PROSPECTUS
November 1, 1996
INVESCO TAX-FREE INTERMEDIATE BOND FUND
INVESCO Tax-Free Intermediate Bond Fund (the "Fund") is actively managed
to seek as high a level of current income exempt from federal income taxes as is
consistent with the preservation of capital, by investing in a diversified
portfolio of intermediate- term obligations, the interest on which is exempt
from federal income taxes. These "municipal bonds" may be issued by states,
territories, and possessions of the United States and the District of Columbia,
as well as their political subdivisions, agencies, and instrumentalities. The
dollar- weighted average maturity of the obligations in the Fund's portfolio
normally will range from five to 10 years.
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 November 1, 1996, has been filed with the Securities and
Exchange Commission, and is incorporated by reference into this prospectus. To
obtain a free copy, write to INVESCO Funds Group, Inc., P.O. Box 173706, Denver,
Colorado 80217-3706; or call 1-800-525-8085.
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TABLE OF CONTENTS
ESSENTIAL INFORMATION................................................ 6
ANNUAL FUND EXPENSES................................................. 7
FINANCIAL HIGHLIGHTS................................................. 9
INVESTMENT OBJECTIVE AND STRATEGY.................................... 11
INVESTMENT POLICIES AND RISKS........................................ 11
THE FUND AND ITS MANAGEMENT.......................................... 15
FUND PRICE AND PERFORMANCE........................................... 17
HOW TO BUY SHARES.................................................... 18
FUND SERVICES........................................................ 23
HOW TO SELL SHARES................................................... 23
TAXES, DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS...................... 25
ADDITIONAL INFORMATION............................................... 27
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK OR OTHER FINANCIAL INSTITUTION. THE SHARES
OF THE FUND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
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ESSENTIAL INFORMATION
Investment Goal And Strategy. INVESCO Tax-Free Intermediate Bond Fund is a
diversified mutual fund that seeks current income free from federal income
taxes. The Fund invests primarily in municipal obligations, and the average
dollar-weighted maturity for its entire portfolio normally will range from five
to 10 years. There is no guarantee that the Fund will meet its objective. See
"Investment Objective And Strategy."
Designed For: Investors primarily seeking current income free from federal
income taxes. While not a complete investment program, the Fund may be a
valuable element of your investment portfolio. The Fund is not a suitable
investment for tax-sheltered retirement programs such as the IRA, SEP-IRA,
SARSEP, 401(k), Profit Sharing, Money Purchase Pension, or 403(b) plans.
Time Horizon. The Fund is managed for daily income, paid monthly. Investors
should not consider this Fund for the portion of their savings devoted to
capital growth.
Risks. The Fund uses a moderate investment strategy, but its investments
are subject to both credit and market risk. Investors should expect to see their
price per share vary with moves in the municipal bond market, economic
conditions and other factors. See "Investment Policies ^ And Risks."
Organization and Management. The Fund is a series of INVESCO Tax-Free
Income Funds, Inc. (the "Company"), a diversified, managed, no-load mutual fund.
The Fund is owned by its shareholders. It employs INVESCO Funds Group, Inc.
("IFG"), founded in 1932, to serve as investment adviser, administrator,
distributor, and transfer agent; and INVESCO Trust Company ("INVESCO Trust"),
founded in 1969, as sub-adviser. Together, IFG and INVESCO Trust constitute
"Fund Management."
The Fund's investments are selected by INVESCO vice president James S.
Grabovac. A Chartered Financial Analyst, Mr. Grabovac earned his MBA from the
University of Michigan and a BA from Lawrence University. See "The Fund And Its
Management."
IFG and INVESCO Trust are part of a global firm that managed approximately
$90 billion as of June 30, 1996. The parent company, INVESCO PLC, is based in
London, with money managers located in Europe, North America, and the Far East.
This Fund Offers all of the following services at no charge:
Telephone purchases
Telephone exchanges
Telephone redemptions
Automatic reinvestment of distributions
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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, which is waived for
regular investment plans, including EasiVest and Direct Payroll
Purchase.
Minimum Subsequent Investment: $50
ANNUAL FUND EXPENSES
The Fund is no-load; there are no fees to purchase, exchange
or redeem shares. The Fund, however, is authorized to pay a Rule
12b-1 distribution fee of one quarter of one percent of the Fund's
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 total
return.
We calculate annual operating expenses as a percentage of the Fund's
average annual net assets. To keep expenses competitive, the Fund's manager
voluntarily reimbursed the Fund for amounts in excess of 0.70% of average net
assets through April 30, 1996, and reimburses the Fund for amounts in excess of
0.80% of average net assets effective May 1, 1996.
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fee 0.50%
12b-1 Fees 0.25%
Other ^ Expenses (after absorbed expenses)(1)(2) 0.01%
-----
Total Fund Operating Expenses (after
absorbed expenses)(1)(2) 0.76%
=====
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(1)Portions of the brokerage commissions paid by the Fund were used to
reduce Fund expenses, and the Fund's custodian fees were reduced under an
expense offset arrangement. However, as a result of a new regulatory
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 any
reductions for periods prior to the fiscal year ended June 30, 1996.
(2)Certain Fund expenses of the Tax-Free Intermediate Bond Fund are being
voluntarily absorbed by IFG. Ratio reflects total expenses less absorbed
expenses by IFG, before any expense offset arrangement. In the absense of such
voluntary expense limitation, the Fund's "Other Expenses" and "Total Fund
Operating Expenses" would have been 1.59% and 2.34%, respectively, based on the
Fund's actual expenses for the fiscal year ended June 30, 1996.
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
------ ------- ------- --------
$8 $24 $42 $94
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 Fund shares
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.
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FINANCIAL HIGHLIGHTS
(For a Fund Share Outstanding Throughout Each Period)
The following information has been audited by Price Waterhouse LLP,
independent accountants. This information should be read in conjunction with the
audited financial statements and the independent accountant's report thereon
appearing in the Fund's 1996 Annual Report to Shareholders, which is
incorporated by reference into the Statement of Additional Information. Both are
available without charge by contacting IFG at the address or telephone number on
the cover of this prospectus. The Annual Report also contains more information
about the Fund's performance.
Period
Ended
Year Ended June 30 June 30
-----------------------------
1996 1995 1994^
PER SHARE DATA
Net Asset Value -- Beginning of Period $9.70 $9.52 $10.00
-----------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.43 0.44 0.19
Net Gains or (Losses) on Securities
(Both Realized and Unrealized) 0.04 0.18 (0.48)
-----------------------------
Total from Investment Operations 0.47 0.62 (0.29)
-----------------------------
LESS DISTRIBUTIONS
Dividends from Net
Investment Income 0.43 0.44 0.19
-----------------------------
Net Asset Value -- End of Period $9.74 $9.70 $9.52
=============================
TOTAL RETURN 4.89% 6.67% (2.93%)*
RATIOS
Net Assets -- End of Period
($000 Omitted) $4,997 $4,907 $5,083
Ratio of Expenses to
Average Net Assets# 0.76%@ 0.70% 0.70%~
Ratio of Net Investment Income
to Average Net Assets# 4.40% 4.56% 3.75%~
Portfolio Turnover Rate 49% 23% 55%*
^ From December 1, 1993, commencement of operations, to June 30, 1994.
* Based on operations for the period shown and, accordingly, are not
representative of a full year.
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# Various expenses of the Fund were voluntarily absorbed by IFG and ITC for the
years ended June 30, 1996 and 1995, and for the period ended June 30, 1994.
If such expenses had not been voluntarily absorbed, ratio of expenses to
average net assets would have been 2.34%, 2.45% and 3.09%, respectively, and
ratio of net investment income to average net assets would have been 2.82%,
2.81% and 1.36%, respectively.
@ Ratio is based on Total Expenses of the Fund, less Expenses Absorbed by
Investment Adviser, which is before any expense offset arrangements.
~ Annualized
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INVESTMENT OBJECTIVE AND STRATEGY
The Fund seeks as high a level of current income exempt from federal
income taxes as is consistent with the preservation of capital. This investment
objective is fundamental and cannot be changed without the approval of the
Fund's shareholders. Our strategy is moderate, so we focus on intermediate-term
municipal bonds, which may include any combination of general obligation,
revenue, or industrial development bonds. As a matter of fundamental investment
policy, at least 80% of the Fund's total assets normally will consist of
municipal bonds rated investment grade, as defined below. Under ordinary
circumstances, no more than 20% of the Fund's total assets may consist of AMT
bonds, short-term taxable securities, debt obligations rated below investment
grade^ and cash. There is no assurance that the Fund's investment objective will
be met.
The dollar-weighted average maturity of the obligations in the Fund's
portfolio normally will range from five to 10 years^ and will vary as Fund
Management responds to changes in interest rates.
INVESTMENT POLICIES AND RISKS
Investors should expect to see their price per share vary with moves in
the municipal bond market, economic conditions and other factors. The Fund
invests in many different issues over a wide geographical range; this
diversification reduces the Fund's overall exposure to investment and market
risks^ but cannot eliminate these risks.
Municipal 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." Municipal obligations are rated based on their estimated credit
risk by independent services such as Standard & Poor's ^("S&P"), Moody's
Investors Service, Inc. ("Moody's"), Fitch Investors Services, Inc. ("Fitch") or
Duff & Phelps, Inc. ("D&P"). "Market risk" refers to sensitivity to changes in
interest rates: For instance, when interest rates go up, the market value of a
previously issued bond generally declines; on the other hand, when interest
rates go down, bonds generally see their prices increase.
The lower a bond's quality, the more it is subject to credit risk and
market risk and the more speculative it becomes. This is also true of most
unrated municipal securities. Therefore, the Fund does not invest in obligations
it believes to be highly speculative. In practice, this means we primarily hold
investment grade municipal bonds -- those rated AAA, AA, A or BBB by S&P or Aaa,
Aa, A or Baa by Moody's. Overall, these municipal securities enjoy strong to
adequate capacity to pay principal and interest. No more than 10% of the Fund's
total assets may be invested in issues rated below investment grade quality
(commonly called "junk bonds^" and rated BB or lower by S&P or Ba or lower by
Moody's^ or, if unrated, judged by Fund Management to be of equivalent quality);
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these include issues which are of poorer quality and may have some speculative
characteristics, according to the ratings services. Never, under any
circumstances, does the Fund invest in bonds which are rated below CCC or Caa by
S&P or Moody's, respectively. Bonds rated CCC or Caa may be in default or there
may be present elements of danger with respect to payment of principal or
interest. While Fund Management continuously monitors all of the municipal 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. For a detailed description of municipal bond ratings, see the
Statement of Additional Information and Appendix A therein.
As discussed above, under normal circumstances, no more than 20% of the
Fund's total assets may be invested in the aggregate in AMT bonds, short-term
taxable securities, debt obligations rated below investment grade and cash.
AMT Bonds. These are "private activity bonds" issued after August 7, 1986;
the proceeds are directed in full or in part to private, for-profit
organizations. The income from AMT bonds is exempt from federal income tax^ but
may be subject to the alternative minimum tax -- a special tax that applies to
taxpayers who have certain adjustments to income or tax preference items.
Short-Term Taxable Investments. These investments, if any, normally will
consist of notes having quality ratings within the two highest grades of
Moody's, S&P, Fitch or D&P; obligations of the U.S. government, its agencies or
instrumentalities; commercial paper rated at least P-2 by Moody's, A-2 by S&P;
certificates of deposit of U.S. domestic banks, including foreign branches of
domestic banks, with assets of $1 billion or more; time deposits; banker's
acceptances and other short-term bank obligations; and repurchase agreements.
Dividends paid by the Fund attributable to income from such investments will be
taxable to investors. See "Taxes, Dividends and Capital Gain Distributions ^."
When we believe market or economic conditions are adverse, the Fund may
assume a defensive position by temporarily investing up to 100% of its assets in
short-term taxable investments, seeking to protect its assets until conditions
stabilize.
Tender Option Bonds. The Fund may seek to earn additional income by
purchasing "tender option bonds," municipal bonds which have relatively long
maturities and offer fixed income at a substantially higher rate than other
short-term tax-exempt bonds. Tender option bonds involve three parties: the
issuer, the buyer, and a third party, such as a bank, broker-dealer, or another
financial institution. In exchange for a periodic fee, this third party allows
the purchaser to cash in ("tender") the bond for its face value at periodic
intervals.
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Tender option bonds must be carefully evaluated, based on the
creditworthiness of the issuer and third party. At times, the tender option
feature on these bonds may be terminable; in such an instance, the tender option
bonds may be considered illiquid securities.
Futures and Options. A futures contract is an agreement to buy or sell a
specific amount of a financial instrument or commodity at a particular price on
a particular date. The Fund will use futures contracts only to hedge against
price changes in the value of its current or intended investments in securities.
In the event that an anticipated decrease in the value of portfolio securities
occurs as a result of a general decrease in prices, the adverse effects of such
changes may be offset, at least in part, by gains on the sale of futures
contracts. Conversely, the increased cost of portfolio securities to be
acquired, caused by a general increase in prices, may be offset, at least in
part, by gains on futures contracts purchased by the Fund. Brokerage fees are
paid to trade futures contracts, and the Fund is required to maintain margin
deposits.
Put and call options on futures contracts or securities may be traded by
the Fund in order to protect against declines in the values of portfolio
securities or against increases in the cost of securities to be acquired. Put
and call options are contracts which grant the right to sell at a specified
price a specific security or futures contract by a certain date. The put option
buyer gains this right in return for a premium. Purchases of options on futures
contracts may present less dollar risk in hedging the Fund's portfolio than the
purchase and sale of the underlying futures contracts, since the potential loss
is limited to the amount of the premium plus related transaction costs. The
premium paid for such a put or call option plus any transaction costs will
reduce the benefit, if any, realized by the Fund upon exercise or liquidation of
the option, and, unless the price of the underlying futures contract changes
sufficiently, the option may expire without value to the Fund.
Although the Fund will enter into futures contracts and options on futures
contracts and securities solely for hedging or other nonspeculative purposes,
their use does involve certain risks. For example, a lack of correlation between
the value of an instrument underlying an option or futures contract and the
assets being hedged, or unexpected adverse price movements, could render the
Fund's hedging strategy unsuccessful and could result in losses. In addition,
there can be no assurance that a liquid secondary market will exist for any
contract purchased or sold, and the Fund may be required to maintain a position
until exercise or expiration, which could result in losses. Transactions in
futures contracts and options are subject to other risks as well, which are set
forth in greater detail in the Statement of Additional Information and Appendix
B therein.
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Zero Coupon Securities. These securities 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. Being
extremely responsive to changes in interest rates, the market price of zero
coupon securities may be more volatile than other bonds. 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. Of the 10% of the Fund's total assets that may be
invested in debt obligations rated below investment grade, no more than 5% of
the Fund's total assets may be invested in zero coupon bonds having such
ratings.
Delayed Delivery or When-Issued Purchases. Municipal obligations may at
times be purchased or sold by the Fund 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 value of
the securities is subject to market fluctuations, and no interest is payable to
the Fund prior to the settlement date.
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.
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. The Fund could incur costs or delays in seeking to sell
the instrument 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 Fund's board of
directors.
The Fund may invest in illiquid securities, including securities that are
subject to restrictions on resale and securities that are not readily
marketable. The Fund also may invest in restricted securities that may be resold
to institutional investors, known as "Rule 144A Securities." For more
information concerning illiquid and Rule 144A Securities, see "Investment
Policies and Restrictions" in the Statement of Additional Information.
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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.
Investment Restrictions. Certain restrictions, which are set forth in the
Statement of Additional Information, may not be altered without the approval of
the Fund's shareholders. For example, with respect to 75% of its total assets,
the Fund limits to 5% the portion of its total assets that may be invested in a
single issuer. In addition, the Fund limits to 25% the portion of its total
assets that may be invested in any one industry. Municipal securities are not
considered to be an "industry" for this purpose, although industrial development
bonds are grouped into industries depending upon the businesses of the companies
that have the ultimate responsibility for payment. Except where indicated to the
contrary, the investment policies described in this prospectus are not
considered fundamental and may be changed without a vote of the Fund's
shareholders.
THE FUND AND ITS MANAGEMENT
The Company is a no-load mutual fund, registered with the Securities and
Exchange Commission as a diversified, open-end, management investment company.
It was incorporated on April 2, 1993, under the laws of Maryland.
The Company's board of directors has responsibility for overall
supervision of the Fund^ and reviews the services provided by the adviser and
sub-adviser. Under an agreement with the Company, INVESCO Funds Group, Inc.
("IFG"), 7800 E. Union Avenue, Denver, Colorado 80237, serves as the Fund's
investment manager; it is primarily responsible for providing the Fund with
various administrative services. IFG's wholly-owned subsidiary, INVESCO Trust,
is the Fund's sub-adviser and is primarily responsible for managing the Fund's
investments. Together, IFG and INVESCO Trust constitute "Fund Management."
James S. Grabovac, portfolio manager for the Fund since 1995, has
responsibility for the day-to-day management of the Fund's holdings. He also
manages INVESCO Tax-Free Long-Term Bond Fund. A Chartered Financial Analyst, Mr.
Grabovac is a vice president of INVESCO Trust; previously, his career included
these highlights: He was a principal and fund manager (1991 to 1995) and
portfolio manager (1989 to 1991) with Stein Roe & Farnham Inc., a futures and
options trader with Continental Illinois National Bank (1987), a corporate bond
trader with The Chicago Corporation from 1985 to 1987, and Midwest municipal
underwriting manager with Continental Illinois National Bank from 1982 to 1985.
He holds an MBA from the University of Michigan and a BA from Lawrence
University.
Fund Management permits investment and other personnel to purchase and
sell securities for their own accounts, subject to a compliance policy governing
personal investing. This policy requires Fund Management's personnel to conduct
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their personal investment activities in a manner that Fund Management
believes is not detrimental to the Fund or Fund Management's other advisory
clients. See the Statement of Additional Information for more detailed
information.
The Fund pays IFG a monthly management fee which is based upon a
percentage of the Fund's average net assets determined daily; in turn, IFG pays
INVESCO Trust a sub-advisory fee out of its management fee. 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 June 30, 1996, investment management fees paid by the Fund
amounted to 0.50% of the Fund's average net assets. Out of this fee, IFG paid an
amount equal to 0.24% of the Fund's average net assets to INVESCO Trust as a
sub- advisory fee. No fee is paid by the Fund to INVESCO Trust.
Under a Transfer Agency Agreement, IFG 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 per participant in an omnibus account for
these services. Registered broker-dealers, third party administrators of
tax-qualified retirement plans and other entities, including affiliates of IFG,
may provide equivalent services to the Fund. In these cases, IFG may pay, out of
the fee it receives from the Fund, an annual sub- transfer agency or
record-keeping fee to the third party.
In addition, under an Administrative Services Agreement, IFG handles
additional administrative, record-keeping, and internal sub-accounting services
for the Fund. For the fiscal year ended June 30, 1996, the Fund paid IFG a fee
for these services equal to 0.20% (prior to the voluntary absorption of certain
Fund expenses by IFG) of the Fund's average net assets.
The Fund's expenses, which are accrued daily, are deducted from total
income before dividends are paid. Total expenses of the Fund for the fiscal year
ended June 30, 1996, including investment management fees (but excluding
brokerage commissions, which are a cost of acquiring securities), amounted to
0.76% of the Fund's average net assets. Certain Fund expenses are absorbed
voluntarily by IFG and ITC pursuant to a commitment to the Fund in order to
ensure that the Fund's total operating expenses did not exceed 0.70% of the
Fund's average net assets (through April 30, 1996) and will not exceed 0.80% of
the Fund's average net assets (beginning May 1, 1996). 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 2.34% of the Fund's average net assets.
Fund Management places orders for the purchase and sale of portfolio
securities with brokers and dealers based upon Fund Management's evaluation of
their financial responsibility coupled with their ability to effect transations
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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 IFG, as the
Fund's Distributor. The Fund may place orders for portfolio transactions with
qualified ^ broker-dealers that recommend the Fund^ or sell shares of the Fund^
to clients, or act as agent in the purchase of Fund shares for clients, if Fund
Management believes that the quality of the execution of the transaction and
level of commission are comparable to those available from other qualified
brokerage firms. For further information, see "Investment Practices -- Placement
of Portfolio Brokerage" in the Statement of Additional Information.
The parent company for IFG and INVESCO Trust is INVESCO PLC, a publicly
traded holding company whose subsidiaries provide investment services around the
world. IFG was established in 1932 and, as of June 30, 1996, managed 14 mutual
funds, consisting of 39 separate portfolios, with combined assets of
approximately $12.9 billion on behalf of over 826,000 shareholders. INVESCO
Trust (founded in 1969) served as adviser or sub-adviser to 45 investment
portfolios as of June 30, 1996, including 27 portfolios in the INVESCO group.
These 45 portfolios had aggregate assets of approximately $12.0 billion as of
June 30, 1996. In addition, INVESCO Trust provides investment management
services to private clients, including employee benefit plans that may be
invested in a collective trust sponsored by INVESCO Trust.
FUND PRICE AND PERFORMANCE
Determining Price. The value of your investment in the Fund will vary
daily. The price per share is also known as the Net Asset Value (NAV). IFG
prices the Fund every day that the New York Stock Exchange is open, as of the
close of regular trading (normally, 4:00 p.m., New York time). NAV is calculated
by adding together the current market value of all of the Fund's assets,
including accrued interest and dividends; then subtracting liabilities,
including accrued expenses; and finally dividing that dollar amount by the total
number of shares outstanding.
Performance Data. To keep shareholders and potential investors informed,
we will occasionally advertise 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; 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, not showing the interim variations in performance over the
periods cited.
The yield of the Fund refers to the income generated by an investment in
the Fund over a 30-day or one-month period^ and is computed by dividng the net
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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. We may also discuss the Fund's "taxable equivalent
yield" -- the yield a taxable investment would have to generate in order to
provide the same income as the Fund, assuming certain federal tax rates. This
yield quotation allows investors to compare taxable and tax-exempt bond funds
more fairly.
More information about the Fund's recent and historical performance is
contained in the Fund's Annual Report to ^ Shareholders. You can get a free copy
by calling or writing to IFG using the phone number or address on the 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
Intermediate Municipal 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 IFG. However, if you invest
in the Fund through a securities broker, you may be charged a commission or
transaction fee. For all new accounts, please send a completed application form.
Please specify which Fund you wish to purchase.
Fund Management reserves the right to increase, reduce or waive the
minimum investment requirements in its sole discretion, where it determines this
action is in the best interests of the Fund. Further, Fund Management reserves
the right in its sole discretion to reject any order for the purchase of Fund
shares (including purchases by exchange) when, in its judgment, such rejection
is in the Fund's best interests.
<PAGE>
================================================================================
Method Investment Minimum Please Remember
- --------------------------------------------------------------------------------
By Check $1,000 for regular If your check does
Mail to: account; not clear, you will
INVESCO Funds $50 minimum for be responsible for
Group, Inc. each subsequent any related loss
P.O. Box 173706, investment. the Fund or IFG
Denver, CO 80217- incurs. If you are
3706. already a
Or you may send shareholder in the
your check by INVESCO funds, the
overnight courier Fund may seek
to: 7800 E. Union reimbursement from
Ave., your existing
Denver, CO 80237. account(s) for any
loss incurred.
- --------------------------------------------------------------------------------
By Telephone or $1,000. Payment must be
Wire received within 3
Call 1-800-525-8085 business days, or
to request your the transaction may
purchase. Then send be cancelled. If a
your check by telephone purchase
overnight courier is cancelled due to
to our street nonpayment, you
address: will be responsible
7800 E. Union Ave., for any related
Denver, CO 80237. loss the Fund or
Or you may transmit IFG incurs. If you
your payment by are already a
bank wire (call IFG shareholder in the
for instructions). INVESCO funds, the
Fund may seek
reimbursement from your
existing account(s) for
any loss incurred.
<PAGE>
- --------------------------------------------------------------------------------
With EasiVest or $50 per month for Like all regular
Direct Payroll EasiVest; $50 per investment plans,
Purchase pay period for neither EasiVest
You may enroll on Direct Payroll nor Direct Payroll
the fund Purchase. You may Purchase ensures a
application, or start or stop your profit or protects
call us for the regular investment against loss in a
correct form and plan at any time, falling market.
more details. with two weeks' Because you'll
Investing the same notice to IFG. invest continually,
amount on a monthly regardless of
basis allows you to varying price
buy more shares levels, consider
when prices are low your financial
and fewer shares ability to keep
when prices are buying through low
high. This "dollar- price levels. And
cost averaging" may remember that you
help offset market will lose money if
fluctuations. Over you redeem your
a period of time, shares when the
your average cost market value of all
per share may be your shares is less
less than the than their cost.
actual average
price per share.
- --------------------------------------------------------------------------------
By PAL(R) $1,000. Be sure to write
Your "Personal down the
Account Line" is confirmation number
available for provided by PAL(R).
subsequent Payment must be
purchases and received within 3
exchanges 24-hours business days, or
a day. Simply call the transaction may
1-800-424-8085. be cancelled. If a
telephone purchase is
cancelled due to
nonpayment, you will be
responsible for any
related loss the Fund or
IFG incurs. If you are
already a shareholder in
the INVESCO funds, the
Fund may seek
reimbursement from your
existing account(s) for
any loss incurred.
<PAGE>
- --------------------------------------------------------------------------------
By Exchange $1,000 to open a See "Exchange
Between this and new account; $50 Privilege," page 10.
another of the for written
INVESCO funds. Call requests to
1-800-525-8085 for purchase additional
prospectuses of shares for an
other INVESCO existing account.
funds. You may also (The exchange
establish an minimum is $250 for
Automatic Monthly purchases requested
Exchange service by telephone.)
between two INVESCO
funds; call IFG for
further details and
the correct form.
================================================================================
Your order to purchase Fund shares will not begin earning dividends or
other distributions until 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 Privilege. You may exchange your shares in this Fund for those in
another INVESCO fund^ on the basis of their respective net asset values at the
time of the exchange. Before making any exchange, be sure to review the
prospectuses of the funds involved and consider their differences.
Please note these policies regarding exchanges of fund shares:
1) The fund accounts must be identically registered.
2) You may make four exchanges out of each fund during each
calendar year.
3) An exchange is the redemption of shares from one fund followed by the
purchase of shares in another. Therefore, any gain or loss realized on the
exchange is recognizable for federal income tax purposes (unless, of course,
your account is tax-deferred).
4) The Fund reserves the right to reject any exchange request, or to
modify or terminate exchange privileges, in the best interests of the Fund and
its shareholders. Notice of all such modifications or termination will be given
at least 60 days prior to the effective date of the change in privilege, except
for unusual instances (such as when redemptions of the exchanged shares are
<PAGE>
suspended under Section 22(e) of the Investment Company Act of 1940, or when
sales of the fund into which you are exchanging are temporarily stopped).
Distribution Expenses. 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 shares. These expenditures may include 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 IFG-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 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.
In addition, other reimbursable expenditures include advertising,
preparation and distribution of sales literature, printing and distribution of
prospectuses to prospective investors, public relations efforts, marketing
programs and such other services and promotional activities agreed upon from
time to time by the Fund and its board of directors. These services and
activities may be conducted by the staff of IFG or its affiliates or by third
parties.
IFG is not entitled to reimbursement for overhead expenses under the Plan^
but may be reimbursed for all or a portion of the compensation paid for salaries
and other employee benefits for IFG personnel whose primary responsibilities
involve marketing shares of the INVESCO funds, including the Fund. Also, any
payments made by the Fund may not be used to finance the distribution of shares
of any other mutual fund advised by IFG. 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.
Under the Plan, the Fund's reimbursement to IFG is limited to an amount
computed at a maximum annual rate of 0.25% of the Fund's average net assets.
Payments by the Fund under the Plan, for any month, may only be made to
reimburse expenditures incurred during the rolling 12-month period in which that
month falls, although this period is expanded to 24 months for expenses incurred
during the first 24 months of the Fund's operations. Therefore, any reimbursable
expenses incurred by IFG in excess of the limitations described above are not
reimbursable and will be borne by IFG. In addition, IFG may from time to time
make additional payments from its revenues to securities dealers 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 its termination.
<PAGE>
FUND SERVICES
Shareholder Accounts. IFG will maintain a share account that reflects your
current holdings. Share certificates will be issued only upon specific request.
You will have greater flexibility to conduct transactions if you do not request
certificates.
Transaction Confirmations. You will receive detailed confirmations of
individual purchases, exchanges^ and redemptions. If you choose certain
recurring transaction plans (for instance, EasiVest), your transactions will be
confirmed on your quarterly Investment Summary.
Investment Summaries. Each calendar quarter, shareholders receive a
written statement which consolidates and summarizes account activity and value
at the beginning and end of the period for each of their INVESCO funds.
Reinvestment of Distributions. Dividends and capital gain distributions
are automatically invested in additional fund shares at the NAV on the
ex-dividend date, unless you choose to have dividends and/or capital gain
distributions automatically reinvested in another INVESCO fund or paid by check
(minimum of $10.00).
Telephone Transactions. All shareholders may exchange and redeem Fund
shares 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.
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>
================================================================================
Method Minimum Redemption Please Remember
================================================================================
By Telephone $250 (or, if less, These telephone
Call us toll-free full liquidation of redemption
at 1-800-525-8085. 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 the
The maximum amount discretion of IFG.
which may be
redeemed by
telephone is
generally $25,000.
- --------------------------------------------------------------------------------
In Writing Any amount. The If the shares to be
Mail your request redemption request redeemed are
to INVESCO Funds must be signed by represented by
Group, Inc., P.O. all registered stock certificates,
Box 173706, shareholders(s). the certificates
Denver, CO 80217- Payment will be must be sent to
3706. You may also mailed to your IFG.
send your request address of record,
by overnight or to a pre-
courier to 7800 E. designated bank.
Union Ave., Denver,
CO 80237.
- --------------------------------------------------------------------------------
By Exchange $1,000 to open a See "Exchange
Between this and new account; $50 Privilege," page 10.
another of the for written
INVESCO funds. Call requests to
1-800-525-8085 for purchase additional
prospectuses of shares for an
other INVESCO existing account.
funds. You may also (The exchange
establish an minimum is $250 for
automatic monthly exchanges requested
exchange service by telephone.)
between two INVESCO
funds; call IFG for
further details and
the correct form.
- --------------------------------------------------------------------------------
Periodic Withdrawal $100 per payment, You must have at
Plan on a monthly or least $10,000 total
You may call us to quarterly basis. invested with the
request the The redemption INVESCO funds, with
appropriate form check may be made at least $5,000 of
and more payable to any that total invested
information at 1- party you in the fund from
800-525-8085. designate. which withdrawals
will be made.
<PAGE>
- --------------------------------------------------------------------------------
Payment To Third Any amount. All registered
Party owners of the
Mail your request account must sign
to INVESCO Funds the request, with a
Group, Inc., P.O. signature guarantee
Box 173706, from an eligible
Denver, CO 80217- guarantor financial
3706. institution, such
as a commercial
bank or recognized
national or
regional securities
firm.
================================================================================
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 may 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 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.
TAXES, DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
Taxes. The Fund intends to distribute to shareholders substantially all of
its net investment income and net capital gains, if any, in order to continue to
qualify for tax treatment as a regulated investment company. Thus, the Fund does
not expect to pay any federal income or excise taxes.
Exempt-interest dividends paid by the Fund are normally free of federal
income tax to shareholders, although they are subject to state and local income
<PAGE>
taxes. Unless shareholders are exempt from income taxes, however, they must
include all capital gain distributions, as well as any dividends earned on the
Fund's sh ort-term taxable investments, in taxable income for federal, state^
and local income tax purposes. These distributions are taxable whether they are
received in cash or automatically ^ reinvested in shares of the Fund or another
fund in the INVESCO group.
Under the Tax Reform Act of 1986, interest on certain "private activity
bonds" issued after August 7, 1986, is an item of tax preference for purposes of
the alternative minimum tax in taxable years beginning after December 31, 1986.
The Fund intends to limit, and has limited in the past, its investments in such
"private activity bonds" to not more than 20% of the Fund's total assets. The
portion of exempt-interest dividends paid by the Fund which is attributable to
such "private activity bonds" would be an item of tax preference to
shareholders.
Shareholders may be subject to backup withholding of 31% on capital gain
distributions and redemption proceeds. Unless you are subject to backup
withholding for other reasons, you can avoid backup withholding on your Fund
account by ensuring that we have a correct, certified tax identification number.
Dividends and Capital Gain Distributions. The Fund earns daily net
investment income in the form of dividends and interest on its investments. The
Fund's policy is to distribute substantially all of this income, less Fund
expenses, to shareholders on a monthly basis, at the discretion of the Fund's
board of directors.
In addition, the Fund realizes capital gains and losses when it sells
securities or engages in futures transactions 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, are distributed to shareholders at least annually, usually in
December.
Dividends and capital gain distributions are paid to shareholders who hold
shares on the record date of distribution regardless of how long the shares have
been held. The Fund's share price will then drop by the amount of the
distribution on the day the distribution is made. 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 distribution, some or all of which may
be taxable.
At the end of each year, information regarding the tax status of
dividends, capital gain distributions^ and distributions subject to tax
preference is provided to shareholders. Net realized capital gains are divided
into short-term and long-term gains depending upon how long the Fund held the
security which gave rise to the gains. The capital gains distribution consists
of long-term capital gains which are taxed at the capital gains rate. Short-
<PAGE>
term capital gains are included with ^ income from dividends and interest
as ordinary income and are paid to shareholders as taxable dividends.
Shareholders also may realize capital gains or losses when they sell their
Fund shares at more or less than the price originally paid.
We encourage you to consult a tax adviser with respect to these matters.
For further information, see "Dividends, Capital Gain Distributions and Taxes"
in the Statement of Additional Information.
ADDITIONAL INFORMATION
Voting Rights. All shares of the Company have equal voting rights based on
one vote for each share owned. Voting with respect to certain matters, such as
ratification of independent accountants and the election of directors, will be
by all the funds of the Company voting together. In other cases, such as voting
upon an investment advisory contract, voting is on a fund-by-fund basis. To the
extent permitted by law, when not all funds are affected by a matter to be voted
upon, only shareholders of the fund or funds affected by the matter will be
entitled to vote thereon. The Company is not generally required and does not
expect to hold regular annual meetings of shareholders. However, 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>
INVESCO TAX-FREE INTERMEDIATE BOND FUND A
no-load mutual fund seeking as high a level
of current income exempt from federal taxes
as is consistent with the preservation of
capital.
PROSPECTUS
November 1, 1996
To receive general information and prospectuses on any of the INVESCO funds or
retirement plans, or to obtain current account or price information or responses
to other questions, call toll-free:
1-800-525-8085
To reach PAL(R), your 24-hour Personal Account Line (PAL) call:
1-800-424-8085
Or write to:
INVESCO Funds Group, Inc., Distributor
Post Office Box 173706
Denver, Colorado 80217-3706
You can find us on the World Wide Web:
http://www.invesco.com
If you're in Denver, please visit one of our convenient Investor Centers:
Cherry Creek
155-B Fillmore Street
Denver Tech Center
7800 East Union Avenue
Lobby Level
<PAGE>
PROSPECTUS
November 1, 1996
INVESCO TAX-FREE LONG-TERM BOND FUND
INVESCO Tax-Free Long-Term Bond Fund (the "Fund") is actively managed to
seek as high a level of current income exempt from federal income taxes^ as is
consistent with the preservation of capital by investing in a diversified
portfolio of long-term obligations, the interest on which is exempt from federal
income taxes. These "municipal bonds" may be issued by states, territories, and
possessions of the United States and the District of Columbia, as well as their
political subdivisions, agencies, and instrumentalities. The dollar-weighted
average maturity of the obligations in the Fund's portfolio normally will be at
least 10 years.
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 November 1, 1996, has been filed with the Securities and
Exchange Commission and is incorporated by reference into this prospectus. To
obtain a free copy, write to INVESCO Funds Group, Inc., P.O. Box 173706, Denver,
Colorado 80217-3706; or call 1-800-525-8085.
<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................................................ 7
FUND PRICE AND PERFORMANCE................................................. 9
HOW TO BUY SHARES.......................................................... 9
FUND SERVICES.............................................................. 12
HOW TO SELL SHARES......................................................... 12
TAXES, DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS............................ 13
ADDITIONAL INFORMATION..................................................... 14
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK OR OTHER FINANCIAL INSTITUTION. THE SHARES
OF THE FUND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
<PAGE>
ESSENTIAL INFORMATION
Investment Goal And Strategy. INVESCO Tax-Free Long-Term Bond Fund is a
diversified mutual fund that seeks current income free from federal income
taxes. The Fund invests primarily in municipal obligations, and the average
dollar-weighted maturity for its entire portfolio will normally be 10 years or
longer. There is no guarantee that the Fund will meet its objective. See
"Investment Objective And Strategy."
Designed For: Investors primarily seeking current income free from federal
income taxes. While not a complete investment program, the Fund may be a
valuable element of your investment portfolio. The Fund is not a suitable
investment for tax-sheltered retirement programs such as the IRA, SEP-IRA,
SARSEP, 401(k), Profit Sharing, Money Purchase Pension, or 403(b) plans.
Time Horizon. The Fund is managed for daily income, paid monthly. Investors
should not consider this Fund for the portion of their savings devoted to
capital growth.
Risks. The Fund uses a moderate investment strategy, but its investments
are subject to both credit and market risk. Investors should expect to see their
price per share vary with moves in the municipal bond market, economic
conditions and other factors. See "Investment Policies ^ And Risks."
Organization and Management. The Fund is a series of INVESCO Tax-Free
Income Funds, Inc. (the "Company"), a diversified, managed, no-load mutual fund.
The Fund is owned by its shareholders. It employs INVESCO Funds Group, Inc.
("IFG"), founded in 1932, to serve as investment adviser, administrator,
distributor, and transfer agent; and INVESCO Trust Company ("INVESCO Trust"),
founded in 1969, as sub-adviser. Together, IFG and INVESCO Trust constitute
"Fund Management."
The Fund's investments are selected by INVESCO vice president James S.
Grabovac. A Chartered Financial Analyst, Mr. Grabovac earned his MBA from the
University of Michigan and a BA from Lawrence University. See "The Fund And Its
Management."
IFG and INVESCO Trust are part of a global firm that managed approximately
$90 billion as of June 30, 1996. The parent company, INVESCO PLC, is based in
London, with money managers located in Europe, North America, and the Far East.
This Fund ^ offers all of the following services at no charge:
Telephone purchases
Telephone exchanges
Telephone redemptions
Automatic reinvestment of distributions
<PAGE>
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, which is waived for
regular investment plans, including EasiVest and Direct Payroll
Purchase.
Minimum Subsequent Investment: $50.
ANNUAL FUND EXPENSES
The Fund is no-load; there are no fees to purchase, exchange
or redeem shares. The Fund, however, is authorized to pay a Rule
12b-1 distribution fee of one quarter of one percent of the Fund's
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 total
return.
We calculate annual operating expenses as a percentage of the Fund's
average annual net assets. To keep expenses competitive, the Fund's manager
voluntarily reimburses the Fund for amounts in excess of 0.90% of average net
assets.
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fee 0.55%
12b-1 Fees 0.25%
Other ^ Expenses (after absorbed expenses)(1),(2) 0.11%
-----
Total Fund Operating Expenses (after
absorbed expenses)(1),(2) 0.91%
=====
(1)It should be noted that the Fund's actual total operating expenses were
lower than the figures shown, because the Fund's custodian fees and pricing
expenses were reduced under an expense offset arrangement and the Fund Manager's
voluntary reimbursement to the Fund for amounts in excess of 0.90% of average
net assets. However, as a result of a regulatory requirement for mutual funds to
state their total operating expenses without crediting any such expense offset
arrangement, 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 any
reductions for periods prior to the fiscal year ended June 30, 1996.
<PAGE>
(2)Certain Fund expenses of the Tax-Free Long-Term Bond Fund are being
voluntarily absorbed by IFG. Ratio reflects total expenses less absorbed
expenses by IFG, before any expense offset arrangement. In the absense of such
voluntary expense limitation, the Fund's "Other Expenses" and "Total Fund
Operating Expenses" would have been 0.24% and 1.04%, respectively, based on the
Fund's actual expenses for the fiscal year ended June 30, 1996.
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 $29 $51 $112
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 Fund shares
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.
*The expense information in the above tables has been presented on a basis that
assumes that the Fund's current 0.90% expense limitation had been in effect
during the entire year ended June 30, ^ 1996.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a Fund Share Outstanding Throughout Each Period)
The following information has been audited by Price Waterhouse LLP,
independent accountants. This information should be read in conjunction with the
audited financial statements and the independent accountant's report thereon
appearing in the Fund's 1996 Annual Report to Shareholders, which is
incorporated by reference into the Statement of Additional Information. Both are
available without charge by contacting IFG at the address or telephone number on
the cover of this prospectus. The Annual Report also contains more information
about the Fund's performance.
<TABLE>
<CAPTION>
Year Ended June 30
----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value --
Beginning of
Period $15.07 $15.29 $16.35 $15.69 $15.05 $14.90 $15.15 $13.82 $13.86 $15.20
------------------------------------------------------------------------------------------------------
INCOME FROM
INVESTMENT
OPERATIONS
Net Investment
Income 0.73 0.80 0.83 0.87 0.92 0.96 0.99 1.01 1.00 1.09
Net Gains or (Losses)
on Securities
(Both Realized
and Unrealized) 0.32 0.09 (1.00) 1.04 0.95 0.27 (0.25) 1.33 (0.04) (0.28)
------------------------------------------------------------------------------------------------------
Total from Investment
Operations 1.05 0.89 (0.17) 1.91 1.87 1.23 0.74 2.34 0.96 0.81
------------------------------------------------------------------------------------------------------
<PAGE>
LESS DISTRIBUTIONS
Dividends from Net
Investment Income 0.73 0.80 0.83 0.87 0.92 0.96 0.99 1.01 1.00 1.09
Distributions from
Capital Gains 0.19 0.31 0.06 0.38 0.31 0.12 0.00 0.00 0.00 1.06
------------------------------------------------------------------------------------------------------
Total Distributions 0.92 1.11 0.89 1.25 1.23 1.08 0.99 1.01 1.00 2.15
------------------------------------------------------------------------------------------------------
Net Asset Value --
End of Period $15.20 $15.07 $15.29 $16.35 $15.69 $15.05 $14.90 $15.15 $13.82 $13.86
======================================================================================================
TOTAL RETURN 7.01% 6.16% (1.16%) 12.57% 12.79% 8.55% 5.10% 17.64% 7.29% 4.99%
RATIOS
Net Assets --
End of Period
($000 Omitted) $250,890 $254,584 $282,407 $332,239 $272,382 $208,100 $179,107 $143,678 $109,132 $117,875
Ratio of Expenses
to Average
Net Assets# 0.91%@ 0.92% 1.00% 1.03% 1.02% 0.93% 0.75% 0.74% 0.77% 0.70%
Ratio of Net
Investment Income
to Average Net
Assets# 4.76% 5.31% 5.14% 5.43% 5.90% 6.39% 6.67% 7.06% 7.33% 7.04%
Portfolio
Turnover Rate 146% 99% 28% 30% 28% 25% 27% 27% 41% 98%
# Various expenses of the Fund were voluntarily absorbed by IFG for the years
ended June 30, 1996 and 1995. If such expenses had not been voluntaily
absorbed, ratio of expenses to average net assets would have been 1.04% and
1.05%, respectively, and ratio of net investment income to average net assets
would have been 4.63% and 5.18%, respectively.
@ Ratio is based on Total Expenses of the Fund, less Expenses Absorbed by
Investment Adviser, which is before any expense offset arrangements.
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE AND STRATEGY
The Fund seeks as high a level of current income exempt from federal
income taxes as is consistent with the preservation of capital. This investment
objective is fundamental and cannot be changed without the approval of the
Fund's shareholders. We focus on long-term municipal bonds, which may include
any combination of general obligation, revenue, or industrial development bonds.
As a matter of fundamental investment policy, at least 80% of the Fund's assets
normally will consist of municipal bonds rated investment grade (as defined
below) and short-term municipal notes rated within the two highest ratings by
Standard & Poor's ^ ("S&P") or Moody's Investors Service, Inc. ("Moody's").
Under ordinary circumstances, no more than 20% of the Fund's assets may consist
of municipal bonds rated below investment grade, temporary taxable investments
(the income from which may be subject to federal income tax), AMT bonds and
cash. There is no assurance that the Fund's investment objective will be met.
The dollar-weighted average maturity of the obligations in the Fund's
portfolio normally will be at least 10 years^ and will vary as Fund Management
responds to changes in interest rates. There is no limitation on the maximum
maturities of investments that may be purchased by the Fund.
INVESTMENT POLICIES AND RISKS
Investors should expect to see their price per share vary with moves in
the municipal bond market, economic conditions and other factors. The Fund
invests in many different issues over a wide geographical range; this
diversification reduces the Fund's overall exposure to investment and market
risks^ but cannot eliminate these risks.
Municipal 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." Municipal obligations are rated based on their estimated credit
risk by independent services such as S&P or Moody's. "Market risk" refers to
sensitivity to changes in interest rates: For instance, when interest rates go
up, the market value of a previously issued bond generally declines; on the
other hand, when interest rates go down, bonds generally see their prices
increase.
The lower a bond's quality, the more it is subject to credit risk and
market risk and the more speculative it becomes; this is also true of most
unrated municipal securities. Therefore, the Fund does not invest in obligations
it believes to be highly speculative. In practice, this means we primarily hold
investment grade municipal bonds -- those rated AAA, AA, A or BBB by S&P or Aaa,
Aa, A or Baa by Moody's. Overall, these municipal securities enjoy strong to
adequate capacity to pay principal and interest. No more than 10% of assets may
be invested in issues rated below investment grade quality (commonly called
"junk bonds^" and rated BB or lower by S&P or Ba or lower by Moody's or^ if
<PAGE>
unrated, are judged by Fund Management to be of equivalent quality); these
include issues which are of poorer quality and may have some speculative
characteristics, according to the ratings services. Never, under any
circumstances, does the Fund invest in bonds which are rated below B- or B by
S&P and Moody's, respectively. Bonds rated B- or B may be in default or there
may be present elements of danger with respect to payment of principal or
interest. While Fund Management continuously monitors all of the municipal 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. For a detailed description of municipal bond ratings, see the
Statement of Additional Information and Appendix A therein.
For the fiscal year ended June 30, 1996, the following percentages of the
Fund's total assets were invested in municipal bonds rated investment grade (BBB
by S&P or Baa by Moody's and above) at the time they were purchased: AAA--
34.39%; AA-- 15.37%; A-- 20.82%; and BBB-- 6.49%; and the following percentages
were invested in municipal bonds rated below investment grade at the time of
purchase: BB-- 3.90%. Finally, 1.65% of total assets were invested in unrated
municipal bonds determined by Fund Management to be at least comparable to bonds
rated B. In addition, 14.15% of the Fund's total assets were invested in
corporate and municipal short-term notes rated in the highest rating category
for such notes. 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 June 30, 1996.
AMT Bonds. These are "private activity bonds" issued after August 7, 1986;
the proceeds are directed in full or in part to private, for-profit
organizations. The income from AMT bonds is exempt from federal income tax^ but
may be subject to the alternative minimum tax -- a special tax that applies to
taxpayers who have certain adjustments to income or tax preference items.
Futures and Options. A futures contract is an agreement to buy or sell a
specific amount of a financial instrument or commodity at a particular price on
a particular date. The Fund will use futures contracts only to hedge against
price changes in the value of its current or intended investments in securities.
In the event that an anticipated decrease in the value of portfolio securities
occurs as a result of a general decrease in prices, the adverse effects of such
changes may be offset, at least in part, by gains on the sale of futures
contracts. Conversely, the increased cost of portfolio securities to be
acquired, caused by a general increase in prices, may be offset, at least in
part, by gains on futures contracts purchased by the Fund. The board of
directors has adopted a non-fundamental restriction that the aggregate market
<PAGE>
value of the futures contracts the Fund holds cannot exceed 30% of the
market value of its total assets. Brokerage fees are paid to trade futures
contracts, and the Fund is required to maintain margin deposits.
Put and call options on futures contracts or securities may be traded by
the Fund in order to protect against declines in the values of portfolio
securities or against increases in the cost of securities to be acquired. Put
and call options are contracts which grant the right to sell at a specified
price a specific security or futures contract by a certain date. The put option
buyer gains this right in return for a premium. Purchases of options on futures
contracts may present less dollar risk in hedging the Fund's portfolio than the
purchase and sale of the underlying futures contracts, since the potential loss
is limited to the amount of the premium plus related transaction costs. The
premium paid for such a put or call option plus any transaction costs will
reduce the benefit, if any, realized by the Fund upon exercise or liquidation of
the option, and, unless the price of the underlying futures contract changes
sufficiently, the option may expire without value to the Fund.
Although the Fund will enter into futures contracts and options on futures
contracts and securities solely for hedging or other nonspeculative purposes,
their use does involve certain risks. For example, a lack of correlation between
the value of an instrument underlying an option or futures contract and the
assets being hedged, or unexpected adverse price movements, could render the
Fund's hedging strategy unsuccessful and could result in losses. In addition,
there can be no assurance that a liquid secondary market will exist for any
contract purchased or sold, and the Fund may be required to maintain a position
until exercise or expiration, which could result in losses. Transactions in
futures contracts and options are subject to other risks as well, which are set
forth in greater detail in the Statement of Additional Information and Appendix
B therein.
Zero Coupon Securities. These securities 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. Being
extremely responsive to changes in interest rates, the market price of zero
coupon securities may be more volatile than other bonds. 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.
Delayed Delivery or When-Issued Purchases. Municipal
obligations may at times be purchased or sold by the Fund 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
<PAGE>
the date of purchase and the settlement date, the value of the securities is
subject to market fluctuations, and no interest is payable to the Fund prior to
the settlement date.
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.
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. The Fund could incur costs or delays in seeking to sell
the instrument 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 Fund's board of
directors.
When we believe market or economic conditions are adverse, the Fund may
assume a defensive position by temporarily investing a portion of its assets in
short-term taxable investments or cash, seeking to protect its assets until
conditions stabilize. Short- term taxable investments, if any, normally will
consist of obligations of the U.S. government, its agencies or
instrumentalities; obligations of banks regulated by the United States,
including negotiable certificates of deposit and banker's acceptances; and
commercial paper rated at least P-2 by Moody's or A-2 by S&P. Dividends paid by
the Fund attributable to income from such investments will be taxable to
investors. See "Taxes, Dividends and Capital Gain Distributions ^."
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.
Investment Restrictions. Certain restrictions, which are set forth 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 which may be invested in a single issuer, and to 25% the portion
that may be invested in any one industry. Municipal securities are not
considered to be an "industry" for this purpose, although industrial development
bonds are grouped into industries depending upon the businesses of the companies
that have the ultimate responsibility for payment. In addition, except where
indicated to the contrary, the investment objective and policies described in
<PAGE>
this prospectus are fundamental and may not be changed without a
vote of the Fund's shareholders.
THE FUND AND ITS MANAGEMENT
The Company is a no-load mutual fund, registered with the Securities and
Exchange Commission as a diversified, open-end, management investment company.
It was incorporated on April 22, 1981, under the laws of Colorado and was
reorganized as a Maryland corporation on November 1, 1993.
The Company's board of directors has responsibility for overall
supervision of the Fund^ and reviews the services provided by the adviser and
sub-adviser. Under an agreement with the Company, INVESCO Funds Group, Inc.
("IFG"), 7800 E. Union Avenue, Denver, Colorado 80237, serves as the Fund's
investment manager; it is primarily responsible for providing the Fund with
various administrative services. IFG's wholly-owned subsidiary, INVESCO Trust,
is the Fund's sub-adviser and is primarily responsible for managing the Fund's
investments. Together, IFG and INVESCO Trust constitute "Fund Management."
James S. Grabovac, portfolio manager for the Fund since 1995, has
responsibility for the day-to-day management of the Fund's holdings. He also
manages INVESCO Tax-Free Intermediate Bond Fund. A Chartered Financial Analyst,
Mr. Grabovoc is a vice president of INVESCO Trust; previously, his career
included these highlights: He was a principal and fund manager (1991 to 1995)
and portfolio manager (1989 to 1991) with Stein Roe & Farnham Inc., a futures
and options trader with Continental Illinois National Bank (1987), a corporate
bond trader with The Chicago Corporation from 1985 to 1987, and Midwest
municipal underwriting manager with Continental Illinois National Bank from 1982
to 1985. He holds an MBA from the University of Michigan and a BA from Lawrence
University.
Fund Management permits investment and other personnel to purchase and
sell securities for their own accounts, subject to a compliance policy governing
personal investing. This policy requires Fund Management's personnel to conduct
their personal investment activities in a manner that Fund Management believes
is not detrimental to the Fund or Fund Management's other advisory clients. See
the Statement of Additional Information for more detailed information.
The Fund pays IFG a monthly management fee which is based upon a
percentage of the Fund's average net assets determined daily; in turn, IFG pays
INVESCO Trust a sub-advisory fee out of its management fee. The management fee
is computed at the annual rate of 0.55% on the first $300 million of the Fund's
average net assets; 0.45% on the next $200 million of the Fund's average net
assets; and 0.35% on the Fund's average net assets over $500 million. For the
fiscal year ended June 30, 1996, investment management fees paid by the Fund
amounted to 0.55% of its average net assets. Out of this fee, IFG paid an amount
<PAGE>
equal to 0.24% of the Fund's average net assets to INVESCO Trust as a
sub-advisory fee. No fee is paid by the Fund to INVESCO Trust.
Under a Transfer Agency Agreement, IFG 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 per participant in an omnibus account for
these services. Registered broker-dealers, third party administrators of
tax-qualified retirement plans and other entities, including affiliates of IFG,
may provide equivalent services to the Fund. In these cases, IFG may pay, out of
the fee it receives from the Fund, an annual sub- transfer agency or
record-keeping fee to the third party.
In addition, under an Administrative Services Agreement, IFG handles
additional administrative, record-keeping, and internal sub-accounting services
for the Fund. For the fiscal year ended June 30, 1996, the Fund paid IFG a fee
for these services equal to 0.02% (prior to the voluntary absorption of certain
fund expenses by IFG) of the Fund's average net assets.
The Fund's expenses, which are accrued daily, are deducted from total
income before dividends are paid. Total expenses of the Fund for the fiscal year
ended June 30, 1996, including investment management fees (but excluding
brokerage commissions, which are a cost of acquiring securities), amounted to
0.91% of the Fund's average net assets. Certain Fund expenses were, and are,
absorbed voluntarily by IFG pursuant to a commitment to the Fund in order to
ensure that the Fund's total operating expenses did not exceed 1.00% of the
Fund's average net assets (from July 1, 1994 through August 31, 1994) and will
not exceed 0.90% of the Fund's average net assets (beginning September 1, 1994).
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 1.04% of its average net assets.
Fund Management places orders for the purchase and sale of portfolio
securities with brokers and dealers based upon Fund Management's evaluation of
their financial responsibility coupled with their ability to effect transactions
at the best available prices. As discussed under "How ^ To Buy Shares --
Distribution Expenses," the Fund may market its shares through intermediary
brokers or dealers that have entered into Dealer Agreements with IFG, as the
Fund's Distributor. The Fund may place orders for portfolio transactions with
qualified ^ broker-dealers that recommend the Fund^ or sell shares of the Fund^
to clients, or act as agent in the purchase of Fund shares for clients, if Fund
Management believes that the quality of the execution of the transaction and
level of commission are comparable to those available from other qualified
brokerage firms. For further information, see "Investment Practices -- Placement
of Portfolio Brokerage" in the Statement of Additional Information.
<PAGE>
The parent company for IFG and INVESCO Trust is INVESCO PLC, a publicly
traded holding company whose subsidiaries provide investment services around the
world. IFG was established in 1932 and, as of June 30, 1996, managed 14 mutual
funds, consisting of 39 separate portfolios, with combined assets of
approximately $12.9 billion on behalf of over 826,000 shareholders. INVESCO
Trust (founded in 1969) served as adviser or sub-adviser to 45 investment
portfolios as of June 30, 1996, including 27 portfolios in the INVESCO group.
These 45 portfolios had aggregate assets of approximately $12.0 billion as of
June 30, 1996. In addition, INVESCO Trust provides investment management
services to private clients, including employee benefit plans that may be
invested in a collective trust sponsored by INVESCO Trust.
FUND PRICE AND PERFORMANCE
Determining Price. The value of your investment in the Fund will vary
daily. The price per share is also known as the Net Asset Value (NAV). IFG
prices the Fund every day that the New York Stock Exchange is open, as of the
close of regular trading (normally, 4:00 p.m., New York time). NAV is calculated
by adding together the current market value of all of the Fund's assets,
including accrued interest and dividends; then subtracting liabilities,
including accrued expenses; and finally dividing that dollar amount by the total
number of shares outstanding.
Performance Data. To keep shareholders and potential investors informed,
we will occasionally advertise 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; 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, not showing the interim variations in performance over the
periods cited.
The yield of the Fund refers to the income generated by an investment in
the Fund over a 30-day or one-month period^ and is computed by dividing the net
investment income per share earned during the period by the net asset value per
share at the end of the period, then adjusting the result to provide for
semi-annual compounding. We may also discuss the Fund's "taxable equivalent
yield" -- the yield a taxable investment would have to generate in order to
provide the same income as the Fund, assuming certain federal tax rates. This
yield quotation allows investors to compare taxable and tax-exempt bond funds
more fairly.
More information about the Fund's recent and historical performance is
contained in the Fund's Annual Report to ^ S hareholders. You can get a free
copy by calling or writing to IFG using the telephone number or address on the
cover of this prospectus.
<PAGE>
When we quote mutual fund rankings published by Lipper Analytical
Services, Inc., we may compare the fund to others in its category of General
Municipal Bond 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 IFG. However, if you invest
in the Fund through a securities broker, you may be charged a commission or
transaction fee. For all new accounts, please send a completed application form.
Please specify which Fund you wish to purchase.
Fund Management reserves the right to increase, reduce or waive the
minimum investment requirements in its sole discretion, where it determines this
action is in the best interests of the Fund. Further, Fund Management reserves
the right in its sole discretion to reject any order for the purchase of Fund
shares (including purchases by exchange) when, in its judgment, such rejection
is in the Fund's best interests.
<PAGE>
================================================================================
Method Investment Minimum Please Remember
- --------------------------------------------------------------------------------
By Check $1,000 for regular If your check does
Mail to: account; not clear, you will
INVESCO Funds $50 minimum for be responsible for
Group, Inc. each subsequent any related loss
P.O. Box 173706, investment. the Fund or IFG
Denver, CO 80217- incurs. If you are
3706. already a
Or you may send shareholder in the
your check by INVESCO funds, the
overnight courier Fund may seek
to: 7800 E. Union reimbursement from
Ave., your existing
Denver, CO 80237. account(s) for any
loss incurred.
- --------------------------------------------------------------------------------
By Telephone or $1,000. Payment must be
Wire received within 3
Call 1-800-525-8085 business days, or
to request your the transaction may
purchase. Then send be cancelled. If a
your check by telephone purchase
overnight courier is cancelled due to
to our street nonpayment, you
address: will be responsible
7800 E. Union Ave., for any related
Denver, CO 80237. loss the Fund or
Or you may transmit IFG incurs. If you
your payment by are already a
bank wire (call IFG shareholder in the
for instructions). INVESCO funds, the
Fund may seek
reimbursement from your
existing account(s) for
any loss incurred.
<PAGE>
- --------------------------------------------------------------------------------
With EasiVest or $50 per month for Like all regular
Direct Payroll EasiVest; $50 per investment plans,
Purchase pay period for neither EasiVest
You may enroll on Direct Payroll nor Direct Payroll
the fund Purchase. You may Purchase ensures a
application, or start or stop your profit or protects
call us for the regular investment against loss in a
correct form and plan at any time, falling market.
more details. with two weeks' Because you'll
Investing the same notice to IFG. invest continually,
amount on a monthly regardless of
basis allows you to varying price
buy more shares levels, consider
when prices are low your financial
and fewer shares ability to keep
when prices are buying through low
high. This "dollar- price levels. And
cost averaging" may remember that you
help offset market will lose money if
fluctuations. Over you redeem your
a period of time, shares when the
your average cost market value of all
per share may be your shares is less
less than the than their cost.
actual average
price per share.
- --------------------------------------------------------------------------------
By PAL(R) $1,000. Be sure to write
Your "Personal down the
Account Line" is confirmation number
available for provided by PAL(R).
subsequent Payment must be
purchases and received within 3
exchanges 24-hours business days, or
a day. Simply call the transaction may
1-800-424-8085. be cancelled. If a
telephone purchase is
cancelled due to
nonpayment, you will be
responsible for any
related loss the Fund or
IFG incurs. If you are
already a shareholder in
the INVESCO funds, the
Fund may seek
reimbursement from your
existing account(s) for
any loss incurred.
<PAGE>
- --------------------------------------------------------------------------------
By Exchange $1,000 to open a See "Exchange
Between this and new account; $50 Privilege," page 11.
another of the for written
INVESCO funds. Call requests to
1-800-525-8085 for purchase additional
prospectuses of shares for an
other INVESCO existing account.
funds. You may also (The exchange
establish an minimum is $250 for
Automatic Monthly purchases requested
Exchange service by telephone.)
between two INVESCO
funds; call IFG for
further details and
the correct form.
================================================================================
Your order to purchase Fund shares will not begin earning dividends or
other distributions until 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 Privilege. You may exchange your shares in this Fund for those in
another INVESCO fund^ on the basis of their respective net asset values at the
time of the exchange. Before making any exchange, be sure to review the
prospectuses of the funds involved and consider their differences.
Please note these policies regarding exchanges of fund shares:
1) The fund accounts must be identically registered.
2) You may make four exchanges out of each fund during each
calendar year.
3) An exchange is the redemption of shares from one fund followed by the
purchase of shares in another. Therefore, any gain or loss realized on the
exchange is recognizable for federal income tax purposes (unless, of course,
your account is tax-deferred).
4) The Fund reserves the right to reject any exchange request, or to
modify or terminate exchange privileges, in the best interests of the Fund and
its shareholders. Notice of all such modifications or termination will be given
at least 60 days prior to the effective date of the change in privilege, except
for unusual instances (such as when redemptions of the exchanged shares are
<PAGE>
suspended under Section 22(e) of the Investment Company Act of 1940, or when
sales of the fund into which you are exchanging are temporarily stopped).
Distribution Expenses. 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 shares. These expenditures may include 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 IFG-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 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.
In addition, other reimbursable expenditures include advertising,
preparation and distribution of sales literature, printing and distribution of
prospectuses to prospective investors, public relations efforts, marketing
programs and such other services and promotional activities agreed upon from
time to time by the Fund and its board of directors. These services and
activities may be conducted by the staff of IFG or its affiliates or by third
parties.
IFG is not entitled to reimbursement for overhead expenses under the Plan^
but may be reimbursed for all or a portion of the compensation paid for salaries
and other employee benefits for IFG personnel whose primary responsibilities
involve marketing shares of the INVESCO funds, including the Fund. Also, any
payments made by the Fund may not be used to finance the distribution of shares
of any other mutual fund advised by IFG. 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.
Under the Plan, the Fund's reimbursement to IFG is limited to an amount
computed at a maximum annual rate of 0.25% of the Fund's average net assets.
Payments by the Fund under the Plan, for any month, may only be made to
reimburse expenditures incurred during the rolling 12-month period in which that
month falls. Therefore, any reimbursable expenses incurred by IFG in excess of
the limitation described above are not reimbursable and will be borne by IFG. In
addition, IFG may from time to time make additional payments from its revenues
to securities dealers 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 its
termination.
<PAGE>
FUND SERVICES
Shareholder Accounts. IFG will maintain a share account that reflects your
current holdings. Share certificates will be issued only upon specific request.
You will have greater flexibility to conduct transactions if you do not request
certificates.
Transaction Confirmations. You will receive detailed confirmations of
individual purchases, exchanges^ and redemptions. If you choose certain
recurring transaction plans (for instance, EasiVest), your transactions will be
confirmed on your quarterly Investment Summary.
Investment Summaries. Each calendar quarter, shareholders receive a
written statement which consolidates and summarizes account activity and value
at the beginning and end of the period for each of their INVESCO funds.
Reinvestment of Distributions. Dividends and capital gain distributions
are automatically invested in additional fund shares at the NAV on the
ex-dividend date, unless you choose to have dividends and/or capital gain
distributions automatically reinvested in another INVESCO fund or paid by check
(minimum of $10.00).
Telephone Transactions. All shareholders may exchange and redeem Fund
shares 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.
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>
================================================================================
Method Minimum Redemption Please Remember
================================================================================
By Telephone $250 (or, if less, These telephone
Call us toll-free full liquidation of redemption
at 1-800-525-8085. 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 the
The maximum amount discretion of IFG.
which may be
redeemed by
telephoneis
generally $25,000.
- --------------------------------------------------------------------------------
In Writing Any amount. The If the shares to be
Mail your request redemption request redeemed are
to INVESCO Funds must be signed by represented by
Group, Inc., P.O. all registered stock certificates,
Box 173706, shareholders(s). the certificates
Denver, CO 80217- Payment will be must be sent to
3706. You may also mailed to your IFG.
send your request address of record,
by overnight or to a pre-
courier to 7800 E. designated bank.
Union Ave., Denver,
CO 80237.
- --------------------------------------------------------------------------------
By Exchange $1,000 to open a See "Exchange
Between this and new account; $50 Privilege," page 11.
another of the for written
INVESCO funds. Call requests to
1-800-525-8085 for purchase additional
prospectuses of shares for an
other INVESCO existing account.
funds. You may also (The exchange
establish an minimum is $250 for
automatic monthly exchanges requested
exchange service by telephone.)
between two INVESCO
funds; call IFG for
further details and
the correct form.
- --------------------------------------------------------------------------------
Periodic Withdrawal $100 per payment, You must have at
Plan on a monthly or least $10,000 total
You may call us to quarterly basis. invested with the
request the The redemption INVESCO funds, with
appropriate form check may be made at least $5,000 of
and more payable to any that total invested
information at 1- party you in the fund from
800-525-8085. designate. which withdrawals
will be made.
<PAGE>
- --------------------------------------------------------------------------------
Payment To Third Any amount. All registered
Party owners of the
Mail your request account must sign
to INVESCO Funds the request, with a
Group, Inc., P.O. signature guarantee
Box 173706, from an eligible
Denver, CO 80217- guarantor financial
3706. institution, such
as a commercial
bank or recognized
national or
regional securities
firm.
================================================================================
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 may 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 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.
TAXES, DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
Taxes. The Fund intends to distribute to shareholders substantially all of
its net investment income and net capital gains, if any, in order to continue to
qualify for tax treatment as a regulated investment company. Thus, the Fund does
not expect to pay any federal income or excise taxes.
Exempt-interest dividends paid by the Fund are normally free of federal
income tax to shareholders, although they are subject to state and local income
<PAGE>
taxes. Unless shareholders are exempt from income taxes, however, they must
include all capital gain distributions, as well as any dividends earned on the
Fund's short-term taxable investments, in taxable income for federal, state^ and
local income tax purposes. These distributions are taxable whether they are
received in cash or automatically ^ reinvested in shares of the Fund or another
fund in the INVESCO group.
Under the Tax Reform Act of 1986, interest on certain "private activity
bonds" issued after August 7, 1986, is an item of tax preference for purposes of
the alternative minimum tax in taxable years beginning after December 31, 1986.
The Fund intends to limit, and has limited in the past, its investments in such
"private activity bonds" to not more than 20% of the Fund's total assets. The
portion of exempt-interest dividends paid by the Fund which is attributable to
such "private activity bonds" would be an item of tax preference to
shareholders.
Shareholders may be subject to backup withholding of 31% on capital gain
distributions and redemption proceeds. Unless you are subject to backup
withholding for other reasons, you can avoid backup withholding on your Fund
account by ensuring that we have a correct, certified tax identification number.
Dividends and Capital Gain Distributions. The Fund earns daily net
investment income in the form of dividends and interest on its investments. The
Fund's policy is to distribute substantially all of this income, less Fund
expenses, to shareholders on a monthly basis, at the discretion of the Fund's
board of directors.
In addition, the Fund realizes capital gains and losses when it sells
securities for more or less than it paid and engages in futures transactions. 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, are distributed to shareholders at least annually, usually in
December.
Dividends and capital gain distributions are paid to shareholders who hold
shares on the record date of distribution regardless of how long the shares have
been held. The Fund's share price will then drop by the amount of the
distribution on the day the distribution is made. 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 distribution, some or all of which may
be taxable.
At the end of each year, information regarding the tax status of
dividends, capital gain distributions^ and distributions subject to tax
preference is provided to shareholders. Net realized capital gains are divided
into short-term and long-term gains depending upon how long the Fund held the
security which gave rise to the gains. The capital gains distribution consists
of long-term capital
<PAGE>
gains which are taxed at the capital gains rate. Short-term capital gains are
included with ^ income from dividends and interest as ordinary income and are
paid to shareholders as taxable dividends.
Shareholders also may realize capital gains or losses when they sell their
Fund shares at more or less than the price originally paid.
We encourage you to consult a tax adviser with respect to these matters.
For further information, see "Dividends, Capital Gain Distributions and Taxes"
in the Statement of Additional Information.
ADDITIONAL INFORMATION
Voting Rights. All shares of the Company have equal voting rights based on
one vote for each share owned. Voting with respect to certain matters, such as
ratification of independent accountants and the election of directors, will be
by all the funds of the Company voting together. In other cases, such as voting
upon an investment advisory contract, voting is on a fund-by-fund basis. To the
extent permitted by law, when not all funds are affected by a matter to be voted
upon, only shareholders of the fund or funds affected by the matter will be
entitled to vote thereon. The Company is not generally required and does not
expect to hold regular annual meetings of shareholders. However, 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 Fund will assist shareholders in
communicating with other shareholders as required by the Investment Company Act
of 1940.
<PAGE>
INVESCO TAX-FREE LONG-TERM BOND FUND A
no-load mutual fund seeking as high a level
of current income exempt from federal taxes
as is consistent with the preservation of
capital.
PROSPECTUS
November 1, 1996
To receive general information and prospectuses on any of the INVESCO funds or
retirement plans, or to obtain current account or price information or responses
to other questions, call toll-free:
1-800-525-8085
To reach PAL(R), your 24-hour Personal Account Line (PAL) call:
1-800-424-8085
Or write to:
INVESCO Funds Group, Inc., Distributor
Post Office Box 173706
Denver, Colorado 80217-3706
You can find us on the World Wide Web:
http://www.invesco.com
If you're in Denver, please visit one of our convenient Investor Centers:
Cherry Creek
155-B Fillmore Street
Denver Tech Center
7800 East Union Avenue
Lobby Level
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
November 1, 1996
INVESCO TAX-FREE INCOME FUNDS, INC.
Two no-load investment funds seeking as high a level
of interest income exempt from federal income taxes
as is consistent with the preservation of capital
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 TAX-FREE INCOME FUNDS, INC. (the "Company"), is a diversified,
managed, no-load mutual fund, consisting of two separate portfolios of
investments: INVESCO Tax-Free Long-Term Bond Fund and INVESCO Tax-Free
Intermediate Bond Fund (collectively, the "Funds" and individually, a "Fund").
The investment objective of each Fund is to seek as high a level of current
income exempt from federal income taxation as is consistent with the
preservation of capital. The Funds will pursue this objective by investing in a
diversified portfolio of obligations issued by states, territories and
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, the interest on which is
exempt from federal taxes ("municipal bonds"). Such obligations may include any
combination of general obligation bonds, revenue bonds, and industrial
development bonds.
Separate Prospectuses for each Fund dated November 1, 1996, which provide
the basic information you should know before investing in a Fund, may be
obtained without charge from INVESCO Funds Group, Inc., Post Office Box 173706,
Denver, Colorado 80217- 3706. This Statement of Additional Information is not a
Prospectus, but contains information in addition to and more detailed than that
set forth in the Prospectus. It is intended to provide additional information
regarding the activities and operations of the Funds, and should be read in
conjunction with the Prospectus.
Investment Adviser and Distributor: INVESCO FUNDS GROUP, INC.
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
INVESTMENT POLICIES AND RESTRICTIONS 3
THE FUNDS AND THEIR MANAGEMENT 17
HOW SHARES CAN BE PURCHASED 29
HOW SHARES ARE VALUED 33
FUND PERFORMANCE 34
SERVICES PROVIDED BY THE FUNDS 37
HOW TO REDEEM SHARES 38
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS, AND TAXES 39
INVESTMENT PRACTICES 40
ADDITIONAL INFORMATION 43
APPENDIX 47
<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS
Municipal Obligations
The Funds may purchase or sell a variety of tax-exempt securities in seeking to
achieve their investment objective without regard to how long the securities
have been held in a Fund's portfolio. Although short-term trading increases
portfolio turnover, execution costs associated with the purchase or sale of
municipal bonds are substantially less than the costs incurred in transactions
involving equity securities of equivalent dollar values. Gains, if any, realized
by a Fund as a result of sales of municipal bonds or other securities and
futures or other transactions are subject to federal income taxes.
Securities in which the Funds invest include the following:
Municipal Bonds. Municipal bonds are debt obligations issued to obtain
funds for various public purposes, including the construction of a wide range of
public facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which municipal bonds may be issued include refunding outstanding
obligations, obtaining funds for general operating expenses and obtaining funds
to loan to other public institutions and facilities. In addition, certain kinds
of industrial development bonds are issued by or on behalf of public authorities
to obtain funds to provide to privately operated housing facilities, sports
facilities, convention or trade show facilities, airport, mass transit, port or
parking facilities, air or water pollution control facilities and certain local
facilities for water supply, gas, electricity, sewage or solid waste disposal.
Such obligations are considered to be municipal bonds if the interest paid
thereon qualifies as exempt from federal income taxation. Other kinds of
industrial development bonds, the proceeds from which are used for the
construction, equipment, repair or improvement of privately operated industrial
or commercial facilities, may also be considered municipal bonds. Although the
current federal tax laws impose substantial limitations on the size of such
issues, the Fund will only invest in industrial development bonds, the interest
from which is exempt from federal income taxation.
There are two principal classifications of tax-exempt municipal bonds:
"general obligation" and "revenue" bonds. General obligation bonds are secured
by the issuer's pledge of its full faith, credit and unlimited taxing power for
the payment of principal and interest. Revenue bonds are payable only from the
revenues generated by a particular facility or class of facility, or in some
cases from the proceeds of a special excise tax or specific revenue source.
Industrial development obligations are a particular kind of municipal bond which
are issued by or on behalf of public authorities to obtain funds for various
local, privately operated facilities. Such obligations are, in most cases,
revenue bonds that generally are secured by a lease with a particular private
<PAGE>
corporation. A Fund's portfolio may consist of any combination of general
obligation and revenue bonds. Municipal Notes are debt obligations issued by
municipalities which normally have a maturity at the time of issuance from six
months to three years.
From time to time, proposals to restrict or eliminate the federal income
tax exemption for interest on municipal bonds have been introduced before
Congress. Similar proposals may be introduced in the future. If such a proposal
were enacted, the availability of municipal bonds for investment by a Fund might
be adversely affected. In such event, the Funds would reevaluate their
investment objective and policies and submit possible changes in the structure
of the Funds for the consideration of shareholders.
As discussed in each Prospectus, the municipal securities in which the
Funds invest are generally subject to two kinds of risk, credit risk and market
risk. The ratings given a municipal security by Moody's Investors Service, Inc.
("Moody's") and Standard & Poor's Ratings Group ("S&P") for the Tax-Free
Long-Term Bond Fund and the ratings given a municipal security by Moody's, S&P,
Fitch Investor Services, Inc. ("Fitch"), and Duff & Phelps, Inc. ("D&P") for the
Tax-Free Intermediate Bond Fund provide a generally useful guide as to such
credit risk. The lower the rating given a municipal security by such rating
service, the greater the credit risk such rating service perceives to exist with
respect to such security.
Increasing the amount of a Fund's assets invested in unrated or lower
grade (Ba or less by Moody's, BB or less by S&P) municipal securities, while
intended to increase the yield produced by the Fund's municipal securities, will
also increase the credit risk to which those municipal securities are subject.
Lower rated municipal securities and non-rated securities of comparable quality
tend to be subject to wider fluctuations in yields and market values than higher
rated securities and may have speculative characteristics. In addition, a
significant economic downturn or major increase in interest rates may well
result in issuers of lower rated municipal securities experiencing increased
financial stress which would adversely affect their ability to service their
principal and interest obligations and to obtain additional financing.
Municipal Notes. The principal classifications of municipal notes are tax
anticipation notes, bond anticipation notes, and revenue anticipation notes.
Notes sold in anticipation of collection of taxes, a bond sale or receipt of
other revenues are normally obligations of the issuing municipality or agency.
While the Funds' investment adviser attempts to limit purchases of lower
rated municipal securities to securities having an established retail secondary
<PAGE>
market, the market for such securities may not be as liquid as the market for
higher rated municipal securities.
Other Permissible Investments
Temporary Investments. As discussed in the section of each Fund's
Prospectus entitled "Investment Objective and Policies," the Funds may from time
to time invest a portion of their assets on a temporary basis in "temporary
investments," the income from which may be subject to federal income tax. Any
net interest income on taxable temporary investments will be taxable to
shareholders as ordinary income when distributed.
When-Issued Purchases. As discussed in the section of each Fund's
Prospectus entitled "Investment Policies and Risks," municipal obligations may
at times be acquired on a when-issued basis. Securities purchased on a
when-issued basis and the securities held in a Fund's portfolio are subject to
changes in value based on the public's perception of the creditworthiness of the
issuers and changes in the level of interest rates (generally resulting in
appreciation when interest rates decline and depreciation when interest rates
rise). The Funds will maintain a separate account with their custodian bank
consisting of a combination of cash and any high-grade, liquid short term debt
securities currently held by a Fund equal in value to the amount of such
commitments. A Fund will only make commitments to purchase securities with the
intention of actually acquiring the securities; however, a Fund may sell these
commitments before the settlement date if to do so is deemed advisable as a
matter of investment strategy.
If the market value of securities in a Fund's separate account declines,
the Fund will place additional cash or securities in the account, on a daily
basis if necessary, so that the market value of the account will continue to
equal the amount of the Fund's commitments. To the extent a Fund remains
substantially invested in debt securities at the same time that it has committed
to purchase securities on a when-issued basis, which it would normally expect to
do, there will be greater fluctuations in the Fund's net asset value than if it
set aside cash to pay for when-issued securities. In addition, there will be a
greater potential for the realization of capital gains, which are not exempt
from federal income taxation, and of capital losses. When the payment of
when-issued securities must be met, a Fund will provide payment from available
cash flow, sale of portfolio securities (possibly at a gain or loss) or,
although it would not normally expect to do so, from sale of the when-issued
securities themselves (which may at the time of sale have a value greater or
less than a Fund's payment obligation). The risk of fluctuation in value of the
short-term securities in the separate account is different from the risk of
fluctuation in the value of the Funds' portfolio securities. Each Fund intends
to enter into commitments to purchase securities on a when-issued basis only to
the extent deemed advisable to further its pursuit of its investment objective
<PAGE>
and policies regarding investments. Such commitments will not ordinarily
involve a substantial portion of a Fund's assets, defined as available cash
reserves of a Fund plus proceeds of unsettled regular-way sales of Fund
securities.
Futures Contracts and Options on Futures
As described in the Funds' Prospectuses, the Funds may enter into futures
contracts and may purchase and sell ("write") options to buy or sell futures
contracts. The Funds will comply with and adhere to all limitations in the
manner and extent to which they effect transactions in futures and options on
such futures currently imposed by the rules and policy guidelines of the
Commodity Futures Trading Commission as conditions for exemption of a mutual
fund, or investment advisers thereto, from registration as a commodity pool
operator. Under those restrictions, each Fund will not, as to any positions,
whether long, short or a combination thereof, enter into futures and options
thereon for which the aggregate initial margins and premiums exceed 5% of the
fair market value of its assets after taking into account unrealized profits and
losses on options it has entered into. In the case of an option that is
"in-the-money," as defined in the Commodity Exchange Act (the "CEA"), the
in-the-money amount may be excluded in computing such 5%. (In general a call
option on a future is "in-the-money" if the value of the future exceeds the
exercise ("strike") price of the call; a put option on a future is
"in-the-money" if the value of the future which is the subject of the put is
exceeded by the strike price of the put.) The Funds may use futures and options
thereon solely for bona fide hedging or for other non-speculative purposes
within the meaning and intent of the applicable provisions of the CEA. As to
long positions which are used as part of the Funds' portfolio strategies and are
incidental to their activities in the underlying cash market, the "underlying
commodity value" of the respective Fund's futures and options thereon must not
exceed the sum of (i) cash set aside in an identifiable manner, or short-term
U.S. debt obligations or other dollar-denominated high-quality, short-term money
instruments so set aside, plus sums deposited on margin; (ii) cash proceeds from
existing investments due in 30 days; and (iii) accrued profits held at the
futures commission merchant. The "underlying commodity value" of a future is
computed by multiplying the size of the future by the daily settlement price of
the future. For an option on a future, that value is the underlying commodity
value of the future underlying the option.
Unlike when the Funds purchase or sell a security, no price is paid or
received by a Fund upon the purchase or sale of a futures contract. Instead, the
Funds are required to deposit in a segregated asset account with a commodity
broker an amount of cash or qualifying securities (currently U.S. Treasury
bills) currently in a minimum amount of $15,000. This is called "initial
margin." Such initial margin is in the nature of a performance bond or good
faith deposit on the contract. However, since losses on open contracts are
required to be reflected in cash in the form of variation margin payments, a
<PAGE>
Fund may be required to make additional payments during the term of the
contracts to its broker. Such payments would be required, for example, where,
during the term of an interest rate futures contract purchased by the Fund,
there was a general increase in interest rates, thereby making the Fund's
portfolio securities less valuable. In all instances involving the purchase of
financial futures contracts by a Fund, an amount of cash together with such
other securities as permitted by applicable regulatory authorities to be
utilized for such purpose, at least equal to the market value of the futures
contracts, will be deposited in a segregated account with the Fund's custodian
to collateralize the position. At any time prior to the expiration of a futures
contract, the Fund may elect to close its position by taking an opposite
position which will operate to terminate the Fund's position in the futures
contract. For a more complete discussion of the risks involved in futures and
options on futures and other securities, refer to Appendix B ("Description of
Futures Contracts and Options").
Where futures are purchased to hedge against a possible increase in the
price of a security before a Fund is able in an orderly fashion to invest in the
security, it is possible that the market may decline instead. If the Fund, as a
result, concluded not to make the planned investment at that time because of
concern as to possible further market decline or for other reasons, the Fund
would realize a loss on the futures contract that is not offset by a reduction
in the price of securities purchased.
In addition to the possibility that there may be an imperfect correlation
or no correlation at all between movements in the futures contracts and the
portion of the portfolio being hedged, the price of futures may not correlate
perfectly with movements in the prices due to certain market distortions. All
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors may close futures contracts through offsetting transactions which
could distort the normal relationship between underlying instruments and the
value of the futures contract. Moreover, the deposit requirements in the futures
market are less onerous than margin requirements in the securities market and
may therefore cause increased participation by speculators in the futures
market. Such increased participation may also cause temporary price distortions.
Due to the possibility of price distortion in the futures market and because of
the imperfect correlation between movements in the underlying instrument and
movements in the prices of futures contracts, the value of futures contracts as
a hedging device may be reduced.
In addition, if a Fund has insufficient available cash, it may at times
have to sell securities to meet variation margin requirements. Such sales may
have to be effected at a time when it may be disadvantageous to do so.
<PAGE>
The Funds may buy and write options on futures contracts for hedging
purposes. The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. Depending
on the pricing of the option compared to either the price of the futures
contract upon which it is based or the price of the underlying instrument,
ownership of the option may or may not be less risky than ownership of the
futures contract or the underlying instrument. As with the purchase of futures
contracts, when a Fund is not fully invested it may buy a call option on a
futures contract to hedge against a market advance.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security which is deliverable under, or of
the index comprising, the futures contract. If the futures price at the
expiration of the option is below the exercise price, a Fund will retain the
full amount of the option premium which provides a partial hedge against any
decline that may have occurred in the Fund's portfolio holdings. The writing of
a put option on a futures contract constitutes a partial hedge against
increasing prices of the security which is deliverable under, or of the index
comprising, the futures contract. If the futures price at expiration of the
option is higher than the exercise price, a Fund will retain the full amount of
the option premium which provides a partial hedge against any increase in the
price of securities which the Fund is considering buying. If a call or put
option which a Fund has written is exercised, the Fund will incur a loss which
will be reduced by the amount of the premium it received. Depending on the
degree of correlation between change in the value of its portfolio securities
and changes in the value of the futures positions, a Fund's losses from existing
options on futures may to some extent be reduced or increased by changes in the
value of portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, a Fund may buy a put option on a futures contract to hedge its
portfolio against the risk of falling prices.
The amount of risk a Fund assumes when it buys an option on a futures
contract is the premium paid for the option plus related transaction costs. In
addition to the correlation risks discussed above, the purchase of an option
also entails the risk that changes in the value of the underlying futures
contract will not be reflected fully in the value of the options bought.
Illiquid and Rule 144A Securities. The Tax-Free Intermediate Bond 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. The 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
<PAGE>
(the "1933 Act") (hereinafter referred to as "Rule 144A Securities"). The
Fund's board of directors has delegated to Fund Management the authority to
determine the liquidity of Rule 144A Securities pursuant to guidelines approved
by the board. Pursuant to undertakings given to certain states, the Fund may not
invest more than 5% of its total assets in illiquid securities. Liquid Rule 144A
Securities are not subject to this limitation, although the Fund may not invest
more than 15% of its total assets in restricted securities.
Investments in restricted securities involve certain risks to the extent
that the Fund might have to bear the expense and incur the delays associated
with effecting registration in order to sell the security.
In recent years, a large institutional market has developed for Rule 144A
Securities. Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend on an efficient
institutional market in which Rule 144A Securities can readily be resold or on
an issuer's ability to honor a demand for repayment. Therefore, the fact that
there are contractual or legal restrictions on resale to the general public or
certain institutions is not dispositive of the liquidity of such investments.
Institutional markets for Rule 144A Securities may provide both readily
ascertainable values for Rule 144A Securities and the ability to liquidate an
investment in order to satisfy share redemption orders. An insufficient number
of qualified institutional buyers interested in purchasing a Rule 144A Security
held by the Fund, however, could adversely affect the marketability of such
security, and the Fund might be unable to dispose of such security promptly or
at reasonable prices.
Repurchase Agreements. As discussed in the Prospectuses, the Funds may
enter into repurchase agreements with respect to debt instruments eligible for
investment by the Funds with member banks of the Federal Reserve System,
registered broker-dealers, and registered government securities dealers, which
are deemed creditworthy under standards established by the Fund's board of
directors. 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 the Fund (including accrued interest earned thereon) must have a
total value in excess of the value of the repurchase agreement, and are held as
collateral by the Funds' custodian bank until the repurchase agreement is
completed.
Loans of Portfolio Securities. The Funds also may lend portfolio securities
to qualified brokers, dealers, banks, or other financial institutions. This
practice permits the Fund to earn income, which, in turn, can be invested in
additional securities to pursue the Fund's investment objective. Loans of
securities by the Fund will be collateralized by cash, letters of credit, or
securities issued or guaranteed by the U.S. government or its agencies equal to
<PAGE>
at least 100% of the current market value of the loaned securities, determined
on a daily basis. Lending securities involves certain risks, the most
significant of which is the risk that a borrower may fail to return a portfolio
security. The Funds monitor the creditworthiness of borrowers in order to
minimize such risks. The Funds 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 Tax-Free Long-Term Bond Fund's total assets or the Tax-Free Intermediate
Bond 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 the Fund
will comply with all other applicable regulatory requirements, including the
rules of the New York Stock Exchange and the requirements of the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules of the
Securities and Exchange Commission (the "SEC") thereunder.
Investment Restrictions. As described in each Fund's Prospectus, the Funds
operate under certain investment restrictions that are fundamental and may not
be changed with respect to a particular Fund without the prior approval of the
holders of a majority, as defined in the 1940 Act, of the outstanding voting
securities of that Fund. For purposes of the following limitations, all
percentage limitations apply immediately after a purchase or initial investment.
Any subsequent change in a particular percentage resulting from fluctuations in
value does not require elimination of any security from a Fund.
Under the Tax-Free Long-Term Bond Fund's fundamental
investment restrictions, the Tax-Free Long-Term Bond Fund may not:
(1) issue preference shares or create any funded debt;
(2) sell short or buy on margin;
(3) mortgage, pledge or hypothecate its 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 the Fund's net assets. The Fund will not purchase
additional securities while any such borrowings exist;
(4) 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;
(5) purchase securities (except obligations issued or
guaranteed by the U.S. Government) if the purchase would
cause the Fund, at the time, to have more than 5% of the
value of its total assets invested in securities of any
<PAGE>
one issuer or to own more than 10% of the outstanding
securities of any one issuer;
(6) make loans to any person, except through the purchase of debt
securities in accordance with the Fund's investment policies, 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 the Fund's total net assets (taken at current value). No
more than 10% of the Fund's total net assets may be invested in
repurchase agreements maturing in more than seven days;
(7) buy or sell commodities or commodity contracts, oil, gas, or other
mineral interest or exploration programs, or real estate or
interests therein. However, the Fund may purchase municipal bonds or
other permitted securities secured by real estate or which may
represent indirect interests therein and may buy and sell options
and futures contracts for the purpose of hedging the value of its
securities portfolio, provided that the Fund will not enter into
options or futures contracts for which the aggregate initial margins
exceed 5% of the fair market value of the Fund's assets;
(8) invest in any issuer for the purpose of exercising
control or management;
(9) purchase securities which have legal or contractual restrictions on
resale or purchase securities for which there is no readily
available market;
(10) engage in the underwriting of any securities of other issuers except
to the extent that the purchase of municipal bonds or other
permitted investments directly from the issuer thereof and the
subsequent disposition of such investments may be deemed to be an
underwriting;
(11) purchase or retain securities of any issuer in which any officer or
director of the Fund or its investment adviser beneficially owns
more than 1/2 of 1% of the outstanding securities, or in which all
of the officers and directors of the Company and its investment
adviser, as a group, beneficially own more than 5% of such
securities;
(12) purchase equity securities or securities convertible into
equity securities;
(13) participate on a joint or a joint and several basis in
any securities trading account or purchase warrants;
<PAGE>
(14) invest more than 25% of its total assets in any particular industry
or industries, except municipal securities, or obligations issued or
guaranteed by the U.S. government, its agencies or
instrumentalities. (Industrial development bonds are grouped into an
"industry" where the payment of principal and interest is the
ultimate responsibility of companies within the same industry.)
With the exception of restriction (7) above, the Tax-Free Long-Term Bond
Fund has no fundamental policies as to the use of future contracts.
The Company has given undertakings to the State of Texas that the Tax-Free
Long-Term Bond Fund may not invest in any oil, gas, or mineral leases; and may
not invest in real estate limited partnership interests.
Under the Tax-Free Intermediate Bond Fund's fundamental
investment restrictions, the Tax-Free Intermediate Bond Fund may
not:
(1) With respect to seventy five percent (75%) of the value of its total
assets, purchase the securities of any one issuer (except cash items
and "Government securities" as defined under the 1940 Act), if the
purchase would cause the Fund to have more than 5% of the value of
its total assets invested in the securities of such issuer or to own
more than 10% of the outstanding voting securities of such issuer;
(2) Borrow money, except that the Fund may borrow money for temporary or
emergency purposes (not for leveraging or investment) and may enter
into reverse repurchase agreements in an aggregate amount not
exceeding 33 1/3% of the value of its total assets (including the
amount borrowed) less liabilities (other than borrowings). Any
borrowings that come to exceed 33 1/3% of the value of the Fund's
total assets by reason of a decline in net assets will be reduced
within three business days to the extent necessary to comply with
the 33 1/3% limitation. This restriction shall not prohibit deposits
of assets to margin or guarantee positions in futures, options,
swaps, or forward contracts, or the segregation of assets in
connection with such contracts.
(3) Invest more than 25% of the value of its total assets in any
particular industry (other than municipal securities or U.S.
Government securities).
(4) Invest directly in real estate or interests in real estate; however,
the Tax-Free Intermediate Bond Fund may own debt or equity
securities issued by companies engaged in those businesses.
<PAGE>
(5) Purchase or sell physical commodities other than foreign
currencies unless acquired as a result of ownership of
securities (but this shall not prevent the Tax-Free
Intermediate Bond Fund from purchasing or selling
options, futures, and forward contracts or from investing
in securities or other instruments backed by physical
commodities).
(6) Lend any security or make any other loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties (but this
limitation does not apply to purchases of commercial paper, debt
securities or to repurchase agreements.)
(7) Act as an underwriter of securities issued by others, except to the
extent that it may be deemed an underwriter in connection with the
disposition of portfolio securities of the Tax-Free Intermediate
Bond Fund.
In applying the industry concentration investment restrictions (no. 14 in
the case of the Tax-Free Long-Term Bond Fund, and no. 3 in the case of the
Tax-Free Intermediate Bond Fund), the Funds use an industry classification
system based on the O'Neil Database published by William O'Neil & Co., Inc.
Additional investment restrictions adopted by the Company on behalf of the
INVESCO Tax-Free Intermediate Bond Fund and which may be changed by the
directors, at their discretion, without shareholder approval, include the
following:
(1) The Tax-Free Intermediate Bond Fund's investments in warrants,
valued at the lower of cost or market, may not exceed 5% of the
value of its total assets. Included within that amount, but not to
exceed 2% of the value of the Tax-Free Intermediate Bond Fund's
total assets, may be warrants that are not listed on the New York,
American, or other United States Securities exchanges. Warrants
acquired by the Tax-Free Intermediate Bond Fund in units or attached
to securities shall be deemed to be without value.
(2) The Tax-Free Intermediate Bond Fund will not (i) enter into any
futures contracts or options on futures contracts if immediately
thereafter the aggregate margin deposits on all outstanding futures
contracts positions held by the Fund and premiums paid on
outstanding options on futures contracts, after taking into account
unrealized profits and losses, would exceed 5% of the market value
of the total assets of the Fund, or (ii) enter into any futures
contracts if the aggregate net amount of the Tax-Free Intermediate
Bond Fund's commitments under outstanding futures contracts
positions of the Tax-Free Intermediate Bond Fund would exceed the
market value of the total assets of the Fund.
<PAGE>
(3) The Tax-Free Intermediate Bond Fund does not currently intend to
sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold
short without the payment of any additional consideration therefor,
and provided that transactions in options and forward futures
contracts are not deemed to constitute selling securities short.
(4) The Tax-Free Intermediate Bond Fund does not currently intend to
purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of
transactions, and provided that margin payments and other deposits
in connection with transactions in options, futures, and forward
contracts shall not be deemed to constitute purchasing securities on
margin.
(5) The Tax-Free Intermediate Bond Fund does not currently intend to (i)
purchase securities of other investment companies, except in the
open market where no commission except the ordinary broker's
commission is paid, or (ii) purchase or retain securities issued by
other open-end investment companies. Limitations (i) and (ii) do not
apply to money market funds or to securities received as dividends,
through offers of exchange, or as a result of a reorganization,
consolidation, or merger. If the Tax- Free Intermediate Bond Fund
invests in a money market fund, the Tax-Free Intermediate Bond
Fund's investment adviser will reduce its advisory fee by the amount
of any investment advisory and administrative services fees paid to
the investment manager of the money market fund.
(6) The Tax-Free Intermediate Bond Fund may not mortgage or pledge any
securities owned or held by the Fund in amounts that exceed, in the
aggregate, 15% of the Fund's net asset value, provided that this
limitation does not apply to reverse repurchase agreements, to
assets deposited to margin or guarantee positions in futures,
options, swaps or forward contracts or to assets placed in a
segregated account in connection with such contracts.
(7) The Tax-Free Intermediate Bond Fund does not currently intend to
invest directly in oil, gas, or other mineral development or
exploration programs or leases; however, the Tax-Free Intermediate
Bond Fund may own debt or equity securities of companies engaged in
those businesses.
(8) The Tax-Free Intermediate Bond Fund does not currently intend to
purchase any illiquid securities or enter into a repurchase
agreement if, as a result, more than 10% of its net assets would be
invested in repurchase agreements not entitling the holder to
<PAGE>
payment of principal and interest within seven days and in
securities that are illiquid by virtue of legal or contractual
restrictions on resale or for which there is no readily available
market. The board of directors, or the Tax-Free Intermediate Bond
Fund's investment adviser acting pursuant to authority delegated by
the board of directors, may determine that a readily available
market exists for securities eligible for resale pursuant to Rule
144A under the Securities Act of 1933, or any successor to such
rule, and that such securities are not subject to the foregoing
limitation.
(9) The Tax-Free Intermediate Bond Fund may not invest in companies for
the purpose of exercising control or management, except to the
extent that exercise by the Fund of its rights under agreements
related to portfolio securities would be deemed to constitute such
control.
(10) The Tax-Free Intermediate Bond Fund may not invest more than 25% of
the value of its total assets in any particular industry or
industries, except municipal securities, or obligations issued or
guaranteed by the U.S. government, its agencies or
instrumentalities. (Industrial development bonds are grouped into an
"industry" where the payment of principal and interest is the
ultimate responsibility of companies within the same industry.)
With respect to investment restriction 8 above, the board of directors has
delegated to the Tax-Free Intermediate Bond Funds' investment adviser the
authority to determine that a liquid market exists for securities eligible for
resale pursuant to Rule 144A under the Securities Act of 1933, or any successor
to such rule, and that such securities are not subject to restriction 8 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).
The Tax-Free Intermediate Bond Fund has given an undertaking to the State
of Arkansas that the Fund will not invest in securities of unseasoned issuers,
including their predecessors, which have been in operation for less than 3
years, and equity securities of issuers which are not readily marketable, if by
reason thereof the value of its aggregate investment in such securities would
exceed 5% of its total assets. Additionally, the Fund may purchase or write put
and call options on securities or straddles, spreads or combinations thereof,
<PAGE>
only if by reason thereof the value of the Fund's aggregate investment in
such classes of securities will be 5% or less of its total assets. Also, the
Fund will not buy or sell commodities or commodity contracts.
Both Funds have also given an undertaking to the State of Kentucky that
they will not invest in oil, gas or other mineral development or exploration
programs or leases.
The Tax-Free Intermediate Bond Fund has given an undertaking to the State
of Ohio that the Fund will not purchase or retain the securities of any issuer
if the officers, directors, advisers or managers of the Fund owning beneficially
more than one-half of 1% of the securities of an issuer together own
beneficially more than 5% of the securities of that issuer. Additionally, the
Fund will not invest more than 15% of the Fund's total net assets in the
securities of issuers which, together with any predecessors, have a record of
less than three years continuous operations, or securities of issuers which are
restricted as to disposition.
<PAGE>
THE FUNDS AND THEIR MANAGEMENT
The Company. The Company was incorporated under the laws of Maryland on
April 2, 1993. On November 1, 1993, the Tax-Free Long- Term Bond Fund of the
Company assumed all the assets and liabilities of Financial Tax-Free Income
Shares, Inc. ("FTFIS"), a Colorado corporation incorporated on April 22, 1981.
All financial and other information about the Tax-Free Long-Term Bond Fund for
periods prior to November 1, 1993, relates to FTFIS.
The Investment Adviser. INVESCO Funds Group, Inc., a Delaware corporation,
("INVESCO") is employed as the Funds' investment adviser. INVESCO was
established in 1932 and also serves as the investment adviser to INVESCO
Diversified Funds, Inc., INVESCO Dynamics Fund, Inc., INVESCO Emerging
Opportunity Funds, Inc., INVESCO Growth Fund, Inc., INVESCO Income Funds, Inc.,
INVESCO Industrial Income Fund, Inc., INVESCO International Funds, Inc., INVESCO
Money Market Funds, Inc., INVESCO Multiple Asset Funds, Inc., INVESCO Specialty
Funds, Inc., INVESCO Strategic Portfolios, Inc., INVESCO Value Trust, and
INVESCO Variable Investment Funds, Inc.
The Sub-Adviser. INVESCO Trust Company ("INVESCO Trust") serves as the
sub-adviser to the Funds, pursuant to an agreement between INVESCO and INVESCO
Trust. INVESCO Trust, a trust company founded in 1969, is a wholly-owned
subsidiary of INVESCO.
INVESCO is an indirect, wholly-owned subsidiary of INVESCO PLC, a
publicly-traded holding company organized in 1935. Through subsidiaries located
in London, Denver, Atlanta, Boston, Louisville, Dallas, Tokyo, Hong Kong, and
the Channel Islands, INVESCO PLC provides investment services around the world.
INVESCO was acquired by INVESCO PLC in 1982 and as of June 30, 1996, managed 14
mutual funds, consisting of 39 separate portfolios, on behalf of over 826,000
shareholders. INVESCO PLC's other North American subsidiaries include the
following:
--INVESCO Capital Management, Inc. of Atlanta, Georgia,
manages institutional investment portfolios, consisting primarily
of discretionary employee benefit plans for corporations and state
and local governments, and endowment funds. INVESCO Capital
Management, Inc. is the sole shareholder of INVESCO Services, Inc.,
a registered broker-dealer whose primary business is the
distribution of shares of two registered investment companies.
--INVESCO Management & Research, Inc. (formerly Gardner and
Preston Moss, 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.
<PAGE>
--INVESCO Realty Advisors of Dallas, Texas, is responsible for providing
advisory services in the U.S. real estate markets for INVESCO PLC's clients
worldwide. Clients include corporate plans, public pension funds as well as
endowment and foundation accounts.
The corporate headquarters of INVESCO PLC are located at 11 Devonshire
Square, London, EC2M 4YR, England.
As indicated in the Prospectus, INVESCO permits investment and other
personnel to purchase and sell securities for their own accounts in accordance
with a compliance policy governing personal investing by directors, officers and
employees of INVESCO and its North American affiliates. The policy requires
officers, inside directors, investment and other personnel of INVESCO and its
North American affiliates to pre-clear all transactions in securities not
otherwise exempt under the policy. Requests for trading authority will be denied
when, among other reasons, the proposed personal transaction would be contrary
to the provisions of the policy or would be deemed to adversely affect any
transaction then known to be under consideration for or to have been effected on
behalf of any client account, including the Funds.
In addition to the pre-clearance requirement described above, the policy
subjects officers, inside directors, investment and other personnel of INVESCO
and its North American affiliates to various trading restrictions and reporting
obligations. All reportable transactions are reviewed for compliance with the
policy. The provisions of the policy are administered by and subject to
exceptions authorized by INVESCO.
Investment Advisory Agreement. INVESCO serves as investment adviser
pursuant to an investment advisory agreement (the "Agreement") with the Company
which was approved on April 21, 1993, by 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. Pursuant to authorization granted by the public shareholders of FTFIS
on May 24, 1993, FTFIS, as the initial shareholder of the Company, approved the
Agreement on October 27, 1993 for an initial term expiring April 30, 1995. The
Agreement has been continued by action of the board of directors through April
30, 1997. Thereafter, the Agreement may be continued from year to year as to
each Fund as long as 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 Investment Company Act of 1940, of the outstanding
shares of such 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 Investment Company Act of 1940) 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 upon sixty (60) days' written notice and terminates automatically
in the event of an assignment to the extent required by the Investment Company
<PAGE>
Act of 1940 and the Rules thereunder. The Agreement was approved by INVESCO
on November 26, 1993 as the then sole shareholder of the Tax-Free Intermediate
Bond Fund.
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 company 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 Funds and INVESCO or any affiliate thereof,
including the distribution and sale of shares of the Funds 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 Funds 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 Fund), 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 Investment Company Act of 1940. Expenses not
assumed by INVESCO are borne by the Funds.
As full compensation for its advisory services to the Company, INVESCO is
entitled to receive a monthly fee. The fee is calculated daily at an annual rate
of: 0.55% on the first $300 million of the average net assets of the Tax-Free
Long-Term Bond Fund; reduced to 0.45% on the next $200 million of the average
net assets of the Tax-Free Long-Term Bond Fund; and further reduced to 0.35% on
the average net assets of the Tax-Free Long-Term Bond Fund greater than $500
million. For the fiscal years ended June 30, 1996, 1995, and 1994, the Tax-Free
Long-Term Bond Fund paid INVESCO advisory fees of $1,389,027 (prior to the
voluntary absorption of certain Fund expenses by INVESCO), $1,471,474 (prior to
the voluntary absorption of certain Fund expenses by INVESCO), and $1,758,722,
respectively. The fee for the Tax-Free Intermediate Bond Fund is calculated
daily at an annual rate of: 0.50% on the first $300 million of the average net
assets; reduced to 0.40% on the next $200 million of the average net assets; and
further reduced to 0.30% on the average net assets greater than $500 million.
For the fiscal years ended June 30, 1996 and 1995 and the period ended June 30,
<PAGE>
1994, the Tax-Free Intermediate Bond Fund paid INVESCO advisory fees (prior
to the voluntary absorption of certain Fund expenses by INVESCO) of $26,991,
$23,812 and $9,874, respectively.
Certain states in which the shares of the Funds are qualified for sale
currently impose limitations on the expenses of the Funds. At the date of this
Statement of Additional Information, the most restrictive state-imposed annual
expense limitation requires that INVESCO absorb any amount necessary to prevent
each Fund's aggregate ordinary operating expenses (excluding interest, taxes,
brokerage fees and commissions and extraordinary charges such as litigation
costs) from exceeding in any fiscal year 2.5% of the Fund's first $30,000,000 of
average net assets, 2.0% of the next $70,000,000 of average net assets and 1.5%
of the remaining average net assets. No payment of the investment advisory fee
will be made to INVESCO which would result in either Fund's expenses exceeding
on a cumulative annualized basis this state limitation. During the past year,
INVESCO did not absorb any amounts under this provision for any Fund.
Sub-Advisory Agreement. INVESCO Trust serves as sub-adviser to the Funds
pursuant to a sub-advisory agreement (the "Sub-Agreement") with INVESCO which
was approved on April 21, 1993, by a vote cast in person by a majority of the
directors of the Company, including a majority of the directors who are not
"interested persons" of the Company, INVESCO, or INVESCO Trust at a meeting
called for such purpose. Pursuant to authorization granted by the public
shareholders of FTFIS on May 24, 1993, FTFIS, as the initial shareholder of the
Company, approved the Sub- Agreement on October 27, 1993 for an initial term
expiring April 30, 1995. Thereafter, the Sub-Agreement may be continued from
year to year as to each Fund as long as each such continuance is specifically
approved by the board of directors of the Company, or by a vote of the holders
of a majority, as defined in the 1940 Act, of the outstanding shares of such
Fund. Each such continuance must also be approved by a majority of the directors
who are not parties to the Sub-Agreement or interested persons (as defined in
the 1940 Act) of any such party, cast in person at a meeting called for the
purpose of voting on such continuance. The Sub-Agreement may be terminated at
any time without penalty by either party or the Funds upon sixty (60) days'
written notice, and terminates automatically in the event of an assignment to
the extent required by the Investment Company Act of 1940 and the rules
thereunder. The Sub- Agreement was approved by INVESCO on November 26, 1993, as
the then sole shareholder of the Tax-Free Intermediate Bond Fund. The Sub-
Agreement has been continued by action of the board of directors through April
30, 1997.
The Sub-Agreement provides that INVESCO Trust, subject to the supervision
of INVESCO, shall manage the investment portfolios of each Fund in conformity
with each Fund's investment policies. These management services would include:
(a) managing the investment and reinvestment of all the assets, now or hereafter
<PAGE>
acquired, of the Funds, and executing all purchases and sales of portfolio
securities; (b) maintaining a continuous investment program for the Funds,
consistent with (i) each Fund's investment policies as set forth in the
Company's Articles of Incorporation, Bylaws, and Registration Statement, as from
time to time amended, under the 1940 Act, as amended, and in any prospectus
and/or statement of additional information of the Funds, as from time to time
amended and in use under the Securities Act of 1933, as amended, and (ii) the
Company's status as a regulated investment company under the Internal Revenue
Code of 1986, as amended; (c) determining what securities are to be purchased or
sold for the Funds, unless otherwise directed by the directors of the Company or
INVESCO, and executing transactions accordingly; (d) providing the Funds the
benefit of all of the investment analysis and research, the reviews of current
economic conditions and trends, and the consideration of long-range investment
policy now or hereafter generally available to investment advisory customers of
the Sub-Adviser; (e) determining what portion of the Funds should be invested in
the various types of securities authorized for purchase by each Fund; and (f)
making recommendations as to the manner in which voting rights, rights to
consent to Company action and any other rights pertaining to each Fund's
portfolio securities shall be exercised.
The Sub-Agreement provides that as compensation for its services, INVESCO
Trust shall receive from INVESCO, at the end of each month, a fee based upon the
average daily value of the Tax- Free Long-Term Bond Fund's average net assets at
the following annual rates: 0.25% of the average net assets up to $200 million,
and 0.20% of the average net assets in excess of $200 million, and a fee based
upon the average daily value of the Tax-Free Intermediate Bond Fund at the
following annual rates: 0.25% of the average net assets up to $300 million;
0.20% of the next $200 million of average net assets; and 0.15% of the average
net assets in excess of $500 million. The Sub-Advisory fee is paid by INVESCO,
NOT the Funds.
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 April 30, 1993 (the "Administrative Agreement"). The
Administrative Agreement was approved on April 21, 1993, 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 of one
year expiring April 30, 1994, and has been continued by action of the board of
directors until April 30, 1997. The Administrative Agreement may be continued
from year to year as long as 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
<PAGE>
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 a Fund's shareholder accounts maintained by
certain retirement plans and employee benefit plans for the benefit of
participants in such plans.
As full compensation for services provided under the Administrative
Agreement, each Fund pays a fee to INVESCO consisting of a base fee of $10,000
per year, plus an additional incremental fee computed daily and paid monthly at
an annual rate of 0.015% per year of the average net assets of each Fund.
During the fiscal year ended June 30, 1996, 1995, and 1994, the Tax-Free
Long-Term Bond Fund paid INVESCO administrative services fees in the amount of
$47,882 (prior to the voluntary absorption of certain Fund expenses by INVESCO),
$50,131 (prior to the voluntary absorption of certain Fund expenses by INVESCO),
and $58,680, respectively. During the fiscal years ended June 30, 1996 and 1995
and the period ended June 30, 1994, the Tax-Free Intermediate Bond Fund paid
INVESCO administrative services fees (prior to the voluntary absorption of
certain Fund expenses by INVESCO) in the amount of $10,810, $10,714 and $6,129,
respectively.
Transfer Agency Agreement. INVESCO also performs transfer agent, dividend
disbursing agent, and registrar services for the Funds pursuant to a Transfer
Agency Agreement 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 April
21, 1993, for an initial term expiring April 30, 1994. The Transfer Agency
Agreement has been continued by action of the board of directors until April 30,
1997 and thereafter may be continued from year to year 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 of the Funds. 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
<PAGE>
automatically in the event of assignment. Prior to March 8, 1991, transfer
agency services were provided by INVESCO Trust Company, a wholly owned
subsidiary of INVESCO.
The Transfer Agency Agreement provides that the Funds shall pay to INVESCO
a fee of $26.00 per shareholder account or omnibus account participant per year.
This fee is paid monthly at 1/12 of the annual fee and is based upon the actual
number of shareholder accounts or omnibus account participants in existence at
any time during each month. For the fiscal years ended June 30, 1996, 1995, and
1994, the Tax-Free Long-Term Bond Fund paid INVESCO transfer agency fees of
$324,030 (prior to the voluntary absorption of certain Fund expenses by
INVESCO), $390,390 (prior to the voluntary absorption of certain Fund expenses
by INVESCO) and $310,709, respectively. For the fiscal years ended June 30, 1996
and 1995 and the period ended June 30, 1994, the Tax-Free Intermediate Bond Fund
paid INVESCO transfer agency fees (prior to the voluntary absorption of certain
Fund expenses by INVESCO) of $14,234, $12,446 and $3,083, respectively.
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 Fund are carried out and that each Fund's portfolio is 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 Funds. The investment adviser for each Fund has the
primary responsibility for making investment decisions on behalf of each 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 Diversified Funds, Inc., INVESCO Dynamics Fund, Inc., INVESCO
Emerging Opportunity Funds, Inc., INVESCO Growth Fund, Inc., INVESCO Income
Funds, Inc., INVESCO Industrial Income Fund, Inc., INVESCO International Funds,
Inc., INVESCO Money Market Funds, Inc., INVESCO Multiple Asset Funds, Inc.,
INVESCO Specialty Funds, Inc., INVESCO Strategic Portfolios, Inc., and INVESCO
Variable Investment Funds, Inc. All of the directors of the Company also serve
as trustees of INVESCO Value Trust. In addition, all of the directors of the
Company also are directors of INVESCO Advisor Funds, Inc. (formerly known as
"The EBI Funds, Inc."); and, with the exception of Mr. Hesser, trustees of
INVESCO Treasurer's Series Trust. All of the officers of the Company also hold
comparable positions with INVESCO Value Trust. Set forth below is information
with respect to each of the Company's officers and directors. Unless otherwise
indicated, the address of the directors and officers is Post Office Box 173706,
Denver, Colorado 80217-3706. Their affiliations represent their principal
occupations during the past five years.
CHARLES W. BRADY,*+ Chairman of the Board. Chief Executive
Officer and Director of INVESCO PLC, London, England, and of
<PAGE>
various subsidiaries thereof; Chairman of the Board of INVESCO
Advisor Funds, Inc., INVESCO Treasurer's Series Trust, and The
Global Health Sciences Fund. Address: 1315 Peachtree Street,
NE, Atlanta, Georgia. Born: May 11, 1935.
FRED A. DEERING,+# Vice Chairman of the Board. Vice Chairman
of INVESCO Advisor Funds, Inc. and INVESCO Treasurer's Series
Trust. Trustee of The Global Health Sciences Fund. Formerly,
Chairman of the Executive Committee and Chairman of the Board of
Security Life of Denver Insurance Company, Denver, Colorado;
Chairman of ING America Life Insurance Co., Urbaine Life Insurance
Company and Midwestern United Life Insurance Company. Address:
Security Life Center, 1290 Broadway, Denver, Colorado. Born:
January 12, 1928.
DAN J. HESSER,+* President and Director. Chairman of the
Board, President, and Chief Executive Officer of INVESCO Funds
Group, Inc.; Director of INVESCO Trust Company. Trustee of The
Global Health Sciences Fund. Born: December 27, 1939.
VICTOR L. ANDREWS,** Director. Professor Emeritus, Chairman
Emeritus and Chairman of the CFO Roundtable of the Department of
Finance at Georgia State University, Atlanta, Georgia; President,
Andrews Financial Associates, Inc. (consulting firm); formerly,
member of the faculties of the Harvard Business School and the
Sloan School of Management of MIT. Dr. Andrews is also a director
of The Southeastern Thrift and Bank Fund, Inc. and The Sheffield
Funds, Inc. Address: 4625 Jettridge Drive, Atlanta, Georgia.
Born: June 23, 1930.
BOB R. BAKER,+** Director. President and Chief Executive
Officer of AMC Cancer Research Center, Denver, Colorado, since
January 1989; until mid-December 1988, Vice Chairman of the Board
of First Columbia Financial Corporation (a financial institution),
Englewood, Colorado. Formerly, Chairman of the Board and Chief
Executive Officer of First Columbia Financial Corporation.
Address: 1775 Sherman Street, #1000, Denver, Colorado. Born:
August 7, 1936.
LAWRENCE H. BUDNER,# Director. Trust Consultant; prior to
June 30, 1987, Senior Vice President and Senior Trust Officer of
InterFirst Bank, Dallas, Texas. Address: 7608 Glen Albens Circle,
Dallas, Texas. Born: July 25, 1930.
DANIEL D. CHABRIS,+# Director. Financial Consultant;
Assistant Treasurer of Colt Industries Inc., New York, New York,
from 1966 to 1988. Address: 15 Sterling Road, Armonk, New York.
Born: August 1, 1923.
A. D. FRAZIER, JR.,*,** Director. Chief Operating Officer of
the Atlanta Committee for the Olympic Games. From 1982 to 1991,
Mr. Frazier was employed in various capacities by First Chicago
Bank, most recently as Executive Vice President of the North
American Banking Group. Trustee of The Global Health Sciences
<PAGE>
Fund. Director of Magellan Health Services, Inc. and of Charter
Medical Corp. Address: 250 Williams Street, Suite 6000, Atlanta,
Georgia 30301. Born: June 23, 1944.
HUBERT L. HARRIS, JR.,* Director, Chairman (since May 1996)
and President (January 1990 to April 1996) of INVESCO Services,
Inc. Director of INVESCO PLC and Chief Financial Officer of
INVESCO Individual Services Group. Member of the Executive
Committee of the Alumni Board of Trustees of Georgia Institute of
Technology. Address: 1315 Peachtree Street, N.E., Atlanta,
Georgia. Born: July 15, 1943.
KENNETH T. KING,** Director. Formerly, Chairman of the Board
of The Capitol Life Insurance Company, Providence Washington
Insurance Company, and Director of numerous subsidiaries thereof in
the U.S. Formerly, Chairman of the Board of The Providence Capitol
Companies in the United Kingdom and Guernsey. Chairman of the
Board of the Symbion Corporation (a high technology company) until
1987. Address: 4080 North Circulo Manzanillo, Tucson, Arizona.
Born: November 16, 1925.
JOHN W. MCINTYRE,# Director. Retired. Formerly, Vice
Chairman of the Board of Directors of the Citizens and Southern
Corporation and Chairman of the Board and Chief Executive Officer
of the Citizens and Southern Georgia Corporation and Citizens and
Southern National Bank. Director of Golden Poultry Co., Inc.
Trustee of The Global Health Sciences Fund and Gables Residential
Trust. Address: Seven Piedmont Center, Suite 100, Atlanta, Georgia
30305. Born: September 14, 1930.
GLEN A. PAYNE, Secretary. Senior Vice President, General
Counsel and Secretary of INVESCO Funds Group, Inc. and INVESCO
Trust Company; formerly, employee of a U.S. regulatory agency,
Washington, D.C., (June 1973 through May 1989). Born: September
25, 1947.
RONALD L. GROOMS, Treasurer. Senior Vice President and
Treasurer of INVESCO Funds Group, Inc. and INVESCO Trust Company
since January 1988. Born: October 1, 1946.
WILLIAM J. GALVIN, JR., Assistant Secretary. Senior Vice
President of INVESCO Funds Group, Inc. and Trust Officer of INVESCO
Trust Company. Formerly, Vice President of 440 Financial Group
from June 1990 to August 1992; Assistant Vice President of Putnam
Companies from November 1986 to June 1990. Born: August 21, 1956.
ALAN I. WATSON, Assistant Secretary. Vice President of
INVESCO Funds Group, Inc. and Trust Officer of INVESCO Trust
Company. Born: September 14, 1941.
JUDY P. WIESE, Assistant Treasurer. Vice President of INVESCO
Funds Group, Inc. and Trust Officer of INVESCO Trust Company.
Born: February 3, 1948.
<PAGE>
#Member of the audit committee of the Company.
+Member of the executive committee of the Company. On occasion, the
executive committee acts upon the current and ordinary business of the Company
between meetings of the board of directors. Except for certain powers which,
under applicable law, may only be exercised by the full board of directors, the
executive committee may exercise all powers and authority of the board of
directors in the management of the business of the Company. All decisions are
subsequently submitted for ratification by the board of directors.
*These directors are "interested persons" of the Company as
defined in the 1940 Act.
**Member of the management liaison committee of the Company.
As of October 16, 1996, officers and directors of the Company, as a group,
beneficially owned less than 1% of the Fund's outstanding shares.
Director Compensation
The following table sets forth, for the fiscal year ended June 30, 1996:
the compensation paid by the Company to its eight independent directors for
services rendered in their capacities as directors of the Company; the benefits
accrued as Company expenses with respect to the Defined Benefit Deferred
Compensation Plan discussed below; and the estimated annual benefits to be
received by these directors upon retirement as a result of their service to the
Company. In addition, the table sets forth the total compensation paid by all of
the mutual funds distributed by INVESCO Funds Group, Inc. (including the
Company), INVESCO Advisor Funds, Inc., INVESCO Treasurer's Series Trust and The
Global Health Sciences Fund (collectively, the "INVESCO Complex") to these
directors for services rendered in their capacities as directors or trustees
during the year ended December 31, 1995. As of December 31, 1995, there were 48
funds in the INVESCO Complex.
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)
Fred A.Deering, $2,688 $478 $398 $87,350
Vice Chairman of
the Board
Victor L. Andrews 2,573 421 438 68,000
Bob R. Baker 2,620 434 587 73,000
<PAGE>
Lawrence H. Budner 2,542 451 438 68,350
Daniel D. Chabris 2,627 515 312 73,350
A. D. Frazier, Jr.(4),(5) 2,442 0 0 63,500
Kenneth T. King 2,574 496 361 70,000
John W. McIntyre4 2,521 0 0 67,850
Total $20,587 $2,795 $2,534 $571,400
% of Net Assets 0.0080%(6) 0.0011%(6) 0.0043%(7)
(1)The vice chairman of the board, the chairmen of the audit, management
liaison and compensation committees, and the members of the executive and
valuation committees each receive compensation for serving in such capacities in
addition to the compensation paid to all independent directors.
(2)Represents benefits accrued with respect to the Defined Benefit Deferred
Compensation Plan discussed below, and not compensation deferred at the election
of the directors.
(3)These figures represent the Company's share of the estimated annual
benefits payable by the INVESCO Complex (excluding the Global Health Sciences
Fund which does not participate in any retirement plan) upon the directors'
retirement, calculated using the current method of allocating director
compensation among the funds in the INVESCO Complex. These estimated benefits
assume retirement at age 72 and that the basic retainer payable to the directors
will be adjusted periodically for inflation, for increases in the number of
funds in the INVESCO Complex, and for other reasons during the period in which
retirement benefits are accrued on behalf of the respective directors. This
results in lower estimated benefits for directors who are closer to retirement
and higher estimated benefits for directors who are further from retirement.
With the exception of Messrs. Frazier and McIntyre, each of these directors has
served as a director/trustee of one or more of the funds in the INVESCO Complex
for the minimum five-year period required to be eligible to participate in the
Defined Benefit Deferred Compensation Plan.
(4)Messrs. Frazier and McIntyre began serving as directors of
the Company on April 19, 1995.
(5)Because of the possibility that A. D. Frazier, Jr. may become
employed by a company affiliated with INVESCO at some point in the
future, he was deemed to be an "interested person" of the Fund and
of the other funds in the INVESCO Complex effective May 1, 1996.
Until such time as Mr. Frazier actually becomes employed by an
INVESCO-affiliated company, however, he will continue to receive
the same director's fees and other compensation as the Fund's
independent directors.
<PAGE>
(6)Totals as a percentage of the Company's net assets as of June
30, 1996.
(7)Total as a percentage of the net assets of the INVESCO
Complex as of December 31, 1995.
Messrs. Brady, Harris, and Hesser, as "interested persons" of the Company
and other funds in the INVESCO Complex, receive compensation as officers or
employees of 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,
INVESCO Advisor Funds, Inc. and INVESCO Treasurer's Series Trust have adopted a
Defined Benefit Deferred Compensation Plan for the non-interested directors and
trustees of the funds. Under this plan, each director or trustee who is not an
interested person of the funds (as defined in the 1940 Act) and who has served
for at least five years (a "qualified director") is entitled to receive, upon
retiring from the boards at the retirement age of 72 (or the retirement age of
73 to 74, if the retirement date is extended by the boards for one or two years,
but less than three years) continuation of payment for one year (the "first year
retirement benefit") of the annual basic retainer payable by the funds to the
qualified director at the time of his retirement (the "basic retainer").
Commencing with any such director's second year of retirement, and commencing
with the first year of retirement of a director whose retirement has been
extended by the board for three years, a qualified director shall receive
quarterly payments at an annual rate equal to 25% of the basic retainer. These
payments will continue for the remainder of the qualified director's life or ten
years, whichever is longer (the "reduced retainer payments"). If a qualified
director dies or becomes disabled after age 72 and before age 74 while still a
director of the funds, the first year retirement benefit and the reduced
retainer payments will be made to him or to his beneficiary or estate. If a
qualified director becomes disabled or dies either prior to age 72 or during
his/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 beneficiary or estate. The plan is
administered by a committee of three directors who are also participants in the
plan and one director who is not a plan participant. The cost of the plan will
be allocated among the INVESCO, INVESCO Advisor and Treasurer's Series funds in
a manner determined to be fair and equitable by the committee. The Company is
not making any payments to directors under the plan as of the date of this
Statement of Additional Information. The Company has no stock options or other
pension or retirement plans for management or other personnel and pays no salary
or compensation to any of its officers.
<PAGE>
The Company has an audit committee comprised of four of the directors who
are not interested persons of the Company. The committee meets periodically with
the Company's independent accountants and officers to review accounting
principles used by the Company, the adequacy of internal controls, the
responsibilities and fees of the independent accountants, and other matters.
The Company also has a management liaison committee which meets quarterly
with various management personnel of INVESCO in order (a) to facilitate better
understanding of management and operations of the Company, and (b) to review
legal and operational matters which have been assigned to the committee by the
board of directors, in furtherance of the board of directors' overall duty of
supervision.
HOW SHARES CAN BE PURCHASED
Each Fund's shares are sold on a continuous basis at the net asset value
per share next calculated after receipt of a purchase order in good form. The
net asset value per share is computed 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." INVESCO acts as
the Funds' Distributor under a distribution agreement with the Company under
which it receives no compensation and bears all expenses, including the cost of
printing and distributing prospectuses, incident to marketing of a Fund's
shares, except for such distribution expenses which are paid out of a Fund's
assets under the Company's Plan of Distribution which has been adopted by the
Company pursuant Rule 12b-1 under the 1940 Act.
Distribution Plan. As discussed under "How To Buy Shares Distribution
Expenses" in the Prospectus, the Funds have adopted a Plan and Agreement of
Distribution (the "Plan") pursuant to Rule 12b-1 under the 1940 Act, which was
implemented on November 1, 1990. The Plan provides that the Funds may make
monthly payments to INVESCO of amounts computed at an annual rate no greater
than 0.25% of each Fund's average net assets to reimburse it for expenses
incurred by it in connection with the distribution of a Fund's shares to
investors. Payment amounts by a Fund under the Plan, for any month, may only be
made to reimburse or pay expenditures incurred during the rolling 12-month
period in which that month falls, although this period is expanded to 24 months
for expenses incurred during the first 24 months of the Fund's operations. For
the fiscal year ended June 30, 1996 the Tax-Free Intermediate Bond Fund and
Tax-Free Long-Term Bond Fund made payments to INVESCO under the 12b-1 Plan
(prior to the voluntary absorption of certain Fund expenses by INVESCO) in the
amount of $13,576 and $326,810, respectively. In addition, as of June 30, 1996,
$953 and $10,542 of additional distribution expenses had been incurred under the
Plan for the Tax-Free Intermediate Bond Fund and Tax-Free Long-Term Bond Fund,
respectively, subject to payment upon approval of the Funds' directors, which
payment was approved on August 14, 1996. As noted in the Prospectuses, one type
<PAGE>
of reimbursable 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 INVESCO 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 Funds do not believe
that these limitations would affect the ability of such banks to enter into
arrangements with INVESCO, but can give no assurance in this regard. However, to
the extent it is determined otherwise in the future, arrangements with banks
might have to be modified or terminated, and, in that case, the size of one or
more of the Funds possibly could decrease to the extent that the banks would no
longer invest customer assets in a particular Fund. Neither the Company nor its
investment adviser will give any preference to banks or other depository
institutions which enter into such arrangements when selecting investments to be
made by each Fund.
For the 12 months ended June 30, 1996 allocation of 12b-1 amounts paid by
the Tax-Free Long-Term Bond Fund for the following categories of expenses were:
advertising--$30,152; sales literature, printing and postage--$76,482; direct
mail--$25,616; public relations/promotion--$25,457; compensation to securities
dealers and other organizations--$81,987; marketing personnel--$87,116. For the
12 months ended June 30, 1996, allocations of 12b-1 amounts paid by the Tax-Free
Intermediate Bond Fund for the following categories of expenses were:
advertising -- $1,265; sales literature, printing and postage -- $5,402; direct
mail -- $1,125; public relations/promotion -- $1,042; compensation to securities
dealers and other organizations -- $1,322; marketing personnel -- $3,420.
The nature and scope of services which are provided by securities dealers
and other organizations may vary by dealer but include, among other things,
processing new stockholder account applications, preparing and transmitting to
the Company's Transfer Agent computer-processable tapes of each Fund's
transactions by customers, serving as the primary source of information to
customers in answering questions concerning each Fund, and assisting in other
customer transactions with each Fund.
The Plan was approved on April 21, 1993, at a meeting called for such
purpose by a majority of the directors of the Company, including a majority of
the directors who neither are "interested persons" of the Company nor have any
financial interest in the operation of the Plan ("12b-1 directors"). The Plan
was approved by INVESCO on November 26, 1993, as the then sole shareholder of
the Tax-Free Intermediate Bond Fund. Pursuant to authorization granted by the
public shareholders of FTFIS on May 24, 1993 FTFIS, as the initial shareholder
<PAGE>
of the Tax-Free Long-Term Bond Fund, approved the Agreement on October 27,
1993 for an initial term expiring April 30, 1994. The Plan has been continued by
action of the board of directors until April 30, 1997.
The Plan provides that it shall continue in effect with respect to each
Fund for so long as such continuance is approved at least annually by the vote
of the board of directors of the Company cast in person at a meeting called for
the purpose of voting on such continuance. The Plan can also be terminated at
any time with respect to any Fund, without penalty, if a majority of the 12b-1
directors, or shareholders of such Fund, vote to terminate the Plan. The Company
may, in its absolute discretion, suspend, discontinue or limit the offering of
its 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 a particular Fund, the investment
climate for any particular Fund, general market conditions, and the volume of
sales and redemptions of a Fund's shares. The Plan may continue in effect and
payments may be made under the Plan following any such temporary suspension or
limitation of the offering of a Fund's shares; however, neither Fund is
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 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
12b-1 directors. Under the agreement implementing the Plan, INVESCO or the
Funds, the latter by vote of a majority of the 12b-1 directors, or of the
holders of a majority of a Fund's outstanding voting securities, may terminate
such agreement as to that Fund without penalty upon 30 days' written notice to
the other party. No further payments will be made by a Fund under the Plan in
the event of its termination as to that Fund.
To the extent that the Plan constitutes a plan of distribution adopted
pursuant to Rule 12b-1 under the 1940 Act, it shall remain in effect as such, so
as to authorize the use of each Fund's assets in the amounts and for the
purposes set forth therein, notwithstanding the occurrence of an assignment, as
defined by the 1940 Act, and rules thereunder. To the extent it constitutes an
agreement pursuant to a plan, each Fund's obligation to make payments to INVESCO
shall terminate automatically, in the event of such "assignment," in which case
the Funds may continue to make payments pursuant to the Plan to INVESCO or
another organization only upon the approval of new arrangements, which may or
may not be with INVESCO, regarding the use of the amounts authorized to be paid
<PAGE>
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 the Funds are provided to, and reviewed by, the directors on a
quarterly basis. In the quarterly review, the directors determine whether, and
to what extent, INVESCO will be reimbursed for expenditures which it has made
that are reimbursable under the Funds' Rule 12b-1 Plan. On an annual basis, the
directors consider the continued appropriateness of the Plan and 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 Fund and Its
Management-- Officers and Directors of the Company" who are also officers either
of INVESCO or companies affiliated with INVESCO. The benefits which the Company
believes will be reasonably likely to flow to it and its 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:
(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 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
<PAGE>
a larger asset base), thereby partially offsetting the
costs of the Plan.
HOW SHARES ARE VALUED
As described in the section of each Fund's Prospectus entitled "Fund Price
and Performance," the net asset value of shares of each Fund 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 in which there is a sufficient degree of
trading in the securities held by a Fund that the current net asset value per
share might be materially affected by changes in the value of the securities
held, but only if on such day a 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,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas. The net asset value per share is calculated by
dividing the value of all securities held by a particular Fund plus other assets
(including interest accrued but not collected), less all liabilities (including
accrued expenses, but excluding capital and surplus), by the number of shares
outstanding.
The Funds value municipal securities (including commitments to purchase
such securities on a when-issued basis) on the basis of prices provided by a
pricing service which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities and
various relationships between securities in determining values. The Company's
directors have approved the use of these pricing procedures and will continue to
evaluate their appropriateness as necessary. Under these procedures, the last
quoted sale price is used to value municipal securities where trades have
occurred on the valuation date. In addition, where trades may not have occurred
but where reliable market quotations are readily available for an issue of
municipal securities held by the Funds, such securities are valued at the bid
price on the basis of such quotations. Non tax-exempt securities for which
market quotations are readily available are valued on a consistent basis at
market value based upon such quotations; any securities for which market
quotations are not readily available and other assets will be valued at fair
value as determined in good faith using methods prescribed by the Company's
board of directors (presently, "matrix pricing" as provided by the pricing
service). Prior to utilizing a pricing service, the Company's board of directors
will review 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. Absent unusual
circumstances, short-term debt securities with remaining maturities of 60 days
or less at the time of purchase are valued at amortized cost.
<PAGE>
FUND PERFORMANCE
As discussed in the section of each Fund's Prospectus entitled "Fund Price
and Performance," the Funds advertise their total return performance and yield.
The total return performance for the Tax-Free Intermediate Bond Fund for the
one-year period ended June 30, 1996 and the period December 1, 1993
(commencement of operations of the Fund) to June 30, 1996 (life of the Fund) was
4.89% and 3.25%, respectively. Average annual total return performance for the
Tax-Free Long-Term Bond Fund for the one-, five- and ten-year periods ended June
30, 1996 was 7.01%, 7.35% and 7.98%, respectively. Average annual total return
performance for each of the periods indicated was computed by finding the
average annual compounded rates of return that would equate the initial amount
invested to the ending redeemable value, according to the following formula:
P(1 + T)n = ERV
where: P = initial payment of $1000
T = average annual total return
n = number of years
ERV = ending redeemable value of initial payment
The average annual total return performance figures shown above were
determined by solving the above formula for "T" for each time period indicated.
The 30-day compounded yield at June 30, 1996, for the Tax-Free Long-Term
Bond Fund of 4.52% and the Tax-Free Intermediate Bond Fund of 4.13%, was
determined by computing the yield of each obligation held by the respective
Fund, based on market value of the obligation (including actual accrued
interest) at the close of business on the last business day of each month, or,
with respect to obligations purchased during the month, the purchase price plus
actual accrued interest. The resultant yield 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 held by the Fund (assuming each month has 30 days).
The yield of each security is determined as follows;
1) For obligations issued without original issue discount (OID) and having
a current market premium, yield to maturity (or yield to call if applicable) is
used.
2) For obligations issued without OID and having a current
market discount, coupon rate is used.
3) For obligations issued with OID, trading at a discount to the remaining
portion of OID, yield to maturity, based on the OID calculation at issue date,
is used.
<PAGE>
4) For obligations issued with OID, trading at a premium to the remaining
portion of OID, yield to maturity is used.
Current yield will fluctuate from day to day and is not necessarily
representative of future results. A shareholder should remember that yield is a
function of the kind and quality of the instruments in each Fund's portfolio,
portfolio maturity and operating expenses. A number of factors should be taken
into account before using yield information as a basis for comparison with
alternative investments. An investment in a Fund is not insured and its yield is
not guaranteed.
Any tax equivalent yield quotation of a Fund will be calculated as
follows: If the entire current yield quotation for such period is tax-exempt,
the tax equivalent yield will be the current yield quotation divided by one
minus a stated income tax rate or rates. If a portion of the current yield
quotation is not tax-exempt, the tax equivalent yield will be the sum of (a)
that portion of the yield which is tax-exempt divided by 1 minus a stated income
tax rate or rates and (b) the portion of the yield which is not tax-exempt. The
tax equivalent yield of the Tax-Free Long-Term Bond Fund as of June 30, 1996,
was 5.32% at the 15% tax bracket, 6.28% at the 28% tax bracket, and 6.75% at the
33% tax bracket. The tax equivalent yield of the Tax-Free Intermediate Bond Fund
as of June 30, 1996 was 4.86% at the 15% tax bracket, 5.74% at the 28% tax
bracket, and 6.16% at the 33% tax bracket.
In conjunction with performance reports, comparative data between each
Fund's performance for a given period and other types of investment vehicles,
including certificates of deposit, may be provided to prospective investors and
shareholders.
In conjunction with performance reports and/or analyses of shareholder
service 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 Tax-Free Long-
<PAGE>
Term Bond Fund and the Tax-Free Intermediate Bond Fund in performance reports
will be drawn from the General Municipal Bond Funds and Intermediate Municipal
Debt Funds mutual fund groupings, respectively, 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
SERVICES PROVIDED BY THE FUNDS
Periodic Withdrawal Plan. As described in the section of each Fund's
Prospectus entitled "How to Sell Shares," each Fund offers a Periodic Withdrawal
Plan. All dividends and distributions on shares owned by shareholders
participating in this Plan are reinvested in additional shares. Since withdrawal
payments represent the proceeds from sales of shares, the amount of
shareholders' investments in a particular 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
<PAGE>
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.
A 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 Privilege. As discussed in the section of each Fund's Prospectus
entitled "How to Buy Shares - Exchange Privilege," the Funds offer shareholders
the privilege of exchanging shares of the Funds for shares of another fund or
for shares of certain other no-load mutual funds advised by INVESCO. Exchange
requests may be made by telephone or by written request to INVESCO Funds Group,
Inc. 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 an exchange is recognized for federal income tax purposes. This privilege is
not an option or right to purchase securities, but is a revocable privilege
permitted under the present policies of each of the funds and is not available
in any state or other jurisdiction where the shares of the mutual fund into
which transfer is to be made are not qualified for sale, or when the net asset
value of the shares presented for exchange is less than the minimum dollar
purchase required by the appropriate prospectus.
HOW TO REDEEM SHARES
Normally, payment for shares redeemed will be mailed within seven days
following receipt of the required documents as described in the section of each
Fund's Prospectus entitled "How to Sell Shares." The right of redemption may be
suspended and payment postponed when: (a) the New York Stock Exchange is closed
for other than customary weekends and holidays; (b) trading on that exchange is
restricted; (c) an emergency exists as a result of which disposal by the Funds
of securities owned by it is not reasonably practicable, or it is not reasonably
practicable for a Fund fairly to determine the value of its net assets; or (d)
the Securities and Exchange Commission by order so permits.
It is possible that in the future conditions may exist which would, in the
opinion of the Company's investment adviser, make it undesirable for a Fund to
<PAGE>
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
Funds. However, the Company has obligated itself under the Investment Company
Act of 1940 to redeem for cash all shares of a Fund presented for redemption by
any one shareholder having a value up to $250,000 (or 1% of the 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 a Fund and its shareholders, and are valued at the value
assigned to them in computing each 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, CAPITAL GAIN DISTRIBUTIONS, AND TAXES
Each Fund intends to continue to conduct its business and satisfy the
applicable diversification of assets and source of income and distribution
requirements to qualify as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended. Each Fund so qualified in the
fiscal year ended June 30, 1996, and each Fund intends to continue to qualify
during its current fiscal year. As a result, it is anticipated that each Fund
will pay no federal income or excise taxes and will be accorded conduit or "pass
through" treatment for federal income tax purposes.
As discussed in the section of each Fund's Prospectus entitled "Taxes,
Capital Gain Distributions and Dividends," the Funds also intend to qualify to
pay "exempt-interest dividends" to its shareholders. The Funds will so qualify
if at least 50% of their total assets are invested in municipal securities at
the close of each quarter of the Company's fiscal year. The exempt interest
portion of the income dividend which is payable monthly may be based on the
ratio of each Fund's tax-exempt income to taxable income for the entire fiscal
year. In such case, the ratio would be determined and reported to shareholders
after the close of each fiscal year of the Funds. Thus, the tax-exempt portion
of any particular dividend may be based upon the tax-exempt portion of all
distributions for the year, rather than upon the tax-exempt portion of that
particular dividend. Exemption of exempt-interest dividends for federal income
tax purposes does not necessarily result in exemption under the income or other
tax laws of any state or local taxing authority. Although these dividends
generally will be subject to such state and local taxes, the laws of the several
states and local taxing authorities vary with respect to the taxation of such
exempt-interest dividends, other dividends and distributions of capital gains.
In addition, interest on indebtedness incurred or continued by a shareholder to
purchase or carry shares of the Funds is not deductible for federal income tax
purposes. Shareholders of the Funds are advised to consult their own tax
advisers with respect to these matters.
As discussed in each Fund's Prospectus, certain corporations which are
subject to the alternative minimum tax may have to include exempt-interest
dividends in calculating their alternative taxable income in situations where
the "adjusted current earnings" of the corporation exceeds its alternative
minimum taxable income. In addition, to the extent that the Funds invest in
certain "private activity bonds" issued after August 7, 1986, a portion of
exempt-interest dividends attributable to such bonds would be an item of tax
preference to shareholders.
<PAGE>
Any loss realized on the sale or exchange of shares in the Funds that have
been held by the shareholder for six months or less (unless Treasury regulations
are issued which provide for a shorter period) is not deductible to the extent
of the amount of any exempt-interest dividend paid with respect to such shares.
If the Fund's shares are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received on those 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 Company
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 method
previously used, unless the shareholder applies to the IRS for permission to
change methods.
Shareholders should consult their own tax advisers regarding specific
questions as to federal, state and local taxes. Qualification as a regulated
investment company under the Internal Revenue Code of 1986, as amended for
income tax purposes does not entail government supervision of management or
investment policies.
INVESTMENT PRACTICES
Portfolio Turnover. There are no fixed limitations regarding the Funds'
portfolio turnover. Since the Tax-Free Long-Term Bond Fund started business, the
rate of portfolio turnover has fluctuated under constantly changing economic
conditions and market circumstances. During the fiscal years ended June 30,
1996, 1995, and 1994, the Tax-Free Long-Term Bond Fund's portfolio turnover
rates were 146%, 99%, and 28%, respectively. For the fiscal years ended June 30,
1996 and 1995 and period ended June 30, 1994, the Tax-Free Intermediate Bond
Fund's portfolio turnover rates were 49%, 23% and 55%, respectively. The higher
portfolio turnover rate for the Tax-Free Long-Term Bond Fund during the fiscal
year ended June 30, 1995, was primarily the result of a restructuring of the
Fund's portfolio to extend duration, increase call protection and increase
overall credit quality. Securities initially satisfying the basic policies and
objectives of a Fund may be disposed of when they are no longer suitable. In
computing the portfolio turnover rate, all investments with maturities or
expiration dates at the time of acquisition of one year or less, were excluded.
Subject to this exclusion, the turnover rate is calculated by dividing (A) the
lesser of purchases or sales of portfolio securities for the fiscal year by (B)
the monthly average of the value of portfolio securities owned by each Fund
during the fiscal year. Prior to 1985, all investments in U.S. government
securities were excluded in computing the portfolio turnover rate.
<PAGE>
Placement of Portfolio Brokerage. Either INVESCO, as the Company's
investment adviser, or INVESCO Trust, as the Company's sub-adviser, places
orders for the purchase and sale of securities with brokers and dealers based
upon INVESCO's or INVESCO Trust's evaluation of their financial responsibility
subject to their ability to effect transactions at the best available prices.
INVESCO or INVESCO Trust evaluates the overall reasonableness of any brokerage
commissions paid by reviewing the quality of executions obtained on the Funds'
portfolio transactions, viewed in terms of the size of transactions, prevailing
market conditions in the security purchased or sold, and general economic and
market conditions. In seeking to ensure that the commissions charged each Fund
are consistent with prevailing and reasonable commissions, INVESCO or INVESCO
Trust also endeavors to monitor brokerage industry practices with regard to the
commissions charged by brokers and dealers on transactions effected for other
comparable institutional investors. While INVESCO or INVESCO Trust seeks
reasonably competitive rates, a Fund does not necessarily pay the lowest
commission or spread available.
Portfolio securities are usually purchased from an underwriter at prices
which include underwriting fees paid by the issuer or from a primary market
maker acting as principal for the securities on a net basis, with no brokerage
commission being paid by the Funds. On occasion, securities may be purchased
directly from the issuer. Other purchases and all sales are placed with those
dealers from whom the investment manager believes best execution will be
obtained, which may be acting as either agents or principals. Usually no
brokerage commissions are paid by the Funds for such transactions. Transactions
placed through dealers serving as primary market makers normally are executed at
a price based on the bid and asked prices.
Consistent with the standard of seeking to obtain the best execution on
portfolio transactions, INVESCO or INVESCO Trust may select brokers that provide
research services to effect such transactions. Research services consist of
statistical and analytical reports relating to issuers, industries, securities
and economic factors and trends, which may be of assistance or value to INVESCO
or INVESCO Trust in making informed investment decisions. Research services
prepared and furnished by brokers through which the Fund effects securities
transactions may be used by INVESCO or INVESCO Trust in servicing all of its
accounts and not all such services may be used by INVESCO or INVESCO Trust in
connection with the Funds.
In recognition of the value of the above-described brokerage and research
services provided by certain brokers, INVESCO or INVESCO Trust, consistent with
the standard of seeking to obtain the best execution on portfolio transactions,
may place orders with such brokers for the execution of Fund transactions on
which the commissions are in excess of those which other brokers might have
charged for effecting the same transactions.
<PAGE>
Portfolio transactions may be effected through qualified broker-dealers
who recommend the Funds to their clients, or who act as agent in the purchase of
a 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 a Fund's shares by a broker or dealer
in selecting among qualified broker/dealers.
Certain financial institutions (including brokers who may sell shares of
the Fund, 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 Fund have authorized the Fund to apply dollars generated from
the Fund'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
Fund's directors have authorized the Fund 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 Fund. 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
Fund have authorized the Fund 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 the Fund's Services
Fee, if any, that exceeds the sum of the sub- transfer agency or recordkeeping
fee and Rule 12b-1 fee. The Fund's directors have further authorized INVESCO to
place a portion of the 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 Fund 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 Fund, 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 and the NTF Program Sponsor. Thus,
the Fund pays 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 the Fund's credits. In the event that the transfer agency fee paid by
the Fund to INVESCO with respect to investors who have beneficial interests in a
<PAGE>
particular NTF Program Sponsor's omnibus accounts in the 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 the Fund. The amount of excess transfer
agency fees carried forward will be reviewed for possible adjustment by INVESCO
prior to each fiscal year-end of the Fund. The Fund's board of directors has
also authorized the Fund to pay to INVESCO the full Rule 12b-1 fees contemplated
by the Plan in reimbursement of expenses incurred by INVESCO in engaging in the
activities and providing the services on behalf of the Fund 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 reimburse INVESCO for payments to such
NTF Program Sponsor absent such credits.
The aggregate dollar amount of brokerage commissions paid by the Tax-Free
Intermediate Bond Fund for the years ended June 30, 1996 and 1995 and the period
ended June 30, 1994 was $7,538, $4,147 and $6,541, respectively, and for the
fiscal years ended June 30, 1996, 1995, and 1994 were $884,965, $393,584, and
$258,985, respectively, for Tax-Free Long-Term Bond Fund. The higher level of
brokerage commissions paid by the Tax-Free Long-Term Bond Fund for the year
ended June 30, 1996 was primarily due to the Fund's higher level of portfolio
turnover in that year. For the period ended June 30, 1996, no commissions were
paid to brokers in connection with their provision of research services to
either Fund.
Neither INVESCO nor INVESCO Trust receive any brokerage commissions on
portfolio transactions effected on behalf of the Funds, and there is no
affiliation between INVESCO, INVESCO Trust, or any person affiliated with
INVESCO, INVESCO Trust, or the Funds, and any broker or dealer that executes
transactions for the Funds.
ADDITIONAL INFORMATION
Common Stock. The Company has 500 million authorized shares of common
stock with a par value of $0.01 per share. Of the Company's authorized shares,
100 million shares have been allocated to the Tax-Free Long-Term Bond Fund and
100 million shares have been allocated to Tax-Free Intermediate Bond Fund. As of
June 30, 1996, 16,507,045 shares of the Tax-Free Long-Term Bond Fund and 512,816
shares of the Tax-Free Intermediate Bond Fund were outstanding. All shares
issued and outstanding are, and all shares offered hereby, when issued, will be,
fully paid and nonassessable. The board of directors has the authority to
designate additional classes of common stock without seeking the approval of
shareholders and may classify and reclassify any authorized but unissued shares.
Shares of each class represent the interests of the shareholders of such
class in a particular portfolio of investments of the Company. Each class of the
<PAGE>
Company's shares is preferred over all other classes with respect to the
assets specifically allocated to that class, and all income, earnings, profits
and proceeds from such assets, subject only to the rights of creditors, are
allocated to shares of that class. The assets of each class are segregated on
the books of account and are charged with the liabilities of that class and with
a share of the Company's general liabilities. The board of directors determines
those assets and liabilities deemed to be general assets or liabilities of the
Company, and those items are allocated among classes in a manner deemed by the
board to be fair and equitable. Generally, such allocation will be made based
upon the relative total net assets of each class. In the unlikely event that a
liability allocable to one class exceeds the assets belonging to the class, all
or a portion of such liability may have to be borne by the holders of shares of
the Company's other classes.
All dividends on shares of a particular class shall be paid only out of
the income belonging to that class, pro rata to the holders of that class. In
the event of the liquidation or dissolution of the Company or of a particular
class, the shareholders of each class that is being liquidated shall be entitled
to receive, as a class, when and as declared by the board of directors, the
excess of the assets belonging to that class over the liabilities belonging to
that class. The holders of shares of any class shall not be entitled to any
distribution upon liquidation of any other class. The assets so distributable to
the shareholders of any particular class shall be distributed among such
shareholders in proportion to the number of shares of that class held by them
and recorded on the books of the Company.
All Fund shares, regardless of class, have equal voting rights. Voting
with respect to certain matters, such as ratification of independent accountants
or election of directors, will be by all classes of the Company. When not all
classes are affected by a matter to be voted upon, such as approval of an
investment advisory contract or changes in a Fund's investment policies, only
shareholders of the class affected by the matter will be entitled to vote.
Company shares have noncumulative voting rights, which means that the holders of
a majority of the shares voting for the election of directors of the Company can
elect 100% of the directors if they choose to do so. In such event, the holders
of the remaining shares voting for the election of directors will not be able to
elect any person or persons to the board of directors. After they have been
elected by shareholders, the directors will continue to serve until their
successors are elected and have qualified or they are removed from office, in
either case by a shareholder vote, or until death, resignation or retirement.
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
<PAGE>
shareholder vote as may be required by the 1940 Act or the Company's Articles of
Incorporation, or at their discretion.
Principal Shareholders. As of October 1, 1996, the following
entities held more than 5% of the outstanding securities of the
Funds listed below.
Name and Address of
Beneficial Owner Number of Shares Percent of Class
- ------------------- ---------------- ----------------
INVESCO Tax-Free
Intermediate Bond Fund
- ------------------------
Charles Schwab & Co., Inc. 61,963.841 12.554%
Special Custody Account Record
for The Exclusive Benefit
of Customers
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
Alice T. Campbell 60,238.780 12.205%
3355 Stonecrest Ct. Record and Beneficial
Atlanta, GA 30341
John Canaday 34,455.088 6.981%
745 Pine St. Record and Beneficial
Boulder, CO 80302
INVESCO Tax-Free
Long-Term Bond Fund
- ---------------------
-0- -0- -0-
Independent Accountants. Price Waterhouse, LLP, 950
Seventeenth Street, Denver, Colorado, has been selected as the
independent accountants of the Company. The independent
accountants are responsible for auditing the financial statements
of the Company.
Custodian. State Street Bank and Trust Company, P.O. Box 351, Boston,
Massachusetts, has been designated as custodian of the cash and investment
securities of the Company. The bank is also responsible for, among other things,
receipt and delivery of the Company's investment securities in accordance with
procedures and conditions specified in the custody agreement.
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, pursuant to the Transfer Agency Agreement described
<PAGE>
herein. Such services include the issuance, cancellation and transfer of
shares of the Fund and the maintenance of records regarding the ownership of
such shares.
Reports to Shareholders. The Company's fiscal year ends on June 30. 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,
Washington, D.C., is legal counsel for the Company. The firm of
Moye, Giles, O'Keefe, Vermeire & Gorrell, Denver, Colorado, serves
as special counsel to the Company.
Financial Statements. The Funds' audited financial statements and the
notes thereto for the fiscal year ended June 30, 1996, and the report of Price
Waterhouse LLP with respect to such financial statements, are incorporated
herein by reference from the Funds' Annual Report to Shareholders for the fiscal
year ended June 30, 1996.
Prospectus. The Company will furnish, without charge, a copy of the
applicable Prospectus for each of its Funds upon request. There is a separate
Prospectus available for each Fund. Such requests should be made to the Company
at the mailing address or telephone number set forth on the first page of this
Statement of Additional Information.
Registration Statement. This Statement of Additional
Information and the Prospectus do not contain all of the
information set forth in the Registration Statement the Company has
filed with the SEC. The complete Registration Statement may be
obtained from the SEC upon payment of the fee prescribed by the
rules and regulations of, the SEC.
<PAGE>
APPENDIX A
Description of Moody's Investors Service, Inc.'s municipal bond
ratings:
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and have
speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements: their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments of, or maintenance of
other terms of, the contract over any long period of time may be small.
Caa--Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Rating Refinements: Moody's may apply the numerical modifier "1",
for municipally-backed bonds, and modifiers "1", "2" and "3", for
<PAGE>
corporate-backed municipals. The modifier 1 indicates that the security ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and modifier 3 indicates that the issue ranks in the lower
end of its generic rating category.
Description of Standard & Poor's municipal bond ratings:
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in a small degree.
A--Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB,B--Bonds rated BB or B are regarded, on balance, as predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and B a higher degree of speculation. While such bonds will likely
have some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CCC--Bonds rated CCC have a currently identifiable vulnerability to default and
are dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, they are not likely to have
the capacity to pay interest and repay principal.
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Description of Fitch Investors Service, Inc. corporate and
municipal bond ratings:
AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA--Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category.
Description of Duff & Phelps Inc. long-term corporate and municipal
debt ratings:
AAA--Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA- --High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
BBB+, BBB, BBB- --Below average protection factors but still
considered sufficient for prudent investment. Considerable
variability in risk during economic cycles.
Plus (+) or Minus (-): The ratings may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
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Description of Moody's Investors Service, Inc.'s ratings of state and municipal
notes:
Moody's ratings for state and municipal and other short-term obligations will be
designated Moody's Investment Grade ("MIG"). This distinction is in recognition
of the differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower are uppermost in importance in
short-term borrowing, while various factors of the first importance in long-term
borrowing risk are of lesser importance in the short run.
Symbols will be used as follows:
MIG-1--Notes bearing this designation are of the best quality enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both.
MIG-2--Notes bearing this designation are of high quality, with margins of
protection ample although not so large as in the preceding group.
Description of Standard & Poor's ratings for investment grade municipal notes
and short-term demand obligations:
SP-1: Issues carrying this designation have a very strong or strong capacity to
pay principal and interest. Issues determined to possess overwhelming safety
characteristics will be given a "plus" designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
Description of Moody's Investors Service, Inc.'s tax-exempt and taxable
commercial paper ratings:
Moody's Commercial Paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's makes no representation that such obligations are exempt
from registration under the Securities Act of 1933, nor does it represent that
any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. The following designations, all judged to be
investment grade, indicate the relative repayment capacity of rated issuers of
securities in which the Fund may invest:
Prime-1: Issuers rated Prime-1 have a superior capacity for repayment for
short-term promissory obligations.
Prime-2: Issuers rated Prime-2 have a strong capacity for repayment of
short-term promissory obligations.
Description of Standard & Poor's ratings for demand obligations and taxable and
tax-exempt commercial paper:
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S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. The two rating
categories for securities in which the Fund may invest are as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
either overwhelming or very strong. Issues determined to possess overwhelming
safety characteristics will be given a "plus" designation.
A-2: Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
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APPENDIX B
DESCRIPTION OF FUTURES CONTRACTS AND OPTIONS
Options on Securities
An option on a security provides the purchaser, or "holder," with the
right, but not the obligation, to purchase, in the case of a "call" option, or
sell, in the case of a "put" option, the security or securities underlying the
option, for a fixed exercise price up to a stated expiration date. The holder
pays a non-refundable purchase price for the option, known as the "premium." The
maximum amount of risk the purchaser of the option assumes is equal to the
premium plus related transaction costs, although the entire amount may be lost.
The risk of the seller, or "writer," however, is potentially unlimited, unless
the option is "covered," which is generally accomplished through the writer's
ownership of the underlying security, in the case of a call option, or the
writer's segregation of an amount of cash or securities equal to the exercise
price, in the case of a put option. If the writer's obligation is not so
covered, it is subject to the risk of the full change in value of the underlying
security from the time the option is written until exercise.
Upon exercise of the option, the holder is required to pay the purchase
price of the underlying security, in the case of a call option, or to deliver
the security in return for the purchase price, in the case of a put option.
Conversely, the writer is required to deliver the security, in the case of a
call option, or to purchase the security, in the case of a put option. Options
on securities which have been purchased or written may be closed out prior to
exercise or expiration by entering into an offsetting transaction on the
exchange on which the initial position was established, subject to the
availability of a liquid secondary market.
Options on securities are traded on national securities exchanges, such as
the Chicago Board of Options Exchange and the New York Stock Exchange, which are
regulated by the Securities and Exchange Commission. The Options Clearing
Corporation guarantees the performance of each party to an exchange-traded
option, by in effect taking the opposite side of each such option. A holder or
writer may engage in transactions in exchange-traded options on securities and
options on indices of securities only through a registered broker/dealer which
is a member of the exchange on which the option is traded.
An option position in an exchange-traded option may be closed out only on
an exchange which provides a secondary market for an option of the same series.
Although the Fund will generally purchase or write only those options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange will exist for any particular option at
any particular time. In such event it might not be possible to effect closing
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transactions in a particular option with the result that this Fund would
have to exercise the option in order to realize any profit. This would result in
this Fund incurring brokerage commissions upon the disposition of underlying
securities acquired through the exercise of a call option or upon the purchase
of underlying securities upon the exercise of a put option. If these Funds as
covered call option writers are unable to effect a closing purchase transaction
in a secondary market, unless the Funds are required to deliver the securities
pursuant to the assignment of an exercise notice, they will not be able to sell
the underlying security until the option expires.
Reasons for the potential absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient trading interest
in certain options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities: (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the facilities
of an exchange or a clearing corporation may not at all times be adequate to
handle current trading volume or (vi) one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of options (or particular class or series of options) in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on that exchange which had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at a particular time, render certain of the facilities of any of the
clearing corporations inadequate and thereby result in the institution by an
exchange of special procedures which may interfere with the timely execution of
customers' orders. However, the Options Clearing Corporation, based on forecasts
provided by the U.S. exchanges, believes that its facilities are adequate to
handle the volume of reasonably anticipated options transactions, and such
exchanges have advised such clearing corporation that they believe their
facilities will also be adequate to handle reasonably anticipated volume.
In addition, options on securities may be traded over-the-counter through
financial institutions dealing in such options as well as the underlying
instruments. OTC options are purchased from or sold (written) to dealers or
financial institutions which have entered into direct agreements with the Fund.
With OTC options, such variables as expiration date, exercise price and premium
will be agreed upon between the Fund and the transacting dealer, without the
intermediation of a third party such as the OCC. If the transacting dealer fails
to make or take delivery of the securities underlying an option it has written,
in accordance with the terms of that option as written, the Fund would lose the
premium paid for the option as well as any anticipated benefit of the
transaction.
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The Fund will engage in OTC option transactions only with primary U.S.
Government securities dealers recognized by the Federal Reserve Bank of New
York.
Futures Contracts
A Futures Contract is a bilateral agreement providing for the purchase and
sale of a specified type and amount of a financial instrument or foreign
currency, or for the making and acceptance of a cash settlement, at a stated
time in the future, for a fixed price. By its terms, a Futures Contract provides
for a specified settlement date on which, in the case of the majority of
interest rate and foreign currency futures contracts, the fixed income
securities or currency underlying the contract are delivered by the seller and
paid for by the purchaser, or on which, in the case of stock index futures
contracts and certain interest rate and foreign currency futures contracts, the
difference between the price at which the contract was entered into and the
contract's closing value is settled between the purchaser and seller in cash.
Futures Contracts differ from options in that they are bilateral agreements,
with both the purchaser and the seller equally obligated to complete the
transaction. In addition, Futures Contracts call for settlement only on the
expiration date, and cannot be "exercised" at any other time during their term.
The purchase or sale of a Futures Contract also differs from the purchase
or sale of a security or the purchase of an option in that no purchase price is
paid or received. Instead, an amount of cash or cash equivalent, which varies
but may be as low as 5% or less of the value of the contract, must be deposited
with the broker as "initial margin." Subsequent payments to and from the broker,
referred to as "variation margin," are made on a daily basis as the value of the
index or instrument underlying the Futures Contract fluctuates, making positions
in the Futures Contract more or less valuable, a process known as "marking to
market."
A Futures Contract may be purchased or sold only on an exchange, known as
a "contract market," designated by the Commodity Futures Trading Commission for
the trading of such contract, and only through a registered futures commission
merchant which is a member of such contract market. A commission must be paid on
each completed purchase and sale transaction. The contract market clearing house
guarantees the performance of each party to a Futures Contract, by in effect
taking the opposite side of such Contract. At any time prior to the expiration
of a Futures Contract, a trader may elect to close out its position by taking an
opposite position on the contract market on which the position was entered into,
subject to the availability of a secondary market, which will operate to
terminate the initial position. At that time, a final determination of variation
margin is made and any loss experienced by the trader is required to be paid to
the contract market clearing house while any profit due to the trader must be
delivered to it.
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Interest rate futures contracts currently are traded on a variety of fixed
income securities, including long-term U.S. Treasury Bonds, Treasury Notes,
Government National Mortgage Association modified pass-through mortgage-backed
securities, U.S. Treasury Bills, bank certificates of deposit and commercial
paper. In addition, interest rate futures contracts include contracts on indices
of municipal securities. Foreign currency futures contracts currently are traded
on the British pound, Canadian dollar, Japanese yen, Swiss franc, West German
mark and on Eurodollar deposits.
Options on Futures Contracts
An Option on a Futures Contract provides the holder with the right to
enter into a "long" position in the underlying Futures Contract, in the case of
a call option, or a "short" position in the underlying Futures Contract, in the
case of a put option, at a fixed exercise price to a stated expiration date.
Upon exercise of the option by the holder, the contract market clearing house
establishes a corresponding short position for the writer of the option, in the
case of a call option, or a corresponding long position, in the case of a put
option. In the event that an option is exercised, the parties will be subject to
all the risks associated with the trading of Futures Contracts, such as payment
of variation margin deposits. In addition, the writer of an Option on a Futures
contract, unlike the holder, is subject to initial and variation margin
requirements on the option position.
A position in an Option on a Futures Contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's profit
or loss on the transaction.
An option, whether based on a Futures Contract, a stock index or a
security, becomes worthless to the holder when it expires. Upon exercise of an
option, the exchange or contract market clearing house assigns exercise notices
on a random basis to those of its members which have written options of the same
series and with the same expiration date. A brokerage firm receiving such
notices then assigns them on a random basis to those of its customers which have
written options of the same series and expiration date. A writer therefore has
no control over whether an option will be exercised against it, nor over the
time of such exercise.
