESCO-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
<PAGE>
banks to act as underwriters of mutual fund shares, INVESCO 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 the Funds
possibly could decrease to the extent that the banks would no longer invest
customer assets in the Funds. 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 a Fund.
During the fiscal year ended August 31, 1999, the High Yield, Select Income and
U.S. Government Securities Funds made payments to IDI under the Plan in the
amounts of $2,032,749, $1,321,787 and $176,399, respectively. During the period
ended August 31, 1999 and the fiscal year ended June 30, 1999, the Tax-Free Bond
Fund made payments to IDI under the Plan in the amounts of $85,752 and $524,866,
respectively. In addition, as of August 31, 1999, $158,254, $113,017, $40,196
and $16,426 of additional distribution accruals had been incurred for High
Yield, Select Income, Tax-Free Bond and U.S. Government Securities Funds,
respectively, and will be paid during the fiscal year ended August 31, 2000. For
the fiscal year ended August 31, 1999 for High Yield, Select Income and U.S.
Government Securities Funds and the period ended August 31, 1999 and the fiscal
year ended June 30, 1999 for Tax-Free Bond Fund, allocation of 12b-1 amounts
paid by the Funds for the following categories of expenses were:
High Yield Fund
Year Ended
August 31, 1999
Advertising $526,714
Sales literature, printing, and postage 219,853
Direct Mail 82,680
Public Relations/Promotion 114,478
Compensation to securities dealers
and other organizations 720,738
Marketing personnel 368,286
Select Income Fund
Year Ended
August 31, 1999
Advertising $317,336
Sales literature, printing, and postage 118,551
Direct Mail 49,357
Public Relations/Promotion 55,990
Compensation to securities dealers
and other organizations 618,053
Marketing personnel 162,500
<PAGE>
Tax-Free Bond Fund
Period Ended Year Ended
August 31, 1999(a) June 30, 1999
Advertising $11,904 $232,757
Sales literature, printing, and postage 30,914 63,087
Direct Mail 3,948 18,290
Public Relations/Promotion 6,713 35,630
Compensation to securities dealers
and other organizations 13,659 64,692
Marketing personnel 18,614 110,410
U.S. Government Securities Fund
Year Ended
August 31, 1999
Advertising $40,932
Sales literature, printing, and postage 17,723
Direct Mail 5,814
Public Relations/Promotion 8,756
Compensation to securities dealers
and other organizations 72,870
Marketing personnel 30,304
(a) For the period July 1, 1999 through August 31, 1999.
The services which are provided by securities dealers and other organizations
may vary by dealer but include, among other things, processing new shareholder
account applications, preparing and transmitting to the Company's Transfer Agent
computer-processable tapes of all Fund transactions by customers, serving as the
primary source of information to customers in answering questions concerning the
Funds, and assisting in other customer transactions with the Funds.
The Plan provides that it shall continue in effect with respect to each Fund as
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, including the vote of a majority of the
Independent Directors. The Plan can also be terminated at any time by a Fund,
without penalty, if a majority of the Independent Directors, or shareholders of
the Fund, vote to terminate the Plan. The Company may, in its absolute
discretion, suspend, discontinue or limit the offering of its shares 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 a Fund, the investment climate for a Fund, general
market conditions, and the volume of sales and redemptions of a Fund's shares.
The Plan may continue in effect and payments may be made under the Plan
following any temporary suspension or limitation of the offering of Fund 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
<PAGE>
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 the amount of a Fund's
payments under the Plan without approval of the shareholders of that Fund, and
all material amendments to the Plan must be approved by the board of directors
of the Company, including a majority of the Independent Directors. Under the
agreement implementing the Plan, IDI or a Fund, the latter by vote of a majority
of the Independent Directors, or the holders of a majority of the Fund's
outstanding voting securities, may terminate such agreement 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.
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 Fund 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, a Fund's obligation to make payments to IDI shall terminate
automatically, in the event of such "assignment." In this event, a Fund may
continue to make payments pursuant to the Plan only upon the approval of new
arrangements regarding the use of the amounts authorized to be paid by a Fund
under the Plan. Such new arrangements must be approved by the directors,
including a majority of the Independent Directors, by a vote cast in person at a
meeting called for such purpose. These new arrangements might or might not be
with IDI. On a quarterly basis, the directors review information about the
distribution services that have been provided to each Fund and the 12b-1 fees
paid for such services. On an annual basis, the directors consider whether the
Plan should be continued and, if so, whether any amendment to the Plan,
including changes in the amount of 12b-1 fees paid by each Fund, should be made.
The only Company directors and interested persons, as that term is defined in
Section 2(a)(19) of the 1940 Act, who have a direct or indirect financial
interest in the operation of the Plan are the officers and directors of the
Company who are also officers either of IDI or other companies affiliated with
IDI. The benefits which the Company believes will be reasonably likely to flow
to a Fund and its shareholders under the Plan include the following:
o 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;
o 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; and
o Increased Fund assets may result in reducing each investor's share of
certain expenses through economies of scale (e.g. exceeding established
breakpoints in an advisory fee schedule and allocating fixed expenses over
a larger asset base), thereby partially offsetting the costs of the plan.
<PAGE>
The positive effect which increased Fund assets will have on INVESCO's revenues
could allow INVESCO and its affiliated companies:
o To have greater resources to make the financial commitments necessary to
improve the quality and level of the Funds' shareholder services (in both
systems and personnel);
o To increase the number and type of mutual funds available to investors from
INVESCO and its affiliated companies (and support them in their infancy),
and thereby expand the investment choices available to all shareholders;
and
o To acquire and retain talented employees who desire to be associated with a
growing organization.
OTHER SERVICE PROVIDERS
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 950 Seventeenth Street, Suite 2500, Denver,
Colorado, are the independent accountants of the Company. The independent
accountants are responsible for auditing the financial statements of the Funds.
CUSTODIAN
State Street Bank and Trust Company, P.O. Box 351, Boston, Massachusetts, is the
custodian of the cash and investment securities of the Company. The custodian is
also responsible for, among other things, receipt and delivery of each Fund's
investment securities in accordance with procedures and conditions specified in
the custody agreement 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
INVESCO, 7800 E. Union Avenue, Denver, Colorado, is the Company's transfer
agent, registrar, and dividend disbursing agent. Services provided by INVESCO
include the issuance, cancellation and transfer of shares of the Funds, and the
maintenance of records regarding the ownership of such shares.
LEGAL COUNSEL
The firm of Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue, N.W., 2nd
Floor, Washington, D.C., is legal counsel for the Company. The firm of Moye,
Giles, O'Keefe, Vermeire & Gorrell LLP, 1225 17th Street, Suite 2900, Denver,
Colorado, acts as special counsel to the Company.
<PAGE>
BROKERAGE ALLOCATION AND OTHER PRACTICES
As the investment adviser to the Funds, INVESCO places orders for the purchase
and sale of securities with broker-dealers based upon an evaluation of the
financial responsibility of the broker-dealers and the ability of the
broker-dealers to effect transactions at the best available prices.
While INVESCO seeks reasonably competitive commission rates, the Funds do not
necessarily pay the lowest commission or spread available. INVESCO is permitted
to, and does, consider qualitative factors in addition to price in the selection
of brokers. Among other things, INVESCO considers the quality of executions
obtained on a 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. INVESCO has found that a broker's
consistent ability to execute transactions is at least as important as the price
the broker charges for those services.
In seeking to ensure that the commissions charged a Fund are consistent with
prevailing and reasonable commissions, INVESCO monitors brokerage industry
practices and commissions charged by broker-dealers on transactions effected for
other institutional investors like the Funds.
Consistent with the standard of seeking to obtain favorable execution on
portfolio transactions, INVESCO may select brokers that provide research
services to INVESCO and the Company, as well as other INVESCO mutual funds and
other accounts managed by INVESCO. Research services include statistical and
analytical reports relating to issuers, industries, securities and economic
factors and trends, which may be of assistance or value to INVESCO in making
informed investment decisions. Research services prepared and furnished by
brokers through which a Fund effects securities transactions may be used by
INVESCO in servicing all of its accounts and not all such services may be used
by INVESCO in connection with a particular Fund. Conversely, a Fund receives
benefits of research acquired through the brokerage transactions of other
clients of INVESCO.
In order to obtain reliable trade execution and research services, INVESCO may
utilize brokers that charge higher commissions than other brokers would charge
for the same transaction. This practice is known as "paying up." However, even
when paying up, INVESCO is obligated to obtain favorable execution of a Fund's
transactions.
Portfolio transactions also may be effected through broker-dealers that
recommend the Funds to their clients, or that act as agent in the purchase of a
Fund's shares for their clients. When a number of broker-dealers can provide
comparable best price and execution on a particular transaction, INVESCO may
consider the sale of a Fund's shares by a broker-dealer in selecting among
qualified broker-dealers.
Certain of the INVESCO Funds utilize fund brokerage commissions to pay custody
fees for each respective fund. This program requires that the participating
funds receive favorable execution.
The aggregate dollar amount of underwriting discounts and brokerage commissions
paid by each Fund for the periods outlined in the table below were:
<PAGE>
High Yield Fund
Year Ended August 31, 1999 $1,665,183
Year Ended August 31, 1998 $3,324,014
Year Ended August 31, 1997 $2,922,214
Select Income Fund
Year Ended August 31, 1999 $ 553,125
Year Ended August 31, 1998 $ 686,913
Year Ended August 31, 1997 $1,171,410
Tax-Free Bond Fund
Period ended August 31, 1999(a) $ 0
Year Ended June 30, 1999 $ 0
Year Ended June 30, 1998 $ 623,244
Year Ended June 30, 1997 $ 748,918
U.S. Government Securities Fund
Year Ended August 31, 1999 $ 0
Year Ended August 31, 1998 $ 0
Year Ended August 31, 1997 $ 0
(a) For the period July 1, 1999 through August 31, 1999.
For the fiscal year ended August 31, 1999 with respect to High Yield, Select
Income and U.S. Government Securities Fund and for the period ended August 31,
1999 with respect to Tax-Free Bond Fund, brokers providing research services
received $918 in commissions on portfolio transactions effected for the Funds.
The aggregate dollar amount of such portfolio transactions was $775,745.
Commissions totaling $0 were allocated to certain brokers in recognition of
their sales of shares of the Funds on portfolio transactions of the Funds
effected during the year ended August 31, 1999 with respect to High Yield,
Select Income and U.S. Government Securities Fund. Commissions totaling $0 and
$0 were allocated to certain brokers in recognition of their sales of shares of
Tax-free Bond Fund on portfolio transactions of Tax-Free Bond Fund during the
period ended August 31, 1999 and the fiscal year ended June 30, 1999,
respectively.
<PAGE>
At August 31, 1999, each Fund held debt securities of its regular brokers or
dealers, or their parents, as follows:
- --------------------------------------------------------------------------------
Fund Broker or Dealer Value of Securities
at August 31, 1999
- --------------------------------------------------------------------------------
High Yield
- --------------------------------------------------------------------------------
State Street Bank & $ 4,500,000
Trust
- --------------------------------------------------------------------------------
Associates $39,000,000
Corporation of North
America
- --------------------------------------------------------------------------------
Select Income
- --------------------------------------------------------------------------------
State Street Bank & $ 1,389,000
Trust
- --------------------------------------------------------------------------------
General Electric 9,000,000
- --------------------------------------------------------------------------------
Tax-Free Bond
- --------------------------------------------------------------------------------
None
- --------------------------------------------------------------------------------
U.S. Government
Securities
- --------------------------------------------------------------------------------
State Street Bank $ 1,210,000
Trust
- --------------------------------------------------------------------------------
Neither INVESCO nor any affiliate of INVESCO receives any brokerage commissions
on portfolio transactions effected on behalf of the Funds, and there is no
affiliation between INVESCO or any person affiliated with INVESCO or the Funds
and any broker-dealer that executes transactions for the Funds.
<PAGE>
CAPITAL STOCK
The Company is authorized to issue up to one billion shares of common stock with
a par value of $0.01 per share. As of September 30, 1999, the following shares
of each Fund were outstanding:
High Yield Fund 121,935,145
Select Income Fund 90,462,894
Tax-Free Bond Fund 13,107,212
U.S. Government Securities Fund 12,088,791
All shares of each Fund are of one class with equal rights as to voting,
dividends and liquidation. 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 have no preemptive rights and are freely transferable on the books of
each Fund.
All shares of the Company have equal voting rights based on one vote for each
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 Funds will assist shareholders in
communicating with other shareholders as required by the 1940 Act.
Fund shares have noncumulative voting rights, which means that the holders of a
majority of the shares of the Company voting for the election of directors of
the Company can elect 100% of the directors if they choose to do so. If that
occurs, the holders of the remaining shares voting for the election of directors
will not be able to elect any person or persons to the board of directors.
Directors may be removed by action of the holders of a majority of the
outstanding shares of the Company.
TAX CONSEQUENCES OF OWNING SHARES OF A FUND
Each Fund intends to continue to conduct its business and satisfy the applicable
diversification of assets, distribution and source of income requirements to
qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended. Each Fund qualified as a regulated investment
company and intends to continue to qualify during its current fiscal year. It is
the policy of each Fund to distribute all investment company taxable income, net
tax-exempt income and net capital gains. As a result of this policy and the
Funds' qualification as regulated investment companies, it is anticipated that
none of the Funds will pay federal income or excise taxes and that all of the
Funds will be accorded conduit or "pass through" treatment for federal income
tax purposes. Therefore, any taxes that a Fund would ordinarily owe are paid by
its shareholders on a pro-rata basis. If a Fund does not distribute all of its
net investment income or net capital gains, it will be subject to income and
excise tax on the amount that is not distributed. If a Fund does not qualify as
a regulated investment company, it will be subject to corporate tax on all of
<PAGE>
its net investment income and net capital gains at the corporate tax rates.
Except, generally, for Tax-Free Bond Fund, dividends paid by a Fund 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
taxable for federal income tax purposes as ordinary income to shareholders.
After the end of each calendar year, the Funds send shareholders information
regarding the amount and character of dividends paid in the year, including the
dividends eligible for the dividends-received-deduction for corporations.
Dividends eligible for the dividends-received-deduction will be limited to the
aggregate amount of qualifying dividends that a Fund derives from its portfolio
investments.
A Fund realizes a capital gain or loss when it sells a portfolio security for
more or less than it paid for that security. Capital gains and losses are
divided into short-term and long-term, depending on how long the Fund held the
security which gave rise to the gain or loss. If the security was held one year
or less the gain or loss is considered short-term, while holding a security for
more than one year will generate a long-term gain or loss. A capital gain
distribution consists of long-term capital gains which are taxed at the capital
gains rate. Short-term capital gains are included with income from dividends and
interest as ordinary income and are paid to shareholders as dividends, as
discussed above. If total long-term gains on sales exceed total short-term
losses, including any losses carried forward from previous years, a Fund will
have a net capital gain. Distributions by a Fund of net capital gain are, for
federal income tax purposes, taxable to the shareholder as a long-term capital
gain regardless of how long a shareholder has held shares of the particular
Fund. Such distributions are not eligible for the dividends-received-deduction.
After the end of each calendar year, the Funds send information to shareholders
regarding the amount and character of distributions paid during the year.
Except, generally, for Tax-Free Bond Fund, all dividends and other distributions
are taxable income to the shareholder, whether or not such dividends and
distributions are reinvested in additional shares or paid in cash. If the net
asset value of a Fund's shares should be 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 a return of invested capital. The net asset value of
shares of a Fund reflects accrued net investment income and undistributed
realized capital and foreign currency gains; therefore, when a distribution is
declared, the net asset value is reduced by the amount of the distribution. If
shares of a Fund are purchased shortly before a distribution, the full price for
the shares will be paid and some portion of the price may then be returned to
the shareholder as a taxable dividend or capital gain. 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.
If it invests in foreign securities, a Fund may be subject to the 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 unless the Fund
meets the qualifications and makes the election to enable it to pass these taxes
through to shareholders for use by them as a foreign tax credit or deduction.
Tax conventions between certain countries and the United States may reduce or
eliminate such taxes.
<PAGE>
Gains or losses (1) from the disposition of foreign currencies, (2) from the
disposition of debt securities denominated in foreign currencies 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 a
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 a Fund's investment company taxable income to be
distributed to its shareholders.
INVESCO 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 INVESCO will be computed using the single-category
average cost method, although neither INVESCO nor the Funds recommend any
particular method of determining cost basis. Other methods may result in
different tax consequences. If you have reported gains or losses for a Fund in
past years, you must continue to use the method previously used, unless you
apply to the IRS for permission to change methods.
If you sell Fund shares at a loss after holding them for six months or less,
your loss will be treated as long-term (instead of short-term) capital loss to
the extent of any capital gain distributions that you may have received on those
shares.
Each Fund will be subject to a nondeductible 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 its net capital gains for the one-year period
ending on October 31 of that year, plus certain other amounts.
Tax-Free Bond Fund intends to qualify to pay "exempt-interest dividends" to its
shareholders. The Fund will so qualify if at least 50% of its total assets are
invested in municipal securities at the close of each quarter of the Fund's
fiscal year. The exempt interest portion of the income dividend that is payable
monthly may be based on the ratio of the Fund's tax-exempt income to taxable
income for the entire taxable year. In such case, the ratio would be determined
and reported to shareholders after the close of each taxable year. Thus, the
exempt-interest portion of any particular dividend may be based upon the
tax-exempt portion of all distributions for the taxable year, rather than upon
the tax-exempt portion of that particular dividend. Exemption of exempt-interest
dividends for federal income tax purposes does not necessarily result in
exemption under the income or other tax laws of any state or local taxing
authority. Although these dividends generally may be subject to state and local
income taxes, the laws of the several states and local taxing authorities vary
with respect to the taxation of exempt-interest dividends, taxable dividends and
distributions of capital gains.
A corporation includes exempt-interest dividends in calculating its alternative
taxable income in situations where the "adjusted current earnings" of the
corporation exceed its alternative minimum taxable income.
<PAGE>
AMT bonds are "private activity bonds" issued after August 1986; the proceeds
are directed in full or in part to private, for-profit organizations. The income
from AMT bonds is exempt from federal income tax but may be subject to the
alternative minimum tax -- a special tax that applies to taxpayers who have
certain adjustments to income or tax preference items.
Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by private activity bonds or
individual development bonds should consult their tax advisers before purchasing
shares of the Fund because, for users of certain of these facilities, the
interest on those bonds is not exempt from federal income tax. For these
purposes, the term "substantial user" is defined generally to include a
"non-exempt person" who regularly uses in trade or business a part of a facility
financed from the proceeds of such bonds.
Up to 85% of social security and railroad retirement benefits may be included in
taxable income for recipients whose adjusted gross income (including income from
tax-exempt sources such as a mutual fund) plus 50% of their benefits exceed
certain base amounts. Exempt-interest dividends from the Fund still are
tax-exempt to the extent described above they are only included in the
calculation of whether a recipient's income exceeds the established amounts.
You should consult your own tax adviser regarding specific questions as to
federal, state and local taxes. Dividends and capital gain distributions will
generally be subject to applicable state and local taxes. Qualification as a
regulated investment company under the Internal Revenue Code of 1986, as
amended, for income tax purposes does not entail government supervision of
management or investment policies.
PERFORMANCE
To keep shareholders and potential investors informed, INVESCO will occasionally
advertise the Funds' total return for one-, five-, and ten-year periods (or
since inception). Total return figures show the rate of return on a $10,000
investment in a Fund, assuming reinvestment of all dividends and capital gain
distributions for the periods cited.
Cumulative total return shows the actual rate of return on an investment for the
period cited; 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. More information about the Funds' 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 INVESCO using the phone number or
address on the back cover of the Funds' prospectus.
When we quote mutual fund rankings published by Lipper Inc., we may compare a
Fund to others in its appropriate Lipper category, as well as the broad-based
Lipper general fund groupings. These rankings allow you to compare a Fund to its
peers. Other independent financial media also produce performance- or
service-related comparisons, which you may see in our promotional materials.
<PAGE>
Performance figures are based on historical earnings and are not intended to
suggest future performance.
Average annual total return performance for the one-, five-, and ten-year
periods ended August 31, 1999 was:
Name of Fund 1 Year 5 Year 10 Year
High Yield Fund 6.53% 10.43% 9.10%
Select Income Fund 0.15% 8.15% 8.55%
Tax-Free Bond Fund -1.00%(a) 5.12% 6.59%
U.S. Government Securities Fund -3.40% 6.98% 7.08%
(a) For the period July 1, 1999 through August 31, 1999.
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 = a hypothetical initial payment of $10,000
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 indicated.
In conjunction with performance reports, comparative data between a Fund's
performance for a given period and other types of investment vehicles, including
certificates of deposit, may be provided to prospective investors and
shareholders.
In conjunction with performance reports and/or analyses of shareholder services
for a Fund, comparative data between that 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 Inc., Lehman Brothers, National Association of
Securities Dealers Automated Quotations, Frank Russell Company, Value Line
Investment Survey, the American Stock Exchange, Morgan Stanley Capital
International, Wilshire Associates, the Financial Times Stock Exchange, the New
York Stock Exchange, the Nikkei Stock Average and 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 Fund. These sources utilize information
<PAGE>
compiled (i) internally; (ii) by Lipper Inc.; or (iii) by other recognized
analytical services. The Lipper Inc. mutual fund rankings and comparisons which
may be used by the Funds in performance reports will be drawn from the following
mutual fund groupings, in addition to the broad-based Lipper general fund
groupings:
High Yield Fund High Current Yield Funds
Select Income Fund Corporate Debt Funds BBB - Rated
Tax-Free Bond Fund General Municipal Bond Funds
U.S. Government Securities Fund U.S. Government Funds
Sources for Fund performance information and articles about the Funds include,
but are not limited to, the following:
AMERICAN ASSOCIATION OF INDIVIDUAL INVESTORS' JOURNAL
BANXQUOTE
BARRON'S
BUSINESS WEEK
CDA INVESTMENT TECHNOLOGIES
CNBC
CNN
CONSUMER DIGEST
FINANCIAL TIMES
FINANCIAL WORLD
FORBES
FORTUNE
IBBOTSON ASSOCIATES, INC.
INSTITUTIONAL INVESTOR
INVESTMENT COMPANY DATA, INC.
INVESTOR'S BUSINESS DAILY
KIPLINGER'S PERSONAL FINANCE
LIPPER 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
THE WALL STREET JOURNAL
WIESENBERGER INVESTMENT COMPANIES SERVICES
WORKING WOMAN
WORTH
<PAGE>
FINANCIAL STATEMENTS
The financial statements for the Company for the fiscal year ended August 31,
1999 are incorporated herein by reference from the Company's Annual Report to
Shareholders dated August 31, 1999.
<PAGE>
APPENDIX A
BOND RATINGS
The following is a description of Moody's and S&P's bond ratings:
Moody's Corporate Bond Ratings
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the long
term risk appear somewhat larger than in Aaa securities.
A - Bonds rated A possess many favorable investment attributes, and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered as medium grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba - Bonds rated Ba are judged to have speculative elements. Their future cannot
be considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or maintenance of other terms of
the contract over any longer period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
<PAGE>
S&P Corporate Bond Ratings
AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB - Bonds rated BBB are regarded as having an adequate capability to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in higher rated categories.
BB - Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B - Bonds rated B have a greater vulnerability to default but currently have the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
CCC - Bonds rated CCC have a currently identifiable vulnerability to default and
are dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, they are not likely to have
the capacity to pay interest and repay principal.
