PROSPECTUS
January 1, 1999
INVESCO Select Income Fund
INVESCO High Yield Fund
INVESCO U.S. Government Securities Fund
The three INVESCO Bond Funds (the "Funds") described in this Prospectus are
actively managed to seek high current income through investments in fixed-income
securities. The INVESCO Select Income Fund (the "Select Income Fund"), the
INVESCO High Yield Fund (the "High Yield Fund") and the INVESCO U.S. Government
Securities Fund (the "U.S. Government Securities Fund") seek as high a level of
current income as is consistent with the risk involved in investing in the types
of securities in which each Fund invests. The Select Income Fund, High Yield
Fund and U.S. Government Securities Fund each have a secondary objective of
capital appreciation. The Funds are a series of INVESCO Bond Funds, Inc.
(formerly, INVESCO Income Funds, Inc.) (the "Company"), a diversified, managed
no-load mutual fund consisting of four portfolios of investments. A separate
Prospectus is available upon request from INVESCO Distributors, Inc. for the
Company's other Fund, INVESCO Short-Term Bond Fund. Investors may purchase
shares of any or all of the Funds. Additional funds may be offered in the
future.
This Prospectus provides you with the basic information you should know
before investing in a Fund. You should read it and keep it for future reference.
A Statement of Additional Information containing further information about the
Funds, dated January 1, 1999, has been filed with the Securities and Exchange
Commission and is incorporated by reference into this Prospectus. To request a
free copy, write to INVESCO Distributors, Inc., P.O. Box 173706, Denver,
Colorado 80217-3706; call 1-800-525-8085; or visit our web site at
http://www.invesco.com.
THE SELECT INCOME FUND MAY INVEST UP TO 50% OF ITS TOTAL ASSETS IN LOWER
RATED BONDS, COMMONLY KNOWN AS "HIGH YIELD" OR "JUNK BONDS." THE HIGH YIELD FUND
INVESTS PRIMARILY IN SUCH BONDS. THESE INVESTMENTS ARE SUBJECT TO GREATER RISKS,
INCLUDING THE RISK OF DEFAULT, THAN HIGHER RATED SECURITIES. YOU SHOULD
CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN THESE FUNDS. SEE
"INVESTMENT OBJECTIVE AND STRATEGY" AND "INVESTMENT POLICIES AND RISKS."
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES OF EACH FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER FINANCIAL INSTITUTION. THE SHARES OF EACH FUND
ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
<PAGE>
TABLE OF CONTENTS
ESSENTIAL INFORMATION..........................................................2
ANNUAL FUND EXPENSES...........................................................3
FINANCIAL HIGHLIGHTS...........................................................4
INVESTMENT OBJECTIVE AND STRATEGY.............................................10
INVESTMENT POLICIES AND RISKS.................................................11
THE FUNDS AND THEIR MANAGEMENT................................................16
FUND PRICE AND PERFORMANCE....................................................18
HOW TO BUY SHARES.............................................................18
FUND SERVICES.................................................................21
HOW TO SELL SHARES............................................................22
TAXES, DIVIDENDS AND OTHER DISTRIBUTIONS......................................24
ADDITIONAL INFORMATION........................................................25
APPENDIX -- RATINGS SERVICES..................................................26
<PAGE>
ESSENTIAL INFORMATION
Investment Goals And Strategy: The Funds seek high current income. The High
Yield Fund invests substantially all of its assets in bonds and other debt
securities and in preferred stocks. Such securities ordinarily include those
rated in lower categories by established ratings services. The Select Income
Fund invests in securities whose maturities will vary with interest rates. The
U.S. Government Securities Fund invests primarily in bonds and other debt
obligations issued or guaranteed by the U.S. government, its agencies and
instrumentalities, and in repurchase agreements and futures contracts with
respect to such securities. Capital appreciation is a secondary objective for
the Funds. There is no guarantee that the Funds will meet their investment
objective. See "Investment Objective And Strategy" and "Investment Policies And
Risks."
Designed For: The Select Income and the U.S. Government Securities Funds
are designed for investors seeking daily income, paid monthly. The High Yield
Fund is designed for investors seeking high daily income, paid monthly, who can
tolerate greater fluctuations in principal value than those associated with more
conservative bond funds. While not a complete investment program, one or more of
these Funds may be a valuable element of your investment portfolio. You may also
wish to consider one of the Funds as part of a Uniform Gifts/Transfers to Minors
Act Account or systematic investment strategy. Each Fund may be a suitable
investment for tax-deferred retirement programs such as various Individual
Retirement Accounts ("IRAs"), 401(k), Profit Sharing, Money Purchase Pension, or
403(b) plans.
Time Horizon: The Funds are primarily managed for current income but also
have a secondary potential for capital growth. Investors should not consider any
of the Funds as a suitable investment for the portion of their savings devoted
to capital appreciation, or for that portion focused on liquidity and stable
principal value.
Risks: The Funds focus on fixed-income securities. Each Fund's investments
are subject to both credit risk and market risk, both of which are increased by
investing in lower rated securities. High Yield and Select Income Fund may
experience rapid portfolio turnover that may result in higher brokerage
commissions and the acceleration of taxable capital gains. See "Investment
Policies And Risks" for specific risks associated with each Fund.
Organization and Management: Each Fund is a series of the Company. Each
Fund is owned by its shareholders. The Funds employ INVESCO Funds Group, Inc.
("INVESCO"), founded in 1932, to serve as investment adviser, administrator and
transfer agent. INVESCO Distributors, Inc. ("IDI"), founded in 1997 as a
wholly-owned subsidiary of INVESCO, is the Funds' distributor.
Each Fund's investments are selected by its portfolio manager or managers.
See "The Funds And Their Management."
<PAGE>
INVESCO and IDI are indirect, wholly-owned subsidiaries of AMVESCAP PLC, an
international investment management company that managed approximately ^ $241
billion in assets as of ^ September 30, 1998. AMVESCAP PLC is based in London
with money managers located in Europe, North America, South America and the Far
East.
The Funds offer all of the following services at no charge:
Telephone purchases
Telephone exchanges
Telephone redemptions
Automatic reinvestment of distributions
Regular investment plans such as EasiVest (the Fund's automatic
monthly investment program), Direct Payroll Purchase, and Automatic Monthly
Exchange
Periodic withdrawal plans
See "How To Buy Shares" and "How To Sell Shares."
Minimum Initial Investment: $1,000 per Fund, which is waived for regular
investment plans, including EasiVest and Direct Payroll Purchase, and certain
retirement plans.
Minimum Subsequent Investment: $50 per Fund (Minimums are lower for certain
retirement plans).
ANNUAL FUND EXPENSES
Each Fund is no-load; there are no fees to purchase, exchange or redeem
shares. Each Fund is authorized to pay a Rule 12b-1 distribution fee of up to
one quarter of one percent of that Fund's average net assets each year. (See
"How To Buy Shares --Distribution Expenses.")
Like any company, each Fund has operating expenses -- such as portfolio
management, accounting, shareholder servicing, maintenance of shareholder
accounts, and other expenses. These expenses are paid from each Fund's assets.
Lower expenses therefore benefit investors by increasing a Fund's investment
return.
We calculate annual operating expenses as a percentage of each Fund's
average annual net assets. To keep expenses competitive, INVESCO voluntarily
reimburses the High Yield Fund, Select Income Fund and U.S. Government
Securities Fund for amounts in excess of 1.25%, 1.05% and 1.00% (excluding
excess amounts that have been offset by the expense offset arrangements
described below), respectively, of each Fund's average net assets.
<PAGE>
Annual Fund Operating Expenses
(as a percentage of average net assets)
High Yield Fund
Management Fee 0.42%
12b-1 Fees 0.25%
Other Expenses 0.19%
Total Fund Operating Expenses(1) 0.86%
Select Income Fund
Management Fee 0.53%
12b-1 Fees 0.25%
Other Expenses 0.28%
Total Fund Operating Expenses (1)(2) 1.06%
U.S. Government Securities Fund
Management Fee 0.55%
12b-1 Fees 0.25%
Other Expenses 0.21%
Total Fund Operating Expenses (1)(2) 1.01%
(1) It should be noted that each Fund's actual total operating expenses were
lower than the figures shown because each Fund's custodian expenses were reduced
under an expense offset arrangements. However, as a result of an SEC
requirement, the figures shown above do not reflect these reductions. In
comparing expenses for different years, please note that the Ratios of Expenses
to Average Net Assets shown under "Financial Highlights" do reflect reductions
for periods prior to the fiscal year ended August 31, 1996. See "The Funds And
Their Management."
(2) Certain Fund expenses are being voluntarily absorbed by INVESCO. In the
absence of such absorbed expenses, "Other Expenses" and "Total Fund Operating
Expenses" for the fiscal year ended August 31, 1998 would have been 0.32% and
1.10%, respectively, for the Select Income Fund, and 0.61% and 1.41%,
respectively, for the U.S. Government Securities Fund. This is based on each
Fund's actual expenses for the fiscal year ended August 31, 1998. See "The Funds
And Their Management."
Example
A shareholder would pay the following expenses on a $1,000 investment for
the periods shown, assuming a hypothetical 5% annual return and redemption at
the end of each time period. (Of course, actual operating expenses are paid from
each Fund's assets, and are deducted from the amount of income available for
distribution to shareholders; they are not charged directly to shareholder
accounts.)
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
High Yield $ 9 $28 $48 $106
Select Income $11 $34 $59 $130
U.S. Government $10 $32 $56 $124
Securities
The purpose of this table and example is to assist you in understanding the
various costs and expenses that you will bear directly or indirectly. THE
EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE PERFORMANCE
OR EXPENSES, AND ACTUAL ANNUAL RETURNS AND EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN. For more information on each Fund's expenses, see "The Funds And
Their Management" and "How To Buy Shares - Distribution Expenses."
Because each Fund pays a Rule 12b-1 distribution fee, investors who own
shares of the Funds for a long period of time may pay more than the economic
equivalent of the maximum front-end sales charge permitted for mutual funds by
the National Association of Securities Dealers, Inc.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a Fund Share Outstanding Throughout Each Period)
The following information has been audited by PricewaterhouseCoopers LLP,
independent accountants. This information should be read in conjunction with the
audited financial statements and the Report of Independent Accountants thereon
appearing in the ^ Company's 1998 Annual Report to Shareholders, which is
incorporated by reference into the Statement of Additional Information. Both are
available without charge by contacting IDI at the address or telephone number on
the back cover of this Prospectus. The Annual Report also contains more
information about each Fund's performance.
<TABLE>
<CAPTION>
Period
Ended
Year Ended August 31 August 31 Year Ended December 31
--------------------------------------- ------- --------------------------------------------
1998 1997 1996 1995 1994 1993(a) 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High Yield Fund
PER SHARE DATA
Net Asset Value -
Beginning of Period $7.45 $6.84 $6.73 $6.73 $7.32 $6.97 $6.66 $6.00 $7.16 $7.82
--------------------------------------- ------- --------------------------------------------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.64 0.62 0.63 0.66 0.62 0.39 0.64 0.70 0.83 0.95
Net Gains or (Losses) on
Securities (Both Realized
and Unrealized) (0.29) 0.64 0.11 0.03 (0.59) 0.36 0.30 0.64 (1.14) (0.66)
--------------------------------------- ------- --------------------------------------------
Total from Investment
Operations 0.35 1.26 0.74 0.69 0.03 0.75 0.94 1.34 (0.31) 0.29
--------------------------------------- ------- --------------------------------------------
LESS DISTRIBUTIONS
Dividends from Net
Investment Income(b) 0.64 0.62 0.63 0.66 0.62 0.40 0.63 0.68 0.85 0.95
Distributions from
Capital Gains 0.40 0.03 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
In Excess of Capital Gains 0.00 0.00 0.00 0.03 0.00 0.00 0.00 0.00 0.00 0.00
--------------------------------------- ------- --------------------------------------------
Total Distributions 1.04 0.65 0.63 0.69 0.62 0.40 0.63 0.68 0.85 0.95
--------------------------------------- ------- --------------------------------------------
Net Asset Value -
End of Period $6.76 $7.45 $6.84 $6.73 $6.73 $7.32 $6.97 $6.66 $6.00 $7.16
======================================= ======= ============================================
TOTAL RETURN 4.44% 19.27% 11.38% 11.12% 0.37% 11.01%(c) 14.53% 23.51% (4.57%) 3.72%
RATIOS
Net Assets - End of Period
($000 Omitted) $641,394 $470,965 $375,201 $288,959 $243,773 $308,945 $212,172 $99,103 $40,380 $49,017
Ratio of Expenses to
Average Net Assets(d) 0.86%(e) 1.00%(e) 0.99%(e) 1.00% 0.97% 0.97%(f) 1.00% 1.05% 0.94% 0.83%
Ratio of Net Investment
Income to Average
Net Assets(d) 8.72% 8.71% 9.13% 10.01% 8.70% 8.28%(f) 9.29% 10.57% 12.57% 12.27%
Portfolio Turnover Rate 282% 129% 266% 201% 195% 45%(c) 120% 64% 28% 53%
</TABLE>
<PAGE>
(a) From January 1, 1993 to August 31, 1993.
(b) Distributions in excess of net investment income for the year ended August
31, 1996, aggregated less than $0.01 on a per share basis.
(c) Based on operations for the period shown and, accordingly, are not
representative of a full year.
(d) Various expenses of the Fund were voluntarily absorbed by INVESCO for the
years ended August 31, 1996, 1995 and 1994. If such expenses had not been
voluntarily absorbed, ^ Ratio of Expenses to Average Net Assets would have been
0.99%, 1.07% and 0.98%, respectively, and ^ Ratio of Net Investment Income to
Average Net Assets would have been 9.13%, 9.94% and 8.69%, respectively.
(e) Ratio is based on Total Expenses of the Fund, less Expenses Absorbed by
Investment Adviser, if applicable, which is before any expense offset
arrangements.
(f) Annualized
<TABLE>
<CAPTION>
Period
Ended
Year Ended August 31 August 31 Year Ended December 31
----------------------------------------------- ------- -------------------------------------
1998 1997 1996 1995 1994 1993(a) 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Select Income Fund
PER SHARE DATA
Net Asset Value -
Beginning of Period $6.66 $6.35 $6.54 $6.18 $6.80 $6.53 $6.50 $5.96 $6.26 $6.39
----------------------------------------------- ------- -------------------------------------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.43 0.45 0.47 0.47 0.47 0.33 0.52 0.53 0.59 0.63
Net Gains or (Losses) on
Securities (Both Realized
and Unrealized) 0.19 0.34 (0.17) 0.36 (0.43) 0.27 0.13 0.53 (0.30) (0.13)
----------------------------------------------- ------- -------------------------------------
Total from Investment
Operations 0.62 0.79 0.30 0.83 0.04 0.60 0.65 1.06 0.29 0.50
----------------------------------------------- ------- -------------------------------------
LESS DISTRIBUTIONS
Dividends from Net
Investment Income 0.43 0.45 0.46 0.47 0.47 0.33 0.52 0.52 0.59 0.63
In Excess of Net
Investment Income(b) 0.00 0.00 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distributions from
Capital Gains 0.17 0.03 0.02 0.00 0.09 0.00 0.10 0.00 0.00 0.00
In Excess of Capital Gains 0.00 0.00 0.00 0.00 0.10 0.00 0.00 0.00 0.00 0.00
----------------------------------------------- ------- -------------------------------------
Total Distributions 0.60 0.48 0.49 0.47 0.66 0.33 0.62 0.52 0.59 0.63
------------------------------------------------ ------- -------------------------------------
Net Asset Value -
End of Period $6.68 $6.66 $6.35 $6.54 $6.18 $6.80 $6.53 $6.50 $5.96 $6.26
================================================ ======= =====================================
TOTAL RETURN 9.58% 12.89% 4.78% 14.01% 0.47% 9.42%(c) 10.38% 18.57% 4.86% 8.17%
<PAGE>
RATIOS
Net Assets - End of Period
($000 Omitted) $502,624 $287,618 $258,093 $216,597 $138,337 $158,780 $123,036 $93,827 $46,423 $32,783
Ratio of Expenses to
Average Net Assets(d) 1.06%(e) 1.03%(e) 1.01%(e) 1.00% 1.11% 1.15%(f) 1.14% 1.15% 1.01% 0.99%
Ratio of Net Investment
Income to Average
Net Assets(d) 6.36% 6.98% 7.14% 7.38% 7.22% 7.40%(f) 7.97% 8.57% 9.67% 9.92%
Portfolio Turnover Rate 140% 263% 210% 181% 135% 105%(c) 178% 117% 38% 121%
</TABLE>
(a) From January 1, 1993 to August 31, 1993.
(b) Distributions in excess of net investment income for the year ended August
31, 1995, aggregated less than $0.01 on a per share basis.
(c) Based on operations for the period shown and, accordingly, are not
representative of a full year.
(d) Various expenses of the Fund were voluntarily absorbed by INVESCO for the
years ended August 31, 1998, 1997, 1996, 1995 and 1994. If such expenses had not
been voluntarily absorbed, ^ Ratio of Expenses to Average Net Assets would have
been 1.10%, 1.21%, 1.16%, 1.22% and 1.15%, respectively, and ^ Ratio of Net
Investment Income to Average Net Assets would have been 6.32%, 6.80%, 6.99%,
7.16% and 7.18%, respectively.
(e) Ratio is based on Total Expenses of the Fund, less Expenses Absorbed by
Investment Adviser, which is before any expense offset arrangements.
(f) Annualized
<PAGE>
<TABLE>
<CAPTION>
Period
Ended
Year Ended August 31 August 31 Year Ended December 31
----------------------------------------------- ------- --------------------------------------
1998 1997 1996 1995 1994 1993(a) 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Securities Fund
PER SHARE DATA
Net Asset Value -
Beginning of Period $7.49 $7.15 $7.49 $7.10 $8.19 $7.61 $7.65 $7.09 $7.14 $6.87
----------------------------------------------- ------- --------------------------------------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.40 0.43 0.44 0.45 0.41 0.28 0.46 0.48 0.53 0.56
Net Gains or (Losses)on
Securities (Both Realized
and Unrealized) 0.67 0.34 (0.34) 0.39 (0.93) 0.58 (0.04) 0.57 (0.05) 0.26
----------------------------------------------- ------- --------------------------------------
Total from Investment
Operations 1.07 0.77 0.10 0.84 (0.52) 0.86 0.42 1.05 0.48 0.82
----------------------------------------------- ------- --------------------------------------
LESS DISTRIBUTIONS
Dividends from Net
Investment Income 0.40 0.43 0.43 0.45 0.41 0.28 0.46 0.49 0.53 0.55
In Excess of Net
Investment Income(b) 0.00 0.00 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distributions from
Capital Gains 0.17 0.00 0.00 0.00 0.16 0.00 0.00 0.00 0.00 0.00
----------------------------------------------- ------- --------------------------------------
Total Distributions 0.57 0.43 0.44 0.45 0.57 0.28 0.46 0.49 0.53 0.55
Net Asset Value -
End of Period $7.99 $7.49 $7.15 $7.49 $7.10 $8.19 $7.61 $7.65 $7.09 $7.14
=============================================== ======= ======================================
TOTAL RETURN 14.75% 11.01% 1.31% 12.37% (6.53%) 11.61%(c) 5.68% 15.56% 7.23% 12.40%
RATIOS
Net Assets - End of Period
($000 Omitted) $79,485 $51,581 $54,614 $38,087 $36,740 $36,391 $35,799 $29,229 $21,247 $19,293
Ratio of Expenses to
Average Net Assets(d) 1.01%(e) 1.01%(e) 1.02%(e) 1.00% 1.32% 1.40%(f) 1.27% 1.27% 1.07% 1.04%
Ratio of Net Investment
Income to Average
Net Assets# 5.22% 5.78% 5.76% 6.24% 5.46% 5.36%(f) 6.08% 6.78% 7.58% 7.98%
Portfolio Turnover Rate 323% 139% 212% 99% 95% 100%(c) 115% 67% 38% 159%
</TABLE>
<PAGE>
(a) From January 1, 1993 to August 31, 1993.
(b) Distributions in excess of net investment income for the year ended August
31, 1995, aggregated less than $0.01 on a per share basis.
(c) Based on operations for the period shown and, accordingly, are not
representative of a full year.
(d) Various expenses of the Fund were voluntarily absorbed by INVESCO for the
years ended August 31, 1998, 1997, 1996, 1995 and 1994. If such expenses had not
been voluntarily absorbed, ^ Ratio of Expenses to Average Net Assets would have
been 1.41%, 1.32%, 1.48%, 1.51% and 1.42%, respectively, and ^ Ratio of Net
Investment Income to Average Net Assets would have been 4.82%, 5.47%, 5.30%,
5.73% and 5.36%, respectively.
(e) Ratio is based on Total Expenses of the Fund, less Expenses Absorbed by
Investment Adviser, which is before any expense offset arrangements.
(f) Annualized
INVESTMENT OBJECTIVE AND STRATEGY
The High Yield Fund seeks to achieve as high a level of current income as
is consistent with the risk involved in investing substantially all of its
assets in bonds and other debt securities and in preferred stocks. The Select
Income Fund seeks as high a level of current income as is consistent with the
risk involved in investing in bonds and marketable debt securities (including
convertible issues) of established companies. The U.S. Government Securities
Fund seeks a high level of income by investing in bonds and other debt
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities, and in repurchase agreements and futures contracts with
respect to such securities. Potential capital appreciation is a secondary factor
in the selection of investments for the Funds. Each Fund's investment objective
is fundamental and cannot be changed without the approval of that Fund's
shareholders. There is no assurance that a Fund's investment objective will be
met.
Portfolio Turnover. There are no fixed limitations regarding portfolio
turnover for the Funds; securities may be sold without regard to the time they
have been held when investment considerations warrant such action. Increased
turnover may result in greater brokerage commissions and acceleration of capital
gains that are taxable when distributed to shareholders. The Statement of
Additional Information includes an expanded discussion of each Fund's portfolio
turnover rate, its brokerage practices and certain federal income tax matters.
High Yield Fund
The Fund invests primarily in higher yielding corporate bonds (including
convertible issues) and preferred stocks with medium to lower credit ratings.
These securities are generally rated Ba or lower by Moody's Investors Services,
Inc. ("Moody's") or BB or lower by S&P. However, under no circumstances will the
Fund invest in any issue rated lower than Caa by Moody's or CCC by ^ Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"), or any issue that
is in default. Potential capital appreciation is a factor in the selection of
investments, but is secondary to the Fund's primary objective. (See "Investment
Policies And Risks" below and the Appendix to this Prospectus for a description
of bond ratings.)
<PAGE>
The Fund also may invest in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities (which may or may not be backed by
the full faith and credit of the United States) and bank certificates of
deposit. In addition, the Fund may invest in corporate short-term notes rated at
least A-1 by S&P or Prime-1 by Moody's. In addition, the Fund may invest in
municipal obligations, including municipal short-term notes rated at least SP-1
by S&P or MIG-1 by Moody's, when we believe that their potential returns are
better than those that might be achieved by investing in securities of corporate
or U.S. governmental issuers.
As a matter of policy, which may be changed without a vote of shareholders,
at least 65% of the Fund's total assets normally will be invested in debt
securities maturing at least three years after they are issued. However, there
are no limitations on the maturities of the securities held by the Fund, and the
Fund's average maturity will vary as INVESCO responds to changes in interest
rates.
Select Income Fund
The Fund normally invests at least 90% of its assets in bonds and
marketable debt securities (including convertible issues) of established
companies which INVESCO believes may provide high current income and which,
consistent with this objective, may have the potential to provide capital
appreciation. Under normal circumstances, at least 50% of the Fund's assets are
invested in investment grade debt securities -- those rated Baa or higher by
Moody's ^ or BBB or higher by ^ S&P. No more than 50% of the Fund's assets may
consist of corporate bonds rated below investment grade. (See the Appendix to
this Prospectus for a description of bond ratings.)
The Fund also may invest in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities (which may or may not be backed by
the full faith and credit of the United States) and bank certificates of
deposit. In addition, the Fund may invest in municipal obligations when we
believe that their potential returns are better than those that might be
achieved by investing in securities of corporate or U.S. governmental issuers.
As a matter of policy, which may be changed without a vote of shareholders,
at least 65% of the Fund's total assets normally will be invested in debt
securities maturing at least three years after they are issued. However, there
are no limitations on the maturities of the securities held by the Fund, and the
Fund's average maturity will vary as INVESCO responds to changes in interest
rates.
<PAGE>
U.S. Government Securities Fund
The Fund invests substantially all (and in no event less than 65%) of its
assets in government and government agency or government instrumentality debt
securities (including mortgage-backed securities issued or guaranteed by
government agencies or government-sponsored enterprises), government agency and
instrumentality securities. Some of these portfolio holdings --Treasury bonds,
bills, and notes -- may be issued directly by the U.S. government and are backed
by the full faith and credit of the federal government. Similar protection is
offered by securities of certain agencies, which include, among others, the
Government National Mortgage Association ^("GNMA"), the Department of Housing
and Urban Development, the Small Business Administration, and the Farmers' Home
Administration. In addition, the Fund may hold U.S. government agency securities
not supported by the U.S. government, but only by the creditworthiness of the
government-related issuer. These include securities issued by Fannie Mae
(formerly, the Federal National Mortgage Association), the Federal Home Loan
Mortgage Corporation ("Freddie Mac"), the Federal Home Loan Banks, the
Resolution Funding Corporation and the Student Loan Marketing Association. The
value of the Fund's shares is not guaranteed by the U.S. government.
As a matter of policy, which may be changed without a vote of shareholders,
at least 65% of the Fund's total assets normally will be invested in debt
securities maturing at least three years after they are issued. However, there
are no limitations on the maturities of the securities held by the Fund, and the
Fund's average maturity will vary as INVESCO responds to changes in interest
rates.
When we believe market or economic conditions are adverse, the High Yield,
Select Income and U.S. Government Funds may assume a defensive position by
temporarily investing up to 100% of their respective assets in cash and debt
securities having maturities of less than three years at the time of issuance,
seeking to protect their assets until conditions stabilize.
INVESTMENT POLICIES AND RISKS
Investors generally should expect to see the price per share of a Fund vary
with movements in the fixed-income market, changes in economic conditions and
other factors. With respect to the High Yield and Select Income Funds, INVESCO
seeks to temper volatility by having each Fund invest in many different
securities and industries. This diversification may help reduce a Fund's
exposure to particular investment and market risks, but cannot eliminate these
risks.
Year 2000 Computer Issue. Due to the fact that many computer systems in use
today cannot recognize the Year 2000, but will, unless corrected, revert to 1900
or 1980 or cease to function at that time, the markets for securities in which
the Funds invest may be detrimentally affected by computer failures affecting
portfolio investments or trading of securities beginning January 1, 2000.
Improperly functioning trading systems may result in settlement problems and
liquidity issues. In addition, corporate and governmental data processing errors
may result in production issues for individual companies and overall economic
uncertainties. Earnings of individual issuers may be affected by remediation
costs, which may be substantial. The Funds' investments may be adversely
affected.
<PAGE>
Debt Securities. The High Yield and Select Income Funds may invest in
corporate debt securities. The U.S. Government Securities Fund may invest in
debt securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities. When we assess an issuer's ability to meet its interest rate
obligations and repay its debt when due, we are referring to "credit risk." Debt
securities issued by the U.S. government, its agencies and instrumentalities
carry a low level of credit risk compared to higher yielding corporate bonds.
Corporate debt obligations are rated based on their credit risk as estimated by
independent services such as Moody's, S&P, Fitch Investors Service, Inc.
("Fitch") or Duff & Phelps, Inc. ("D&P"). These ratings attempt to evaluate the
likelihood that principal and interest will be paid when due, but do not
evaluate the volatility of a debt obligation's value or its liquidity and do not
guarantee the performance of the issuer. "Market risk" refers to sensitivity to
changes in interest rates. For instance, when interest rates go up, the market
value of a previously issued bond generally declines; on the other hand, when
interest rates go down, bond prices generally increase. All bonds, including
government, government agency and government instrumentality securities, are
subject to market risk.
The High Yield and Select Income Funds may invest in issues rated below
investment grade quality (commonly called "junk bonds"), that is, rated Ba or
lower by Moody's or BB or lower by S&P, or, if unrated, are judged by INVESCO to
be of equivalent quality. These include issues which are of poorer quality and
may have some speculative characteristics according to the ratings services.
Risks of Lower Rated Bonds. The lower a bond's quality, the more it is
believed by the rating service to be subject to credit risk and market risk and
the more speculative it becomes; this is also true of most unrated securities.
To reduce these risks, at least 50% of the Select Income Fund's assets normally
are invested in debt securities rated Baa or above by Moody's or BBB or above by
S&P. In addition, the Select Income Fund may invest in corporate short-term
notes rated at least Prime-1 by Moody's or A-1 by S&P. Overall, these bonds and
notes enjoy strong to adequate capacity to pay principal and interest.
No more than 50% of the Select Income Fund's assets may be invested in junk
bonds. Investments in unrated securities may not exceed 25% of the Select Income
Fund's total assets. Never, under any circumstances, is the Select Income Fund
permitted to invest in bonds which are rated below B by Moody's or B- by S&P.
Bonds rated below B or B- generally lack characteristics of a desirable
investment and are deemed speculative with respect to the issuer's capacity to
pay interest and repay principal over a long period of time.
Because the High Yield Fund normally invests primarily in junk bonds, the
securities held by this Fund generally will be subject to greater credit and
market risks. Never, under any circumstances, is the High Yield Fund permitted
to invest in bonds that are in default or are rated below Caa by Moody's or CCC
by S&P or, if unrated, are judged by INVESCO to be of equivalent quality. Bonds
rated Caa or CCC are predominantly speculative and may be in default or may have
present elements of danger with respect to the repayment of principal or
interest.
While INVESCO continuously monitors all of the corporate bonds in each
Fund's portfolio for the issuer's ability to make required principal and
interest payments and other quality factors, it may retain a bond whose rating
is changed to one below the minimum rating required for purchase of the
security. A Fund is not required to sell immediately debt securities that go
into default, but may continue to hold such securities until such time as
INVESCO determines it is in the best interests of the Fund to sell the
securities.
<PAGE>
Because investment in medium and lower rated securities involves both
greater credit risk and market risk, achievement of each Fund's investment
objective may be more dependent on INVESCO's own credit analysis than is the
case for funds investing in higher quality securities. In addition, the share
price and yield of each Fund may be expected to fluctuate more than in the case
of funds investing in higher quality, shorter term securities. Moreover, a
significant economic downturn or major increase in interest rates may result in
issuers of lower rated securities experiencing increased financial stress, which
would adversely affect their ability to service their principal, dividend and
interest obligations, meet projected business goals, and obtain additional
financing. In this regard, it should be noted that while the market for high
yield corporate bonds has been in existence for many years and from time to time
has experienced economic downturns, there has been a significant increase in the
use of high yield corporate debt securities to fund highly leveraged corporate
acquisitions and restructurings. Past experience may not, therefore, provide an
accurate indication of future performance of the high yield bond market,
particularly during periods of economic recession. Furthermore, expenses
incurred to recover an investment in a defaulted security may adversely affect a
Fund's net asset value. Finally, while INVESCO attempts to limit purchases of
medium and lower rated securities to securities having an established secondary
market, the secondary market for such securities may be less liquid than the
market for higher quality securities. The reduced liquidity of the secondary
market for such securities may adversely affect the market price of, and ability
of a Fund to value, particular securities at certain times, thereby making it
difficult to make specific valuation determinations.
For the fiscal year ended August 31, 1998, the following percentages of
High Yield and Select Income Funds' total net assets were invested in corporate
bonds rated investment grade (Baa by Moody's or BBB by S&P and above) at the
time they were purchased: Aaa/AAA--0.00%; Aa/AA--0.00%; A--0.00% and
Baa/BBB--0.68% for the High Yield Fund and Aaa/AAA--7.03%; Aa/AA--0.78%;
A--16.05% and Baa/BBB--34.19% for the Select Income Fund. The following
percentages were invested in corporate bonds rated below investment grade at the
time of purchase: Ba/BB--7.79%; B--66.87%; Caa/CCC--3.27% and D--0.00% for the
High Yield Fund and Ba/BB--20.77; B--16.24%; Caa/CCC--0.00% and D--0.00% for the
Select Income Fund. Finally, 7.02% and 1.56% of total assets were invested in
unrated corporate bonds for the High Yield and Select Income Funds,
respectively. All of these percentages were determined on a dollar-weighted
basis, calculated by averaging each Fund's month-end portfolio holdings during
the fiscal year. Keep in mind that a Fund's holdings are actively traded, and
bond ratings are occasionally adjusted by ratings services, so these figures do
not represent each Fund's actual holdings or quality ratings as of August 31,
1998.
For a detailed description of corporate bond ratings, see the Appendix to
this Prospectus.
Foreign Securities. The High Yield and Select Income Funds' investments in
debt obligations may include securities issued by foreign governments and
foreign corporations. As a matter of policy, which may be changed without a vote
of shareholders, up to 25% of each Fund's total assets, measured at the time of
purchase, may be invested directly in foreign debt securities, provided that all
such securities are denominated and pay interest in U.S. dollars (such as
Eurobonds and Yankee bonds). Securities of Canadian issuers and American
Depository Receipts ("ADRs") are not subject to this 25% limitation. ADRs are
receipts representing shares of a foreign corporation held by a U.S. bank that
entitles the holder to all dividends and capital gains. ADRs are denominated in
U.S. dollars and trade in the U.S. securities markets. Investments in foreign
debt securities involve certain risks.
<PAGE>
For U.S. investors, the returns on foreign debt securities are influenced
not only by the returns on the foreign investments themselves, but also by
currency fluctuations. That is, when the U.S. dollar generally rises against a
foreign currency, returns for a U.S. investor on foreign securities may
decrease. By contrast, in a period when the U.S. dollar generally declines,
those returns may increase. Each Fund attempts to minimize these risks by
limiting its investments in foreign debt securities to those which are
denominated and pay interest in U.S. dollars.
Other aspects of international investing to consider include:
-less publicly available information than is generally available about U.S.
issuers;
-differences in accounting, auditing and financial reporting standards;
-generally higher commission rates on foreign portfolio transactions and
longer settlement periods;
-smaller trading volumes and generally lower liquidity of foreign stock
markets, which may cause greater price volatility; and
-investment income on certain foreign currencies may be subject to foreign
withholding taxes, which may reduce dividend income or capital gains payable to
shareholders.
There is also the possibility of expropriation or confiscatory taxation;
adverse changes in investment or exchange control regulations; political
instability; potential restrictions on the flow of international capital; and
the possibility that each Fund may experience difficulties in pursuing legal
remedies and collecting judgments.
ADRs are subject to some of the same risks as direct investments in foreign
securities, including the risk that material information about the issuer may
not be disclosed in the United States and the risk that currency fluctuations
may adversely affect the value of the ADR.
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"). The EMU has established a common European
currency for EMU countries which is known as the "euro." Each participating
country has adopted the euro as its currency effective January 1, 1999. The old
national currencies are sub-currencies of the euro until July 1, 2002, at which
time the old currencies will disappear entirely. Other European countries may be
permitted to join the EMU in the future.
<PAGE>
The introduction of the euro presents some uncertainties and possible
risks, including whether the payment and operational systems of banks and other
financial institutions will have been ready by January 1, 1999; the
establishment of exchange rates for existing currencies and the euro; and the
creation of suitable clearing and settlement systems for the euro. These and
other factors may cause market disruptions after January 1, 1999 and could
adversely affect the value of securities held by the Funds.
Illiquid and Rule 144A Securities. The High Yield Fund may invest up to 15%
of its net assets in securities that are illiquid because they are subject to
restrictions on resale ("restricted securities") or because they are not readily
marketable. The Fund may not be able to dispose of illiquid securities at the
time desired or at a reasonable price. In addition, if the securities are not
registered, their marketability and value could be adversely affected.
The Select Income Fund and U.S. Government Securities Fund may not purchase
securities that are not readily marketable. However, the Select Income and U.S.
Government Securities Funds may purchase certain securities that are not
registered for sale to the general public but that can be resold to
institutional investors ("Rule 144A Securities"), if a liquid trading market
exists. The Company's board of directors has delegated to INVESCO the authority
to determine the liquidity of Rule 144A Securities pursuant to guidelines
approved by the board. In the event that a Rule 144A Security held by a Fund is
subsequently determined to be illiquid, the security will be sold as soon as
that can be done in an orderly fashion consistent with the best interests of
such Fund's shareholders. For more information concerning ^ Rule 144A
Securities, see "Investment Policies And Restrictions" in the Statement of
Additional Information.
Zero Coupon Bonds and Pay-in-Kind Bonds. The High Yield and Select Income
Funds may invest in zero coupon bonds and payment-in-kind ("PIK") bonds if
INVESCO determines that the risk of a default on the security, which could
result in adverse tax consequences, is not significant. Zero coupon bonds make
no periodic interest payments. Instead, they are sold at a discount from their
face value. The buyer of the security receives the rate of return by the gradual
appreciation in the price of the security, which is redeemed at face value at
maturity. PIK bonds pay interest in cash or additional securities, at the
issuer's option, for a specified period. Zero coupon and PIK bonds are more
sensitive to changes in interest rates than bonds that pay interest on a current
basis in cash. When interest rates fall, the value of these types of bonds will
increase more rapidly, and when interest rates rise, their value falls more
dramatically. A Fund may be required to distribute income recognized on these
bonds, even though no cash interest payments are received, which could reduce
the amount of cash available for investment by such Fund.
Interest Rate Futures Contracts. The U.S. Government Securities Fund may
buy and sell interest rate futures contracts relating to the debt securities in
which the Fund invests for the purpose of hedging the value of its securities
portfolio. These practices and their risks are discussed under "Investment
Policies And Restrictions" in the Statement of Additional Information.
Mortgage-Backed Securities. The U.S. Government Securities Fund may invest
in mortgage-backed securities issued or guaranteed as to principal and interest
by the U.S. government, federal agencies or instrumentalities such as GNMA,
Fannie Mae and Freddie Mac. Some of these securities, such as GNMA certificates,
are backed by the full faith and credit of the U.S. Treasury while others, such
as FHLMC certificates, are not. Mortgage-backed securities represent interests
in pools of mortgages which have been purchased from loan institutions such as
banks and savings and loan associations, and packaged for resale in the
secondary market. Interest and principal are "passed through" to the holders of
the securities. The timely payment of interest and principal is guaranteed by a
federal agency, but the market value of the security is not guaranteed and will
vary. When interest rates drop, many home buyers choose to refinance their
mortgages. These prepayments may shorten the average weighted lives of
mortgage-backed securities and may lower their returns.
<PAGE>
Delayed Delivery or When-Issued Purchases. Up to 10% of the value of the
High Yield and Select Income Funds' net assets may be committed to the purchase
or sale of securities on a when-issued or delayed-delivery basis -- that is,
with settlement taking place in the future. The payment obligation and the
interest rate that will be received on the securities generally are fixed at the
time a Fund enters into the commitment. Between the date of purchase and the
settlement date, the market value of the securities may vary. No interest is
payable to a Fund prior to settlement.
Repurchase Agreements. Each Fund may invest money, for as short a time as
overnight, using repurchase agreements ("repos"). With a repo, a Fund buys a
debt instrument, agreeing simultaneously to sell it back to the prior owner at
an agreed-upon price and date. A Fund could incur costs or delays in seeking to
sell the security if the prior owner defaults on its repurchase obligation. To
reduce that risk, the securities that are the subject of the repurchase
agreement will be maintained with a Fund's custodian in an amount at least equal
to the repurchase price under the agreement (including accrued interest). These
agreements are entered into only with member banks of the Federal Reserve
System, registered brokers and dealers, and registered U.S. government
securities dealers that are deemed creditworthy under standards set by the
Company's board of directors.
Securities Lending. Each Fund may seek to earn additional income by lending
securities to qualified brokers, dealers, banks, or other financial
institutions, on a fully collateralized basis. For further information on this
policy, see "Investment Policies And Restrictions" in the Statement of
Additional Information.
Investment Restrictions. Certain restrictions, which are identified in the
Statement of Additional Information, may not be altered without the approval of
each Fund's shareholders. For example, each Fund limits to 5% the portion of its
respective total assets that may be invested in any one issuer (other than cash
items and U.S. government securities). In addition, each Fund's ability to
borrow money is limited to borrowings from banks for temporary or emergency
purposes in amounts not exceeding 10% of net assets.
For a further discussion of risks associated with an investment in each
Fund, see "Investment Policies And Restrictions" and "Investment Practices" in
the Statement of Additional Information.
THE FUNDS AND THEIR MANAGEMENT
The Company is a no-load mutual fund, registered with the Securities and
Exchange Commission as an open-end, diversified, management investment company.
It was incorporated on August 20, 1976, under the laws of Colorado 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.
The Company's board of directors has responsibility for overall supervision
of the Funds, and reviews the services provided by the investment adviser. Under
an agreement with the Company, INVESCO, 7800 E. Union Avenue, Denver, Colorado
80237, serves as each Fund's investment adviser; it is primarily responsible for
providing the Funds with portfolio management and various administrative
services.
INVESCO and IDI are indirect, wholly-owned subsidiaries of AMVESCAP PLC.
AMVESCAP PLC is a publicly-traded holding company that, through its
subsidiaries, engages in the business of investment management on an
international basis. INVESCO PLC changed its name to AMVESCO PLC on March 3,
1997 and to AMVESCAP PLC on May 8, 1997, as part of a merger between a direct
subsidiary of INVESCO PLC and A I M Management Group Inc., that created one of
the largest investment management businesses in the world. AMVESCAP PLC had
approximately $241 billion in assets under management as of September 30, 1998.
INVESCO was established in 1932 and, as of August 31, 1998, managed 14 mutual
funds, consisting of 49 separate portfolios, with combined assets of
approximately $17.1 billion on behalf of over 899,439 shareholders.
<PAGE>
Prior to February 3, 1998, Institutional Trust Company, doing business as
INVESCO Trust Company ("ITC"), provided sub-advisory services to the Funds;
termination of ITC's sub-advisory services in no way changed the basis upon
which investment advice is provided to the Funds, the cost of those services to
the Funds or the persons actually performing the investment advisory and other
services previously provided by ITC. INVESCO provides such day-to-day portfolio
management services.
The Funds are managed by members of the INVESCO Fixed Income Team, which is
headed by Donovan J. (Jerry) Paul. The following individuals are primarily
responsible for the day-to-day management of the Fund's portfolio holdings:
Donovan J. (Jerry) Paul, a Chartered Financial Analyst and Certified Public
Accountant, has been the portfolio manager of the Select Income Fund since 1994
and the portfolio manager of the High Yield Fund since 1994. Mr. Paul also
manages the INVESCO VIF-High Yield Fund and co-manages the INVESCO Short-Term
Bond Fund, INVESCO Industrial Income Fund, INVESCO VIF-Industrial Income Fund,
and INVESCO Balanced Fund. Mr. Paul is also a senior vice president, portfolio
manager, and director of fixed-income research of INVESCO. Mr. Paul was
previously a senior vice president and director of fixed-income research (1989
to 1992) and portfolio manager (1987 to 1992) with Stein, Roe & Farnham Inc. and
president of Quixote Investment Management, Inc. (1993 to 1994). Mr. Paul
received an M.B.A. from the University of Northern Iowa and a B.B.A. from the
University of Iowa.
Richard R. Hinderlie has been the portfolio manager of the INVESCO U.S.
Government Securities Fund since 1994. Mr. Hinderlie also manages INVESCO U.S.
Government Money Fund and INVESCO Cash Reserves Fund and co-manages the INVESCO
Short-Term Bond Fund, and is a vice president of INVESCO. Mr. Hinderlie was
previously a securities analyst with Bank Western from 1987 to 1993. Mr.
Hinderlie received an M.B.A. from Arizona State University and a B.A. in
Economics from Pacific Lutheran University.
INVESCO permits investment and other personnel to purchase and sell
securities for their own accounts, subject to a compliance policy governing
personal investing. This policy requires INVESCO's personnel to conduct their
personal investment activities in a manner that INVESCO believes is not
detrimental to the Fund or INVESCO's other advisory clients. See the Statement
of Additional Information for more detailed information.
<PAGE>
Each Fund pays INVESCO a monthly management fee which is based upon a
percentage of each Fund's average net assets determined daily. With respect to
the Select Income and U.S. Government Securities Funds, the management fee is
computed at the annual rate of 0.55% on the first $300 million of each Fund's
average net assets; 0.45% on the next $200 million of each Fund's average net
assets; and 0.35% on each Fund's average net assets over $500 million. With
respect to the High Yield Fund, the management fee is computed at the annual
rate of 0.50% on the first $300 million of the Fund's average net assets; 0.40%
on the next $200 million of the Fund's average net assets; and 0.30% on the
Fund's average net assets over $500 million. For the fiscal year ended August
31, 1998, investment management fees paid by the High Yield, Select Income and
U.S. Government Securities Funds amounted to 0.42%, 0.53% and 0.55%,
respectively, of each Fund's average net assets (prior to the voluntary
absorption of certain Fund expenses by INVESCO).
Under a Distribution Agreement, IDI provides services relating to the
distribution and sale of the Funds' shares. IDI, established in 1997, is a
registered broker-dealer that acts as distributor for all retail funds advised
by INVESCO. Prior to September 30, 1997, INVESCO served as the Funds'
distributor.
Under a Transfer Agency Agreement, INVESCO acts as registrar, transfer
agent, and dividend disbursing agent for the Funds. Each Fund pays an annual fee
of $26.00 per shareholder account or where applicable, per participant in an
omnibus account. Registered broker-dealers, third party administrators of
tax-qualified retirement plans and other entities, including affiliates of
INVESCO, may provide equivalent services to the Funds. In these cases, INVESCO
may pay, out of the fee it receives from the Funds, an annual sub-transfer
agency fee or recordkeeping fee to the third party.
Under an Administrative Services Agreement, INVESCO handles additional
administrative, recordkeeping and internal sub-accounting services for the
Funds. For the fiscal year ended August 31, 1998, the Funds paid INVESCO a fee
equal to the following percentages of each Fund's average net assets (prior to
the absorption of certain Fund expenses): High Yield Fund, 0.02%; Select Income
Fund, 0.02% and U.S. Government Securities Fund, 0.03%.
The management and custodial services provided to the Funds by INVESCO and
the Funds' custodian, and the services provided to shareholders by INVESCO and
IDI, depend on the continued functioning of their computer systems. Many
computer systems in use today cannot recognize the Year 2000, but will revert to
1900 or 1980 or will cease to function due to the manner in which dates were
encoded and are calculated. That failure could have a negative impact on the
handling of each Funds' securities trades, their share pricing and account
services. The Funds and their service providers have been actively working on
necessary changes to their computer systems to deal with the Year 2000 issue and
expect that their systems will be adapted before that date, but there can be no
assurance that they will be successful. Furthermore, services may be impaired at
that time as a result of the interaction of their systems with the noncomplying
computer systems of others. INVESCO plans to test as many such interactions as
practicable prior to December 31, 1999 and to develop contingency plans for
reasonably anticipated failures.
Each Fund's expenses, which are accrued daily, are deducted from total
income before dividends are paid. Total expenses of each Fund (prior to any
expense offset arrangements) for the fiscal year ended August 31, 1998,
including investment management fees (but excluding brokerage commissions, which
are a cost of acquiring securities), amounted to the following percentages of
each Fund's average net assets: High Yield Fund, 0.86%, Select Income Fund,
1.06%, and U.S. Government Securities Fund, 1.01%. Certain expenses of the
Select Income, High Yield and U.S. Government Securities Funds are absorbed
voluntarily by INVESCO pursuant to a commitment to each Fund to ensure that each
Fund's total operating expenses do not exceed the following percentages of each
Fund's average net assets: High Yield Fund, 1.25%; Select Income Fund, 1.05% and
U.S. Government Securities Fund, 1.00%. These commitments may be changed
following consultation with the Company's board of directors. In the absence of
this voluntary expense limitation, each Fund's total operating expenses would
have been 1.10% and 1.41% of their average net assets for Select Income and U.S.
Government Securities Funds, respectively.
<PAGE>
INVESCO places orders for the purchase and sale of portfolio securities
with brokers and dealers based upon INVESCO's evaluation of such brokers' and
dealers' financial responsibility coupled with their ability to effect
transactions at the best available prices. As discussed under "How To Buy Shares
- -- Distribution Expenses," each Fund may market its shares through intermediary
brokers or dealers that have entered into Dealer Agreements with INVESCO or IDI,
as the Funds' distributor. A Fund may place orders for portfolio transactions
with qualified brokers and dealers that recommend the Fund, or sell shares of
the Fund, to clients, or act as agent in the purchase of Fund shares for
clients, if INVESCO believes that the quality of the execution of the
transaction and level of commission are comparable to those available from other
qualified brokerage firms. For further information, see "Investment Practices --
Placement of Portfolio Brokerage" in the Statement of Additional Information.
FUND PRICE AND PERFORMANCE
Determining Price. The value of your investment in the Funds may vary
daily. The price per share is also known as the Net Asset Value ("NAV"). INVESCO
prices each Fund every day that the New York Stock Exchange is open, as of the
close of regular trading (generally, 4:00 p.m., New York time). NAV is
calculated by adding together the current market value of all of a Fund's
assets, including accrued interest and dividends; subtracting liabilities,
including accrued expenses; and dividing that dollar amount by the total number
of shares outstanding.
Performance Data. To keep shareholders and potential investors informed, we
will occasionally advertise each Fund's total return and yield. Total return
figures show the average annual rate of return on a $1,000 investment in a Fund,
assuming reinvestment of all dividends and capital gain distributions for one-,
five- and ten-year periods. Cumulative total return shows the actual rate of
return on an investment for the periods 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.
With respect to the High Yield and Select Income Funds, the yield is
calculated by utilizing the Fund's calculated income, expenses and average
outstanding shares for the most recent 30-day or one-month period, dividing it
by the month-end net asset value and annualizing the resulting number. With
respect to the U.S. Government Securities Fund, the yield is computed by
dividing the net investment income per share earned during the period by the net
asset value per share at the end of the period, then adjusting the result to
provide for semi-annual compounding. More information about each Fund's recent
and historical performance is contained in the Company's Annual Report to
Shareholders. You can get a free copy by calling or writing to IDI using the
telephone number or address on the back cover of this Prospectus.
When we quote mutual fund rankings published by Lipper Analytical Services,
Inc., we may compare each Fund to others in their category of Corporate Bond
Funds -- High Current Yield Funds for the High Yield Fund, BBB rated for the
Select Income Fund and U.S. Government Funds for the U.S. Government Securities
Fund, as well as the broad-based Lipper general fund groupings. These rankings
allow you to compare each Fund to its peers. Other independent financial media
also produce performance- or service-related comparisons, which you may see in
our promotional materials. For more information see "Fund Performance" in the
Statement of Additional Information.
<PAGE>
Performance figures are based on historical investment results and are not
intended to suggest future performance.
HOW TO BUY SHARES
The following chart shows several convenient ways to invest in a Fund. Your
new Fund shares will be priced at the NAV next determined after your order is
received in proper form. There is no charge to invest, exchange, or redeem
shares when you make transactions directly through INVESCO. However, if you
invest in a Fund through a securities broker, you may be charged a commission or
transaction fee. INVESCO may from time to time make payments from its revenues
to securities dealers and other financial institutions that provide
distribution-related and/or administrative services for the Funds. For all new
accounts, please send a completed application form. Please specify which Fund's
shares you wish to purchase.
INVESCO reserves the right to increase, reduce or waive the minimum
investment requirements in its sole discretion, when it determines this action
is in the best interests of a Fund. Further, INVESCO reserves the right in its
sole discretion to reject any order for the purchase of Fund shares (including
purchases by exchange) when, in its judgment, such rejection is in a Fund's best
interests.
<TABLE>
<CAPTION>
HOW TO BUY SHARES
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<S> <C> <C>
Method Investment Minimum Please Remember
- ---------------------------------------------------------------------------------------------------
By Check
Mail to: INVESCO $1,000 for regular If your check does
Funds Group, Inc. account; $250 for not clear, you will
P.O. Box 173706 an IRA; $50 minimum be responsible for
Denver, CO for each subsequent any related loss a
80217-3706. Or you investment. Fund or INVESCO
may send your check incurs. If you are
by overnight already a
courier to: 7800 E. shareholder in the
Union Ave., Denver, INVESCO funds, a
CO 80237. Fund may seek
reimbursement from
your existing
account(s) for any
loss incurred.
- ---------------------------------------------------------------------------------------------------
<PAGE>
- ---------------------------------------------------------------------------------------------------
By Telephone or
Wire
Call 1-800-525-8085 $1,000. Payment must be
to request your received within 3
purchase. Then send business days, or
your check by the transaction may
overnight courier be canceled. If a
to our street purchase is
address: 7800 E. canceled due to
Union Ave., Denver, nonpayment, you
CO 80237. Or you will be responsible
may transmit your for any related
payment by bank loss a Fund or
wire (call INVESCO INVESCO incurs. If
for instructions). you are already a
shareholder in the
INVESCO funds, a
Fund may
seek
reimbursement
from your
existing
account(s) for
any loss
incurred.
- ---------------------------------------------------------------------------------------------------
With EasiVest or
Direct Payroll
Purchase
You may enroll on $50 per month for Like all regular
the fund EasiVest; $50 per investment plans,
application, or pay period for neither EasiVest
call us for the Direct Payroll nor Direct Payroll
correct form and Purchase. You may Purchase ensures a
more details. start or stop your profit or protects
Investing the same regular investment against loss in a
amount on a monthly plan at any time, falling market.
basis allows you to with two weeks' Because you'll
buy more shares notice to INVESCO. invest continually,
when prices are low regardless of
and fewer shares varying price
when prices are levels, consider
high. This your financial
"dollar-cost ability to keep
averaging" may help buying through low
offset market price levels. And
fluctuations. Over remember that you
a period of time, will lose money if
your average cost you redeem your
per share may be shares when the
less than the market value of all
actual average your shares is less
price per share. than their cost.
- ---------------------------------------------------------------------------------------------------
<PAGE>
- ---------------------------------------------------------------------------------------------------
By PAL(R)
Your "Personal $1,000; $250 for an Be sure to write
Account Line" is IRA. down the
available for confirmation number
subsequent provided by PAL(R).
purchases and Payment must be
exchanges 24-hours received within 3
a day. Simply call business days, or
1-800-424-8085. the transaction may
be canceled. If a
telephone purchase
is canceled due to
nonpayment, you
will be responsible
for any related
loss a Fund or
INVESCO incurs.
If you are already
a shareholder in
the INVESCO funds,
a Fund may seek
reimbursement
from your
existing
account(s) for
any loss
incurred.
- ---------------------------------------------------------------------------------------------------
By Exchange
Between a Fund and $1,000 to open a See "Exchange
another of the new account; $50 Policy" page 18.
INVESCO funds. Call for written
1-800-525-8085 for requests to
prospectuses of purchase additional
other INVESCO shares for an
funds. You may also existing account.
establish an ^ (The exchange
automatic monthly minimum is $250 for
exchange service purchases requested
between two INVESCO by telephone.)
funds; call INVESCO
for further details
and the correct
form.
===================================================================================================
</TABLE>
<PAGE>
Your order to purchase shares of a Fund will not begin earning dividends or
other distributions until either your payment can be converted into available
federal funds under regular banking procedures or, if you are acquiring shares
in an exchange from another INVESCO fund, the Fund receives the proceeds of the
exchange. Checks normally are converted into federal funds (moneys held on
deposit within the Federal Reserve System) within two or three business days
after we receive them, although this period may be longer for checks drawn on
banks that are not members of the Federal Reserve System.
Exchange Policy. You may exchange your shares in a Fund for those in
another INVESCO fund, on the basis of their respective net asset values at the
time of the exchange. Before making any exchange, be sure to review the
prospectuses of the funds involved and consider their differences.
Please note these policies regarding exchanges of fund shares:
(1) The fund accounts must be identically registered.
(2) You may make four exchanges out of each fund during each
calendar year.
(3) An exchange is the redemption of shares from one fund followed
by the purchase of shares in another. Therefore, any gain or
loss realized on the exchange is recognizable for federal
income tax purposes (unless, of course, your account is
tax-deferred).
(4) In order to prevent abuse of this policy to the
disadvantage of other shareholders, the Fund reserves the
right to temporarily or permanently terminate the
exchange option of any shareholder who requests more than
four exchanges in a year, or at any time the Fund
determines the actions of the shareholder are detrimental
to Fund performance and shareholders. The Fund will
determine whether to do so based on a consideration of
both the number of exchanges any particular shareholder,
or group of shareholders, has requested and the time
period over which those exchange requests have been made,
together with the level of expense to the Fund which will
result from effecting additional exchange requests. The
Fund is intended to be a long-term investment vehicle and
is not designed to provide investors the means of
speculation on short-term market movements.
(5) Notice of all modifications to the policy or terminations
that would affect all Fund shareholders will be given at
least 60 days prior to the effective date of the change
in policy, except in unusual circumstances (such as when
redemptions of the exchanged shares are suspended under
Section 22(e) of the Investment Company Act of 1940, or
when sales of the fund into which you are exchanging are
temporarily suspended).
<PAGE>
Distribution Expenses. Each Fund is authorized under a Plan and Agreement
of Distribution pursuant to Rule 12b-1 under the Investment Company Act of 1940
(the "Plan") to use its assets to finance certain activities relating to the
distribution of its shares to investors. Under the Plan, monthly payments may be
made by each Fund to IDI to permit IDI, at its discretion, to engage in certain
activities and provide certain services approved by the board of directors of
the Company in connection with the distribution of each Fund's shares to
investors. These activities and services may include the payment of compensation
(including incentive compensation and/or continuing compensation based on the
amount of customer assets maintained in a Fund) to securities dealers and other
financial institutions and organizations, which may include INVESCO- and
IDI-affiliated companies, to obtain various distribution-related and/or
administrative services for the Funds. Such services may include, among other
things, processing new shareholder account applications, preparing and
transmitting electronically to the Funds' Transfer Agent computer processable
tapes of all transactions by customers, and serving as the primary source of
information to customers in answering questions concerning a Fund and their
transactions with a Fund.
In addition, other permissible activities and services include advertising,
preparation, printing and distribution of sales literature, printing and
distribution of prospectuses to prospective investors and such other services
and promotional activities for the Funds as may from time to time be agreed upon
by the Company and its board of directors, including public relations efforts
and marketing programs to communicate with investors and prospective investors.
These services and activities may be conducted by the staff of INVESCO, IDI or
their affiliates or by third parties.
Under the Plan, the Funds' payments to IDI are limited to an amount
computed at an annual rate of 0.25% of each Fund's average net assets. IDI is
not entitled to payment for overhead expenses under the Plan, but may be paid
for all or a portion of the compensation paid for salaries and other employee
benefits for the personnel of INVESCO or IDI whose primary responsibilities
involve marketing shares of the INVESCO funds, including the Funds. Payment
amounts by each Fund under the Plan, for any month, may be made to compensate
IDI for permissible activities engaged in and services provided by IDI during
the rolling 12-month period in which that month falls. Therefore, any
obligations incurred by IDI in excess of the limitations described above will
not be paid by the Funds under the Plan, and will be borne by IDI. In addition,
IDI and its affiliates may from time to time make additional payments from their
revenues to securities dealers, financial advisors and other financial
institutions that provide distribution-related and/or administrative services
for the Funds. No further payments will be made by the Funds under the Plan in
the event of the Plan's termination. Payments made by the Funds may not be used
to finance directly the distribution of shares of any other Fund of the Company
or other mutual fund advised by INVESCO and distributed by IDI. However,
payments received by IDI which are not used to finance the distribution of
shares of the Fund become part of IDI's revenues and may be used by IDI for
activities that promote distribution of any of the mutual funds advised by
INVESCO. Subject to review by the Company's directors, payments made by each
Fund under the Plan for compensation of marketing personnel, as noted above, are
based on an allocation formula designed to ensure that all such payments are
appropriate. IDI will bear any distribution-and service-related expenses in
excess of the amounts which are compensated pursuant to the Plan. The Plan also
authorizes any financing of distribution which may result from ^ INVESCO's or
IDI's use of fees received from the Fund for services rendered by INVESCO,
provided that such fees are legitimate and not excessive. For more information
see "How Shares Can Be Purchased --Distribution Plan" in the Statement of
Additional Information.
<PAGE>
FUND SERVICES
Shareholder Accounts. INVESCO will maintain a share account that reflects
your current holdings. Share certificates will be issued only upon specific
request. You will have greater flexibility to conduct transactions if you do not
request certificates.
Transaction Confirmations. You will receive detailed confirmations of
individual purchases, exchanges, and redemptions. If you choose certain
recurring transaction plans (for instance, EasiVest), your transactions will be
confirmed on your quarterly Investment Summary.
Investment Summaries. Each calendar quarter, shareholders receive a written
statement which consolidates and summarizes account activity and value at the
beginning and end of the period for each of their INVESCO funds.
Reinvestment of Distributions. Dividends and capital gain distributions are
automatically reinvested in additional fund shares at the NAV on the ex-dividend
or ex-distribution date, unless you choose to have dividends and/or other
distributions automatically reinvested in another INVESCO fund or paid by check
(minimum of $10.00).
Telephone Transactions. All shareholders may exchange and redeem shares of
the Funds by telephone, unless they expressly decline these privileges. By
signing the new account Application, a Telephone Transaction Authorization Form,
or otherwise using these privileges, the investor has agreed that, if a Fund has
followed reasonable procedures, such as recording telephone instructions and
sending written transaction confirmations, it will not be liable for following
telephoned instructions that it believes to be genuine. As a result of this
policy, the investor may bear the risk of any loss due to unauthorized or
fraudulent instructions.
Retirement Plans and IRAs. Shares of the Funds may be purchased for IRAs
and many other types of tax-deferred retirement plans. INVESCO can supply you
with information and forms to establish or transfer your existing plan or
account.
HOW TO SELL SHARES
The following chart shows several convenient ways to redeem your Fund
shares. Shares of the Funds may be redeemed at any time at their current NAV
next determined after a request in proper form is received at the Fund's office.
The NAV at the time of the redemption may be more or less than the price you
paid to purchase your shares, depending primarily upon a Fund's investment
performance.
Please specify from which INVESCO fund you wish to redeem shares.
Shareholders have a separate account for each fund in which they invest.
<PAGE>
<TABLE>
<CAPTION>
HOW TO SELL SHARES
===================================================================================================
<S> <C> <C>
Method Minimum Redemption Please Remember
- ---------------------------------------------------------------------------------------------------
By Telephone
Call us toll-free $250 (or, if less, These telephone
at 1-800-525-8085. full liquidation of redemption
the account) for a privileges may be
redemption check; modified or
$1,000 for a wire terminated in the
to bank of record. future at INVESCO's
The maximum amount discretion.
which may be
redeemed by
telephone is
generally $25,000.
- ---------------------------------------------------------------------------------------------------
In Writing
Mail your request Any amount. The If the shares to be
to INVESCO Funds redemption request redeemed are
Group, Inc., P.O. must be signed by represented by
Box 173706 all registered stock certificates,
Denver, CO account owners. the certificates
80217-3706. You may Payment will be must be sent to
also send your mailed to your INVESCO.
request by address of record
overnight courier or to a
to 7800 E. Union pre-designated
Ave., Denver, CO bank.
80237.
- ---------------------------------------------------------------------------------------------------
By Exchange
Between a Fund and $1,000 to open a See "Exchange
another of the new account; $50 Policy" page 18.
INVESCO funds. Call for written
1-800-525-8085 for requests to
prospectuses of purchase additional
other INVESCO shares for an
funds. You may also existing account.
establish an (The exchange
automatic monthly minimum is $250 for
exchange service exchanges requested
between two INVESCO by telephone.)
funds; call INVESCO
for further details
and the correct
form.
- ---------------------------------------------------------------------------------------------------
<PAGE>
- ---------------------------------------------------------------------------------------------------
Periodic Withdrawal
Plan
You may call us to $100 per payment, You must have at
request the on a monthly or least $10,000 total
appropriate form quarterly basis. invested with the
and more The redemption INVESCO funds, with
information at check may be made at least $5,000 of
1-800-525-8085. payable to any that total invested
party you in the fund from
designate. which withdrawals
will be made.
- ---------------------------------------------------------------------------------------------------
Payment To Third
Party
Mail your request Any amount. All registered
to INVESCO Funds account owners must
Group, Inc., P.O. sign the request,
Box 173706 with a signature
Denver, CO guarantee from an
80217-3706. eligible guarantor
financial
institution,
such as a
commercial
bank or
recognized
national
or regional
securities
firm.
===================================================================================================
</TABLE>
While the Funds will attempt to process telephone redemptions promptly,
there may be times -- particularly in periods of severe economic or market
disruption -- when you may experience delays in redeeming shares by phone.
Payments of redemption proceeds will be mailed within seven days following
receipt of the redemption request in proper form. However, payment may be
postponed under unusual circumstances -- for instance, if normal trading is not
taking place on the New York Stock Exchange or during an emergency as defined by
the Securities and Exchange Commission. If your shares were purchased by a check
which has not yet cleared, payment will be made promptly upon clearance of the
purchase check (which will take up to 15 days).
If you participate in EasiVest, the Fund's automatic monthly investment
program, and redeem all of the shares in your account, we will terminate any
further EasiVest purchases unless you instruct us otherwise.
Because of the high relative costs of handling small accounts, should the
value of any shareholder's account fall below $250 as a result of shareholder
action, the Funds reserve the right to involuntarily redeem all shares in such
account, in which case the account would be liquidated and the proceeds
forwarded to the shareholder. Prior to any such redemption, a shareholder will
be notified and given 60 days to increase the value of the account to $250 or
more.
<PAGE>
TAXES, DIVIDENDS AND OTHER DISTRIBUTIONS
Taxes. Each Fund intends to distribute to shareholders substantially all of
its net investment income, net capital gains and net gains from foreign currency
transactions, if any. Distribution of substantially all net investment income to
shareholders allows a Fund to maintain its tax status as a regulated investment
company. Each Fund does not expect to pay any federal income or excise taxes
because of its distribution ^ policies and tax status as a regulated investment
company.
Shareholders must include all dividends and other distributions as taxable
income for federal, state and local income tax purposes unless their accounts
are exempt from income taxes. Dividends and other distributions are taxable
whether they are received in cash or automatically reinvested in shares of a
Fund or another fund in the INVESCO group.
Net realized capital gains of a Fund are classified as short-term and
long-term gains depending upon how long the Fund held the security that gave
rise to the gains. Short-term capital gains are included in income from
dividends and interest as ordinary income and are taxed at the taxpayer's
marginal tax rate. During 1997, the Taxpayer Relief Act established a new
maximum capital gains tax rate of 20%. Depending on the holding period of the
asset giving rise to the gain, a capital gain was taxable at a maximum rate of
either 20% or 28%. Beginning January 1, 1998, all long-term gains realized on
the sale of securities held more than 12 months will be taxable at a maximum
rate of 20%. In addition, legislation signed in October of 1998 provides that
all capital gain distributions from a mutual fund paid to shareholders during
1998 will be taxed at a maximum rate of 20%. Accordingly, all capital gain
distributions paid in 1998 will be taxable at a maximum rate of 20%. Note that
the rate of capital gains tax is dependent on the shareholder's marginal tax
rate and may be lower than the above rates. At the end of each year, information
regarding the tax status of dividends and other distributions is provided to
shareholders. Shareholders should consult their tax advisers as to the effect of
distributions by a Fund.
Shareholders may realize capital gains or losses when they sell their Fund
shares at more or less than the price originally paid. Capital gains on shares
held for more than one year will be long-term capital gains, in which event they
will be subject to federal income tax at the rates indicated above.
The Fund may be subject to withholding of foreign taxes on dividends or
interest it receives on foreign securities. Foreign taxes withheld may be
treated as an expense of the Fund.
Individuals and certain other non-corporate shareholders may be subject to
backup withholding of 31% on dividends, capital gain distributions and other
distributions and redemption proceeds. You can avoid backup withholding on your
account by ensuring that we have a correct, certified tax identification number,
unless you are subject to backup withholding for other reasons.
We encourage you to consult a tax adviser with respect to these matters.
For further information see "Dividends, Other Distributions And Taxes" in the
Statement of Additional Information.
Dividends and Other Distributions. Each Fund earns ordinary or net
investment income in the form of interest and dividends on investments.
Dividends paid by each Fund will be based solely on the net investment income
earned by it. Each Fund's policy is to distribute substantially all of this
income, less expenses, to shareholders. Dividends from net investment income are
declared daily and paid monthly at the discretion of the Company's board of
directors. Dividends are automatically reinvested in additional shares of the
Fund at the net asset value on the ex-dividend date unless otherwise requested.
<PAGE>
In addition, each Fund realizes capital gains and losses when it sells
securities or derivatives for more or less than it paid. If total gains on sales
exceed total losses (including losses carried forward from previous years), the
Fund has a net realized capital gain. Net realized capital gains, if any,
together with gains, if any, realized on certain foreign currency transactions,
if any, are distributed to shareholders at least annually, usually in December.
Capital gain distributions are automatically reinvested in additional shares of
a Fund at the net asset value on the ex-distribution date unless otherwise
requested.
Dividends and other distributions are paid to shareholders who hold shares
on the record date of distribution regardless of how long the Fund shares have
been held by the shareholder. The Fund's share price will then drop on the
ex-dividend or ex-distribution date by the amount of the distribution. If a
shareholder purchases shares immediately prior to the distribution, the
shareholder will, in effect, have "bought" the distribution by paying the full
purchase price, a portion of which is then returned in the form of a taxable
distribution.
ADDITIONAL INFORMATION
Voting Rights. All shares of the Company have equal voting rights based on
one vote for each share owned and a corresponding fractional vote for each
fractional share owned. The Company is not generally required and does not
expect to hold regular annual meetings of shareholders. However, when requested
to do so in writing by the holders of 10% or more of the outstanding shares of
the Company or as may be required by applicable law or the Company's Articles of
Incorporation, the board of directors will call special meetings of
shareholders. Directors may be removed by action of the holders of a majority of
the outstanding shares of the Company. The Company will assist shareholders in
communicating with other shareholders as required by the Investment Company Act
of 1940.
<PAGE>
APPENDIX -- RATINGS SERVICES
There are several independent ratings services that analyze debt
obligations and preferred stock issued by corporations. The two most frequently
used services are Moody's and S&P.
The chart below shows the various ratings used by each service for the
categories of bonds and preferred stock in which the Funds may invest. There are
additional refinements to each rating system: Moody's may use the modifier 1 to
indicate that the security ranks in the higher end of its generic ratings
category; modifier 2 indicates a mid-range rank, and 3 indicates the issue ranks
at the lower end of its category. Similarly, S&P may use a + or - sign to
indicate a security's relative standing within its generic category. For a
further discussion of risks associated with the Funds, see "Investment Policies
And Risks" and "Investment Practices" in the Statement of Additional
Information.
================================================================================
Moody's S&P Bond Description
- --------------------------------------------------------------------------------
Aaa AAA Highest quality, often referred to
as "gilt edged." Carries the
smallest degree of investment risk:
Interest payments are protected by
a larger or exceptionally stable
margin and principal is secure.
- --------------------------------------------------------------------------------
Aa AA High quality or high grade. Margins
of protection may be smaller than
those above, or fluctuation of
protective elements may be of
greater amplitude. Other elements
may be present which make long-term
risks somewhat larger than in Aaa
or AAA securities.
- --------------------------------------------------------------------------------
A A Upper medium-grade obligations.
Adequate to strong capacity to pay
principal and interest,but somewhat
more susceptible to adverse effects
of changes in circumstances and
economic conditions.
- --------------------------------------------------------------------------------
Baa BBB Medium-grade obligations. Neither
highly protected nor poorly
secured. Interest and principal
security currently appear adequate,
but certain protective elements may
be lacking or characteristically
unreliable over the longer-term.
May have speculative
characteristics.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Ba BB Speculative, but less near-term
vulnerability to default than those
below. These bonds face major
ongoing uncertainties or exposure
to adverse business, financial or
economic conditions that could lead
to inadequate capacity to make
timely interest and principal
payments.
- --------------------------------------------------------------------------------
B B Generally lack characteristics of a
desirable investment. Greater
vulnerability to default: currently
have capacity to meet timely
interest and principal payments,but
assurance of payments over any
extended period of time may be
small, and/or other terms of the
bond contract may be in jeopardy.
- --------------------------------------------------------------------------------
Caa CCC Bonds in poor standing. These
bonds may be in default or there
may be present elements of danger
with respect to principal or
interest.
- --------------------------------------------------------------------------------
aaa AAA Top-quality. Good asset protection
and extremely strong capacity for
dividend payment.
- --------------------------------------------------------------------------------
aa AA High-grade. Offers reasonable
assurance that earnings and asset
protection will remain relatively
well-maintained in the foreseeable
future.
- --------------------------------------------------------------------------------
a A Upper medium-grade. Earnings and
asset protection are expected to
remain at adequate levels.
- --------------------------------------------------------------------------------
baa BBB Medium-grade. Neither highly
protected nor poorly secured.
Backed by adequate capacity to
maintain dividend payments, but
susceptible to adverse economic
conditions or changing
circumstances.
- --------------------------------------------------------------------------------
ba BB Has speculative elements and its
future is not well assured.
Earnings and asset protection may
be very moderate and not well
safeguarded during adverse periods.
- --------------------------------------------------------------------------------
b B Lacks the characteristics of a
desirable investment. Assurance of
dividend payments over any extended
period of time may be small.
================================================================================
<PAGE>
INVESCO BOND FUNDS, INC.
High Yield Fund
Select Income Fund
U.S. Government Securities Fund
No-load mutual funds seeking a high
level of current income from
investing in fixed-income
securities.
PROSPECTUS
January 1, 1999
INVESCO FUNDS
INVESCO Distributors, Inc.,(sm)
Distributor
Post Office Box 173706
Denver, Colorado 80217-3706
1-800-525-8085
PAL(R), 1-800-424-8085
http://www.invesco.com
In Denver, visit one of
our convenient Investor Centers:
Cherry Creek,
155-B Fillmore Street;
Denver Tech Center,
7800 East Union Avenue,
Lobby Level
In addition, all documents
filed by the Company with
the Securities and Exchange
Commission can be located
on a web site maintained
by the Commission at
http://www.sec.gov.
<PAGE>
PROSPECTUS
January 1, 1999
INVESCO Short-Term Bond Fund
INVESCO Short-Term Bond Fund (the "Fund") seeks to achieve the highest
level of current income as is consistent with minimum fluctuation in principal
value and with maintaining liquidity.
The Fund is a series of INVESCO Bond Funds, Inc. (formerly, INVESCO Income
Funds, Inc.) (the "Company"), a diversified, managed no-load mutual fund,
consisting of four separate portfolios of investments. A separate Prospectus is
available upon request from INVESCO Distributors, Inc. for the Company's other
funds, INVESCO High Yield Fund, INVESCO Select Income Fund and INVESCO U.S.
Government Securities Fund. Investors may purchase shares of any or all of the
Funds. Additional funds may be offered in the future.
This Prospectus provides you with the basic information you should know
before investing in the Fund. You should read it and keep it for future
reference. A Statement of Additional Information containing further information
about the Fund, dated January 1, 1999, has been filed with the Securities and
Exchange Commission and is incorporated by reference into this Prospectus. To
request a free copy, write to INVESCO Distributors, Inc., P.O. Box 173706,
Denver, Colorado 80217-3706; call 1-800-525-8085; or visit us on the world wide
web: http://www.invesco.com.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES OF EACH FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER FINANCIAL INSTITUTION. THE SHARES OF EACH FUND
ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
<PAGE>
TABLE OF CONTENTS
ESSENTIAL INFORMATION..........................................................2
ANNUAL FUND EXPENSES...........................................................3
FINANCIAL HIGHLIGHTS...........................................................4
INVESTMENT OBJECTIVE AND STRATEGY..............................................5
INVESTMENT POLICIES AND RISKS..................................................5
THE FUND AND ITS MANAGEMENT...................................................10
FUND PRICE AND PERFORMANCE....................................................12
HOW TO BUY SHARES.............................................................12
FUND SERVICES.................................................................15
HOW TO SELL SHARES............................................................16
TAXES, DIVIDENDS AND OTHER DISTRIBUTIONS......................................18
ADDITIONAL INFORMATION........................................................19
APPENDIX -- RATINGS SERVICES..................................................20
<PAGE>
ESSENTIAL INFORMATION
Investment Goals And Strategy: The Short-Term Bond Fund seeks the highest
current income consistent with minimum fluctuations in principal value and with
maintaining liquidity; the Fund's investments are primarily in government and
government agency debt securities, with a dollar-weighted average maturity of
not more than three years. There is no guarantee that the Fund will meet its
investment objective. See "Investment Objective And Strategy" and "Investment
Policies And Risks."
Designed For: The Short-Term Bond Fund is designed for investors seeking
higher yields than those available from shorter-term, higher quality money
market funds and who can tolerate modest price fluctuations. While not a
complete investment program, the Fund may be a valuable element of your
investment portfolio. You may also wish to consider one of the Funds as part of
a Uniform Gifts/Transfers to Minors Act Account or systematic investment
strategy. Each Fund may be a suitable investment for tax-deferred retirement
programs, including various Individual Retirement Accounts ("IRAs"), 401(k),
Profit Sharing, Money Purchase Pension, or 403(b) plans.
Time Horizon: The Fund is primarily managed for current income. Investors
should not consider the Fund as a suitable investment for the portion of their
savings devoted to capital appreciation, or for that portion focused on
liquidity and stable principal value.
Risks: The Fund focuses on fixed-income securities. The Fund's investments
are subject to both credit risk and market risk, both of which are increased by
investing in lower rated securities. See "Investment Policies And Risks" for
specific risks associated with the Fund.
Organization and Management: The Fund is a series of the Company. The Fund
is owned by its shareholders. It employs INVESCO Funds Group, Inc. ("INVESCO"),
founded in 1932, to serve as investment adviser, administrator and transfer
agent. INVESCO Distributors, Inc. ("IDI"), founded in 1997 as a wholly-owned
subsidiary of INVESCO, is the ^ Fund's distributor.
The Fund's investments are selected by its portfolio manager or managers.
See "The Fund And Its Management."
INVESCO and IDI are indirect, wholly-owned subsidiaries of AMVESCAP PLC, an
international investment management company that manages approximately ^ $241
billion in assets as of ^ September 30, 1998. AMVESCAP PLC is based in London
with money managers located in Europe, North America, South America and the Far
East.
<PAGE>
The Funds offer all of the following services at no charge:
Telephone purchases
Telephone exchanges
Telephone redemptions
Automatic reinvestment of distributions
Regular investment plans such as EasiVest (the Fund's automatic monthly
investment program), Direct Payroll Purchase, and Automatic Monthly Exchange
Periodic withdrawal plans
See "How To Buy Shares" and "How To Sell Shares."
Minimum Initial Investment: $1,000 per Fund, which is waived for regular
investment plans, including EasiVest and Direct Payroll Purchase, and certain
retirement plans.
Minimum Subsequent Investment: $50 per Fund (Minimums are lower for certain
retirement plans).
ANNUAL FUND EXPENSES
The Fund is no-load; there are no fees to purchase, exchange or redeem
shares. The Fund is authorized to pay a Rule 12b-1 distribution fee of up to one
quarter of one percent of its average net assets each year. (See "How To Buy
Shares -- Distribution Expenses.")
Like any company, the Fund has operating expenses -- such as portfolio
management, accounting, shareholder servicing, maintenance of shareholder
accounts, and other expenses. These expenses are paid from the Fund's assets.
Lower expenses therefore benefit investors by increasing the Fund's investment
return.
We calculate annual operating expenses as a percentage of the Fund's
average annual net assets. To keep expenses competitive, INVESCO voluntarily
reimburses the Fund for amounts in excess of 0.85% (excluding excess amounts
that have been offset by the expense offset arrangement described below) of the
Fund's average net assets.
<PAGE>
Annual Fund Operating Expenses
(as a percentage of average net assets)
Short-Term Bond Fund
Management Fee 0.50%
12b-1 Fees 0.25%
Other Expenses 0.13%
Total Fund Operating Expenses (1)(2) 0.88%
(1) It should be noted that the Fund's actual total operating expenses were
lower than the figures shown because the Fund's custodian and pricing expenses
were reduced under an expense offset arrangement. However, as a result of an SEC
requirement, the figures shown above do not reflect these reductions. In
comparing expenses for different years, please note that the Ratios of Expenses
to Average Net Assets shown under "Financial Highlights" do reflect reductions
for periods prior to the fiscal year ended August 31, 1996. See "The Fund And
Its Management."
(2) Certain Fund expenses are being voluntarily absorbed by INVESCO. In the
absence of such absorbed expenses, "Other Expenses" and "Total Fund Operating
Expenses" for the fiscal year ended August 31, 1998, would have been 1.11% and
1.86%, respectively, for the Fund. This is based on the Fund's actual expenses
for the fiscal year ended August 31, 1998. See "The Fund And Its Management."
Example
A shareholder would pay the following expenses on a $1,000 investment for
the periods shown, assuming a hypothetical 5% annual return and redemption at
the end of each time period. (Of course, actual operating expenses are paid from
the Fund's assets, and are deducted from the amount of income available for
distribution to shareholders; they are not charged directly to shareholder
accounts.)
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$9 $28 $49 $109
The purpose of this table is to assist you in understanding the various
costs and expenses that you will bear directly or indirectly. THE EXAMPLE SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE PERFORMANCE OR EXPENSES,
AND ACTUAL ANNUAL RETURNS AND EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
For more information on the Fund's expenses, see "The Fund And Its Management"
and "How To Buy Shares -- Distribution Expenses."
Because the Fund pays a distribution fee, investors who own shares of the
Fund for a long period of time may pay more than the economic equivalent of the
maximum front-end sales charge permitted for mutual funds by the National
Association of Securities Dealers, Inc.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a Fund Share Outstanding Throughout Each Period)
The following information has been audited by PricewaterhouseCoopers LLP,
independent accountants. This information should be read in conjunction with the
audited financial statements and the Report of Independent Accountants thereon
appearing in the Company's 1998 Annual Report to Shareholders, which is
incorporated by reference into the Statement of Additional Information. Both are
available without charge by contacting IDI at the address or telephone number on
the back cover of this Prospectus. The Annual Report also contains more
information about ^ the Fund's performance.
<TABLE>
<CAPTION>
Period
Ended
Year Ended August 31 August 31
--------------------------------------------------------------- -----------
1998 1997 1996 1995 1994(a)
<S> <C> <C> <C> <C> <C>
Short-Term Bond Fund
PER SHARE DATA
Net Asset Value - Beginning of Period $9.51 $9.41 $9.54 $9.46 $10.00
--------------------------------------------------------------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.55 0.50 0.56 0.57 0.47
Net Gains or (Losses) on Securities
(Both Realized and Unrealized) 0.08 0.15 (0.13) 0.08 (0.54)
--------------------------------------------------------------- -----------
Total from Investment Operations 0.63 0.65 0.43 0.65 (0.07)
--------------------------------------------------------------- -----------
LESS DISTRIBUTIONS
Dividends from Net Investment Income(b) 0.55 0.55 0.56 0.57 0.47
--------------------------------------------------------------- -----------
Net Asset Value - End of Period $9.59 $9.51 $9.41 $9.54 $9.46
=============================================================== ===========
TOTAL RETURN 6.76% 7.08% 4.63% 7.16% (0.72%)(c)
RATIOS
Net Assets - End of Period ($000 Omitted) $24,467 $12,344 $10,735 $8,979 $7,878
Ratio of Expenses to Average Net Assets(d) 0.88%(e) 0.83%(e) 0.80%(e) 0.46% 0.46%(f)
Ratio of Net Investment Income to
Average Net Assets(d) 5.74% 5.82% 5.85% 6.05% 5.50%(f)
Portfolio Turnover Rate 135% 331% 103% 68% 169%(c)
</TABLE>
(a) From September 30, 1993, commencement of investment operations, to August
31, 1994.
(b) Distributions in excess of net investment income for the years ended August
31, 1996 and 1995, aggregated less than $0.01 on a per share basis.
(c) Based on operations for the period shown and, accordingly, are not
representative of a full year.
(d) Various expenses of the Fund were voluntarily absorbed by INVESCO and/or ITC
for the years ended August 31, 1998, 1997, 1996, 1995 and for the period ended
August 31, 1994. If such expenses had not been voluntarily absorbed, ratio of
expenses to average net assets would have been 1.86%, 1.84%, 2.17%, 2.09% and
2.04%, respectively, and ratio of net investment income to average net assets
would have been 4.76%, 4.81%, 4.48%, 4.42% and 3.92%, respectively.
(e) Ratio is based on Total Expenses of the Fund, less Expenses Absorbed by
Investment Adviser, which is before any expense offset arrangements.
(f) Annualized
<PAGE>
INVESTMENT OBJECTIVE AND STRATEGY
The Short-Term Bond Fund seeks to achieve the highest level of current
income as is consistent with minimum fluctuation in principal value and with
maintaining liquidity. The Fund's investment objective is fundamental and cannot
be changed without the approval of the Fund's shareholders. There is no
assurance that the Fund's investment objective will be met.
The Fund normally invests at least 65% of its total assets in bonds and
debentures. The Fund may invest in all types of variable and fixed rate
corporate, government and government agency debt securities. The government and
government agency securities in which the Fund invests may or may not be backed
by the full faith and credit of the United States.
Holdings are selected primarily from two maturity ranges: short-term
(obligations maturing in under three years) and intermediate-term (obligations
maturing in three to 10 years). The Fund maintains a diversified portfolio with
a dollar-weighted average maturity of three years or less. This average is based
on the actual stated maturity dates of the debt securities in the Fund's
portfolio, except for debt securities having special features that give them the
characteristics of shorter-term obligations. For example, variable rate
securities, on which coupon rates of interest are adjusted on specified dates in
response to changes in interest rates, are deemed to mature at their next
interest rate adjustment date. In addition, debt securities with "put" features
entitling the Fund to repayment of principal on specified dates are deemed to
mature at the next put exercise date. When INVESCO deems it appropriate, the
Fund may invest in debt securities having maturities in excess of 10 years.
Debt securities will be selected based on INVESCO's assessment of interest
rate trends and the liquidity of various instruments under prevailing market
conditions. The potential for capital appreciation is an incidental factor that
also may be considered.
Portfolio Turnover. There are no fixed limitations regarding portfolio
turnover for the Fund; securities may be sold without regard to the time they
have been held when investment considerations warrant such action. Increased
turnover may result in greater brokerage commissions and acceleration of capital
gains that are taxable when distributed to shareholders. The Statement of
Additional Information includes an expanded discussion of the Fund's portfolio
turnover rate, its brokerage practices and certain federal income tax matters.
INVESTMENT POLICIES AND RISKS
Investors should expect to see the price per share of the Fund vary with
movements in the fixed-income market, economic conditions and other factors.
INVESCO seeks to temper volatility through diversification and credit analysis,
as well as by maintaining an average dollar-weighted maturity of three years or
less. This diversification may help reduce the Fund's exposure to particular
investment and market risks, but cannot eliminate these risks.
Year 2000 Computer Issue. Due to the fact that many computer systems in use
today cannot recognize the Year 2000, but will, unless corrected, revert to 1900
or 1980 or cease to function at that time, the markets for securities in which
the Fund invests may be detrimentally affected by computer failures affecting
portfolio investments or trading of securities beginning January 1, 2000.
Improperly functioning trading systems may result in settlement problems and
liquidity issues. In addition, corporate and governmental data processing errors
may result in production issues for individual companies and overall economic
uncertainties. Earnings of individual issuers may be affected by remediation
costs, which may be substantial. The Fund's investments may be adversely
affected.
<PAGE>
Debt Securities. The Fund may invest in corporate debt securities. When we
assess an issuer's ability to meet its interest rate obligations and repay its
debt when due, we are referring to "credit risk." Debt securities issued by the
U.S. government, its agencies and instrumentalities carry a low level of credit
risk compared to higher yielding corporate bonds. Corporate debt obligations are
rated based on their credit risk as estimated by independent services such as
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's, a division of
the McGraw-Hill Companies, Inc. ("S&P"), Fitch Investors Service, Inc. ("Fitch")
or Duff & Phelps, Inc. ("D&P"). These ratings attempt to evaluate the likelihood
that principal and interest will be paid when due, but do not evaluate the
volatility of a debt obligation's value or its liquidity and do not guarantee
the performance of the issuer. "Market risk" refers to sensitivity to changes in
interest rates. For instance, when interest rates go up, the market value of a
previously issued bond generally declines; on the other hand, when interest
rates go down, bond prices generally increase. All bonds, including government,
government agency and government instrumentality securities, are subject to
market risk.
The Fund may invest in issues rated below investment grade quality
(commonly called "junk bonds"), that are rated Ba or lower by Moody's or BB or
lower by S&P, or, if unrated, are judged by INVESCO to be of equivalent quality.
These include issues which are of poorer quality and may have some speculative
characteristics according to the ratings services.
Risks of Lower Rated Bonds. The lower a bond's quality, the more it is
believed by the rating service to be subject to credit risk and market risk and
the more speculative it becomes; this is also true of most unrated securities.
The Fund does not invest in obligations it believes to be highly
speculative. As a result, the Fund invests primarily in corporate bonds rated
investment grade (BBB and above by S&P, Fitch or D&P or Baa and above by
Moody's) that are believed to enjoy strong to adequate capacity to pay principal
and interest. No more than 15% of the Fund's total assets may be invested in
junk bonds. Never, under any circumstances, does the Short-Term Bond Fund invest
in securities rated below B. Although bonds rated B are believed to have the
current capacity to meet principal and interest payments, they are believed to
be subject to a greater extent than higher rated instruments to the risk that
adverse business, financial or economic conditions will impair this capacity. In
addition, the Fund may invest in corporate short-term notes rated at least
Prime-1 by Moody's or A-1 by S&P and municipal short-term notes rated at least
MIG-1 by Moody's, SP-1 by S&P, F-1 by Fitch or Duff-1 by D&P (the highest rating
categories for such notes).
While INVESCO continuously monitors all of the corporate bonds in the
Fund's portfolio for the issuer's ability to make required principal and
interest payments and other quality factors, it may retain a bond whose rating
is changed to one below the minimum rating required for purchase of the
security. The Fund is not required to sell immediately debt securities that go
into default, but may continue to hold such securities until such time as
INVESCO determines it is in the best interests of the Fund to sell the
securities.
<PAGE>
Because investment in medium and lower rated securities involves both
greater credit risk and market risk, achievement of the Fund's investment
objective may be more dependent on INVESCO's own credit analysis than is the
case for funds investing in higher quality securities. In addition, the share
price and yield of the Fund may be expected to fluctuate more than in the case
of funds investing in higher quality, shorter term securities. Moreover, a
significant economic downturn or major increase in interest rates may result in
issuers of lower rated securities experiencing increased financial stress, which
would adversely affect their ability to service their principal, dividend and
interest obligations, meet projected business goals, and obtain additional
financing. In this regard, it should be noted that while the market for high
yield corporate bonds has been in existence for many years and from time to time
has experienced economic downturns, there has been a significant increase in the
use of high yield corporate debt securities to fund highly leveraged corporate
acquisitions and restructurings. Past experience may not, therefore, provide an
accurate indication of future performance of the high yield bond market,
particularly during periods of economic recession. Furthermore, expenses
incurred to recover an investment in a defaulted security may adversely affect
the Fund's net asset value. Finally, while INVESCO attempts to limit purchases
of medium and lower rated securities to securities having an established
secondary market, the secondary market for such securities may be less liquid
than the market for higher quality securities. The reduced liquidity of the
secondary market for such securities may adversely affect the market price of,
and ability of the Fund to value, particular securities at certain times,
thereby making it difficult to make specific valuation determinations.
<PAGE>
For the fiscal year ended August 31, 1998, the following percentages of the
Short-Term Bond Fund's net assets were invested in corporate bonds rated
investment grade (Baa by Moody's or BBB by S&P and above) at the time they were
purchased: Aa/AA--0.00%; A--9.19%, Baa/BBB--1.85% and Ba--5.02%. The following
percentages were invested in corporate bonds rated below investment grade at the
time of purchase: B--8.27%; CCC--0.00% and D--0.00%. Finally, 0.18% of total
assets were invested in unrated corporate bonds. All of these percentages were
determined on a dollar-weighted basis, calculated by averaging the Fund's
month-end portfolio holdings during the fiscal year. Keep in mind that the
Fund's holdings are actively traded, and bond ratings are occasionally adjusted
by ratings services, so these figures do not represent the Fund's actual
holdings or quality ratings as of August 31, 1998.
For a detailed description of corporate bond ratings, see the Appendix to
this Prospectus and the Statement of Additional Information.
Foreign Securities. The Fund's investments in debt obligations may include
securities issued by foreign governments and foreign corporations. As a matter
of policy, which may be changed without a vote of shareholders, up to 25% of the
Fund's total assets, measured at the time of purchase, may be invested directly
in foreign debt securities, provided that all such securities are denominated
and pay interest in U.S. dollars (such as Eurobonds and Yankee bonds).
Securities of Canadian issuers and American Depository Receipts ("ADRs") are not
subject to this 25% limitation. ADRs are receipts representing shares of a
foreign corporation held by a U.S. bank that entitles the holder to all
dividends and capital gains. ADRs are denominated in U.S. dollars and trade in
the U.S. securities markets. Investments in foreign debt securities involve
certain risks.
For U.S. investors, the returns on foreign debt securities are influenced
not only by the returns on the foreign investments themselves, but also by
currency fluctuations. That is, when the U.S. dollar generally rises against a
foreign currency, returns for a U.S. investor on foreign securities may
decrease. By contrast, in a period when the U.S. dollar generally declines,
those returns may increase. The Fund attempts to minimize these risks by
limiting its investments in foreign debt securities to those which are
denominated and pay interest in U.S. dollars.
<PAGE>
Other aspects of international investing to consider include:
-less publicly available information than is generally available about U.S.
issuers;
-differences in accounting, auditing and financial reporting standards;
-generally higher commission rates on foreign portfolio transactions and
longer settlement periods;
-smaller trading volumes and generally lower liquidity of foreign stock
markets, which may cause greater price volatility; and
-investment income on certain foreign securities may be subject to foreign
withholding taxes, which may reduce dividend income or capital gains payable to
shareholders.
There is also the possibility of expropriation or confiscatory taxation;
adverse changes in investment or exchange control regulations; political
instability; potential restrictions on the flow of international capital; and
the possibility that the Fund may experience difficulties in pursuing legal
remedies and collecting judgments.
ADRs are subject to some of the same risks as direct investments in foreign
securities, including the risk that material information about the issuer may
not be disclosed in the United States and the risk that currency fluctuations
may adversely affect the value of the ADR.
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"). The EMU has established a common European
currency for EMU countries is known as the "euro." Each participating country
has adopted the euro as its currency effective January 1, 1999. The old national
currencies are sub-currencies of the euro until July 1, 2002, at which time the
old currencies will disappear entirely. Other European countries may adopt the
euro in the future.
<PAGE>
The introduction of the euro presents some uncertainties and possible
risks, including whether the payment and operational systems of banks and other
financial institutions will have been ready by January 1, 1999; whether exchange
rates for existing currencies and the euro will have been adequately
established; and whether suitable clearing and settlement systems for the euro
will have been in operation. These and other factors may cause market
disruptions after January 1, 1999 and could adversely affect the value of
securities held by the Fund.
Illiquid and Rule 144A Securities. The Fund may not purchase securities
that are not readily marketable. However, the Fund may invest in restricted
securities, including securities that are not registered for sale to the general
public but that may be resold to institutional investors ("Rule 144A
Securities"), if a liquid trading market exists. The Company's board of
directors has delegated to INVESCO the authority to determine the liquidity of
Rule 144A Securities pursuant to guidelines approved by the board. In the event
that a Rule 144A Security held by the Fund is subsequently determined to be
illiquid, the security will be sold as soon as that can be done in an orderly
fashion consistent with the best interests of the Fund's shareholders. For more
information concerning illiquid and ^ Rule 144A Securities, see "Investment
Policies And Restrictions" in the Statement of Additional Information.
Zero Coupon Bonds and Step-up Bonds. The Fund may invest in zero coupon
bonds if INVESCO determines that the risk of a default on the security, which
could result in adverse tax consequences, is not significant. Zero coupon bonds
make no periodic interest payments. Instead, they are sold at a discount from
their face value. The buyer of the security receives the rate of return by the
gradual appreciation in the price of the security, which is redeemed at face
value at maturity. In addition to zero coupon bonds, the Fund may invest in
step-up bonds. Step-up bonds initially make no (or low) cash interest payments,
but begin paying interest (or a higher rate of interest) at a fixed time after
issuance of the bond. Zero coupon and step-up bonds are more sensitive to
changes in interest rates than bonds that pay interest on a current basis in
cash. When interest rates fall, the value of these types of bonds will increase
more rapidly, and when interest rates rise, their value falls more dramatically.
The Fund may be required to distribute income recognized on these bonds, even
though no cash interest payments are received, which could reduce the amount of
cash available for investment by the Fund.
Interest Rate Futures Contracts. The Fund may buy and sell interest rate
futures contracts relating to the debt securities in which the Fund invests for
the purpose of hedging the value of its securities portfolio. These practices
and their risks are discussed under "Investment Policies And Restrictions" in
the Statement of Additional Information.
Mortgage-Backed and Asset-Backed Securities. The Fund may invest in
mortgage-backed securities issued or guaranteed as to principal and interest by
the U.S. government, federal agencies or instrumentalities such as GNMA, Fannie
Mae and Freddie Mac. Some of these securities, such as GNMA certificates, are
backed by the full faith and credit of the U.S. Treasury while others, such as
Freddie Mac certificates, are not. Mortgage-backed securities represent
interests in pools of mortgages which have been purchased from loan institutions
such as banks and savings and loans, and packaged for resale in the secondary
market. Interest and principal are "passed through" to the holders of the
securities. The timely payment of interest and principal is guaranteed by a
federal agency, but the market value of the security is not guaranteed and will
vary. When interest rates drop, many home buyers choose to refinance their
mortgages. These prepayments may shorten the average weighted lives of
mortgage-backed securities and may lower their returns.
<PAGE>
In addition to being able to invest in mortgage-backed securities, the Fund
may also invest in asset-backed securities which represent interests in pools of
consumer loans. As with mortgage-backed securities, asset-backed securities are
structured as pass-through securities. Interest and principal payments
ultimately depend on payment of the underlying loans, although securities may be
supported, at least in part, by letters of credit or other credit enhancements.
As with mortgage-backed securities, underlying loans are subject to prepayments
that may shorten the securities' weighted average lives and may lower their
return.
The Fund may invest in stripped mortgage- or asset-backed securities, in
which the principal and interest payments on the underlying pool of loans are
separated or "stripped" to create two classes of securities. In general, the
interest-only, or IO, class receives all of the interest payments and the
principal-only, or PO, class receives all of the principal payments. The market
prices of these securities generally are more sensitive to changes in interest
and prepayment rates than traditional mortgage- and asset-backed securities.
Such purchases are used to help the Fund maintain stability.
Delayed Delivery or When-Issued Purchases. Up to 10% of the value of the
Fund's net assets may be committed to the purchase or sale of securities on a
when-issued or delayed-delivery basis --that is, with settlement taking place in
the future. The payment obligation and the interest rate that will be received
on the securities generally are fixed at the time the Fund enters into the
commitment. Between the date of purchase and the settlement date the market
value of the securities may vary. No interest is payable to the Fund prior to
settlement.
Repurchase Agreements. The Fund may invest money, for as short a time as
overnight, using repurchase agreements ("repos"). With a repo, the Fund buys a
debt instrument, agreeing simultaneously to sell it back to the prior owner at
an agreed-upon price and date. The Fund could incur costs or delays in seeking
to sell the security if the prior owner defaults on its repurchase obligation.
To reduce that risk, the securities that are the subject of the repurchase
agreement will be maintained with the Fund's custodian in an amount at least
equal to the repurchase price under the agreement (including accrued interest).
These agreements are entered into only with member banks of the Federal Reserve
System, registered broker-dealers, and registered U.S. government securities
dealers that are deemed creditworthy under standards set by the Company's board
of directors.
Securities Lending. The Fund may seek to earn additional income by lending
securities to qualified brokers, dealers, banks, or other financial
institutions, on a fully collateralized basis. For further information on this
policy, see "Investment Policies And Restrictions" in the Statement of
Additional Information.
Investment Restrictions. Certain restrictions, which are identified in the
Statement of Additional Information, may not be altered without the approval of
the Fund's shareholders. For example, the Fund limits to 5% the portion of its
total assets that may be invested in any one issuer (other than cash items and
U.S. government securities). In addition, the Fund's ability to borrow money is
limited to borrowings from banks for temporary or emergency purposes in amounts
not exceeding 10% of net assets.
For a further discussion of risks associated with an investment in ^ the
Fund, see "Investment Policies And Restrictions" and "Investment Practices" in
the Statement of Additional Information.
THE FUND AND ITS MANAGEMENT
The Company is a no-load mutual fund, registered with the Securities and
Exchange Commission as an open-end, diversified, management investment company.
It was incorporated on August 20, 1976, under the laws of Colorado and was
reorganized as a Maryland corporation on April 2, 1993.
<PAGE>
The Company's board of directors has responsibility for overall supervision
of the Fund, and reviews the services provided by the investment adviser. Under
an agreement with the Company, INVESCO, 7800 E. Union Avenue, Denver, Colorado
80237, serves as the Fund's investment adviser; it is primarily responsible for
providing the Fund with portfolio management and various administrative
services.
INVESCO and IDI are indirect wholly-owned subsidiaries of AMVESCAP, PLC.
AMVESCAP PLC is a publicly traded holding company that through its subsidiaries
engages in the business of investment management on an international basis.
INVESCO PLC changed its name to AMVESCO PLC on March 8, 1997 and to AMVESCAP PLC
on May 8, 1997 as part of a merger between a direct subsidiary of INVESCO PLC
and ^ A I M Management Group Inc., that created one of the largest independent
investment management businesses in the world. AMVESCAP PLC had approximately
$241 billion in assets under management as of September 30, 1998. INVESCO was
established in 1932 and, as of August 31, 1998, managed 14 mutual funds,
consisting of 49 separate portfolios, with combined assets of approximately
$17.1 billion on behalf of over 899,439 shareholders.
Prior to February 3, 1998, Institutional Trust Company, doing business as
INVESCO Trust Company ("ITC"), provided sub-advisory services to the Fund;
termination of ITC's sub-advisory services in no way changed the basis upon
which investment advice is provided to the Fund, the cost of those services to
the Fund or the persons actually performing the investment advisory and other
services previously provided by ITC. INVESCO provides such day-to-day portfolio
management services.
The Fund is managed by members of the INVESCO Fixed Income Team, which is
headed by Donovan J. (Jerry) Paul. The following individuals are primarily
responsible for the day-to-day management of the Fund's portfolio holdings:
Donovan J. (Jerry) Paul, a Chartered Financial Analyst and Certified Public
Accountant, has been a co-portfolio manager of the Fund since 1994. Mr. Paul
also manages INVESCO High Yield Fund, INVESCO Select Income Fund, INVESCO
VIF-High Yield Fund, and co-manages INVESCO Industrial Income Fund, INVESCO
VIF-Industrial Income Fund, and INVESCO Balanced Fund. Mr. Paul is also a senior
vice president, portfolio manager, and director of fixed-income research of
INVESCO. Mr. Paul was previously a senior vice president and director of
fixed-income research (1989 to 1992) and portfolio manager (1987 to 1992) with
Stein, Roe & Farnham Inc. and president of Quixote Investment Management, Inc.
(1993 to 1994). Mr. Paul received an M.B.A. from the University of Northern Iowa
and a B.B.A. from the University of Iowa.
Richard R. Hinderlie has been a co-portfolio manager of the Fund since
1993. Mr. Hinderlie also manages INVESCO U.S. Government Securities Fund,
INVESCO U.S. Government Money Fund and INVESCO Cash Reserves Fund and is a vice
president of INVESCO. Mr. Hinderlie was previously a securities analyst with
Bank Western from 1987 to 1993. Mr. Hinderlie received an M.B.A. from Arizona
State University and a B.A. in Economics from Pacific Lutheran University.
INVESCO permits investment and other personnel to purchase and sell
securities for their own accounts, subject to a compliance policy governing
personal investing. This policy requires INVESCO's personnel to conduct their
personal investment activities in a manner that INVESCO believes is not
detrimental to the Fund or INVESCO's other advisory clients. See the Statement
of Additional Information for more detailed information.
The Fund pays INVESCO a monthly management fee which is based upon a
percentage of the Fund's average net assets determined daily. The management fee
is computed at the annual rate of 0.50% on the first $300 million of the Fund's
average net assets; 0.40% on the next $200 million of the Fund's average net
assets; and 0.30% on the Fund's average net assets over $500 million. For the
fiscal year ended August 31, 1998, investment management fees paid by the Fund
amounted to 0.50% of the Fund's average net assets (prior to the voluntary
absorption of certain Fund expenses by INVESCO).
<PAGE>
Under a Distribution Agreement, IDI provides services relating to the
distribution and sale of the Fund's shares. IDI, established in 1997, is a
registered broker-dealer that acts as distributor for all retail funds advised
by INVESCO. Prior to September 30, 1997, INVESCO served as the ^ Fund's
distributor.
Under a Transfer Agency Agreement, INVESCO acts as registrar, transfer
agent, and dividend disbursing agent for the Fund. The Fund pays an annual fee
of $26.00 per shareholder account or where applicable, per participant in an
omnibus account. Registered broker-dealers, third party administrators of
tax-qualified retirement plans and other entities, including affiliates of
INVESCO, may provide equivalent services to the ^ Fund. In these cases,INVESCO
may pay, out of the fee it receives from the ^ Fund, an annual sub-transfer
agency fee or recordkeeping fee to the third party.
Under an Administrative Services Agreement,INVESCO handles additional
administrative, recordkeeping and internal sub-accounting services for the ^
Fund. For the fiscal year ended August 31, 1998, the Fund paid INVESCO a fee
equal to 0.09% of the Fund's average net assets for these services (prior to the
absorption of certain Fund expenses).
The management and custodial services provided to the Fund by INVESCO and
the Fund's custodian, and the services provided to shareholders by INVESCO and
IDI, depend on the continued functioning of their computer systems. Many
computer systems in use today cannot recognize the Year 2000, but will revert to
1900 or 1980 or will cease to function due to the manner in which dates were
encoded and are calculated. That failure could have a negative impact on the
handling of the Fund's securities trades, its share pricing and its account
services. The Fund and its service providers have been actively working on
necessary changes to their computer systems to deal with the Year 2000 issue and
expect that their computer systems will be adapted before that date, but there
can be no assurance that they will be successful. Furthermore, services may be
impaired at that time as a result of the interaction of their systems with
noncomplying computer systems of others. INVESCO plans to test as many such
interactions as practicable prior to December 31, 1999 and to develop
contingency plans for reasonably anticipated failures.
The Fund's expenses, which are accrued daily, are deducted from total
income before dividends are paid. Total expenses of the Fund (prior to any
expense offset arrangements) for the fiscal year ended August 31, 1998,
including investment management fees (but excluding brokerage commissions, which
are a cost of acquiring securities), amounted to 0.88% of the Fund's average net
assets. Certain expenses of the Fund are absorbed voluntarily by INVESCO
pursuant to a commitment to the Fund in order to ensure that the Fund's total
operating expenses do not exceed 0.85% of its average net assets. This
commitment may be changed following consultation with the Company's board of
directors. In the absence of this voluntary expense limitation, the Fund's total
operating expenses would have been 1.86% of the Fund's average net assets.
INVESCO places orders for the purchase and sale of portfolio securities
with brokers and dealers based upon INVESCO's evaluation of such brokers' and
dealers' financial responsibility coupled with their ability to effect
transactions at the best available prices. As discussed under "How To Buy Shares
- -- Distribution Expenses," the Fund may market its shares through intermediary
brokers or dealers that have entered into Dealer Agreements with INVESCO or IDI,
as the Fund's distributor. The Fund may place orders for portfolio transactions
with qualified brokers and dealers that recommend the Fund, or sell shares of
the Fund, to clients, or act as agent in the purchase of Fund shares for
clients, if INVESCO believes that the quality of the execution of the
transaction and level of commission are comparable to those available from other
qualified brokerage firms. For further information, see "Investment Practices --
Placement of Portfolio Brokerage" in the Statement of Additional Information.
<PAGE>
FUND PRICE AND PERFORMANCE
Determining Price. The value of your investment in the Fund may vary daily.
The price per share is also known as the Net Asset Value ("NAV"). INVESCO prices
the Fund every day that the New York Stock Exchange is open, as of the close of
regular trading (generally, 4:00 p.m., New York time). NAV is calculated by
adding together the current market value of all of the Fund's assets, including
accrued interest and dividends; subtracting liabilities, including accrued
expenses; and dividing that dollar amount by the total number of shares
outstanding.
Performance Data. To keep shareholders and potential investors informed, we
will occasionally advertise the Fund's total return and yield. Total return
figures show the average annual rate of return on a $1,000 investment in the
Fund, assuming reinvestment of all dividends and capital gain distributions for
one-, five- and ten-year periods. Cumulative total return shows the actual rate
of return on an investment for the periods 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 the Fund's investment results, because they do not show the
interim variations in performance over the periods cited.
The Fund's yield is calculated by utilizing the Fund's calculated income,
expenses and average outstanding shares for the most recent 30-day or one-month
period, dividing it by the month-end net asset value and annualizing the
resulting number. More information about the Fund's recent and historical
performance is contained in the Company's Annual Report to Shareholders. You can
get a free copy by calling or writing to IDI using the telephone number or
address on the back cover of this Prospectus.
When we quote mutual fund rankings published by Lipper Analytical Services,
Inc., we may compare the Fund to others in its category of Corporate Bond Funds
- -- Short Investment Grade Debt Funds, as well as the broad-based Lipper general
fund groupings. These rankings allow you to compare the Fund to its peers. Other
independent financial media also produce performance- or service-related
comparisons, which you may see in our promotional materials. For more
information see "Fund Performance" in the Statement of Additional Information.
Performance figures are based on historical investment results and are not
intended to suggest future performance.
HOW TO BUY SHARES
The following chart shows several convenient ways to invest in the Fund.
Your new Fund shares will be priced at the NAV next determined after your order
is received in proper form. There is no charge to invest, exchange, or redeem
shares when you make transactions directly through INVESCO. However, if you
invest in the Fund through a securities broker, you may be charged a commission
or transaction fee. INVESCO may from time to time make payments from its
revenues to securities dealers and other financial institutions that provide
distributions related and/or administrative services for the Company. For all
new accounts, please send a completed application form. Please specify which
fund's shares you wish to purchase.
INVESCO reserves the right to increase, reduce or waive the minimum
investment requirements in its sole discretion, when it determines this action
is in the best interests of the Fund. Further, INVESCO reserves the right in its
sole discretion to reject any order for the purchase of Fund shares (including
purchases by exchange) when, in its judgment, such rejection is in ^ the Fund's
best interests.
<PAGE>
<TABLE>
<CAPTION>
HOW TO BUY SHARES
===================================================================================================
<S> <C> <C>
Method Investment Minimum Please Remember
- ---------------------------------------------------------------------------------------------------
By Check
Mail to: INVESCO $1,000 for regular If your check does
Funds Group, Inc. account; $250 for not clear, you will
P.O. Box 173706 an IRA; $50 minimum be responsible for
Denver, CO for each subsequent any related loss
80217-3706. Or you investment. the Fund or INVESCO
may send your check incurs. If you are
by overnight already a
courier to: 7800 E. shareholder in the
Union Ave., Denver, INVESCO funds, the
CO 80237. Fund may seek
reimbursement from
your existing
account(s) for any
loss incurred.
- ---------------------------------------------------------------------------------------------------
By Telephone or
Wire
Call 1-800-525-8085 $1,000. Payment must be
to request your received within 3
purchase. Then send business days, or
your check by the transaction may
overnight courier be canceled. If a
to our street purchase is
address: 7800 E. canceled due to
Union Ave., Denver, nonpayment, you
CO 80237. Or you will be responsible
may transmit your for any related
payment by bank loss the Fund or
wire (call INVESCO INVESCO incurs. If
for instructions). you are already a
shareholder in the
INVESCO funds,
the Fund may seek
reimbursement
from your
existing
account(s) for
any loss
incurred.
- ---------------------------------------------------------------------------------------------------
<PAGE>
- ---------------------------------------------------------------------------------------------------
With EasiVest or
Direct Payroll
Purchase
You may enroll on $50 per month for Like all regular
the fund EasiVest; $50 per investment plans,
application, or pay period for neither EasiVest
call us for the Direct Payroll nor Direct Payroll
correct form and Purchase. You may Purchase ensures a
more details. start or stop your profit or protects
Investing the same regular investment against loss in a
amount on a monthly plan at any time, falling market.
basis allows you to with two weeks' Because you'll
buy more shares notice to INVESCO. invest continually,
when prices are low regardless of
and fewer shares varying price
when prices are levels, consider
high. This your financial
"dollar-cost ability to keep
averaging" may help buying through low
offset market price levels. And
fluctuations. Over remember that you
a period of time, will lose money if
your average cost you redeem your
per share may be shares when the
less than the market value of all
actual average your shares is less
price per share. than their cost.
- ---------------------------------------------------------------------------------------------------
<PAGE>
- ---------------------------------------------------------------------------------------------------
By PAL(R)
Your "Personal $1,000; $250 for an Be sure to write
Account Line" is IRA. down the
available for confirmation number
subsequent provided by PAL(R).
purchases and Payment must be
exchanges 24-hours received within 3
a day. Simply call business days, or
1-800-424-8085. the transaction may
be canceled. If a
telephone purchase
is canceled due to
nonpayment, you
will be responsible
for any related
loss the Fund or
INVESCO incurs. If
you are already a
shareholder in the
INVESCO funds, a
Fund may seek
reimbursement
from your
existing
account(s) for
any loss
incurred.
- ---------------------------------------------------------------------------------------------------
By Exchange
Between the Fund $1,000 to open a See "Exchange
and another of the new account; $50 Policy" page 12.
INVESCO funds. Call for written
1-800-525-8085 for requests to
prospectuses of purchase additional
other INVESCO shares for an
funds. You may also existing account.
establish an ^ (The exchange
automatic monthly minimum is $250 for
exchange service purchases requested
between two INVESCO by telephone.)
funds; call INVESCO
for further details
and the correct
form.
===================================================================================================
</TABLE>
<PAGE>
Your order to purchase shares of the Fund will not begin earning dividends
or other distributions until either your payment can be converted into available
federal funds under regular banking procedures or, if you are acquiring shares
in an exchange from another INVESCO fund, the Fund receives the proceeds of the
exchange. Checks normally are converted into federal funds (moneys held on
deposit within the Federal Reserve System) within two or three business days
after we receive them, although this period may be longer for checks drawn on
banks that are not members of the Federal Reserve System.
Exchange Policy. You may exchange your shares in the Fund for those in
another INVESCO fund, on the basis of their respective net asset values at the
time of the exchange. Before making any exchange, be sure to review the
prospectuses of the funds involved and consider their differences.
Please note these policies regarding exchanges of fund shares:
(1) The fund accounts must be identically registered.
(2) You may make four exchanges out of a fund during each calendar
year.
(3) An exchange is the redemption of shares from one fund followed
by the purchase of shares in another. Therefore, any gain or
loss realized on the exchange is recognizable for federal
income tax purposes (unless, of course, your account is
tax-deferred).
(4) In order to prevent abuse of this policy to the
disadvantage of other shareholders, the Fund reserves the
right to temporarily or permanently terminate the
exchange option of any shareholder who requests more than
four exchanges in a year, or at any time the Fund
determines the actions of the shareholder are detrimental
to Fund performance and shareholders. The Fund will
determine whether to do so based on a consideration of
both the number of exchanges any particular shareholder,
or group of shareholders, has requested and the time
period over which those exchange requests have been made,
together with the level of expense to the Fund which will
result from effecting additional exchange requests. The
Fund is intended to be a long-term investment vehicle and
is not designed to provide investors the means of
speculation on short-term market movements.
(5) Notice of all modifications of this policy or
terminations that would affect all Fund shareholders will
be given at least 60 days prior to the effective date of
the change in policy, except in unusual circumstances
(such as when redemptions of the exchanged shares are
suspended under Section 22(e) of the Investment Company
Act of 1940, or when sales of the fund into which you are
exchanging are temporarily suspended).
<PAGE>
Distribution Expenses. The Fund is authorized under a Plan and Agreement of
Distribution pursuant to Rule 12b-1 under the Investment Company Act of 1940
(the "Plan") to use its assets to finance certain activities relating to the
distribution of its shares to investors. Under the Plan, monthly payments may be
made by the Fund to IDI to permit IDI, at its discretion, to engage in certain
activities and provide certain services approved by the board of directors of
the Company in connection with the distribution of the Fund's shares to
investors. These activities and services may include the payment of compensation
(including incentive compensation and/or continuing compensation based on the
amount of customer assets maintained in the Fund) to securities dealers and
other financial institutions and organizations, which may include INVESCO- and
IDI-affiliated companies, to obtain various distribution-related and/or
administrative services for the Fund. Such services may include, among other
things, processing new shareholder account applications, preparing and
electronically transmitting to the Fund's Transfer Agent computer processable
tapes of all transactions by customers, and serving as the primary source of
information to customers in answering questions concerning the Fund and their
transactions with the Fund.
In addition, other permissible activities and services include advertising,
preparation, printing and distribution of sales literature, printing and
distribution of prospectuses to prospective investors and such other services
and promotional activities for the Fund as may from time to time be agreed upon
by the Company and its board of directors, including public relations efforts
and marketing programs to communicate with investors and prospective investors.
These services and activities may be conducted by the staff of INVESCO, IDI or
their affiliates or by third parties.
Under the Plan, the Fund's payments to IDI on behalf of the Fund are
limited to an amount computed at an annual rate of 0.25% of the Fund's average
net assets. IDI is not entitled to payment for overhead expenses under the Plan,
but may be paid for all or a portion of the compensation paid for salaries and
other employee benefits for the personnel of IDI or INVESCO whose primary
responsibilities involve marketing shares of the INVESCO funds, including the
Fund. Payment amounts by the Fund under the Plan, for any month, may be made to
compensate IDI for permissible activities engaged in and services provided by
IDI during the rolling 12-month period in which that month falls. Therefore, any
obligations incurred by IDI in excess of the limitations described above will
not be paid by the Fund under the Plan, and will be borne by IDI. In addition,
IDI and its affiliates may from time to time make additional payments from their
revenues to securities dealers, financial advisors and other financial
institutions that provide distribution-related and/or administrative services
for the Fund. No further payments will be made by the Fund under the Plan in the
event of the Plan's termination. Payments made by the Fund may not be used to
finance directly the distribution of shares of any other Fund of the Company or
other mutual fund advised by INVESCO and distributed by IDI. However, payments
received by IDI which are not used to finance the distribution of shares of the
Fund become part of IDI's revenues and may be used by IDI for activities that
promote distribution of any of the mutual funds advised by INVESCO. Subject to
review by the Company's directors, payments made by the Fund under the Plan for
compensation of marketing personnel, as noted above, are based on an allocation
formula designed to ensure that all such payments are appropriate. IDI will bear
any distribution- and service-related expenses in excess of the amounts which
are compensated pursuant to the Plan. The Plan also authorizes any financing of
distribution which may result from ^ INVESCO's or IDI's use of fees received
from the Fund for services rendered by INVESCO, provided that such fees are
legitimate and not excessive. For more information see "How Shares Can Be
Purchased --Distribution Plan" in the Statement of Additional Information.
<PAGE>
FUND SERVICES
Shareholder Accounts.INVESCO will maintain a share account that reflects
your current holdings. Share certificates will be issued only upon specific
request. You will have greater flexibility to conduct transactions if you do not
request certificates.
Transaction Confirmations. You will receive detailed confirmations of
individual purchases, exchanges, and redemptions. If you choose certain
recurring transaction plans (for instance, EasiVest), your transactions will be
confirmed on your quarterly Investment Summary.
Investment Summaries. Each calendar quarter, shareholders receive a written
statement which consolidates and summarizes account activity and value at the
beginning and end of the period for each of their INVESCO funds.
Reinvestment of Distributions. Dividends and capital gain distributions are
automatically reinvested in additional fund shares at the NAV on the ex-dividend
or ex-distribution date, unless you choose to have dividends and/or other
distributions automatically reinvested in another INVESCO fund or paid by check
(minimum of $10.00).
Telephone Transactions. All shareholders may exchange and redeem shares of
the Fund by telephone, unless they expressly decline these privileges. By
signing the new account Application, a Telephone Transaction Authorization Form,
or otherwise using these privileges, the investor has agreed that, if the Fund
has followed reasonable procedures, such as recording telephone instructions and
sending written transaction confirmations, it will not be liable for following
telephoned instructions that it believes to be genuine. As a result of this
policy, the investor may bear the risk of any loss due to unauthorized or
fraudulent instructions.
Retirement Plans and IRAs. Shares of the Fund may be purchased for IRAs and
many types of tax-deferred retirement plans. INVESCO can supply you with
information and forms to establish or transfer your existing plan or account.
HOW TO SELL SHARES
The following chart shows several convenient ways to redeem your Fund
shares. Shares of the Fund may be redeemed at any time at their current NAV next
determined after a request in proper form is received at the Fund's office. The
NAV at the time of the redemption may be more or less than the price you paid to
purchase your shares, depending primarily upon the Fund's investment
performance.
Please specify from which fund you wish to redeem shares. Shareholders have
a separate account for each fund in which they invest.
<PAGE>
<TABLE>
<CAPTION>
HOW TO SELL SHARES
===================================================================================================
<S> <C> <C>
Method Minimum Redemption Please Remember
- ---------------------------------------------------------------------------------------------------
By Telephone
Call us toll-free $250 (or, if less, These telephone
at 1-800-525-8085. full liquidation of redemption
the account) for a privileges may be
redemption check; modified or
$1,000 for a wire terminated in the
to bank of record. future at INVESCO's
The maximum amount discretion.
which may be
redeemed by
telephone is
generally $25,000.
- ---------------------------------------------------------------------------------------------------
In Writing
Mail your request Any amount. The If the shares to be
to INVESCO Funds redemption request redeemed are
Group, Inc., P.O. must be signed by represented by
Box 173706 all registered stock certificates,
Denver, CO account owners. the certificates
80217-3706. You may Payment will be must be sent to
also send your mailed to your INVESCO.
request by address of record
overnight courier or to a
to 7800 E. Union pre-designated
Ave., Denver, CO bank.
80237.
- ---------------------------------------------------------------------------------------------------
By Exchange
Between the Fund $1,000 to open a See "Exchange
and another of the new account; $50 Policy" page 12.
INVESCO funds. Call for written
1-800-525-8085 for requests to
prospectuses of purchase additional
other INVESCO shares for an
funds. You may also existing account.
establish an (The exchange
automatic monthly minimum is $250 for
exchange service exchanges requested
between two INVESCO by telephone.)
funds; call INVESCO
for further details
and the correct
form.
- ---------------------------------------------------------------------------------------------------
<PAGE>
- ---------------------------------------------------------------------------------------------------
Periodic Withdrawal
Plan
You may call us to $100 per payment, You must have at
request the on a monthly or least $10,000 total
appropriate form quarterly basis. invested with the
and more The redemption INVESCO funds, with
information at check may be made at least $5,000 of
1-800-525-8085. payable to any that total invested
party you in the fund from
designate. which withdrawals
will be made.
- ---------------------------------------------------------------------------------------------------
Payment To Third
Party
Mail your request Any amount. All registered
to INVESCO Funds account owners must
Group, Inc., P.O. sign the request,
Box 173706 with a signature
Denver, CO guarantee from an
80217-3706. eligible guarantor
financial
institution,
such as a
commercial bank
or recognized
national or
regional
securities firm.
===================================================================================================
</TABLE>
<PAGE>
While the Fund will attempt to process telephone redemptions promptly,
there may be times -- particularly in periods of severe economic or market
disruption -- when you may experience delays in redeeming shares by phone.
Payments of redemption proceeds will be mailed within seven days following
receipt of the redemption request in proper form. However, payment may be
postponed under unusual circumstances --for instance, if normal trading is not
taking place on the New York Stock Exchange or during an emergency as defined by
the Securities and Exchange Commission. If your shares were purchased by a check
which has not yet cleared, payment will be made promptly upon clearance of the
purchase check (which will take up to 15 days).
If you participate in EasiVest, the Fund's automatic monthly investment
program, and redeem all of the shares in your account, we will terminate any
further EasiVest purchases unless you instruct us otherwise.
Because of the high relative costs of handling small accounts, should the
value of any shareholder's account fall below $250 as a result of shareholder
action, the Fund reserves the right to redeem all shares in such account, in
which case the account would be involuntarily liquidated and the proceeds
forwarded to the shareholder. Prior to any such redemption, a shareholder will
be notified and given 60 days to increase the value of the account to $250 or
more.
TAXES, DIVIDENDS AND OTHER DISTRIBUTIONS
Taxes. The Fund intends to distribute to shareholders substantially all of
its net investment income, net capital gains and net gains from foreign currency
transactions, if any. Distribution of substantially all net investment income to
shareholders allows the Fund to maintain its tax status as a regulated
investment company. The Fund does not expect to pay any federal income or excise
taxes because of its distribution policies and tax status as a regulated
investment company.
Shareholders must include all dividends and other distributions as taxable
income for federal, state and local income tax purposes unless they are exempt
from income taxes. Dividends and other distributions are taxable whether they
are received in cash or automatically reinvested in shares of the Fund or
another fund in the INVESCO group.
Net realized capital gains of the Fund are classified as short-term and
long-term gains depending upon how long the Fund held the security that gave
rise to the gains. Short-term capital gains are included in income from
dividends and interest as ordinary income and are taxed at the taxpayer's
marginal tax rate. During 1997, the Taxpayer Relief Act established a new
maximum capital gains tax rate of 20%. Depending on the holding period of the
asset giving rise to the gain, a capital gain was taxable at a maximum rate of
either 20% or 28%. Beginning January 1, 1998, all long-term gains realized on
the sale of securities held more than 12 months will be taxable at a maximum
rate of 20%. In addition, legislation signed in October of 1998 provides that
all capital gain ^ distributions from a mutual fund paid to shareholders during
1998 will be taxed at a maximum rate of 20%. Accordingly, all capital gain
distributions paid in 1998 will be taxable at a maximum rate of 20%. Note that
the rate of capital gains tax is dependent on the shareholder's marginal tax
rate and may be lower than the above rates. At the end of each year, information
regarding the tax status of dividends and other distributions is provided to
shareholders. Shareholders should consult their tax advisers as to the effect of
distributions by the Fund.
Shareholders may realize capital gains or losses when they sell their Fund
shares at more or less than the price originally paid. Capital gains on shares
held for more than one year will be long-term capital gains, in which event they
will be subject to federal income tax at the rates indicated above.
<PAGE>
The Fund may be subject to withholding of foreign taxes on dividends or
interest it receives on foreign securities. Foreign taxes withheld will be
treated as an expense of the Fund.
Individuals and certain other non-corporate shareholders may be subject to
backup withholding of 31% on dividends, capital gain distributions and other
distributions and redemption proceeds. You can avoid backup withholding on your
account by ensuring that we have a correct, certified tax identification number,
unless you are subject to backup withholding for other reasons.
We encourage you to consult a tax adviser with respect to these matters.
For further information see "Dividends, Other Distributions And Taxes" in the
Statement of Additional Information.
Dividends and Other Distributions. The Fund earns ordinary or net
investment income in the form of interest and dividends on its investments.
Dividends paid by the Fund will be based solely on the net investment income
earned by it. The Fund's policy is to distribute substantially all of this
income, less Fund expenses, to shareholders. Dividends from net investment
income are declared daily and paid monthly at the discretion of the Company's
board of directors. Dividends are automatically reinvested in additional shares
of the Fund at the net asset value on the payable date unless otherwise
requested.
In addition, each Fund realizes capital gains and losses when it sells
securities or derivatives for more or less than it paid. If total gains on sales
exceed total losses (including losses carried forward from previous years), the
Fund has a net realized capital gain. Net realized capital gains, if any,
together with gains, if any, realized on certain foreign currency transactions,
if any, are distributed to shareholders at least annually, usually in December.
Capital gain distributions are automatically reinvested in additional shares of
the Fund at the net asset value on the ex-distribution date unless otherwise
requested.
Dividends and other distributions are paid to shareholders who hold shares
on the record date of distribution regardless of how long the Fund shares have
been held by the shareholder. The Fund's share price will then drop on the
ex-dividend or ex-distribution date by the amount of the distribution. If a
shareholder purchases shares immediately prior to the distribution, the
shareholder will, in effect, have "bought" the distribution by paying the full
purchase price, a portion of which is then returned in the form of a taxable
distribution.
<PAGE>
ADDITIONAL INFORMATION
Voting Rights. All shares of the Company have equal voting rights based
on one vote for each share owned and a corresponding fractional vote for each
fractional share owned. The Company is not generally required and does not
expect to hold regular annual meetings of shareholders. However, when requested
to do so in writing by the holders of 10% or more of the outstanding shares of
the Company or as may be required by applicable law or the Company's Articles of
Incorporation, the board of directors will call special meetings of
shareholders. Directors may be removed by action of the holders of a majority of
the outstanding shares of the Company. The Company will assist shareholders in
communicating with other shareholders as required by the Investment Company Act
of 1940.
<PAGE>
APPENDIX -- RATINGS SERVICES
There are several independent ratings services that analyze debt
obligations and preferred stock issued by corporations. The two most frequently
used services are Moody's and S&P.
The chart below shows the various ratings used by each service for the
categories of bonds and preferred stock in which the Funds may invest. There are
additional refinements to each rating system: Moody's may use the modifier 1 to
indicate that the security ranks in the higher end of its generic ratings
category; modifier 2 indicates a mid-range rank, and 3 indicates the issue ranks
at the lower end of its category. Similarly, S&P may use a + or - sign to
indicate a security's relative standing within its generic category. For a
further discussion of risks associated with the Funds, see "Investment Policies
And Risks" and "Investment Practices" in the Statement of Additional
Information.
================================================================================
Moody's S&P Bond Description
- --------------------------------------------------------------------------------
Aaa AAA Highest quality, often referred to
as "gilt edged." Carries the
smallest degree of investment risk:
Interest payments are protected by
a larger or exceptionally stable
margin and principal is secure.
- --------------------------------------------------------------------------------
Aa AA High quality or high grade. Margins
of protection may be smaller than
those above, or fluctuation of
protective elements may be of
greater amplitude. Other elements
may be present which make long-term
risks somewhat larger than in Aaa
or AAA securities.
- --------------------------------------------------------------------------------
A A Upper medium-grade obligations.
Adequate to strong capacity to pay
principal and interest, but
somewhat more susceptible to
adverse effects of changes in
circumstances and economic
conditions.
- --------------------------------------------------------------------------------
Baa BBB Medium-grade obligations. Neither
highly protected nor poorly
secured. Interest and principal
security currently appear adequate,
but certain protective elements may
be lacking or characteristically
unreliable over the longer-term.
May have speculative
characteristics.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Ba BB Speculative, but less near-term
vulnerability to default than those
below. These bonds face major
ongoing uncertainties or exposure
to adverse business, financial or
economic conditions that could lead
to inadequate capacity to make
timely interest and principal
payments.
- --------------------------------------------------------------------------------
B B Generally lack characteristics of a
desirable investment. Greater
vulnerability to default: currently
have capacity to meet timely
interest and principal payments,
but assurance of payments over any
extended period of time may be
small, and/or other terms of the
bond contract may be in jeopardy.
- --------------------------------------------------------------------------------
Caa CCC Bonds in poor standing. These
bonds may be in default or there
may be present elements of danger
with respect to principal or
interest.
- --------------------------------------------------------------------------------
aaa AAA Top-quality. Good asset protection
and extremely strong capacity for
dividend payment.
- --------------------------------------------------------------------------------
aa AA High-grade. Offers reasonable
assurance that earnings and asset
protection will remain relatively
well-maintained in the foreseeable
future.
- --------------------------------------------------------------------------------
a A Upper medium-grade. Earnings and
asset protection are expected to
remain at adequate levels.
- --------------------------------------------------------------------------------
baa BBB Medium-grade. Neither highly
protected nor poorly secured.
Backed by adequate capacity to
maintain dividend payments,
but susceptible to adverse economic
conditions or changing
circumstances.
- --------------------------------------------------------------------------------
ba BB Has speculative elements and its
future is not well assured.
Earnings and asset protection may
be very moderate and not well
safeguarded during adverse periods.
- --------------------------------------------------------------------------------
b B Lacks the characteristics of a
desirable investment. Assurance of
dividend payments over any extended
period of time may be small.
================================================================================
<PAGE>
^ Short-Term Bond Fund
A no-load mutual fund seeking a high
level of current income from
investing in fixed-income
securities.
PROSPECTUS
January 1, 1999
^ We're easy to stay in touch with:
^ Investor Services:
1-800-525-8085
PAL(R), your Personal
Account Line: 1-800-424-8085
On the World Wide Web:
^ www.invesco.com
In Denver, visit one of
our convenient Investor Centers:
Cherry Creek,
155-B Fillmore Street;
Denver Tech Center,
7800 East Union Avenue,
Lobby Level
INVESCO Distributors, Inc.,(SM)
Distributor
Post Office Box 173706
Denver, Colorado 80217-3706
In addition, all documents
filed by the Company with
the Securities and Exchange
Commission can be located
on a web site maintained
by the Commission at
http://www.sec.gov.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
January 1, 1999
INVESCO BOND FUNDS, INC.
INVESCO High Yield Fund
INVESCO Select Income Fund
INVESCO Short-Term Bond Fund
INVESCO U.S. Government Securities Fund
Address: Mailing Address:
7800 E. Union Avenue Post Office Box 173706
Denver, Colorado 80237 Denver, Colorado 80217-3706
Telephone:
In continental U.S., 1-800-525-8085
- --------------------------------------------------------------------------------
INVESCO BOND FUNDS, INC. (formerly, INVESCO Income Funds, Inc.) (the
"Company"), is an open-end, diversified, no-load management investment company
currently consisting of four separate portfolios of investments: INVESCO High
Yield Fund (the "High Yield Fund"), INVESCO Select Income Fund (the "Select
Income Fund"), INVESCO Short-Term Bond Fund (the "Short-Term Bond Fund") and
INVESCO U.S. Government Securities Fund (the "U.S. Government Securities Fund"),
(collectively, the "Funds" and individually, a "Fund").
The investment objective of each Fund is to provide investors with as high
a level of current income as is consistent with the risk involved in investing
in the types of securities in which each Fund invests. Potential capital
appreciation is a factor in the selection of investments, but is secondary to
the Select Income, High Yield and U.S. Government Funds' primary objective.
Investors may purchase shares of any or all Funds. Additional Funds may be added
in the future.
INVESCO HIGH YIELD FUND
The High Yield Fund seeks to achieve its investment objective through the
investment of substantially all of its assets in bonds and other debt securities
and in preferred stock. Such securities ordinarily include those rated in lower
categories by established rating services.
<PAGE>
INVESCO SELECT INCOME FUND
The Select Income Fund seeks to achieve its investment objective through
the investment of substantially all of its assets in bonds and other debt
securities. It is anticipated that at least 50% of such securities will be rated
in medium and higher categories by an established rating service. ^
INVESCO SHORT-TERM BOND FUND
The Short-Term Bond Fund (the "Fund") seeks to achieve the highest level of
current income as is consistent with minimum fluctuation in principal value and
with liquidity. The Fund invests primarily in short-term debt securities (having
maturities of 3 years or less) and intermediate-term debt securities (having
maturities of 3 to 10 years) and maintains a diversified portfolio with a
dollar-weighted average maturity of not more than three years. The Fund pursues
its investment objective by investing in a variety of debt securities consistent
with the policies of this Fund.
INVESCO U.S. GOVERNMENT SECURITIES FUND
The U.S. Government Securities Fund seeks to achieve its investment
objective by investing in bonds and other debt obligations issued or guaranteed
by the U.S. Government or its agencies or instrumentalities and in repurchase
agreements and futures contracts with respect thereto.
A Prospectus for the High Yield, Select Income and U.S. Government
Securities Funds and a Prospectus for the Short-Term Bond Fund, each dated
January 1, 1999, which provide the basic information you should know before
investing in the Funds may be obtained without charge from INVESCO Distributors,
Inc., P.O. Box 173706, Denver, Colorado 80217-3706. This Statement of Additional
Information is not a prospectus, but contains information in addition to and
more detailed than that set forth in the Prospectuses. It is intended to provide
you with additional information regarding the activities and operations of the
Funds and should be read in conjunction with the Prospectuses.
Investment Adviser: INVESCO FUNDS GROUP, INC.
Distributor: INVESCO DISTRIBUTORS, INC.
<PAGE>
TABLE OF CONTENTS Page
INVESTMENT POLICIES AND RESTRICTIONS...........................................4
THE FUNDS AND THEIR MANAGEMENT................................................19
HOW SHARES CAN BE PURCHASED...................................................34
HOW SHARES ARE VALUED.........................................................39
FUND PERFORMANCE..............................................................40
SERVICES PROVIDED BY THE FUND.................................................43
TAX-DEFERRED RETIREMENT PLANS.................................................44
HOW TO REDEEM SHARES..........................................................44
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES......................................45
INVESTMENT PRACTICES..........................................................48
ADDITIONAL INFORMATION........................................................52
APPENDIX - GNMA CERTIFICATES AND FUTURES CONTRACTS............................57
<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS
As discussed in the Funds' Prospectuses in the sections entitled
"Investment Objective And Strategy" and "Investment Policies And Risks," the
Select Income Fund and High Yield Fund may invest in bonds and other debt
securities. Such securities include corporate bonds and debentures (including
convertible issues), equipment trust certificates and promissory notes, and,
where the yields are competitive with those of corporate debt securities,
obligations issued or guaranteed by the U.S. government or its agencies, and
obligations of any state, municipality or political subdivision thereof.
Generally, corporate bonds and equipment trust certificates are secured
obligations, whereas debentures and notes are unsecured. In addition, the High
Yield Fund may invest in preferred stock. Preferred stock generally entitles
holders thereof to certain preferences in payment of dividends and assets in
priority to holders of common stock. As discussed in its Prospectus, the
Short-Term Bond Fund may invest in investment-grade debt securities of all types
in any proportion. The U.S. Government Securities Fund may invest in government
and government agency or government instrumentality debt securities (including
mortgage-backed securities issued or guaranteed by government agencies or
government-sponsored enterprises).
Subject to complying with applicable investment policies, in recognition of
changing fiscal policies and economic conditions, each of the Funds may vary the
proportions of its holdings in intermediate, long-term, and short-term
obligations, and they may dispose of any such securities prior to maturity and
reinvest on the basis of yield disparities. The value of the debt securities
held by each of the Funds will vary inversely with changes in prevailing
interest rates. Thus, when interest rates decline, the market value of a
portfolio security already invested at higher yields can be expected to rise if
such security is protected against early call. Conversely, when interest rates
increase, the market value of a portfolio security already invested at lower
yields can be expected to decline. When it appears to INVESCO, as investment
adviser to the Funds, that interest rates may change, the composition of a
Fund's portfolio may be adjusted should such anticipated changes offer the
opportunity to further the Fund's investment objectives.
Foreign Securities. As discussed in the Prospectuses in the section
entitled "Investment Policies And Risks -- Foreign Securities," the Select
Income Fund, Short-Term Bond Fund and High Yield Fund may invest up to 25% of
their respective total assets, measured at the time of purchase, in foreign
securities. Securities of Canadian issuers are not subject to this 25%
limitation. There is generally less publicly available information, reports and
ratings about foreign companies and other foreign issuers than that which is
available about companies and issuers in the United States. Foreign issuers are
also generally subject to fewer uniform accounting and auditing and financial
reporting standards, practices, and requirements as compared to those applicable
to United States issuers.
For U.S. investors, the returns on foreign debt securities are influenced
not only by the returns on the foreign investments themselves, but also by
currency fluctuations. That is, when the U.S. dollar generally rises against
foreign currencies, returns on foreign securities for a U.S. investor may
decrease. By contrast, in a period when the U.S. dollar generally declines,
those returns may increase. The Select Income and High Yield Funds attempt to
minimize these risks by limiting their investments in foreign debt securities to
those which are denominated and pay interest in U.S. dollars.
<PAGE>
INVESCO will normally purchase foreign securities in over-the-counter
markets or on exchanges located in the countries in which the respective
principal offices of the issuers of the various debt securities are located, as
such markets or exchanges are generally the best available market for foreign
securities. Foreign securities markets are generally not as developed or
efficient as those in the United States. While growing in volume, they usually
have substantially less volume than the New York Stock Exchange, and securities
of some foreign issuers are less liquid and more volatile than securities of
comparable United States issuers. Fixed commissions on foreign exchanges are
generally higher than negotiated commissions on United States exchanges,
although the Funds will endeavor to achieve the most favorable net results on
their portfolio transactions. There is generally less government supervision and
regulation of securities exchanges, brokers and listed issuers in foreign
countries than in the United States.
With respect to certain foreign countries, there is the possibility of
adverse changes in investment or exchange control regulations, expropriation or
confiscatory taxation, limitations on the removal of funds or other assets,
political or social instability, or diplomatic developments which could affect
United States investments in those countries. Moreover, the economies of
individual countries may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payment position.
The dividends and interest payable on certain of the Funds' foreign debt
securities may be subject to foreign withholding taxes, thus reducing the net
amount of income available for distribution to the Funds' shareholders.
Illiquid and 144A Securities. As discussed in the section of its Prospectus
entitled "Investment Policies And Risks," the High Yield Fund may invest in
securities that are illiquid because they are subject to restrictions on their
resale ("restricted securities") or because, based upon their nature or the
market for such securities, they are not readily marketable. However, the High
Yield Fund will not purchase any such security if the purchase would cause the
Fund to invest more than 15% of its net assets, measured at the time of
purchase, in illiquid securities. Repurchase agreements maturing in more than
seven days will be considered as illiquid for purposes of this restriction.
Investments in illiquid securities involve certain risks to the extent that the
High Yield Fund may be unable to dispose of such securities at the time desired
or at a reasonable price. In addition, in order to resell a restricted security,
the High Yield Fund might have to bear the expense and incur the delays
associated with effecting registration.
Each Fund also may invest in restricted securities that can be resold to
institutional investors pursuant to Rule 144A under the Securities Act of 1933,
as amended (the "1933 Act") (hereinafter referred to as "Rule 144A Securities"),
if a liquid institutional trading market exists. The Company's board of
directors has delegated to INVESCO the authority to determine the liquidity of
Rule 144A Securities pursuant to guidelines approved by the board.
In recent years, a large institutional market has developed for Rule 144A
Securities. Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend on an efficient
institutional market in which Rule 144A Securities can readily be resold or on
an issuer's ability to honor a demand for repayment. Therefore, the fact that
there are contractual or legal restrictions on resale to the general public or
certain institutions is not dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act establishes a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for Rule 144A Securities
may provide both readily ascertainable values for Rule 144A Securities and the
ability to liquidate an investment in order to satisfy share redemption orders.
An insufficient number of qualified institutional buyers interested in
purchasing a Rule 144A Security held by a Fund could adversely affect the
marketability of such security and the Fund might be unable to dispose of such
security promptly or at reasonable prices.
<PAGE>
Euro/Yankee Bonds. The Select Income, High Yield and Short-Term Bond Funds
may invest in dollar-denominated bonds issued by foreign branches of domestic
banks ("Eurobonds") and dollar-denominated bonds issued by a U.S. branch of a
foreign bank and sold in the United States ("Yankee bonds"). Investments in
Eurobonds and Yankee bonds entail certain risks similar to investments in
foreign securities in general. For information on these risks see "Investment
Policies And Risks" in the Prospectuses.
When-Issued and Delayed Delivery Securities. As discussed in the section of
the Funds' Prospectuses entitled "Investment Policies And Risks," the Funds may
purchase and sell securities on a when-issued or delayed delivery basis.
When-issued or delayed delivery transactions arise when securities (normally,
debt obligations of issuers eligible for investment by the Funds) are purchased
or sold by the Funds with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous price and yield.
However, the yield on a comparable security available when delivery takes place
may vary from the yield on the security at the time that the when-issued or
delayed delivery transaction was entered into. When the Funds engage in
when-issued and delayed delivery transactions, they rely on the seller or buyer,
as the case may be, to consummate the sale. Failure to do so may result in the
Funds missing the opportunity of obtaining a price or yield considered to be
advantageous. When-issued and delayed delivery transactions generally may be
expected to settle within one month from the date a transaction is entered into,
but in no event later than 90 days after the transaction date. No payment or
delivery is made by the Funds until they receive delivery or payment from the
other party to the transaction. However, when a Fund purchases a security on a
when-issued or delayed delivery basis, it assumes the risk that the market price
of the security may fluctuate between the date of purchase and the date of
delivery.
To the extent that a Fund remains substantially fully invested at the same
time that it has purchased when-issued securities, as it would normally expect
to do, there may be greater fluctuations in its net assets than if the Fund sets
aside cash to satisfy its purchase commitments.
When a Fund purchases securities on a when-issued basis, it will maintain
in a segregated account cash or liquid securities having an aggregate value
equal to the amount of such purchase commitments, until payment is made. If
necessary, additional assets will be placed in the account daily so that the
value of the account will equal or exceed the amount of the Fund's purchase
commitments.
Repurchase Agreements. As discussed in the section of the Funds'
Prospectuses entitled "Investment Policies And Risks," the Funds may invest in
repurchase agreements with respect to debt instruments eligible for investment
by the Funds with member banks of the Federal Reserve System, registered
brokers-dealers and registered U.S. government securities dealers that are
believed to be creditworthy. A repurchase agreement is an agreement under which
a Fund acquires a debt instrument (generally a security issued by the U.S.
government or an agency thereof, a banker's acceptance or a certificate of
deposit) from a commercial bank, broker or dealer, subject to resale to the
seller at an agreed upon price and date (normally, the next business day). A
repurchase agreement may be considered a loan collateralized by securities. The
resale price reflects an agreed-upon interest rate effective for the period the
instrument is held by the Funds and is unrelated to the interest rate on the
underlying instrument. In these transactions, the securities acquired by a Fund
(including interest earned thereon) must have a total value at least equal to
the value of the repurchase agreement, and are held as collateral by the Fund's
custodian bank until the repurchase agreement is completed. The Company's board
of directors monitors the Funds' repurchase agreement transactions and has
established guidelines and standards for review by INVESCO of the
creditworthiness of any bank, broker or dealer that is a party to a repurchase
agreement with the Funds. The High Yield Fund may enter into a repurchase
agreement maturing in more than seven days if as a result no more than 15% of
the High Yield Fund's net assets would be invested in such repurchase agreements
and other illiquid securities.
<PAGE>
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent the Funds may experience costs and delays in
realizing on the collateral. Finally, it is possible that a Fund may not be able
to substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement. While INVESCO
acknowledges these risks, it is expected that they can be controlled through
careful monitoring procedures.
Securities Lending. As described in the section of the Funds' Prospectuses
entitled "Investment Policies And Risks," the Funds may lend their portfolio
securities to qualified brokers, dealers, banks and other financial
institutions, provided that such loans are callable at any time by a Fund and
are at all times secured by collateral consisting of cash, letters of credit or
securities issued or guaranteed by the U. S. government or its agencies, or any
combination thereof, equal to the market value, determined daily, of the loaned
securities. The advantage of such loans is that a Fund continues to have the
benefits (and risks) of ownership of the loaned securities, while at the same
time receiving income from the borrower of the securities. Loans will be made
only to firms deemed by INVESCO (under procedures established by the Company's
board of directors) to be creditworthy and when the amount of interest to be
received justifies the inherent risks. A loan may be terminated by the borrower
on one business day's notice, or by a Fund at any time. A Fund will not lend any
security if, as a result of such loan, the aggregate value of securities then on
loan would exceed 33-1/3% of the Fund's net assets (taken at market value).
While voting rights may pass with the loaned securities, if a material event
(e.g., proposed merger, sale of assets, or liquidation) is to occur affecting an
investment on loan, the loan must be called and the securities voted. Loans of
securities made by a Fund will comply with all applicable regulatory
requirements.
At the present time, a Fund may pay reasonable negotiated finder fees in
connection with loaned securities, so long as such fees are set forth in a
written contract and are in compliance with guidelines with respect to such fees
established by the Company's directors.
U.S. Government Obligations. These securities consist of treasury bills,
treasury notes, and treasury bonds, which differ only in their interest rates,
maturities, and dates of issuance. Treasury bills have a maturity of one year or
less. Treasury notes generally have a maturity of one to ten years, and treasury
bonds generally have maturities of more than ten years. As discussed in each
Fund's Prospectus, U.S. government obligations also include securities issued or
guaranteed by agencies or instrumentalities of the U.S. government.
<PAGE>
Some obligations of United States government agencies, which are
established under the authority of an act of Congress, such as Government
National Mortgage Association (GNMA) participation certificates, are supported
by the full faith and credit of the United States Treasury. GNMA Certificates
are mortgage-backed securities representing part ownership of a pool of mortgage
loans. These loans -- issued by lenders such as mortgage bankers, commercial
banks and savings and loan associations -- are either insured by the Federal
Housing Administration or guaranteed by the Veterans Administration. A "pool" or
group of such mortgages is assembled and, after being approved by GNMA, is
offered to investors through securities dealers. Once approved by GNMA, the
timely payment of interest and principal on each mortgage is guaranteed by GNMA
and backed by the full faith and credit of the United States government. The
market value of GNMA Certificates is not guaranteed. GNMA Certificates differ
from bonds in that principal is paid back monthly by the borrower over the term
of the loan rather than returned in a lump sum at maturity. GNMA Certificates
are called "pass-through" securities because both interest and principal
payments (including prepayments) are passed through to the holder of the
Certificate. Upon receipt, principal payments will be used by each Fund to
purchase additional securities under its investment objective and investment
policies.
Other United States government obligations, such as securities of the
Federal Home Loan Banks, are supported by the right of the issuer to borrow from
the Treasury to repay its obligations. Still others, such as bonds issued by the
Federal National Mortgage Association, a federally chartered private
corporation, are supported only by the credit of the instrumentality, although
the underlying mortgage may be guaranteed as to principal and interest.
Obligations of Domestic Banks. These obligations consist of certificates of
deposit ("CDs") and bankers' acceptances issued by domestic banks (including
their foreign branches) having total assets in excess of $5 billion, which meet
the Funds' minimum rating requirements. CDs are issued against deposits in a
commercial bank for a specified period and rate and are normally negotiable.
Eurodollar CDs are certificates issued by a foreign branch (usually London) of a
U.S. Domestic bank, and, as such, the credit is deemed to be that of the
domestic bank.
Bankers' acceptances are short-term credit instruments evidencing the
promise of the bank (by virtue of the bank's "acceptance") to pay at maturity a
draft which has been drawn on it by a customer (the "drawer"). These instruments
are used to finance the import, export, transfer, or storage of goods and
reflect the obligation of both the bank and the drawer to pay the face amount.
Commercial Paper. These obligations are short-term promissory notes issued
by domestic corporations to meet current working capital requirements. Such
paper may be unsecured or backed by a bank letter of credit. Commercial paper
issued with a letter of credit is, in effect, "two party paper," with the issuer
directly responsible for payment, plus a bank's guarantee that if the note is
not paid at maturity by the issuer, the bank will pay the principal and interest
to the buyer. Commercial paper is sold either as interest-bearing or on a
discounted basis, with maturities not exceeding 270 days.
Futures Contracts. As discussed in the Funds' Prospectuses, the U.S.
Government Securities and Short-Term Bond Funds may engage in buying and selling
interest rate futures contracts; however, the U.S. Government Securities Fund
may buy and sell only interest rate futures contracts relating to U.S.
government securities ("Government Securities Futures"). This limitation on this
Fund's engaging in interest rate futures contracts to those relating to U.S.
government securities is a fundamental policy which may be changed only by
holders of a majority, as defined in the Investment Company Act of 1940 (the
"1940 Act"), of the Fund's outstanding shares. The Short-Term Bond Fund may
engage in buying and selling interest rate futures contracts relating to the
debt securities in which it invests for the purpose of hedging the value of its
securities portfolio. The U.S. Government Securities and Short-Term Bond Funds
have no other fundamental policies as to their use of futures contracts and thus
no fundamental policy as to a percentage limit thereon; however, see below for
limitations relating to the Commodity Futures Trading Commission (the "CFTC")
and a percentage restriction adopted by the board of directors.
<PAGE>
In connection with hedging (a "long futures position"), the U.S. Government
Securities and Short-Term Bond Funds, respectively, would take a long futures
position with the intention of doing so as a temporary substitute for the
purchase of long-term U.S. government securities, and any debt securities in
which the Short-Term Bond Fund invests, which may then be purchased in an
orderly fashion. These Funds expect that they would, in the ordinary course,
purchase such long-term securities upon termination of the long futures position
a substantial majority of the time, but under unusual market conditions, a long
futures position may be terminated without the corresponding purchase of
long-term U.S. government securities or other long-term debt securities. These
Funds will deposit in a segregated account with their custodian bank U.S.
government securities maturing in one year or less, or cash, in an amount equal
to the fluctuating market value of long futures contracts they have purchased,
less any margin deposited on their long position. They may hold cash or acquire
such government securities for the purpose of making these deposits.
The "sale" of a Government Securities Future by the U.S. Government
Securities Fund or "sale" of a debt security future by the Short-Term Bond Fund
means the acquisition by these Funds of an obligation to deliver the related
U.S. government securities or other debt securities (i.e., those called for by
the contract) at a specified price on a specified date. The "purchase" of a
Government Securities Future by the U.S. Government Securities Fund or
"purchase" of a debt security future by the Short-Term Bond Fund means the
acquisition by these Funds of an obligation to acquire the related U.S.
government securities or other debt securities at a specified price on a
specified date.
Unlike when the U.S. Government Securities Fund purchases or sells a U.S.
government security, or when the Short-Term Bond Fund purchases or sells a debt
security, no price is paid or received by these Funds upon the purchase or sale
of a Government Securities Future or a debt security future. Initially, these
Funds will be required to deposit with the futures commission merchant (the
"broker") an amount of cash or U.S. Treasury Bills equal to a varying specified
percentage of the contract amount. This amount is known as initial margin.
Subsequent payments, called variation margin, to and from the broker, will be
made on a daily basis as the price of the underlying U.S. Government Securities
Future or debt securities future fluctuates, making the Government Securities
Future or debt security future more or less valuable, a process known as marking
to market. Changes in variation margin are recorded by these Funds as unrealized
gains or losses. Initial margin payments will be deposited in the Company's
custodian bank in an account registered in the broker's name; access to the
assets in that account may be made by the broker only under specified
conditions. At any time prior to expiration of the Government Securities Future
or debt security future, a Fund may elect to close the position by taking an
opposite position which will operate to terminate the Funds' position on the
Government Securities Future or debt security future. A final determination of
variation margin is then made, additional cash is required to be paid by or
released to these Funds, and the Funds realize a loss or a gain. Although
Government Securities Futures or debt security futures by their terms call for
the actual delivery or acquisition of the related U.S. government securities or
debt securities, in most cases the contractual obligation is so fulfilled
without having to make or take delivery of the related U.S. government
securities or debt securities. These Funds do not intend to make or take
delivery of these securities. All transactions in the futures markets, including
transactions in Government Securities Futures or debt security futures, are
made, offset or fulfilled through a clearing house associated with the exchange
on which the contracts are traded.
<PAGE>
One risk in employing Government Securities Futures or debt security
futures to attempt to protect against the price volatility of the U.S.
government securities or debt securities held in the U.S. Government Securities
Fund or Short-Term Bond Fund is the prospect that the prices of Government
Securities Futures or debt security futures will correlate imperfectly with the
behavior of the cash (i.e., market value) prices of a Fund's U.S. government
securities or debt securities. For a hedge to be completely effective, the price
change of the hedging instrument should equal the price change of the security
being hedged. Such equal price changes are not always possible because the
investment underlying the hedging instrument may not be the same investment that
is being hedged. The adviser or sub-adviser will attempt to create a closely
correlated hedge, but hedging activity may not be completely successful in
eliminating market value fluctuation. The ordinary spreads between prices in the
cash and futures markets, due to differences in the natures of those markets,
may be subject to distortions in the following manners. First, all participants
in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close future contracts through offsetting transactions which could
distort the normal relationship between the cash and futures markets. Second,
the liquidity of the futures market depends on participants entering into
offsetting transactions rather than making or taking delivery. To the extent
participants decide to make or take delivery, liquidity in the futures market
could be reduced, thus producing distortion. Third, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price
distortions. Due to the possibility of distortion, a correct forecast of general
interest trends by INVESCO may still not result in a successful transaction.
Another risk is that INVESCO would be incorrect in its expectations as to
the extent of various interest rate movements or the time span within which the
movements take place. For example, if the U.S. Government Securities Fund sold a
Government Securities Future, or the Short-Term Bond Fund sold a debt security
future in anticipation of an increase in interest rates, and then interest rates
went down instead, these Funds would lose money on the sale. Any gains or losses
on futures transactions will not be tax-exempt.
The use of futures to attempt to protect against the market risk of a
decline in the value of portfolio securities is referred to as having a "short
futures position." The use of futures to attempt to protect against the market
risk that portfolio securities are not fully included in an increase in value is
referred to as having a "long futures position." The U.S. Government Securities
and Short-Term Bond Fund must operate within certain restrictions as to their
long and short positions in futures under a rule (the "CFTC Rule") adopted by
the CFTC under the Commodity Exchange Act (the "CEA") to be eligible for the
exclusion provided by the CFTC Rule from registration by these Funds with the
CFTC as a "commodity pool operator" (as defined under the CEA), and they must
represent to the CFTC that they will operate within such restrictions. Under
these restrictions, these Funds will not, as to any positions, whether long,
short or a combination thereof, enter into futures for which the aggregate
initial margins exceed 5% of the fair market value of the Funds' assets.
Although these Funds have no fundamental policy restricting the use of
futures, the Company's board of directors has adopted a restriction that the
aggregate market value of the Futures Contracts the U.S. Government Securities
Fund or the Short-Term Bond Fund holds cannot exceed 20% of the market value of
the respective Fund's total assets. This restriction would not be changed by the
Company's board of directors without considering the policies and concerns of
federal and state regulatory agencies.
<PAGE>
Investment Restrictions
As described in the section of the Funds' Prospectuses entitled "Investment
Policies And Risks," the Funds operate under certain investment restrictions.
For purposes of the Funds' investment restrictions and their investment
policies, all percentage limitations apply immediately after a purchase or
initial investment. Any subsequent change in a particular percentage resulting
from fluctuations in value does not require elimination of any security from a
Fund.
The following restrictions are fundamental and may not be changed with
respect to a particular Fund without the prior approval of the holders of a
majority of the outstanding voting securities of that Fund, as defined in the
1940 Act. Under these fundamental investment restrictions, each Fund may not:
(1) sell short or buy on margin;
(2) mortgage, pledge or hypothecate portfolio securities or
borrow money, except from banks for temporary or emergency
purposes (but not for investment) and then in an amount
not exceeding 10% of the value of its total net assets.
A Fund will not purchase additional securities while any
borrowings on behalf of such Fund exist; provided,
however, that this restriction shall not be deemed to
affect the U.S. Government Securities Fund's entering into
futures contracts in accordance with that Fund's
investment policies, or the Short-Term Bond Fund's
entering into futures contracts or options transactions in
accordance with that Fund's investment policies.
(3) invest in the securities of any other investment company except
for a purchase or acquisition in accordance with a plan of
reorganization, merger or consolidation;
(4) purchase securities if the purchase would cause the Fund
to have at the time more than 5% of the value of its total
assets invested in securities of any one issuer or to own
more than 10% of the outstanding voting securities of any
one issuer (except obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities*). For
this purpose, all indebtedness of an issuer shall be
deemed a single class of security;
(5) make loans to any person, except through the purchase of
debt securities in accordance with the investment policies
of the Funds, or the lending of portfolio securities to
broker-dealers or other institutional investors, or the
entering into repurchase agreements with member banks of
the Federal Reserve System, registered broker-dealers and
registered government securities dealers. The aggregate
value of all portfolio securities loaned may not exceed
33-1/3% of a Fund's total net assets (taken at current
value). [No more than 10% of a Fund's total net assets may
be invested in repurchase agreements maturing in more than
seven days;]
<PAGE>
(6) other than the U.S. Government Securities Fund entering
into futures contracts or the Short-Term Bond Fund
entering into futures contracts or options transactions in
accordance with those Funds' investment policies, buy or
sell commodities, commodity contracts or real estate
(however, securities of companies investing in real estate
may be purchased);
(7) invest in any company for the purpose of exercising control or
management;
(8) other than the High Yield Fund, buy other than readily
marketable securities;
(9) engage in the underwriting of any securities;
(10) purchase securities of any company in which any officer or
director of the Fund or of its investment adviser beneficially
owns more than 1/2 of 1% of the outstanding securities or in
which all of the officers or directors of the Fund and its
investment adviser, as a group, own more than 5% of such
securities;
(11) purchase equity securities; provided, however, that the
High Yield Fund may purchase convertible and
non-convertible preferred stock. This shall not be
deemed to prohibit the acquisition of equity securities
resulting from the ownership of debt securities, as, for
example, the conversion of convertible bonds or an
exchange in connection with a corporate reorganization;
(12) other than the High Yield Fund, purchase the securities of any
issuer having a record, together with predecessors, of less
than three years continuous operation;
(13) buy or sell oil, gas or other mineral interest or
exploration programs;
(14) participate on a joint or joint and several basis in any
securities trading account, or purchase warrants, or, except
for the Short-Term Bond Fund, write, purchase or sell puts,
calls, straddles or any other option contract or combination
thereof;
(15) other than the High Yield Fund, enter into repurchase
agreements maturing in more than seven days if, as a result,
such repurchase agreements, together with securities for which
there are no readily available market quotations, would
constitute more than 10% of that Fund's total net assets;
(16) invest more than 25% of that Fund's total assets in any one
industry, excluding government securities. Telephone
utilities, water, gas, and electric utilities shall be
considered separate industries.
*If an entity, other than the U.S. government, its agencies or
instrumentalities, guarantees a security, such guarantee is considered a
separate security which must be valued and included in the five percent
limitation, subject to those exceptions allowed by Rule 5b-2 under the 1940 Act.
<PAGE>
In applying this restriction (16) above, the Funds use a modified S&P
industry code classification schema which uses various sources to classify
securities.
In applying restriction (8) above, the Funds also include illiquid
securities (those which cannot be sold in the ordinary course of business within
seven days at approximately the valuation given to them by the Fund) among the
securities subject to the limitations of that paragraph. The Company's board of
directors has delegated to INVESCO the authority to determine that a liquid
market exists for securities eligible for resale pursuant to Rule 144A under the
1933 Act, or any successor to such rule, and that such securities are not
subject to the Funds' limitations on investing in illiquid securities or
securities that are not readily marketable. Under guidelines established by the
board of directors, INVESCO will consider the following factors, among others,
in making this determination: (1) the unregistered nature of a Rule 144A
security, (2) the frequency of trades and quotes for the security; (3) the
number of dealers willing to purchase or sell the security and the number of
other potential purchasers; (4) dealer undertakings to make a market in the
security; and (5) the nature of the security and the nature of marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer).
In applying restriction (11) above, the Funds consider acquisitions of
equity securities as components of units which consist primarily of debt
securities as permissible acquisitions resulting from the ownership of debt
securities.
In applying restriction (14) above, the Funds consider warrants acquired as
components of units consisting primarily of debt securities to be permissible
investments as contemplated by restriction (11) above.
The Short-Term Bond Fund does not currently intend to buy or sell put or
call options or option contracts, and will not do so until the Company's board
of directors adopts an investment policy governing such purchases or sales.
In addition to the foregoing, the Funds may not issue preference shares or
create any funded debt. "Fund shares," the only means of participating in the
ownership of a Fund, are all nonassessable, and have equal rights, within each
class, as to dividends, voting power and asset value. No shareholder of a Fund,
as such, has any preemptive right to purchase or subscribe for any Fund shares
which may be issued; however, the board of directors, in its discretion, may
extend purchase or subscription rights pro rata to all shareholders.
Additional investment restrictions adopted by the Company on behalf of the
Funds and which may be changed by the directors, at their discretion, without
shareholder approval, include the following:
(1) The High Yield Fund will not purchase any security or
enter into a repurchase agreement if, as a result, more
than 15% of its net assets would be invested in
repurchase agreements not entitling the holder to payment
of principal and interest within seven days and in
securities that are illiquid by virtue of legal or
contractual restrictions on resale that offered liquidity
or the absence of a readily available market. The board
of directors, or the Fund's investment adviser acting
pursuant to authority delegated by the board of
directors, may determine that a readily available market
exists for securities that are not registered under the
Securities Act of 1933 but are nevertheless eligible for
resale pursuant to Rule 144A under the Securities Act of
1933, or any successor to such rule, and therefore that
such securities are not subject to the foregoing
limitation.
<PAGE>
With respect to the non-fundamental investment restriction (1)
above, the board of directors has delegated to the Fund's
investment adviser the authority to determine whether a liquid
market exists for securities eligible for resale pursuant to
Rule 144A under the 1933 Act, or any successor to such rule,
and whether such securities are subject to the non-fundamental
restriction (1) above. Under guidelines established by the
board of directors, the adviser will consider the following
factors, among others, in making this determination: (1) the
unregistered nature of a Rule 144A security; (2) the frequency
of trades and quotes for the security; (3) the number of
dealers willing to purchase or sell the security and the
number of other potential purchasers; (4) dealer undertakings
to make a market in the security; and (5) the nature of the
security and the nature of marketplace trades (e.g., the time
needed to dispose of the security, the method of soliciting
offers and the mechanics of transfer).
(2) The High Yield Fund will not purchase securities of any
issuer (other than the U.S. government, its agencies and
instrumentalities or instruments guaranteed by the U.S.
government or any such agency or instrumentality) with a
record of less than three years' continuous operation
(including that of predecessors) if such purchase would
cause the Fund's investments in all such issuers to
exceed 5% of the Fund's total assets taken at market
value at the time of such purchases.
THE FUNDS AND THEIR MANAGEMENT
The Company. The Company was incorporated on April 2, 1993, under the laws
of Maryland.
The Investment Adviser. INVESCO Funds Group, Inc., a Delaware corporation
("INVESCO"), is employed as the Company's investment adviser. INVESCO was
established in 1932 and also serves as an investment adviser to INVESCO
Combination Stock and Bond Funds, Inc. (formerly, INVESCO Flexible Funds, Inc.),
INVESCO Diversified Funds, Inc., INVESCO Emerging Opportunity Funds, Inc.,
INVESCO Growth Funds, Inc. (formerly, INVESCO Growth Fund, Inc.), INVESCO
Industrial Income Fund, Inc., INVESCO International Funds, Inc., INVESCO Money
Market Funds, Inc., INVESCO Sector Fund, Inc. (formerly, INVESCO Strategic
Portfolios, Inc.), INVESCO Specialty Funds, Inc., INVESCO Stock Funds, Inc.
(formerly, INVESCO Equity Funds, Inc.), INVESCO Tax-Free Income Funds, Inc.,
INVESCO Value Trust, and INVESCO Variable Investment Funds, Inc.
The Distributor. Effective September 30, 1997, INVESCO Distributors, Inc.
("IDI") is the Funds' distributor. IDI, established in 1997, is a registered
broker-dealer that acts as distributor for all retail mutual funds advised by
INVESCO. Prior to September 30, 1997, INVESCO served as the Funds' distributor.
INVESCO and IDI are indirect wholly-owned subsidiaries of AMVESCAP PLC, a
publicly-traded holding company that, through its subsidiaries, engages in the
business of investment management on an international basis. INVESCO PLC changed
its name to AMVESCO PLC on March 3, 1997 and to AMVESCAP PLC on May 8, 1997, as
part of a merger between a direct subsidiary of INVESCO PLC and A I M Management
Group, Inc. that created one of the largest investment management businesses in
the world with approximately $241 billion in assets under management as of
September 30, 1998. INVESCO was established in 1932 and as of August 31, 1998,
managed 14 mutual funds, consisting of 49 separate portfolios, on behalf of over
899,000 shareholders.
<PAGE>
AMVESCAP PLC's North American subsidiaries include the following:
--INVESCO Retirement and Benefit Services, Inc. ("IRBS") of Atlanta,
Georgia, develops and provides domestic and international defined contribution
retirement plan services to plan sponsors, institutional retirement plan
services to sponsors, institutional plan providers and foreign governments.
--INVESCO Retirement Plan Services ("IRPS") of 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") of Denver, Colorado, a division of IRBS, provides retirement account
custodian and/or trust services for individual retirement accounts ("IRAs") and
other retirement plan accounts. These include services such as recordkeeping,
tax reporting and compliance. ITC acts as trustee or custodian to these plans.
ITC accepts contributions and provides, through INVESCO, complete transfer
agency functions: correspondence, sub-accounting, telephone communications and
processing of distributions.
--INVESCO Capital Management, Inc. of Atlanta, Georgia manages
institutional investment portfolios, consisting primarily of discretionary
employee benefit plans for corporations and state and local governments, and
endowment funds. INVESCO Capital Management, Inc. is the sole shareholder of
INVESCO Services, Inc., a registered broker-dealer.
--INVESCO Management & Research, Inc. of Boston, Massachusetts primarily
manages pension and endowment accounts.
--PRIMCO Capital Management, Inc. of Louisville, Kentucky specializes in
managing stable return investments, principally on behalf of Section 401(k)
retirement plans.
--INVESCO Realty Advisors, Inc. of Dallas, Texas is responsible for
providing advisory services in the U.S. real estate markets for pension plans
and public pension funds, as well as endowment and foundation accounts.
--INVESCO (NY), Inc. of 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 also offers the opportunity for its clients to invest both directly
and indirectly through partnerships in primarily private investments or
privately negotiated transactions. INVESCO NY further serves as investment
adviser to several closed-end investment companies, and as subadviser with
respect to certain commingled employee benefit trusts. INVESCO NY specializes in
the fundamental research investment approach, with the help of quantitative
tools.
--A I M Advisors, Inc. of Houston, Texas provides investment advisory and
administrative services for retail and institutional mutual funds.
--A I M Capital Management, Inc. of Houston, Texas provides investment
advisory services to individuals, corporations, pension plans and other private
investment advisory accounts and also serves as a sub-adviser to certain retail
and institutional mutual funds, one Canadian mutual fund and one portfolio of an
open-end registered investment company that is offered to separate accounts of
variable insurance companies.
<PAGE>
--A I M Distributors, Inc. and Fund Management Company of Houston, Texas
are registered broker-dealers that act as the principal underwriters for retail
and institutional mutual funds.
The corporate headquarters of AMVESCAP PLC are located at 11 Devonshire
Square, London, EC2M4YR, England.
As indicated in the Funds' Prospectuses, INVESCO permits investment and
other personnel to purchase and sell securities for their own accounts in
accordance with a compliance policy governing personal investing by directors,
officers and employees of INVESCO and its North American affiliates. The policy
requires officers, inside directors, investment and other personnel of INVESCO
and its North American affiliates to pre-clear all transactions in securities
not otherwise exempt under the policy. Requests for trading authority will be
denied when, among other reasons, the proposed personal transaction would be
contrary to the provisions of the policy or would be deemed to adversely affect
any transaction then known to be under consideration for or to have been
effected on behalf of any client accounts, including the Funds.
In addition to the pre-clearance requirement described above, the policy
subjects officers, inside directors, investment and other personnel of INVESCO
and its North American affiliates to various trading restrictions and reporting
obligations. All reportable transactions are reviewed for compliance with the
policy. The provisions of the policy are administered by and subject to
exceptions authorized by INVESCO.
Investment Advisory Agreement. INVESCO serves as investment adviser to the
Funds pursuant to an investment advisory agreement dated February 28, 1997 (the
"Agreement") with the Company which was approved by the board of directors on
November 6, 1996, by a vote cast in person by a majority of the directors of the
Company, including a majority of the directors who are not "interested persons"
of the Company or INVESCO at a meeting called for such purpose. The Agreement
was approved by the Funds' shareholders on January 31, 1997, for an initial term
expiring February 28, 1999. On May 13, 1998, this period was extended by the
Company's board of directors ^ through May 15, 1999. Thereafter, the Agreement
may be continued from year to year with respect to each Fund as long as each
such continuance is specifically approved at least annually by the board of
directors of the Company, or by a vote of the holders of a majority, as defined
in the 1940 Act, of the outstanding shares of the applicable Fund. Any such
continuance also must be approved by a majority of the Company's directors who
are not parties to the Agreement or interested persons (as defined in the 1940
Act) of any such party, cast in person at a meeting called for the purpose of
voting on such continuance. The Agreement may be terminated at any time without
penalty by either party, or by a Fund with respect to that Fund, upon sixty (60)
days' written notice and terminates automatically in the event of an assignment
to the extent required by the 1940 Act and the rules thereunder.
<PAGE>
The Agreement provides that INVESCO shall manage the investment portfolios
of the Funds in conformity with the Funds' investment policies (either directly
or by delegation to a sub-adviser, which may be a party affiliated with
INVESCO). Further, INVESCO shall perform all administrative, internal accounting
(including computation of net asset value), clerical, statistical, secretarial
and all other services necessary or incidental to the administration of the
affairs of the Funds excluding, however, those services that are the subject of
separate agreement between the Company and INVESCO or any affiliate thereof,
including the distribution and sale of Fund shares and provision of transfer
agency, dividend disbursing agency, and registrar services, and services
furnished under an Administrative Services Agreement with INVESCO discussed
below. Services provided under the Agreement include, but are not limited to:
supplying the Company with officers, clerical staff and other employees, if any,
who are necessary in connection with the Funds' operations; furnishing office
space, facilities, equipment, and supplies; providing personnel and facilities
required to respond to inquiries related to shareholder accounts; conducting
periodic compliance reviews of the Funds' operations; preparation and review of
required documents, reports and filings by INVESCO's in-house legal and
accounting staff (including the prospectus, statement of additional information,
proxy statements, shareholder reports, tax returns, reports to the SEC, and
other corporate documents of the Funds), except insofar as the assistance of
independent accountants or attorneys is necessary or desirable; supplying basic
telephone service and other utilities; and preparing and maintaining certain of
the books and records required to be prepared and maintained by the Funds under
the 1940 Act. Expenses not assumed by INVESCO are borne by the Funds.
As full compensation for its advisory services to the Company, INVESCO
receives a monthly fee. The fee with respect to the Select Income and U.S.
Government Securities Funds is calculated daily at an annual rate of: 0.55% of
average net assets of each such Fund up to $300 million; reduced to 0.45% of
average net assets of each such Fund exceeding $300 million but not exceeding
$500 million; and further reduced to 0.35% of average net assets of each such
Fund in excess of $500 million. The fees for the High Yield and Short-Term Bond
Funds also are calculated daily but are reduced by 0.05% at each level in the
above fee schedule.
Administrative Services Agreement. INVESCO, either directly or through
affiliated companies, also provides certain administrative, sub-accounting, and
recordkeeping services to the Funds pursuant to an Administrative Services
Agreement dated February 28, 1997 (the "Administrative Agreement"). The
Administrative Agreement was approved by the board of directors on November 6,
1996, by a vote cast in person by all of the directors of the Company, including
all of the directors who are not "interested persons" of the Company or INVESCO
at a meeting called for such purpose. The Administrative Agreement was for an
initial term expiring February 28, 1998, and has been continued by action of the
board of directors ^ through May 15, 1999. The Administrative Agreement may be
continued from year to year as long as each such continuance is specifically
approved by the board of directors of the Company, including a majority of the
directors who are not parties to the Administrative Agreement or interested
persons (as defined in the 1940 Act) of any such party, cast in person at a
meeting called for the purpose of voting on such continuance. The Administrative
Agreement may be terminated at any time without penalty by INVESCO on sixty (60)
days' written notice, or by the Company upon thirty (30) days' written notice,
and terminates automatically in the event of an assignment unless the Company's
board of directors approves such assignment.
The Administrative Agreement provides that INVESCO shall provide the
following services to the Funds: (a) such sub-accounting and recordkeeping
services and functions as are reasonably necessary for the operation of the
Funds; and (b) such sub-accounting, recordkeeping, and administrative services
and functions, which may be provided by affiliates of INVESCO, as are reasonably
necessary for the operation of Fund shareholder accounts maintained by certain
retirement plans and employee benefit plans for the benefit of participants in
such plans.
<PAGE>
As full compensation for services provided under the Administrative
Agreement, each Fund pays a monthly fee to INVESCO consisting of a base fee of
$10,000 per year, plus an additional incremental fee computed daily and paid
monthly at an annual rate of 0.015% per year of the average net assets of the
Fund.
Transfer Agency Agreement. INVESCO also performs transfer agent, dividend
disbursing agent, and registrar services for the Funds pursuant to a Transfer
Agency Agreement dated February 28, 1997, which was approved by the board of
directors of the Company, including a majority of the Company's directors who
are not parties to the Transfer Agency Agreement or "interested persons" of any
such party, on November 6, 1997, for an initial term expiring February 28, 1998,
which has been extended by action of the board of directors ^ through May 15,
1999. Thereafter, the Transfer Agency Agreement may be continued from year to
year as to each Fund as long as such continuance is specifically approved at
least annually by the board of directors of the Company, or by a vote of the
holders of a majority of the outstanding shares of each Fund. Any such
continuance also must be approved by a majority of the Company's directors who
are not parties to the Transfer Agency Agreement or interested persons (as
defined by the 1940 Act) of any such party, cast in person at a meeting called
for the purpose of voting on such continuance. The Transfer Agency Agreement may
be terminated at any time without penalty by either party upon sixty (60) days'
written notice and terminates automatically in the event of assignment.
The Transfer Agency Agreement provides that the Funds will pay to INVESCO
an annual fee of $26.00 per shareholder account or, where applicable, per
participant in an omnibus account. This fee is paid monthly at a rate of 1/12 of
the annual fee and is based upon the number of shareholder accounts and omnibus
account participants in existence at any time during each month.
Set forth below is a table showing the advisory fees, administrative
services fees, and transfer agency fees paid by each of the Funds for the
periods shown.
<PAGE>
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
August 31, 1998(1) August 31, 1997(1) August 31, 1996(1)
------------------ ------------------ ------------------
Adminis- Adminis- Adminis-
Transfer trative Transfer trative Transfer trative
Advisory Agency Services Advisory Agency Services Advisory Agency Services
Fees Fees Fees Fees Fees Fees Fees Fees Fees
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High Yield $2,842,990 $778,174 $112,212 $1,964,043 $651,471 $72,410 $1,671,610 $532,180 $61,443
Select Income 2,023,679 895,360 67,475 1,477,302 786,616 50,289 1,410,937 614,471 48,480
Short-Term Bond 68,131 68,560 12,044 61,150 61,050 11,833 44,394 51,685 11,332
U.S. Government
Securities 284,609 186,705 17,762 312,851 178,192 18,532 233,025 177,086 16,355
</TABLE>
(1) These amounts do not reflect the voluntary expense limitations described in
the Funds' Prospectuses.
<PAGE>
Officers and Directors of the Company. The overall direction and
supervision of the Company is the responsibility of the board of directors,
which has the primary duty of seeing that the general investment policies and
programs of each of the Funds are carried out and that the Funds are properly
administered. The officers of the Company, all of whom are officers and
employees of, and paid by, INVESCO, are responsible for the day-to-day
administration of the Company and each of the Funds. The investment adviser for
each Fund has the primary responsibility for making investment decisions on
behalf of that Fund. These investment decisions are reviewed by the investment
committee of INVESCO.
All of the officers and directors of the Company hold comparable positions
with INVESCO ^ Combination Stock & Bond Funds, Inc. (formerly, INVESCO Flexible
Funds, Inc.), INVESCO Diversified Funds, Inc., INVESCO Emerging Opportunity
Funds, Inc., INVESCO Growth Funds, Inc. (formerly, INVESCO Growth Fund, Inc.),
INVESCO Industrial Income Fund, 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 Tax-Free Income Funds, Inc.
and INVESCO Variable Investment Funds, Inc. All of the directors and officers of
the Company also serve as trustees of INVESCO Treasurer's Series Trust and
INVESCO Value Trust. Set forth below is information with respect to each of the
Company's officers and directors. Unless otherwise indicated, the address of the
directors and officers is Post Office Box 173706, Denver, Colorado 80217-3706.
Their affiliations represent their principal occupations during the past five
years.
CHARLES W. BRADY,*+ Chairman of the Board. Chief Executive Officer and
Director of AMVESCAP PLC, London, England, and of various subsidiaries thereof.
Chairman of the Board of INVESCO Global Health Sciences Fund. Address: 1315
Peachtree Street, NE, Atlanta, Georgia. Born: May 11, 1935.
FRED A. DEERING,+# Vice Chairman of the Board. Trustee of INVESCO Global
Health Sciences Fund. Formerly, Chairman of the Executive Committee and Chairman
of the Board of Security Life of Denver Insurance Company, Denver, Colorado;
Director of ING America Life Insurance Company. Address: Security Life Center,
1290 Broadway, Denver, Colorado. Born: January 12, 1928.
VICTOR L. ANDREWS,**@ Director. Professor Emeritus, Chairman Emeritus and
Chairman of the CFO Roundtable of the Department of Finance at Georgia State
University, Atlanta, Georgia; President, Andrews Financial Associates, Inc.
(consulting firm); since October 1984, Director of the Center for the Study of
Regulated Industry at Georgia State University; formerly, member of the
faculties of the Harvard Business School and the Sloan School of Management of
MIT. Dr. Andrews is also a Director of the Southeastern Thrift and Bank Fund,
Inc. and The Sheffield Funds, Inc. Address: 34 Seawatch Drive, Savannah,
Georgia. Born: June 23, 1930.
BOB R. BAKER,+** Director. President and Chief Executive Officer of AMC
Cancer Research Center, Denver, Colorado, since January 1989; until mid-December
1988, Vice Chairman of the Board of First Columbia Financial Corporation (a
financial institution), Englewood, Colorado. Formerly, Chairman of the Board and
Chief Executive Officer of First Columbia Financial Corporation. Address: 1600
Pierce Street, Lakewood, Colorado. Born: August 7, 1936.
LAWRENCE H. BUDNER,#@@ Director. Trust Consultant; prior to June 30, 1987,
Senior Vice President and Senior Trust Officer of InterFirst Bank, Dallas,
Texas. Address: 7608 Glen Albens Circle, Dallas, Texas. Born: July 25, 1930.
<PAGE>
WENDY L. GRAMM, Ph.D.,**@ Director. Self-employed (since 1993); Professor
of Economics and Public Administration, University of Texas at Arlington.
Formerly, Chairman, Commodity Futures Trading Commission from 1988 to 1993,
administrator for Information and Regulatory Affairs at the Office of Management
and Budget from 1985 to 1988, Executive Director of the Presidential Task Force
on Regulatory Relief and Director of the Federal Trade Commission's Bureau of
Economics. Dr. Gramm is also a director of the Chicago Mercantile Exchange,
Enron Corporation, IBP, Inc., State Farm Insurance Company, State Farm Life
Insurance Company, Independent Women's Forum, International Republic Institute,
and the Republican Women's Federal Forum. Dr. Gramm is also a member of the
Board of Visitors, College of Business Administration, University of Iowa, and a
member of the Board of Visitors, Center for Study of Public Choice, George Mason
University. Address: 4201 Yuma Street, N.W., Washington, D.C. Born: January 10,
1945.
KENNETH T. KING,+#@@ Director. Formerly, Chairman of the Board of The
Capitol Life Insurance Company, Providence Washington Insurance Company, and
Director of numerous subsidiaries thereof in the U.S. Formerly, Chairman of the
Board of The Providence Capitol Companies in the United Kingdom and Guernsey.
Chairman of the Board of the Symbion Corporation (a high technology company)
until 1987. Address: 4080 North Circulo Manzanillo, Tucson, Arizona. Born:
November 16, 1925.
JOHN W. MCINTYRE,+#@@ Director. Retired. Formerly, Vice Chairman of the
Board of Directors of The Citizens and Southern Corporation and Chairman of the
Board and Chief Executive Officer of The Citizens and Southern Georgia
Corporation and Citizens and Southern National Bank. Trustee of INVESCO Global
Health Sciences Fund and Gables Residential Trust. Address: 7 Piedmont Center,
Suite 100, Atlanta, Georgia. Born: September 14, 1930.
LARRY SOLL, Ph.D.,**@ Director. Retired. Formerly, Chairman of the Board
(1987 to 1994), Chief Executive Officer (1982 to 1989 and 1993 to 1994) and
President (1982 to 1989) of Synergen Corp. Director of Synergen since
incorporation in 1982. Director of ISI Pharmaceuticals, Inc., Trustee of INVESCO
Global Health Sciences Fund. Address: 345 Poorman Road, Boulder, Colorado. Born:
April 26, 1942.
MARK H. WILLIAMSON, +* President, CEO and Director. President, CEO and
Director of IDI; President, CEO and Director of INVESCO and President of INVESCO
Global Health Sciences Fund. Formerly, Chairman and CEO of NationsBanc Advisors,
Inc. (1995 to 1997) and Chairman of NationsBanc Investments, Inc. (1997 to
1998). Born: May 24, 1951.
GLEN A. PAYNE, Secretary. Senior Vice President (since 1995), General
Counsel (since 1989) and Secretary (since 1989) of INVESCO and Senior Vice
President, Secretary and General Counsel of IDI (since 1997); Secretary of
INVESCO Global Health Sciences Fund; Vice President (May 1989 to April 1995) of
INVESCO; Senior Vice President (1995 to 1998), Secretary (1989 to 1998) and
General Counsel (1989 to 1998) of ITC. Formerly, employee of a U.S. regulatory
agency, Washington, D.C., (June 1973 through May 1989). Born: September 25,
1947.
RONALD L. GROOMS, Treasurer. Senior Vice President and Treasurer of INVESCO
(since 1988). Senior Vice President and Treasurer of IDI (since 1997). Treasurer
and Principal Financial and Accounting Officer of INVESCO Global Health Sciences
Fund. Senior Vice President and Treasurer of ITC (1988 to 1998). Born: October
1, 1946.
<PAGE>
WILLIAM J. GALVIN, JR., Assistant Secretary. Senior Vice President of
INVESCO (since 1995) and of IDI (since 1997) and formerly, Trust Officer of ITC
(1995 to 1998) and Vice President of INVESCO (1992 to 1995). Formerly, Vice
President of 440 Financial Group from June 1990 to August 1992; Assistant Vice
President of Putnam Companies from November 1986 to June 1990. Born: August 21,
1956.
ALAN I. WATSON, Assistant Secretary. Vice President of INVESCO (since
1984). Formerly, Trust Officer of ITC. Born: September 14, 1941.
JUDY P. WIESE, Assistant Treasurer. Vice President of INVESCO (since 1984)
and of IDI (since 1997). Formerly, Trust Officer of ITC. Born: February 3, 1948.
*These directors are "interested persons" of the Company as defined in the
1940 Act.
#Member of the audit committee of the ^ Company.
@Member of the derivatives committee of the ^ Company.
@@Member of the soft dollar brokerage 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.
**Member of the management liaison committee of the Company's board of
directors.
As of October 16, 1998, officers and directors of the Company, as a group,
beneficially owned less than 1% of the Company's outstanding shares and less
than 1% of the Funds' outstanding shares.
Director Compensation
The following table sets forth, for the fiscal year ended August 31, 1998,
the compensation paid by the Company to its eligible independent directors for
services rendered in their capacities as directors of the Company; the benefits
accrued as Company expenses with respect to the Defined Benefit Deferred
Compensation Plan discussed below; and the estimated annual benefits to be
received by these directors upon retirement as a result of their service to the
Company. In addition, the table sets forth the total compensation paid by all of
the mutual funds distributed by IDI and advised by INVESCO (including the
Company), INVESCO Treasurer's Series Trust and INVESCO Global Health Sciences
Fund (collectively, the "INVESCO Complex") to these directors for services
rendered in their capacities as directors or trustees during the year ended
December 31, 1997. As of December 31, 1997, there were 49 funds in the INVESCO
Complex.
<PAGE>
<TABLE>
<CAPTION>
Total
Compensa-
Benefits Estimated tion From
Aggregate Accrued As Annual INVESCO
Compensa- Part of Benefits Complex
tion From Company Upon Paid To
Company(1) Expenses(2) Retirement(3) Directors(1)
<S> <C> <C> <C> <C>
Fred A. Deering, $6,464 $2,112 $1,356 $113,350
Vice Chairman of
the Board
Victor L. Andrews 6,305 1,996 1,569 92,700
Bob R. Baker 6,518 1,783 2,103 96,050
Lawrence H. Budner 6,189 1,996 1,569 91,000
Daniel D. Chabris(4) 6,344 2,158 1,171 89,350
Wendy L. Gramm 6,067 0 0 39,000
Kenneth T. King 5,957 2,194 1,230 94,350
John W. McIntyre 6,108 0 0 104,000
Larry Soll 6,108 0 0 78,000
------ ------- ------ --------
Total $56,060 $12,239 $8,998 $797,800
% of Net Assets 0.0044%(5) 0.0010%(5) 0.0046%(6)
</TABLE>
(1)The vice chairman of the board, the chairmen of the audit, management
liaison, derivatives, soft dollar brokerage and compensation committees and the
members of the executive and valuation committees each receive compensation for
serving in such capacities in addition to the compensation paid to all
independent directors.
(2)Represents benefits accrued with respect to the Defined Benefit Deferred
Compensation Plan discussed below, and not compensation deferred at the election
of the directors.
(3)These figures represent the Company's share of the estimated annual
benefits payable by the INVESCO Complex (excluding INVESCO Global Health
Sciences Fund which does not participate in this retirement plan) upon the
directors' retirement, calculated using the current method of allocating
director compensation among the funds in the INVESCO Complex. These estimated
benefits assume retirement at age 72 and that the basic retainer payable to the
directors will be adjusted periodically for inflation, for increases in the
number of funds in the INVESCO Complex, and for other reasons during the period
in which retirement benefits are accrued on behalf of the respective directors.
This results in lower estimated benefits for directors who are closer to
retirement and higher estimated benefits for directors who are further from
retirement. With the exception of Mr. McIntyre and Drs. Gramm and Soll, each of
these directors has served as a director/trustee of one or more of the funds in
the INVESCO Complex for the minimum five-year period required to be eligible to
participate in the Defined Benefit Deferred Compensation Plan.
(4)Mr. Chabris retired as a director effective September 30, 1998.
(5)Total as a percentage of the Company's net assets as of August 31, 1998.
(6)Total as a percentage of the net assets of the INVESCO Complex as of
December 31, 1997.
<PAGE>
Messrs. Brady and Williamson, as "interested persons" of the Company, the
Funds and other funds in the INVESCO Complex, receive compensation as officers
or employees of INVESCO or its affiliated companies, and do not receive any
director's fees or other compensation from the Company or other funds in the
INVESCO Complex for their services as directors.
The boards of directors/trustees of the mutual funds managed by INVESCO and
INVESCO Treasurer's Series Trust have adopted a Defined Benefit Deferred
Compensation Plan for the non-interested directors and trustees of the funds.
Under this plan, each director or trustee who is not an interested person of the
funds (as defined in the 1940 Act) and who has served for at least five years (a
"qualified director") is entitled to receive, upon termination of service as a
director (normally at the retirement age of 72, or the retirement age of 73 to
74, if the retirement date is extended by the boards for one or two years, but
less than three years) continuation of payment for one year (the "first year
retirement benefit") of the annual basic retainer and annualized board meeting
fees payable by the funds to the qualified director at the time of his or her
retirement (the "basic retainer"). Commencing with any such director's second
year of retirement, and commencing with the first year of retirement of a
director whose retirement has been extended by the board for three years, a
qualified director shall receive quarterly payments at an annual rate equal to
50% of the basic retainer and annualized board meeting fees. These payments will
continue for the remainder of the qualified director's life or ten years,
whichever is longer (the "reduced retainer payments"). If a qualified director
dies or becomes disabled after age 72 and before age 74 while still a director
of the funds, the first year retirement benefit and the reduced retainer
payments will be made to him or her or to his or her beneficiary or estate. If a
qualified director becomes disabled or dies either prior to age 72 or during his
or her 74th year while still a director of the funds, the director will not be
entitled to receive the first year retirement benefit; however, the reduced
retainer payments will be made to his or her beneficiary or estate. The plan is
administered by a committee of three directors who are also participants in the
plan and one director who is not a plan participant. The cost of the plan will
be allocated among the INVESCO and Treasurer's Series Trust funds in a manner
determined to be fair and equitable by the committee. The Company began making
plan payments to Mr. Chabris on 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.
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 selected INVESCO
Funds. The deferred amounts are being invested in the shares of all of the
INVESCO and Treasurer's Series Trust Funds. Each independent director is,
therefore, an indirect owner of shares of each INVESCO and INVESCO Treasurer's
Series Trust Fund.
The Company has an audit committee that is comprised of four of the
directors who are not interested persons of the Company. The committee meets
periodically with the Company's independent accountants and officers to review
accounting principles used by the Company, the adequacy of internal controls,
the responsibilities and fees of the independent accountants, and other matters.
The Company has a management liaison committee which meets quarterly with
various management personnel of INVESCO in order (a) to facilitate better
understanding of management and operations of the Company, and (b) to review
legal and operational matters which have been assigned to the committee by the
board of directors, in furtherance of the board of directors' overall duty of
supervision.
The Company has a soft dollar brokerage committee. The committee meets
periodically to review soft dollar brokerage transactions by the Funds, and to
review policies and procedures of the Funds' adviser with respect to soft dollar
brokerage transactions. It reports on these matters to the Company's board of
directors.
<PAGE>
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 the Funds' adviser 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.
HOW SHARES CAN BE PURCHASED
Shares of each Fund are sold on a continuous basis at the respective net
asset value per share of the Fund next calculated after receipt of a purchase
order in good form. The net asset value per share is computed separately for
each Fund and is determined once each day that the New York Stock Exchange is
open as of the close of regular trading on that Exchange, but may also be
computed at other times. See "How Shares Are Valued."
The Company has authorized one or more brokers to accept purchase orders on
the Funds' behalf. Such brokers are authorized to designate other intermediaries
to accept purchase orders on the Funds' behalf. The Funds will be deemed to have
received a purchase order when an authorized broker, or, if applicable, a
broker's authorized designee, accepts the order. A purchase order will be priced
at a Fund's net asset value next calculated after the order has been accepted by
an authorized broker or the broker's authorized designee.
IDI acts as the Funds' distributor under a distribution agreement with the
Funds and bears all expenses, including the costs of printing and distributing
prospectuses, incident to direct sales and distribution of Fund shares on a
no-load basis.
Distribution Plan. As described in the section of the Funds' Prospectuses
entitled "How To Buy Shares - Distribution Expenses," the Company has adopted a
Plan and Agreement of Distribution (the "Plan") pursuant to Rule 12b-1 under the
1940 Act. The Plan provides that the Funds may make monthly payments to IDI of
amounts computed at an annual rate no greater than 0.25% of each Fund's average
net assets to permit IDI, at its discretion, to engage in certain activities and
provide services in connection with the distribution of a Fund's shares to
investors. Payment by a Fund under the Plan, for any month, may be made to
compensate IDI for permissible activities engaged in and services provided by
IDI during the rolling 12-month period in which that month falls. For the fiscal
year ended August 31 1998, the High Yield, Select Income, Short-Term Bond and
U.S. Government Securities Funds made payments to INVESCO (the predecessor of
IDI as distributor of shares of the Funds) and IDI under the 12b-1 Plan in the
amount of $1,648,632, $920,502, $33,386 and $130,124, respectively. In addition,
as of August 31, 1998, $153,387, $97,910, $3,270 and $12,020 of additional
distribution accruals had been incurred under the Plan for the High Yield,
Select Income, Short-Term Bond and U.S. Government Securities Funds,
respectively, and will be paid to IDI during the fiscal year ended August 31,
1999. As noted in the Prospectuses, one type of expenditure is the payment of
compensation 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 banks to act as underwriters of mutual fund
shares, the Company does not believe that these limitations would affect the
ability of such banks to enter into arrangements with IDI, but can give no
assurance in this regard. However, to the extent it is determined otherwise in
the future, arrangements with banks might have to be modified or terminated,
and, in that case, the size of one or more of the Funds possibly could decrease
to the extent that the banks would no longer invest customer assets in a
particular Fund. Neither the Company nor its investment adviser will give any
preference to banks or other depository institutions which enter into such
arrangements when selecting investments to be made by each Fund.
<PAGE>
For the fiscal year ended August 31, 1998, allocations of 12b-1 amounts
paid by the High Yield Fund for the following categories of expenses were:
advertising--$576,525; sales literature, printing, and postage--$158,225; direct
mail--$76,686 public relations/promotion--$66,740; compensation to securities
dealers and other organizations--$523,938; marketing personnel--$246,518. For
the fiscal year ended August 31, 1998, allocations of 12b-1 amounts paid by the
Select Income Fund for the following categories of expenses were:
advertising--$250,643; sales literature, printing and postage--$95,059; direct
mail--$63,831; public relations/promotion--$34,325; compensation to securities
dealers and other organizations--$370,771; marketing personnel--$105,873. For
the fiscal year ended August 31, 1998, allocations of 12b-1 amounts paid by the
Short-Term Bond Fund were: advertising-- $9,634; sales literature, printing and
postage--$6,006; direct mail--$2,090; public relations/promotion--$1,861;
compensation to securities dealers and other organizations--$6,633; marketing
personnel--$7,162. For the fiscal year ended August 31, 1998, allocation of
12b-1 amounts paid by the U.S. Government Securities Fund were:
advertising--$23,343; sales literature, printing and postage--$14,712; direct
mail--$6,182; public relations/promotion--$5,178; compensation to securities
dealers and other organizations--$58,130; marketing personnel--$22,579.
The nature and scope of services which are provided by securities dealers
and other organizations may vary by dealer but include, among other things,
processing new stockholder account applications, preparing and transmitting to
the Company's Transfer Agent computer-processable tapes of each Fund's
transactions by customers, serving as the primary source of information to
customers in answering questions concerning each Fund, and assisting in
other customer transactions with each Fund.
The initial Plan was approved on April 21, 1993, at a meeting called for
such purpose by a majority of the directors of the Company, including a majority
of the directors who neither are "interested persons" of the Company nor have
any financial interest in the operation of the Plan ("independent directors").
The board of directors, on February 4, 1997, approved amending the Plan to a
compensation type 12b-1 plan. This amendment of the Plan did not result in
increasing the amount of the Funds' payments thereunder. The Plan has been
continued by action of the board of directors until May 15, 1999. Pursuant to
authorization granted by the Company's board of directors on September 2, 1997,
a new Plan became effective on September 30, 1997, under which IDI assumed all
obligations related to distribution which were previously performed by INVESCO.
The Plan provides that it shall continue in effect with respect to each
Fund for so long as such continuance is approved at least annually by the vote
of the board of directors of the Company cast in person at a meeting called for
the purpose of voting on such continuance. The Plan can also be terminated at
any time with respect to any Fund, without penalty, if a majority of the
independent directors, or shareholders of such Fund, vote to terminate the Plan.
The Company may, in its absolute discretion, suspend, discontinue or limit the
offering of the shares of any Fund at any time. In determining whether any such
action should be taken, the board of directors intends to consider all relevant
factors including, without limitation, the size of the Funds, the investment
climate for any particular Fund, general market conditions, and the volume of
sales and redemptions of Fund shares. The Plan may continue in effect and
payments may be made under the Plan following any such temporary suspension or
limitation of the offering of a Fund's shares; however, the Company is not
contractually obligated to continue the Plan for any particular period of time.
Suspension of the offering of a Fund's shares would not, of course, affect a
shareholder's ability to redeem his or her shares. So long as the Plan is in
effect, the selection and nomination of persons to serve as independent
directors of the Company shall be committed to the independent directors then in
office at the time of such selection or nomination. The Plan may not be amended
to increase materially the amount of any Fund's payments thereunder without
approval of the shareholders of that Fund, and all material amendments to the
Plan must be approved by the board of directors of the Company, including a
majority of the independent directors. Under the agreement implementing the
Plan, INVESCO or the Funds, the latter by vote of a majority of the 12b-1
directors or of the holders of a majority of a Fund's outstanding voting
securities, may terminate such agreement as to that Fund without penalty upon 30
days' written notice to the other party. No further payments will be made by a
Fund under the Plan in the event of its termination as to that Fund.
<PAGE>
To the extent that the Plan constitutes a plan of distribution adopted
pursuant to Rule 12b-1 under the 1940 Act, it shall remain in effect as such, so
as to authorize the use of each Fund's assets in the amounts and for the
purposes set forth therein, notwithstanding the occurrence of an assignment, as
defined by the 1940 Act, and rules thereunder. To the extent it constitutes an
agreement pursuant to a plan, each Fund's obligation to make payments to IDI
shall terminate automatically, in the event of such "assignment," in which case
the Funds may continue to make payments, pursuant to the Plan, to IDI or another
organization only upon the approval of new arrangements, which may or may not be
with IDI, regarding the use of the amounts authorized to be paid by it under the
Plan, by the directors, including a majority of the 12b-1 directors, by a vote
cast in person at a meeting called for such purpose.
Information regarding the services rendered under the Plan and the amounts
paid therefor by each Fund are provided to, and reviewed by, the directors on a
quarterly basis. On an annual basis, the directors consider the continued
appropriateness of the Plan at the level of compensation provided therein.
The only directors or interested persons, as that term is defined in
Section 2(a)(19) of the 1940 Act, of the Company who have a direct or indirect
financial interest in the operation of the Plan are the officers and directors
of the Company listed herein under the section entitled "The Funds And Their
Management -Officers and Directors of the Company" who are also officers either
of IDI or companies affiliated with IDI. The benefits which the Company believes
will be reasonably likely to flow to the Funds and their shareholders under the
Plan include the following:
(1) Enhanced marketing efforts, if successful, should result in an
increase in net assets through the sale of additional shares
and afford greater resources with which to pursue the
investment objectives of the Funds;
(2) The sale of additional shares reduces the likelihood that
redemption of shares will require the liquidation of
securities of the Funds in amounts and at times that are
disadvantageous for investment purposes;
(3) The positive effect which increased Fund assets will have on
its revenues could allow INVESCO and its affiliated companies:
(a) To have greater resources to make the financial
commitments necessary to improve the quality and
level of each Fund's shareholder services (in both
systems and personnel),
(b) To increase the number and type of mutual funds
available to investors from INVESCO and its
affiliated companies (and support them in their
infancy), and thereby expand the investment choices
available to all shareholders, and
(c) To acquire and retain talented employees who desire
to be associated with a growing organization; and
(4) Increased Fund assets may result in reducing each investor's
share of certain expenses through economies of scale (e.g.
exceeding established breakpoints in the advisory fee schedule
and allocating fixed expenses over a larger asset base),
thereby partially offsetting the costs of the Plan.
<PAGE>
HOW SHARES ARE VALUED
As described in the section of the Funds' Prospectuses entitled "Fund Price
And Performance," the net asset value of shares of each Fund of the Company is
computed once each day that the New York Stock Exchange is open as of the close
of regular trading on that Exchange (generally, 4:00 p.m., New York time) and
applies to purchase and redemption orders received prior to that time. Net asset
value per share is also computed on any other day on which there is a sufficient
degree of trading in the securities held by a Fund that the current net asset
value per share of such Fund might be materially affected by changes in the
value of the securities held, but only if on such day that Fund receives a
request to purchase or redeem shares. Net asset value per share is not
calculated on days the New York Stock Exchange is closed, such as federal
holidays, including New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving, and
Christmas.
The net asset value per share of each Fund is calculated by dividing the
value of all securities held by that Fund plus its other assets (including
dividends and interest accrued but not collected), less that Fund's liabilities
(including accrued expenses), by the number of outstanding shares of the Fund.
Securities traded on national securities exchanges, the NASDAQ National Market
System, the NASDAQ Small Cap Market and foreign markets are valued at their last
sale prices on the exchanges or markets where such securities are primarily
traded. Securities traded in the over-the-counter market for which last sale
prices are not available, and listed securities for which no sales were reported
on a particular date, are valued at their highest closing bid prices (or, for
debt securities, yield equivalents thereof) obtained from one or more dealers
making markets for such securities. If market quotations are not readily
available, securities or other assets will be valued at their fair values as
determined in good faith by the Company's board of directors or pursuant to
procedures adopted by the board of directors. The above procedures may include
the use of valuations furnished by a pricing service which employs a matrix to
determine valuations for normal institutional-size trading units of debt
securities. Prior to utilizing a pricing service, the Company's board of
directors reviews the methods used by such service to assure itself that
securities will be valued at their fair values. The Company's board of directors
also periodically monitors the methods used by such pricing services. Debt
securities with remaining maturities of 60 days or less at the time of purchase
are normally valued at amortized cost.
The value of securities held by each Fund, and other assets used in
computing net asset value generally are determined as of the time regular
trading in such securities or assets is completed each day. Because regular
trading in most foreign securities markets is completed simultaneously with, or
prior to, the close of regular trading on the New York Stock Exchange, closing
prices for foreign securities usually are available for purposes of computing a
Fund's net asset value on a particular day. However, in the event that the
closing price of a foreign security is not available in time to calculate a
Fund's net asset value on a particular day the Company's board of directors has
authorized the use of the market price for the established time during the day
which may be prior to the close of regular trading in the security. The value of
all assets and liabilities initially expressed in foreign currencies will be
converted into U.S. dollars at the spot rates of such currencies against U.S.
dollars provided by an approved pricing service.
<PAGE>
FUND PERFORMANCE
As discussed in the section of the Funds' Prospectuses entitled "Fund Price
And Performance," the Company advertises the yield and total return performance
of the Funds. In calculating yield quotations for the Funds, except for
asset-backed securities, such as GNMA certificates, interest earned is
determined by computing yield to maturity (or yield to call, if applicable) of
each obligation held by a Fund, based upon market value of each obligation
(including actual accrued interest) at the close of business on the last
business day of each month, or, with respect to an obligation purchased during
the month, the purchase price plus accrued interest. The resultant yield to
maturity is divided by 360 and multiplied by the market value of the obligation
(including actual accrued interest), and the result is multiplied by the number
of days in the subsequent month that the obligation is in the Fund (assuming
that each month has 30 days). Dividends received on the preferred stocks held by
the High Yield Fund are recognized, for purposes of yield calculations, on a
daily accrual basis. As discussed in the Prospectuses, and in the Appendix of
this Statement of Additional Information, the GNMA Certificates held by the U.S.
Government Securities and Select Income Funds are generally subject to monthly
payments of principal and interest ("paydowns"). In computing these Funds'
yields, gain or loss attributable to actual monthly paydowns is accounted for as
an increase or decrease to interest income during the period. The Funds amortize
the discount and premium on the remaining security, based on the cost of the
security, to the weighted average maturity date, if such information is
available, or to the remaining term of the GNMA Certificate, if the weighted
average maturity date is not available. Yield quotations for each Fund for the
30 days ended August 31, 1998, were as follows: High Yield Fund, 9.60%; Select
Income Fund, 6.08%; Short-Term Bond Fund, 5.49% and U.S. Government Securities
Fund, 4.83%.
Average annual total return performance for each of the Funds for the
indicated periods ended August 31, 1998, was as follows:
1 3 5 10
Fund Year Years Years Years
- ---- ---- ----- ----- -----
INVESCO High Yield 4.44% 11.53% 9.12% 9.41%
INVESCO Select Income 9.58% 9.03% 8.22% 9.49%
INVESCO Short-Term
Bond 6.76% 6.15% NA 5.02%(1)
INVESCO U.S. Government
Securities 14.75% 8.87% 6.27% 8.65%
- ---------------------------
(1) Inception date: September 30, 1993.
Average annual total return performance for each of the periods indicated
was computed by finding the average annual compounded rates of return that would
equate the initial amount invested to the ending redeemable value, according to
the following formula:
P(1 + T)exponent n = ERV
where: P = initial payment of $1000
T = average annual total return
n = number of years
ERV = ending redeemable value of initial payment
The average annual total return performance figures shown above were
determined by solving the above formula for "T" for each time period and Fund
indicated.
<PAGE>
In conjunction with performance reports and/or analyses for the Funds,
comparative data between a Fund's performance for a given period and recognized
indices of investment results for the same period, and/or assessments of the
quality of shareholder service, may be provided to shareholders. Such indices
include indices provided by Dow Jones & Company, Standard & Poor's, Lipper
Analytical Services, Inc., Lehman Brothers, National Association of Securities
Dealers Automated Quotations, Frank Russell Company, Value Line Investment
Survey, the American Stock Exchange, Morgan Stanley Capital International,
Wilshire Associates, the Financial Times Stock Exchange, the New York Stock
Exchange, the Nikkei Stock Average and Deutcher Aktienindex, all of which are
unmanaged market indicators. In addition, rankings, ratings, and comparisons of
investment performance and/or assessments of the quality of shareholder service
made by independent sources may be used in advertisements, sales literature or
shareholder reports, including reprints of, or selections from, editorials or
articles about the Funds. These sources utilize information compiled (i)
internally; (ii) by Lipper Analytical Services, Inc.; or (iii) by other
recognized analytical services. The Lipper Analytical Services, Inc. mutual fund
rankings and comparisons which may be used by the Funds in performance reports
will be drawn from the mutual fund groupings listed in each Fund's prospectus,
in addition to the broad-based Lipper general fund groupings. Sources for Fund
performance information and articles about the Funds include, but are not
limited to, the following:
American Association of Individual Investors' Journal
Banxquote
Barron's
Business Week
CDA Investment Technologies
CNBC
CNN
Consumer Digest
Financial Times
Financial World
Forbes
Fortune
Ibbotson Associates, Inc.
Institutional Investor
Investment Company Data, Inc.
Investor's Business Daily
Kiplinger's Personal Finance
Lipper Analytical Services, Inc.'s Mutual Fund Performance
Analysis
Money
Morningstar
Mutual Fund Forecaster
No-Load Analyst
No-Load Fund X
Personal Investor
Smart Money
The New York Times
The No-Load Fund Investor
U.S. News and World Report
United Mutual Fund Selector
USA Today
Wall Street Journal
Wiesenberger Investment Companies Services
Working Woman
Worth
<PAGE>
SERVICES PROVIDED BY THE FUND
Periodic Withdrawal Plan. As described in the section of the Funds'
Prospectuses entitled "How To Sell Shares," each Fund offers a Periodic
Withdrawal Plan. All dividends and other distributions on shares owned by
shareholders participating in this Plan are reinvested in additional shares.
Because withdrawal payments represent the proceeds from sales of shares, the
amount of shareholders' investments in a Fund will be reduced to the extent that
withdrawal payments exceed dividends and other distributions paid and
reinvested. Any gain or loss on such redemptions must be reported for tax
purposes. In each case, shares will be redeemed at the close of business on or
about the 20th day of each month preceding payment and payments will be mailed
within five business days thereafter.
The Periodic Withdrawal Plan involves the use of principal and is not a
guaranteed annuity. Payments under such Plan do not represent income or a return
on investment.
Participation in the Periodic Withdrawal Plan may be terminated at any time
by sending a written request to INVESCO. Upon termination, all future dividends
and capital gain distributions will be reinvested in additional shares unless a
shareholder requests otherwise.
Exchange Policy. As discussed in the section of the Funds' Prospectuses
entitled "How To Buy Shares - Exchange Policy," each Fund offers shareholders
the ability to exchange shares of the Funds for shares of another Fund or for
shares of certain other no-load mutual funds advised by INVESCO. Exchange
requests may be made either by telephone or by written request to INVESCO using
the telephone number or address on the cover of this Statement of Additional
Information. Exchanges made by telephone must be in an amount of at least $250,
if the exchange is being made into an existing account of one of the INVESCO
funds. All exchanges that establish a new account must meet the fund's
applicable minimum initial investment requirements. Written exchange requests
into an existing account have no minimum requirements other than the fund's
applicable minimum subsequent investment requirements. Any gain or loss realized
on such an exchange is recognized for federal income tax purposes. This ability
is not an option or right to purchase securities and is not available in any
state or other jurisdiction where the shares of the mutual fund into which
transfer is to be made are not qualified for sale, or when the net asset value
of the shares presented for exchange is less than the minimum dollar purchase
required by the appropriate prospectus.
TAX-DEFERRED RETIREMENT PLANS
As described in the section of the Funds' Prospectuses entitled "Fund
Services," shares of a Fund may be purchased as the investment medium for
various tax-deferred retirement plans. Persons who request information regarding
these plans from INVESCO will be provided with prototype documents and other
supporting information regarding the type of Plan requested. Each of these plans
involves a long-term commitment of assets and is subject to possible regulatory
penalties for excess contributions, premature distributions or for insufficient
distributions after age 70-1/2. The legal and tax implications may vary
according to the circumstances of the individual investor. Therefore, the
investor is urged to consult with an attorney or tax adviser prior to the
establishment of such a plan.
HOW TO REDEEM SHARES
Normally, payments for shares redeemed will be mailed within seven days
following receipt of the required documents as described in the section of the
Funds' Prospectuses entitled "How To Sell Shares." The right of redemption may
be suspended and payment postponed when: (a) the New York Stock Exchange is
closed for other than customary weekends and holidays; (b) trading on that
exchange is restricted; (c) an emergency exists as a result of which disposal by
a Fund of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Fund fairly to determine the value of its net
assets; or (d) the SEC by order so permits.
<PAGE>
The Company has authorized one or more brokers to accept redemption orders
on the Funds' behalf. Such brokers are authorized to designate other
intermediaries to accept redemption orders on the Funds' behalf. The Funds will
be deemed to have received a redemption order when an authorized broker, or, if
applicable, a broker's authorized designee, accepts the order. A redemption
order will be priced at a Fund's net asset value next calculated after the order
has been accepted by an authorized broker or the broker's authorized designee.
It is possible that in the future conditions may exist which would, in the
opinion of the Company's investment adviser, make it undesirable for a Fund to
pay for redeemed shares in cash. In such cases, the investment adviser may
authorize payment to be made in portfolio securities or other property of the
Fund. However, the Company is obligated under the 1940 Act to redeem for cash
all shares of a Fund presented for redemption by any one shareholder having a
value up to $250,000 (or 1% of the Fund's net assets if that is less) in any
90-day period. Securities delivered in payment of redemptions are selected
entirely by the investment adviser based on what is in the best interests of the
Fund and its shareholders, and are valued at the value assigned to them in
computing the Fund's net asset value per share. Shareholders receiving such
securities are likely to incur brokerage costs on their subsequent sales of the
securities.
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES
Each Fund intends to continue to conduct its business and satisfy the
applicable diversification of assets, distribution and source of income
requirements to qualify as a regulated investment company ("RIC") under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). Each
Fund so qualified for the taxable year ended August 31, 1998, and intends to
continue to qualify during its current taxable year. As a result of their
distribution policies and qualification as RICs, it is anticipated that the
Funds will pay no federal income or excise taxes and that the Funds will be
accorded conduit or "pass through" treatment for federal income tax purposes.
Dividends paid by the Funds from net investment income as well as
distributions of net realized short-term capital gains and net realized gains
from certain foreign currency transactions are, for federal income tax purposes,
taxable as ordinary income to shareholders. After the end of each calendar year,
each Fund sends shareholders information regarding the amount and character of
dividends paid in the year.
Distributions by each Fund of net capital gain (the excess of net long-term
capital gain over net short-term capital loss) are, for federal income tax
purposes, taxable to the shareholder as long-term capital gains regardless of
how long a shareholder has held shares of the Fund. Long-term gains realized
between May 7, 1997 and July 28, 1997 on the sale of securities held for more
than 12 months are taxable at the maximum rate of 20%. Long-term gains realized
between July 29, 1997 and December 31, 1997 on the sale of securities held for
more than one year but not for more than 18 months are taxable at the maximum
rate of 28%. Long-term gains realized between July 29, 1997 and December 31,
1997 on the sale of securities held for more than 18 months are taxable at the
maximum rate of 20%. Beginning January 1, 1998, the IRS Restructuring and Reform
Act of 1998, signed into law on July 24, 1998, lowers the holding period for
long-term capital gains entitled to the 20% capital gains tax rate from 18
months to 12 months. Accordingly, all long-term gains realized after December
31, 1997 on the sale of securities held for more than 12 months will be taxable
at a maximum rate of 20%. Note that the rate of capital gains tax is dependent
on the shareholder's marginal tax rate and may be lower than the above rates. At
the end of each year, information regarding the tax status of dividends and
other distributions is provided to shareholders. Shareholders should consult
their tax advisers as to the effect of distributions by a Fund.
<PAGE>
All dividends and other distributions are regarded as taxable to the
investor, regardless whether such dividends and distributions are reinvested in
additional shares of one of the Funds or another fund in the INVESCO group. The
net asset value of Fund shares reflects accrued net investment income and
undistributed realized capital and foreign currency gains; therefore, when a
distribution is made, the net asset value is reduced by the amount of the
distribution. If the net asset value of Fund shares were reduced below a
shareholder's cost as a result of a distribution, such distribution would be
taxable to the shareholder although a portion would be, in effect, a return of
invested capital. If shares 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.
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 Fund
recommends any particular method of determining cost basis. Other methods may
result in different tax consequences. If a shareholder has reported gains or
losses for a Fund in past years, the shareholder must continue to use the cost
basis method previously used unless the shareholder applies to the IRS for
permission to change the method.
If Fund shares are sold at a loss after being held for six months or less,
the loss will be treated as a long-term, instead of short-term, capital loss to
the extent of any capital gain distributions received on those shares.
Each Fund will be subject to a non-deductible 4% excise tax to the extent
it fails to distribute by the end of any calendar year substantially all of its
ordinary income for that year and net capital gains for the one-year period
ending on October 31 of that year, plus certain other amounts.
Dividends and interest received by each Fund may be subject to income,
withholding or other taxes imposed by foreign countries and U.S. possessions
that would reduce the yield on its securities. Tax conventions between certain
countries and the United States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not imposes taxes on capital gains in
respect of investments by foreign investors. Foreign taxes withheld may be
treated as an expense of the Fund.
The Fund may invest in the stock of "passive foreign investment companies"
(PFICs). A PFIC is a foreign corporation (other than a controlled foreign
corporation) that, in general, meets either of the following tests: (1) at least
75% of its gross income is passive or (2) an average of at least 50% of its
assets produce, or are held for the production of, passive income. Under certain
circumstances, a Fund will be subject to federal income tax on a portion of any
"excess distribution" received on the stock of a PFIC or of any gain on
disposition of the stock (collectively "PFIC income"), plus interest thereon,
even if the Fund distributes the PFIC income as a taxable dividend to its
shareholders. The balance of the PFIC income will be included in the Fund's
investment company taxable income and, accordingly, will not be taxable to the
Fund to the extent that income is distributed to its shareholders.
<PAGE>
Each Fund may elect to "mark-to-market" its stock in any PFIC.
Marking-to-market, in this context, means including in ordinary income for each
taxable year the excess, if any, of the fair market value of the PFIC stock over
a Fund's adjusted tax basis therein as of the end of that year. Once the
election has been made, a Fund also will be allowed to deduct from ordinary
income the excess, if any, of its adjusted basis in PFIC stock over the fair
market value thereof as of the end of the year, but only to the extent of any
net mark-to-market gains with respect to that PFIC stock included by the Fund
for prior taxable years beginning after December 31, 1997. A Fund's adjusted tax
basis in each PFIC's stock with respect to which it makes this election will be
adjusted to reflect the amounts of income included and deductions taken under
the election.
Gains or losses (1) from the disposition of foreign currencies, (2) from
the disposition of debt securities denominated in foreign currency that are
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of each security and the date of disposition, and (3) that
are attributable to fluctuations in exchange rates that occur between the time
the Fund accrues interest, dividends or other receivables or accrues expenses or
other liabilities denominated in a foreign currency and the time the Fund
actually collects the receivables or pays the liabilities, generally will be
treated as ordinary income or loss. These gains or losses may increase or
decrease the amount of the Fund's investment company taxable income to be
distributed to its shareholders.
Shareholders should consult their own tax advisers regarding specific
questions as to federal, state and local taxes. Dividends and other
distributions generally will be subject to applicable state and local taxes.
Qualification as a regulated investment company under the Code for federal
income tax purposes does not entail government supervision of management or
investment policies.
INVESTMENT PRACTICES
Portfolio Turnover. There are no fixed limitations regarding the portfolio
turnover of the Funds. The rate of portfolio turnover has fluctuated under
constantly changing economic conditions and market circumstances. During the
fiscal years ended August 31, 1998, 1997 and 1996, the High Yield Fund's
portfolio turnover rates were 282%, 129% and 266%, respectively, the Select
Income Fund's turnover rates were 140%, 263% and 210%, respectively, the
Short-Term Bond Fund's portfolio turnover rates were 135%, 331% and 103%,
respectively and the U.S. Government Securities Fund's portfolio turnover rates
were 323%, 139% and 212%, respectively. Securities initially satisfying the
basic policies and objectives of a Fund may be disposed of when they are no
longer suitable. Brokerage costs to these Funds are commensurate with the rate
of portfolio activity. In computing the above portfolio turnover rates, all
investments with maturities or expiration dates at the time of acquisition of
one year or less were excluded. Subject to this exclusion, the turnover rate was
calculated by dividing (a) the lesser of purchases or sales of portfolio
securities for the fiscal year by (b) the monthly average of the value of
portfolio securities owned by the Fund during the fiscal year.
Placement of Portfolio Brokerage. INVESCO, as the Company's investment
adviser, places orders for the purchase and sale of securities with brokers and
dealers based upon INVESCO's evaluation of such brokers' and dealers' financial
responsibility subject to their ability to effect transactions at the best
available prices. INVESCO evaluates the overall reasonableness of brokerage
commissions or underwriting discounts (the difference between the full
acquisition price to acquire the new offering and the discount offered to
members of the underwriting syndicate) paid by reviewing the quality of
executions obtained on each Fund's portfolio transactions, viewed in terms of
the size of transactions, prevailing market conditions in the security purchased
or sold, and general economic and market conditions. In seeking to ensure that
the commissions or discounts charged the Fund are consistent with prevailing and
reasonable commissions or discounts, INVESCO also endeavors to monitor brokerage
industry practices with regard to the commissions or discounts charged by
brokers and dealers on transactions effected for other comparable institutional
investors. While INVESCO seeks reasonably competitive rates, the Funds do not
necessarily pay the lowest commission, spread or discount available.
<PAGE>
Consistent with the standard of seeking to obtain the best execution on
portfolio transactions, INVESCO may select brokers that provide research
services to effect such transactions. Research services consist of statistical
and analytical reports relating to issuers, industries, securities and economic
factors and trends, which may be of assistance or value to INVESCO in making
informed investment decisions. Research services prepared and furnished by
brokers through which the Funds effect securities transactions may be used by
INVESCO in servicing all of their respective accounts and not all such services
may be used by INVESCO in connection with the Funds.
In recognition of the value of the above-described brokerage and research
services provided by certain brokers, INVESCO, consistent with the standard of
seeking to obtain the best execution on portfolio transactions, may place orders
with such brokers for the execution of transactions for the Funds on which the
commissions or discounts are in excess of those which other brokers might have
charged for effecting the same transactions.
Portfolio transactions may be effected through qualified broker-dealers who
recommend the Funds to their clients, or that act as agent in the purchase of
any of the Fund's shares for their clients. When a number of brokers and dealers
can provide comparable best price and execution on a particular transaction, the
Company's adviser may consider the sale of Fund shares by a broker or dealer in
selecting among qualified broker-dealers.
Certain financial institutions (including brokers who may sell shares of
the Funds, or affiliates of such brokers) are paid a fee (the "Services Fee")
for recordkeeping, shareholder communications and other services provided by the
brokers to investors purchasing shares of the Funds through no transaction fee
programs ("NTF Programs") offered by the financial institution or its affiliated
broker (an "NTF Program Sponsor"). The Services Fee is based on the average
daily value of the investments in each Fund made in the name of such NTF Program
Sponsor and held in omnibus accounts maintained on behalf of investors
participating in the NTF Program. With respect to certain NTF Programs, the
directors of the Company have authorized the Funds to apply dollars generated
from the Company's Plan and Agreement of Distribution pursuant to Rule 12b-1
under the 1940 Act (the "Plan") to pay the entire Services Fee, subject to the
maximum Rule 12b-1 fee permitted by the Plan. With respect to other NTF
Programs, the Company's directors have authorized the Funds to pay transfer
agency fees to INVESCO based on the number of investors who have beneficial
interests in the NTF Program Sponsor's omnibus accounts in the Funds. INVESCO,
in turn, pays these transfer agency fees to the NTF Program Sponsor as a
sub-transfer agency or recordkeeping fee in payment of all or a portion of the
Services Fee. In the event that the sub-transfer agency or recordkeeping fee is
insufficient to pay all of the Services Fee with respect to these NTF Programs,
the directors of the Company have authorized the Company to apply dollars
generated from the Plan to pay the remainder of the Services Fee, subject to the
maximum Rule 12b-1 fee permitted by the Plan. INVESCO itself pays the portion of
each Fund's Services Fee, if any, that exceeds the sum of the sub-transfer
agency or recordkeeping fee and Rule 12b-1 fee. The Company's directors have
further authorized INVESCO to place a portion of each Fund's brokerage
transactions with certain NTF Program Sponsors or their affiliated brokers, if
INVESCO reasonably believes that, in effecting the Fund's transactions in
portfolio securities, the broker is able to provide the best execution of orders
at the most favorable prices. A portion of the commissions earned by such a
broker from executing portfolio transactions on behalf of the Funds may be
credited by the NTF Program Sponsor against its Services Fee. Such credit shall
be applied first against any sub-transfer agency or recordkeeping fee payable
with respect to the Funds, and second against any Rule 12b-1 fees used to pay a
portion of the Services Fee, on a basis which has resulted from negotiations
between INVESCO or IDI and the NTF Program Sponsor. Thus, the Funds pay
sub-transfer agency or recordkeeping fees to the NTF Program Sponsor in payment
of the Services Fee only to the extent that such fees are not offset by a Fund's
credits. In the event that the transfer agency fee paid by the Funds to INVESCO
with respect to investors who have beneficial interests in a particular NTF
Program Sponsor's omnibus accounts in a Fund exceeds the Services Fee applicable
to the Fund, after application of credits, INVESCO may carry forward the excess
and apply it to future Services Fees payable to that NTF Program Sponsor with
respect to that Fund. The amount of excess transfer agency fees carried forward
<PAGE>
will be reviewed for possible adjustment by INVESCO prior to each fiscal
year-end of the Funds. The Company's board of directors has also authorized the
Funds to pay to IDI the full Rule 12b-1 fees contemplated by the Plan in
compensate IDI for expenses incurred by IDI in engaging in the activities and
providing the services on behalf of the Funds contemplated by the Plan, subject
to the maximum Rule 12b-1 fee permitted by the Plan, notwithstanding that
credits have been applied to reduce the portion of the 12b-1 fee that would have
been used to compensate IDI for payments to such NTF Program Sponsor absent such
credits.
The aggregate dollar amount of underwriting discounts and brokerage
commissions paid by the Company for the fiscal years ended August 31, 1998, 1997
and 1996, were $4,011,552, $4,191,369 and $3,611,046, respectively. For the
fiscal year ended August 31, 1998, brokers providing research services received
$5,225 in commissions on portfolio transactions effected for the Funds. On a
Fund-by-Fund basis this figure breaks down as follows: High Yield Fund, $4,750;
Select Income Fund, $475; Short-Term Bond Fund, $0 and U.S. Government
Securities Fund, $0. The aggregate dollar amount of such portfolio transactions
was $2,243,520. As a result of selling shares of the Fund, brokers received $0
in commissions on portfolio transactions effected for the Funds during the
fiscal year ended August 31, 1998.
At August 31, 1998, the Funds held securities of their regular brokers or
dealers, or their parents, as follows:
Value of
Securities
Fund Broker or Dealer at 08/31/98
- ---- ---------------- -----------
High Yield Fund American General $7,444,000
Select Income Fund Lehman Brothers 10,545,000
American General 13,997,000
Short-Term Bond Fund State Street Capital 4,372,000
Market
U.S. Government State Street Capital 3,450,000
Securities Fund Market
INVESCO does not receive 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 or dealer that executes transactions for the Funds.
ADDITIONAL INFORMATION
Common Stock. The Company has 600,000,000 authorized shares of common stock
with a par value of $0.01 per share. Of such shares, 300,000,000 have been
allocated to the High Yield Fund and 100,000,000 each have been allocated to the
Select Income Fund, Short-Term Bond Fund and U.S. Government Securities Fund. As
of August 31, 1998, 75,300,011 shares of the Select Income Fund; 94,943,777
shares of the High Yield Fund; 9,950,826 shares of the U.S. Government
Securities Fund; and 2,550,753 shares of the Short-Term Bond Fund were
outstanding. All shares issued and outstanding are, and all shares offered
hereby, when issued, will be fully paid and nonassessable. The board of
directors has the authority to designate additional classes of common stock
without seeking the approval of shareholders, and may classify and reclassify
any authorized but unissued shares.
<PAGE>
Shares of each series represent the interests of the shareholders of such
series in a particular portfolio of investments of the Company. Each series of
the Company's shares is preferred over all other series with respect to the
assets specifically allocated to that series, and all income, earnings, profits
and proceeds from such assets, subject only to the rights of creditors, are
allocated to shares of that series. The assets of each series are segregated on
the books of account and are charged with the liabilities of that class and with
a share of the Company's general liabilities. The board of directors determines
those assets and liabilities deemed to be general assets or liabilities of the
Company, and those items are allocated among series in a manner deemed by the
board to be fair and equitable. Generally, such allocation will be made based
upon the relative total net assets of each series. In the unlikely event that a
liability allocable to one series exceeds the assets belonging to the series,
all or a portion of such liability may have to be borne by the holders of shares
of the Company's other series.
All dividends on shares of a particular series shall be paid only out of
the income belonging to that series, pro rata to the holders of that series. In
the event of the liquidation or dissolution of the Company or of a particular
series, the shareholders of each series that is being liquidated shall be
entitled to receive, as a series, when and as declared by the board of
directors, the excess of the assets belonging to that series over the
liabilities belonging to that series. The holders of shares of any series shall
not be entitled to any distribution upon liquidation of any other series. The
assets so distributable to the shareholders of any particular series shall be
distributed among such shareholders in proportion to the number of shares of
that series held by them and recorded on the books of the Company.
All Fund shares, regardless of series, have equal voting rights. Voting
with respect to certain matters, such as ratification of independent accountants
or election of directors, will be by all series of the Company. When not all
series are affected by a matter to be voted upon, such as approval of an
investment advisory contract or changes in a Fund's investment policies, only
shareholders of the series affected by the matter will be entitled to vote.
Company shares have noncumulative voting rights, which means that the holders of
a majority of the shares voting for the election of directors of the Company can
elect 100% of the directors if they choose to do so. In such event, the holders
of the remaining shares voting for the election of directors will not be able to
elect any person or persons to the board of directors. After they have been
elected by shareholders, the directors will continue to serve until their
successors are elected and have qualified or they are removed from office, in
either case by a shareholder vote, or until death, resignation or retirement.
They may appoint their own successors, provided that always at least a majority
of the directors have been elected by the Company's shareholders. It is the
intention of the Company not to hold annual meetings of shareholders. The
directors will call annual or special meetings of shareholders for action by
shareholder vote as may be required by the 1940 Act or the Company's Articles of
Incorporation, or at their discretion.
Principal Shareholders. As of October 1, 1998 the following entities held
more than 5% of the outstanding securities of the Funds listed below.
Amount and Nature Percent
Name and Address of Ownership of Class
- ---------------- ----------------- --------
High Yield Fund
- ---------------
Charles Schwab & Co., Inc. 36,826,433.3300 36.35%
Special Custody Acct. For The
Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104
<PAGE>
Nat'l. Financial Services Corp. 7,476,899.4420 7.38%
The Exclusive Benefit of Customers
One World Financial Center
200 Liberty Street 5th Floor
Attn: Kate Recon
New York, NY 10181-5500
Select Income Fund
- ------------------
Charles Schwab & Co., Inc. 11,938,703.8590 15.85%
Special Custody Acct. For The
Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104
INVESCO Trust Company TR 5,819,376.7690 7.72%
Morris Communications Corp.
Employees' Profit Sharing Ret. Plan
725 Broad St.
Augusta, GA 30901-1336
Nat'l. Financial Services Corp. 4,236,014.9610 5.62%
The Exclusive Benefit of Customers
One World Financial Center
200 Liberty Street 5th Floor
Attn: Kate Recon
New York, NY 10181-5500
Short-Term Bond Fund
- --------------------
Merrill Lynch 223,554.5200 9.61%
Security #97MLO
4800 Deer Lake Dr. East
Jacksonville, FL 32246-6486
FTC & Co. 193,745.1010 8.33%
Attn: Datalynx #035
PO Box 173736
Denver, CO 80217-3736
Charles Schwab & Co., Inc. 177,564.0090 7.63%
Special Custody Acct. For The
Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104-4122
<PAGE>
U.S. Government Securities Fund
- -------------------------------
Resources Trust Co. Cust. For 1,501,232.5630 14.94%
The Exclusive Benefit of The
Various Customers of IMS
P.O. Box 3865
Englewood, CO 80155
Charles Schwab & Co., Inc. 912,730.9980 9.08%
Special Custody Acct. For The
Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104
Independent Accountants. PricewaterhouseCoopers LLP, 950 Seventeenth
Street, Denver, Colorado, has been selected as the independent accountants of
the Company. The independent accountants are responsible for auditing the
financial statements of the Company.
Custodian. State Street Bank and Trust Company, P.O. Box 351, Boston,
Massachusetts, has been designated as custodian of the cash and investment
securities of the Company. The bank is also responsible for, among other things,
receipt and delivery of the investment securities of the Company's Funds in
accordance with procedures and conditions specified in the custody agreement.
Under its contract with the Company, the custodian is authorized to establish
separate accounts in foreign countries and to cause foreign securities owned by
the Funds to be held outside the United States in branches of U.S. banks and, to
the extent permitted by applicable regulations, in certain foreign banks and
securities depositories.
Transfer Agent. The Company is provided with transfer agent, registrar, and
dividend disbursing agent services by INVESCO Funds Group, Inc., 7800 E. Union
Avenue, Denver, Colorado 80237, pursuant to the Transfer Agency Agreement
described herein. Such services include the issuance, cancellation and transfer
of shares of the Funds, and the maintenance of records regarding the ownership
of such shares.
Reports to Shareholders. The Company's fiscal year ends on August 31. The
Company distributes reports at least semiannually to its shareholders. Financial
statements regarding the Company, audited by the independent accountants, are
sent to shareholders annually.
Legal Counsel. The firm of Kirkpatrick & Lockhart LLP, Washington, D.C. is
legal counsel for the Company. The firm of Moye, Giles, O'Keefe, Vermeire &
Gorrell, Denver, Colorado, acts as special counsel to the Company.
Financial Statements. The Company's audited financial statements and the
notes thereto for the fiscal year ended August 31, 1998, and the report of
PricewaterhouseCoopers LLP with respect to such financial statements, are
incorporated herein by reference from the Company's Annual Report to
Shareholders for the fiscal year ended August 31, 1998.
Prospectuses. The Company will furnish, without charge, a copy of the
Funds' Prospectuses upon request. Such requests should be made to the Company at
the mailing address or telephone number set forth on the first page of this
Statement of Additional Information.
Registration Statement. This Statement of Additional Information and the
Prospectuses do not contain all of the information set forth in the Registration
Statement the Company has filed with the SEC. The complete Registration
Statement may be obtained from the SEC upon payment of the fee prescribed by the
rules and regulations of the SEC.
<PAGE>
APPENDIX - GNMA CERTIFICATES AND FUTURES CONTRACTS
GNMA Certificates
Government National Mortgage Association. The Government National Mortgage
Association is a wholly-owned corporate instrumentality of the United States
within the U.S. Department of Housing and Urban Development. GNMA's principal
programs involve its guarantees of privately issued securities backed by pools
of mortgages.
Nature of GNMA Certificates. GNMA Certificates are mortgage-backed
securities. The Certificates evidence part ownership of a pool of mortgage
loans. The Certificates which the Company purchases are of the modified
pass-through type. Modified pass-through Certificates entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
fees paid to the GNMA Certificate issuer and GNMA, regardless of whether or not
the mortgagor actually makes the payment.
GNMA Certificates are backed by mortgages and, unlike most bonds, their
principal amount is paid back by the borrower over the length of the loan rather
than in a lump sum at maturity. Principal payments received by the Company will
be reinvested in additional GNMA Certificates or in other permissible
investments.
GNMA Guarantee. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal of and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration or the Farmers Home
Administration or guaranteed by the Veterans Administration. The GNMA guarantee
is backed by the full faith and credit of the United States. GNMA is also
empowered to borrow without limitation from the U.S. Treasury if necessary to
make any payments required under its guarantee.
Life of GNMA Certificates. The average life of a GNMA Certificate is likely
to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will result in the return of a portion of principal invested before
the maturity of the mortgages in the pool.
As prepayment of individual mortgage pools will vary widely, it is not
possible to predict accurately the average life of a particular issue of GNMA
Certificates. However, statistics published by the Federal Housing
Administration are normally used as an indicator of the expected average life of
GNMA Certificates. These statistics indicate that the average life of
single-family dwelling mortgages with 25-30 year maturities (the type of
mortgages backing the vast majority of GNMA Certificates) is approximately 12
years. For this reason, it is customary for pricing purposes to consider GNMA
Certificates as 30-year mortgage-backed securities which prepay fully in the
twelfth year.
Yield Characteristics of GNMA Certificates. The coupon rate of interest of
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates, but only by the amount of the
fees paid to GNMA and the GNMA Certificate issuer. For the most common type of
mortgage pool, containing single-family dwelling mortgages, GNMA receives an
annual fee of 0.06 of 1% of the outstanding principal for providing its
guarantee, and the GNMA Certificate issuer is paid an annual servicing fee of
0.44 of 1% for assembling the mortgage pool and for passing through monthly
payments of interest and principal to Certificate holders.
<PAGE>
The coupon rate by itself, however, does not indicate the yield which will
be earned on the Certificates for the following reasons:
1. Certificates are usually issued at a premium or discount, rather than at
par.
2. After issuance, Certificates usually trade in the secondary market at a
premium or discount.
3. Interest is paid monthly rather than semiannually as is the case for
traditional bonds. Monthly compounding has the effect of raising the effective
yield earned on GNMA Certificates.
4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificate. If
mortgagors prepay their mortgages, the principal returned to Certificate holders
may be reinvested at higher or lower rates.
In quoting yields for GNMA Certificates, the customary practice is to
assume that the Certificates will have a 12-year life. Compared on this basis,
GNMA Certificates have historically yielded roughly 1/4 of 1% more than high
grade corporate bonds and 1/2 of 1% more than U.S. Government and U.S.
Government agency bonds. As the life of individual pools may vary widely,
however, the actual yield earned on any issue of GNMA Certificates may differ
significantly from the yield estimated on the assumption of a 12-year life.
Market for GNMA Certificates. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make GNMA Certificates highly liquid instruments. Quotes for GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificates' coupon rates and the
prepayment experience of the pool of mortgages backing each Certificate.
Futures Contracts
A futures contract is an agreement between two parties for the future
acquisition or delivery of fixed income securities. A "sale" of a futures
contract means the acquisition of a contractual obligation to deliver the
securities called for by the contract at a specified price on a specified date.
A "purchase" of a futures contract means the acquisition of a contractual
obligation to acquire the securities called for by the contract at a specified
price on a specified date. The purpose of the acquisition or sale of a futures
contract, in the case of a Fund holding long-term debt securities, is to protect
the portfolio from fluctuations in interest rates without actually buying or
selling long-term debt securities. For example, when a Fund owns long-term U.S.
treasury bonds, if interest rates were expected to increase, the Fund might
enter into futures contracts for the sale of such bonds. Such a sale would have
much the same effect as selling some of the long-term U.S. treasury bonds owned
by the Fund. If interest rates did increase, the value of the bonds in the Fund
would decline, but the value of the Fund's futures contracts would increase at
approximately the same rate, thereby keeping the net asset value of the Fund
from declining as much as it otherwise would have. Similarly, when it is
expected that interest rates may decline, futures contracts may be purchased to
hedge against anticipated purchases of long-term bonds at higher prices. Since
fluctuations in the value of futures contracts should be similar to that of
long-term bonds, the Fund could take advantage of the anticipated rise in the
value of long-term bonds without actually buying them until the market had
stabilized. At that time, the futures contracts could be liquidated and the
Fund's cash reserves could then be used to buy long-term bonds on the cash
market. The Fund could accomplish similar results by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase. However, since the futures contract market is more liquid
than the cash market, the use of futures contracts as an investment technique
allows the Fund to maintain a defensive position without having to sell its
portfolio securities.