PROSPECTUS
November 1, 1997
INVESCO TAX-FREE INCOME FUNDS, INC.
INVESCO Tax-Free Intermediate Bond Fund
INVESCO Tax-Free Long-Term Bond Fund
The two INVESCO Tax-Free Income Funds (the "Funds") described in this
Prospectus are actively managed to seek as high a level of current income exempt
from federal income taxes as is consistent with the preservation of capital. The
INVESCO Tax-Free Intermediate Bond Fund (the "Intermediate Bond Fund") invests
in a diversified portfolio of intermediate-term obligations, the interest on
which is exempt from federal income taxes. The INVESCO Tax-Free Long-Term Bond
Fund (the "Long-Term Bond Fund") invests 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 Intermediate Bond Fund's portfolio normally
will range from five to 10 years. The dollar weighted average maturity of the
obligations in the Long-Term Bond Fund's portfolio normally will be at least 10
years.
This Prospectus provides you with the basic information you should know
before investing in either of the Funds. You should read it and keep it for
future reference. A Statement of Additional Information containing further
information about the Funds, dated November 1, 1997, has been filed with the
Securities and Exchange Commission, and is incorporated by reference into this
Prospectus. To obtain a free copy, write to INVESCO ^ Distributors, Inc., P.O.
Box 173706, Denver, Colorado 80217-3706; or call 1-800-525-8085; or ^ visit our
web site at: http://www.invesco.com.
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>
TABLE OF CONTENTS
ESSENTIAL INFORMATION........................................................2
ANNUAL FUND EXPENSES.........................................................3
FINANCIAL HIGHLIGHTS.........................................................4
INVESTMENT OBJECTIVE AND STRATEGY............................................6
INVESTMENT POLICIES AND RISKS................................................7
THE FUNDS AND THEIR MANAGEMENT...............................................10
FUND PRICE AND PERFORMANCE...................................................12
HOW TO BUY SHARES............................................................12
FUND SERVICES................................................................15
HOW TO SELL SHARES...........................................................15
TAXES, DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS..............................17
ADDITIONAL INFORMATION.......................................................18
<PAGE>
ESSENTIAL INFORMATION
Investment Goal And Strategy^: INVESCO Tax-Free Income Funds 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 and long-term obligations for the Intermediate Bond Fund and
Long-Term Bond Fund, respectively. The Funds invest primarily in municipal
obligations. The dollar-weighted average maturity for the Funds' portfolios
normally will range from ^ five to ten years for the Intermediate Bond Fund and
ten years or longer for the Long-Term Bond Fund. There is no guarantee that the
Funds will meet their investment objectives. See "Investment Objective And
Strategy."
Designed For: Investors primarily seeking current income free from federal
income taxes. While not a complete investment program, the Funds may be a
valuable element of your investment portfolio. The Funds are not a suitable
investment for tax-sheltered retirement programs such as the IRA, SEP-IRA,
SIMPLE IRA, 401(k), Profit Sharing, Money Purchase Pension, or 403(b) plans.
Time Horizon^: The Funds are managed for daily income, paid monthly.
Investors should not consider these Funds for the portion of their savings
devoted to capital growth.
Risks^: The Funds use a moderate investment strategy, but their 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^: Each Fund is a series of INVESCO Tax-Free
Income Funds, Inc. (the "Company"), a diversified, managed, no-load mutual fund.
Each Fund is owned by its shareholders. ^ It employs INVESCO Funds Group, Inc.
("IFG"), founded in 1932, to serve as investment adviser, administrator and
transfer agent. INVESCO Trust Company ("INVESCO Trust"), founded in 1969, serves
as sub-adviser. Together, IFG and INVESCO Trust constitute "Fund Management."
Prior to September ^ 30, 1997, ^ IFG served as the Funds' distributor. Effective
September ^ 30, 1997 INVESCO Distributors, Inc. ("IDI"), founded in 1997 as a
wholly-owned subsidiary of IFG, became the Funds' distributor.
The Funds' investments are selected by INVESCO Vice President James S.
Grabovac. A Chartered Financial Analyst, Mr. Grabovac earned his ^ M.B.A. from
the University of Michigan and a ^ B.A. from Lawrence University. See "The Funds
And Their Management."
IFG, INVESCO Trust and IDI are subsidiaries of AMVESCAP PLC, an
international investment management company that manages approximately ^ $177.5
billion in assets. AMVESCAP PLC is based in London with money managers located
in Europe, North America, and the Far East.
<PAGE>
This Fund Offers all of the following services at no charge:
Telephone purchases Regular investment plans, such as
Telephone exchanges EasiVest (the Fund's automatic
Telephone redemptions monthly investment program),
Automatic reinvestment Direct Payroll Purchase, and
of distributions Automatic Monthly Exchange
Periodic withdrawal plans
See "How To Buy Shares" and "How To Sell Shares."
Minimum Initial Investment: $1,000 per Fund, which is waived for regular
investment plans, including EasiVest and Direct Payroll Purchase.
Minimum Subsequent Investment: $50 per Fund
ANNUAL FUND EXPENSES
The Funds are no-load; there are no fees to purchase, exchange or redeem
shares. Each Fund, however, is authorized to pay a Rule 12b-1 distribution fee
of one quarter of one percent of ^ each Fund's average net assets each year.
(See "How To Buy Shares --Distribution Expenses.").
Like any company, each Fund has operating expenses -- such as portfolio
management^ accounting, shareholder servicing, maintenance of shareholder
accounts, and other expenses. These expenses are paid from each Fund's assets.
Lower expenses therefore benefit investors by increasing a Fund's total return.
We calculate annual operating expenses as a percentage of each Fund's
average annual net assets. To keep expenses competitive, ^ IFG and INVESCO Trust
voluntarily reimburse the Intermediate Bond Fund for amounts in excess of 0.90%
of average net assets and ^ INVESCO Trust voluntarily reimburses the Long-Term
Bond Fund for amounts in excess of 0.90% of average net assets.
<PAGE>
Annual Fund Operating Expenses (as a percentage of average net assets)
Intermediate Long-Term
Bond Fund Bond Fund
------------ ---------
Management Fee 0.50% 0.55%
12b-1 Fees 0.25% 0.25%
Other Expenses (after
absorbed expenses)1,2 0.09% 0.10%
Total Fund Operating Expenses
(after absorbed expenses)1,2 0.84% 0.90%
(1) It should be noted that each Fund's actual total operating expenses were
lower than the figures shown because each Fund's custodian fees were reduced
under an expense offset arrangement. However, as a result of an SEC 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 reductions for expense offset arrangements for periods prior to the
fiscal year ended June 30, 1997. See "The Funds and Their Management."
(2) Certain expenses of the Intermediate Bond Fund are being absorbed
voluntarily by IFG and INVESCO Trust and of the Long-Term Bond Fund by IFG. In
the absence of such absorbed expense, the Intermediate Bond Fund's "Other
Expenses" and "Total Fund Operating Expenses" would have been 1.68% and 2.43%,
respectively, and the Long-Term Bond Fund's "Other Expenses" and "Total Fund
Operating Expenses" would have been 0.25% and 1.05%, respectively, based on each
Fund's actual expenses for the fiscal year ended June 30, 1997.
Example:^ A shareholder would pay the following expenses on a $1,000
investment for the periods shown, assuming a hypothetical 5% annual return and
redemption at the end of each time period. (Of course, actual operating expenses
are paid from each Fund's assets and are deducted from the amount of income
available for distribution to shareholders; they are not charged directly to
shareholder accounts.)
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Intermediate Bond Fund $9 $27 $47 $104
Long-Term Bond Fund $9 $29 $50 $111
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.
<PAGE>
For more information on each Fund's expenses, see "The Funds And Their
Management" and "How To Buy Shares -- Distribution Expenses."
Because each Fund pays a distribution fee, investors who own shares of the
Funds for a long period of time may pay more than the economic equivalent of the
maximum front-end sales charge permitted for mutual funds by the National
Association of Securities Dealers, Inc.
<PAGE>
FINANCIAL HIGHLIGHTS
(For a Fund Share Outstanding Throughout Each Period)
The following information has been audited by Price Waterhouse LLP,
independent accountants. This information should be read in conjunction with the
audited financial statements and the independent accountant's report thereon
appearing in the Company's 1997 Annual Report to Shareholders, which is
incorporated by reference into the Statement of Additional Information. Both are
available without charge by contacting ^ IDI at the address or telephone number
on the cover of this Prospectus.
<TABLE>
<CAPTION>
Period
Ended
Year Ended June 30 June 30
-------------------------------------------- -----------
1997 1996 1995 1994^
Tax-Free Intermediate Bond Fund
<S> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value - Beginning of Period $9.74 $9.70 $9.52 $10.00
-------------------------------------------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income 0.41 0.43 0.44 0.19
Net Gains or (Losses) on Securities
(Both Realized and Unrealized) 0.16 0.04 0.18 (0.48)
-------------------------------------------- -----------
Total from Investment Operations 0.57 0.47 0.62 (0.29)
-------------------------------------------- -----------
LESS DISTRIBUTIONS
Dividends from Net Investment Income 0.41 0.43 0.44 0.19
-------------------------------------------- -----------
Net Asset Value - End of Period $9.90 $9.74 $9.70 $9.52
============================================ ===========
TOTAL RETURN 5.96% 4.89% 6.67% (2.93%)*
<PAGE>
RATIOS
Net Assets - End of Period
($000 Omitted) $4,645 $4,997 $4,907 $5,083
Ratio of Expenses to Average Net Assets# 0.84%@ 0.76%@ 0.70% 0.70%~
Ratio of Net Investment Income to
Average Net Assets# 4.18% 4.40% 4.56% 3.75%~
Portfolio Turnover Rate 41% 49% 23% 55%*
^ From December 1, 1993, commencement of investment operations, to June 30,
1994.
* Based on operations for the period shown and, accordingly, are not
representative of a full year.
# Various expenses of the Fund were voluntarily absorbed by IFG and ITC for the
years ended June 30, 1997, 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 2.43%, 2.34%, 2.45% and 3.09%
(annualized), respectively, and ratio of net investment income to average
net assets would have been 2.59%, 2.82%, 2.81% and 1.36% (annualized),
respectively.
@ Ratio is based on Total Expenses of the Fund, less Expenses Absorbed by
Investment Adviser, which is before any expense offset arrangements.
~ Annualized
</TABLE>
<PAGE>
Financial Highlights (Continued)
(For a Fund Share Outstanding Throughout Each Period)
<TABLE>
<CAPTION>
Year Ended June 30
---------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
Tax-Free Long-Term Bond Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE DATA
Net Asset Value -
Beginning of Period $15.20 $15.07 $15.29 $16.35 $15.69 $15.05 $14.90 $15.15 $13.82 $13.86
---------------------------------------------------------------------------------------
INCOME FROM
INVESTMENT OPERATIONS
Net Investment Income 0.66 0.73 0.80 0.83 0.87 0.92 0.96 0.99 1.01 1.00
Net Gains or (Losses)
on Securities (Both
Realized and Unrealized) 0.38 0.32 0.09 (1.00) 1.04 0.95 0.27 (0.25) 1.33 (0.04)
---------------------------------------------------------------------------------------
Total from Investment
Operations 1.04 1.05 0.89 (0.17) 1.91 1.87 1.23 0.74 2.34 0.96
---------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Dividends from Net
Investment Income 0.66 0.73 0.80 0.83 0.87 0.92 0.96 0.99 1.01 1.00
In Excess of Net
Investment Income 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Distributions from
Capital Gains 0.23 0.19 0.31 0.06 0.38 0.31 0.12 0.00 0.00 0.00
---------------------------------------------------------------------------------------
Total Distributions 0.90 0.92 1.11 0.89 1.25 1.23 1.08 0.99 1.01 1.00
---------------------------------------------------------------------------------------
Net Asset Value -
End of Period $15.34 $15.20 $15.07 $15.29 $16.35 $15.69 $15.05 $14.90 $15.15 $13.82
=======================================================================================
<PAGE>
TOTAL RETURN 7.05% 7.01% 6.16% (1.16%) 12.57% 12.79% 8.55% 5.10% 17.64% 7.29%
RATIOS
Net Assets - End of Period
($000 Omitted) $220,410 $250,890 $254,584 $282,407 $332,239 $272,382 $208,100 $179,107 $143,678 $109,132
Ratio of Expenses to
Average Net Assets# 0.90%@ 0.91%@ 0.92% 1.00% 1.03% 1.02% 0.93% 0.75% 0.74% 0.77%
Ratio of Net Investment
Income to Average
Net Assets# 4.36% 4.76% 5.31% 5.14% 5.43% 5.90% 6.39% 6.67% 7.06% 7.33%
Portfolio Turnover Rate 123% 146% 99% 28% 30% 28% 25% 27% 27% 41%
# Various expenses of the Fund were voluntarily absorbed by IFG for the years
ended June 30, 1997, 1996 and 1995. If such expenses had not been
voluntaily absorbed, ratio of expenses to average net assets would have been
1.05%, 1.04% and 1.05%, respectively, and ratio of net investment income
to average net assets would have been 4.21%, 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
Each 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 each
Fund's shareholders. There is no assurance that a Fund's investment objective
will be met.
INVESCO TAX-FREE
INCOME FUNDS FUND STRATEGY
- --------------------------------------------------------------------------------
^ Tax-Free o Intermediate-Term Municipal Bonds
Intermediate which may include any combination
Bond Fund of general obligation, revenue or
industrial development bonds.
o At least 80% of the Fund's total
assets normally will consist of a
combination of municipal bonds
rated investment grade as defined
under "Investment Policies and
Risks" and short-term municipal
notes rated within the two highest
rating categories as described
under "Investment Policies and
Risks."
o Municipal bonds may include any
combination of general ^ obligation,
revenue or industrial development bonds.
o The dollar-weighted average maturity
of the Fund's obligations normally will
range from ^ five to ten years and
will vary as Fund Management responds
to changes in interest rates.
<PAGE>
^ Tax-Free Long- o Long-Term Municipal Bonds which may
Term Bond Fund include any combination of general
obligation, revenue or industrial
development bonds.
o At least 80% of the Fund's assets
normally will consist of a
combination of municipal bonds
rated investment grade as described
under "Investment Policies and
Risks" and short-term municipal
notes rated within the two highest
rating categories as described
under "Investment Policies and
Risks."
o Municipal bonds may include any
combination of general obligation,
revenue or industrial development bonds.
o The dollar-weighted average maturity
of the Fund's portfolio normally
will be at least ten years and will
vary as Fund Management responds to
changes in interest rates.
Under ordinary circumstances, no more than 20% of each Fund's total assets
may consist of bonds subject to the Alternative Minimum Tax ("AMT Bonds"),
short-term or temporary taxable securities (the income from which may be subject
to federal income tax), debt obligations rated below investment grade and cash.
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 Funds
invest in many different issues over a wide geographical range; this
diversification reduces the Funds' 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 payment obligations and repay principal 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 Ratings Group, Inc., a
division of The McGraw-Hill Companies, Inc. ("S&P"), Moody's Investors
<PAGE>
Services, 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, the prices of bonds generally 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 Funds do not invest in obligations
they believe 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 each 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);
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 Intermediate Bond Fund invest in bonds which are rated
below CCC or Caa by S&P or Moody's, respectively. In addition, never, under any
circumstances, does the Long-Term Bond Fund invest in bonds which are rated
below B- or B by S&P and Moody's, respectively. Bonds rated B-, B, 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 each Fund's portfolio for the issuer's ability to
make required principal and interest payments and other quality factors, it may
retain a bond whose rating is changed to one below the minimum rating required
for purchase of the security. For a detailed description of municipal bond
ratings, see the Statement of Additional Information and Appendix A therein.
The Funds may invest in short-term municipal notes rated within the two
highest ratings by S&P or Moody's.
The following chart reflects the percentage of each Fund's total assets
that were invested in municipal bonds (by rating category) for the fiscal year
ended June 30, 1997.
<PAGE>
BELOW
INVESTMENT UN-
INVESCO INVESTMENT GRADE GRADE RATED
TAX-FREE
INCOME -----------------------------------------------------------------
FUNDS
AAA/ AA/ BBB/ BB/
Aaa Aa A Baa Ba B
- --------------------------------------------------------------------------------
INVESCO
Tax-Free
Interme- 41.29% 11.54% 19.55% 10.36% 0.25% 0.25% 2.91%
diate Bond
Fund
INVESCO
Tax-Free
Long-Term 42.34% 12.94% 14.11% 3.00% 2.23% 0.00% 2.13%
Bond Fund
In addition, 10.46% and 21.10%, respectively, of the Intermediate Bond
Fund's and Long-Term Bond Fund's total assets were invested in corporate and
municipal short-term notes rated by at least one rating category in the highest
rating category for such notes.
All of these percentages were determined on a dollar-weighted basis,
calculated by averaging the Funds' month-end portfolio holdings during the
fiscal year. Keep in mind that each Fund's holdings are actively traded, and
bond ratings are occasionally adjusted by ratings services, so these figures do
not represent the Funds' actual holdings or quality ratings as of June 30, 1997.
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.
Temporary/Short-Term Taxable Investments. The Funds may invest in
temporary and/or short-term taxable investments. Short-term taxable 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. Temporary taxable investments, if any, normally will
consist of corporate bonds and other debt obligations. Dividends paid by a Fund
attributable to income from such investments will be taxable to investors. See
"Taxes, Dividends ^ And Capital Gain Distributions."
<PAGE>
When we believe market or economic conditions are adverse, the Funds may
assume a defensive position by temporarily investing up to 100% of ^ their
assets in short-term taxable investments or cash, seeking to protect ^ their
assets until conditions stabilize.
Tender Option Bonds. The Intermediate Bond 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 at par plus
accrued-interest at designated times.
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. Each 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 a Fund. Brokerage fees are paid
to trade futures contracts, and each Fund is required to maintain margin
deposits. The board of directors has adopted a non- fundamental restriction that
the aggregate market value of the futures contracts the Long-Term Bond Fund
holds cannot exceed 30% of the market value of its total assets.
Put and call options on futures contracts or securities may be traded by
each Fund in order to protect against declines in the values of portfolio
securities or against increases in the cost of securities to be acquired. The
purchaser of an option purchases the right to ^ effect a transaction in the
underlying future or security at a specified price (the "strike price") before a
specified date (the "expiration date"). In exchange for the right, the purchaser
pays a "premium" to the seller, which represents the price of the right to buy
or sell the underlying instrument. In exchange for the premium, the seller of
the option becomes obligated to ^ effect a transaction in the underlying future
or security, at the strike price, at any time prior to the expiration date,
should the buyer choose to exercise the option. A call option contract grants
<PAGE>
the purchaser the right to buy the underlying future or security, at the
strike price, before the expiration date. A put option contract grants the
purchaser the right to sell the underlying future or security, at the strike
price, before the expiration date. Purchases of options on futures contracts may
present less dollar risk in hedging a 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 a Fund upon exercise or liquidation of the option, and, unless
the price of the underlying futures contract or security changes sufficiently,
the option may expire without value to the Fund.
Although each 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 a Fund's hedging strategy unsuccessful and could result in losses.
In addition, there can be no assurance that a liquid secondary market will exist
for any contract purchased or sold, and a 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. The Funds may invest in Zero Coupon Securities. Of
the 10% of the Intermediate Bond Fund's total assets that may be invested in
debt obligations rated below investment grade, no more than 5% of the
Intermediate Bond Fund's total assets may be invested in zero coupon bonds
having such ratings. 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. A Fund may be required to
distribute income recognized on these bonds, even though no cash interest
payments are received, which could reduce the amount of cash available for
investment by the Fund.
Delayed Delivery or When-Issued Purchases. Municipal obligations may at
times be purchased or sold by each 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 a 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.
<PAGE>
Securities Lending. Each Fund may seek to earn additional income by
lending securities to qualified brokers, dealers, banks, or other financial
institutions, on a fully collateralized basis. For further information on this
policy, see "Investment Policies and Restrictions" in the Statement of
Additional Information.
Repurchase Agreements. Each Fund may invest money, for as short a time as
overnight, using repurchase agreements ("repos"). With a repo, a Fund buys a
debt instrument, agreeing simultaneously to sell it back to the prior owner at
an agreed-upon price and time. A Fund could incur costs or delays in seeking to
sell the instrument if the prior owner defaults on its repurchase obligation. To
reduce that risk, the securities that are the subject of ^ each repurchase
agreement will be maintained with such Fund's custodian in an amount at least
equal to the repurchase price under the agreement (including accrued interest).
These agreements are entered into only with member banks of the Federal Reserve
System, registered broker-dealers, and registered U.S. government securities
dealers that are deemed creditworthy under standards set by the Company's board
of directors.
Illiquid and Rule 144A Securities. ^ The Tax-Free Intermediate Bond Fund
may invest up to 15% of its total assets in illiquid securities, including
securities that are subject to restrictions on resale and securities that are
not readily marketable. Investments in illiquid securities are subject to the
risk that a Fund may not be able to dispose of a security at the time desired or
at a reasonable price, or may have to bear the expense and delay of registering
the security in order to resell it. The Intermediate Bond Fund also may purchase
certain securities that are not registered for sale to the general public, but
that can be resold to institutional investors ("Rule 144A Securities"), without
regard to the foregoing 15% limitation, if a liquid trading market exists. For
more information concerning illiquid and Rule 144A Securities, see "Investment
Policies and Restrictions" in the Statement of Additional Information.
For a further discussion of risks associated with an investment in the
Funds, 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
each Fund's shareholders. For example, with respect to 75% of its total assets,
each Fund limits to 5% the portion of its total assets that may be invested in a
single issuer. In addition, each 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
<PAGE>
contrary, the investment policies described in this Prospectus are not
considered fundamental and may be changed without a vote of each Fund's
shareholders.
^
THE FUNDS AND THEIR MANAGEMENT
The Company is a no-load mutual fund, registered with the Securities and
Exchange Commission as a diversified, open-end, management investment company.
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 Funds and reviews the services provided by the adviser and
sub-adviser. Under an agreement with the Company, IFG, 7800 E. Union Avenue,
Denver, Colorado 80237, serves as investment adviser for each Fund; it is
primarily responsible for providing the Funds with various administrative
services. IFG's wholly-owned subsidiary, INVESCO Trust, is the Funds'
sub-adviser and is primarily responsible for managing each Fund's investments.
James S. Grabovac, portfolio manager for the Funds since 1995, has
responsibility for the day-to-day management of the Funds' holdings. 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 ^ M.B.A. from the University of
Michigan and a ^ B.A. 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 Funds or Fund Management's other advisory clients. See
the Statement of Additional Information for more detailed information.
Each Fund pays IFG a monthly management fee ^ that is based upon a
percentage of each Fund's average net assets determined daily; in turn, IFG pays
INVESCO Trust a sub-advisory fee out of its management fee. With respect to the
Intermediate Bond Fund, the management fee is computed at the annual rate of
0.50% on the first $300 million of the Fund's average net assets; 0.40% on the
next $200 million of the Fund's average net assets; and 0.30% on the Fund's
average net assets over $500 million. With respect to the Long-Term Bond Fund,
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
<PAGE>
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, ^ 1997, investment management
fees paid by the Intermediate Bond Fund and the Long- Term Bond Fund amounted to
0.50% and 0.55%, respectively (after voluntary expense limitation), of each
Fund's average net assets. Out of these advisory fees^ IFG paid to INVESCO Trust
as a sub- advisory fee an amount equal to 0.25% and 0.24%, respectively, of the
Intermediate Bond Fund's and the Long-Term Bond Fund's average net assets. ^ No
fee is paid by the Funds to INVESCO Trust.
Under a Transfer Agency Agreement, IFG acts as registrar, transfer agent,
and dividend disbursing agent for the Funds. Each Fund pays an annual fee of
$26.00 per shareholder account or, where applicable, per participant in an
omnibus account ^. Registered broker-dealers, third party administrators of
tax-qualified retirement plans and other entities, including affiliates of IFG,
may provide equivalent services to the Funds. In these cases, IFG may pay, out
of the fee it receives from the Funds, an annual sub- transfer agency or
recordkeeping fee to the third party.
In addition, under an Administrative Services Agreement, IFG handles
additional administrative, recordkeeping, and internal sub- accounting services
for the Funds. For such services, IFG was paid, for the fiscal year ended June
30, 1997, a fee equal to the following percentages of each Fund's average net
assets (prior to the absorption of certain Fund expenses): Intermediate Bond
Fund, 0.23% and Long-Term Bond Fund, 0.02%.
Each Fund's expenses, which are accrued daily, are deducted from total
income before dividends are paid. Total expenses of each Fund (prior to any
expense offset ^ arrangement) for the fiscal year ended June 30, 1997, including
investment management fees (but excluding brokerage commissions, which are a
cost of acquiring securities), amounted to the following percentages of each
Fund's average net assets: Intermediate Bond Fund, 0.84% and Long-Term Bond
Fund, 0.90% (after voluntary expense limitation). Certain expenses of the
Intermediate Bond Fund are absorbed voluntarily by IFG and INVESCO Trust and
certain expenses of the Long-Term Bond Fund are absorbed voluntarily by IFG
pursuant to a commitment to those Funds in order to ensure that each Fund's
total operating expenses do not exceed 0.90% of each Fund's average net assets.
These commitments may be changed following consultation with the Company's board
of directors. In the absence of this voluntary expense limitation, total
operating expenses of the Intermediate Bond Fund and the Long-Term Bond Fund
would have been 2.43% and 1.05%, respectively.
Fund Management places orders for the purchase and sale of portfolio
securities with brokers and dealers based upon Fund Management's evaluation of
their financial responsibility coupled with their ability to effect transactions
at the best available prices. As discussed under "How To Buy Shares --
Distribution Expenses," the Funds may market their shares through intermediary
<PAGE>
brokers or dealers that have entered into ^ dealer agreements with IDI, as
the Funds' ^ distributor. The Funds may place orders for portfolio transactions
with qualified broker-dealers that recommend the Funds or sell shares of the
Funds to clients, or act as agent in the purchase of shares of the Funds for
clients, if Fund Management believes that the quality of the execution of the
transaction and level of commission are comparable to those available from other
qualified brokerage firms. For further information, see "Investment Practices --
Placement of Portfolio Brokerage" in the Statement of Additional Information.
IFG, INVESCO Trust and IDI are indirect wholly-owned subsidiaries of
AMVESCAP PLC. AMVESCAP PLC is a publicly-traded holding company that, through
its subsidiaries, engages in the business of investment management on an
international basis. INVESCO PLC changed its name to AMVESCO PLC on March 3,
1997 and to AMVESCAP PLC on May 8, 1997, as part of a merger between a direct
subsidiary of INVESCO PLC and A I M Management Group Inc., that created one of
the largest independent investment management businesses in the world. IFG and
INVESCO Trust ^ continued to operate under their existing names. AMVESCAP PLC
has approximately ^ $177.5 billion in assets under management. IFG was
established in 1932 and, as of June 30, 1997, managed 14 mutual funds,
consisting of ^ 46 separate portfolios, with combined assets of approximately
$15.4 billion on behalf of over 857,000 shareholders. INVESCO Trust (founded in
1969) served as adviser or sub-adviser to 59 investment portfolios as of June
30, 1997, including 31 portfolios in the INVESCO group. These 59 portfolios had
aggregate assets of approximately $14.1 billion as of June 30, 1997. In
addition, INVESCO Trust provides investment management services to private
clients including employee benefit plans that may be invested in a collective
trust sponsored by INVESCO Trust. IDI was established in 1997 and is the
distributor for 14 mutual funds consisting of ^ 46 separate portfolios.
FUND PRICE AND PERFORMANCE
Determining Price. The value of your investment in ^ a Fund will vary
daily. The price per share is also known as the Net Asset Value ("NAV"). IFG
prices each Fund every day that the New York Stock Exchange is open, as of the
close of regular trading (normally, 4:00 p.m., New York time). NAV is calculated
by adding together the current market value of each 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 a Fund's total return and yield. Total return
figures show the average annual rate of return on a $1,000 investment in a Fund,
assuming reinvestment of all dividends and capital gain distributions, for one-,
five- and ten-year periods (or since inception). Cumulative total return shows
the actual rate of return on an investment for the period cited; average annual
<PAGE>
total return represents the average annual percentage change in the value
of an investment. Both cumulative and average annual total returns tend to
"smooth out" fluctuations in a Fund's investment results, because they do not
show interim variations in performance that occur during the periods cited.
The yield of a 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 a 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 Funds' recent and historical performance is
contained in the Company's Annual Report to Shareholders. You can get a free
copy by calling or writing to ^ IDI using the phone number or address on the
back of this Prospectus.
When we quote mutual fund rankings published by Lipper Analytical
Services, Inc., we may compare the Funds to others in their categories of
Intermediate Municipal Debt Funds for the Intermediate Bond Fund and General
Municipal Bond Funds for the Long-Term Bond Fund, as well as the broad-based
Lipper general fund groupings. These rankings allow you to compare the Funds to
their 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 Funds.
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 IDI. However, if you invest
in the Funds through a securities broker, you may be charged a commission or
transaction fee. For all new accounts, please send a completed application form.
Please specify which ^ fund's shares you wish to purchase.
Fund Management reserves the right to increase, reduce or waive the
minimum investment requirements in its sole discretion, where it determines this
action is in the best interests of a Fund. Further, Fund Management reserves the
right in its sole discretion to reject any order for the purchase of Fund shares
(including purchases by exchange) when, in its judgment, such rejection is in a
Fund's best interests.
<PAGE>
HOW TO BUY SHARES
================================================================================
Method Investment Minimum Please Remember
- --------------------------------------------------------------------------------
By Check $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 a
P.O. Box 173706, investment. Fund or IFG incurs.
Denver, CO 80217- If you are already
3706. a shareholder in
Or you may send the INVESCO funds,
your check by the Fund may seek
overnight courier reimbursement from
to: 7800 E. Union your existing
Ave., account(s) for any
Denver, CO 80237. 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 a Fund or IFG
Or you may transmit incurs. If you are
your payment by already a
bank wire (call IFG shareholder in the
for instructions). INVESCO funds, a
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 a Fund or
IFG incurs. If you are
already a shareholder in
the INVESCO funds, a Fund
may seek reimbursement
from your existing
account(s) for any loss
incurred.
<PAGE>
================================================================================
By Exchange $1,000 to open a See "Exchange
Between a Fund and new account; $50 Policy" page 14.
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 shares of a Fund 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 Policy. You may exchange your shares in these Funds 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 INVESCO fund shares:
1) The fund accounts must be identically registered.
2) You may make four exchanges out of each fund during each
calendar year.
3) An exchange is the redemption of shares from one fund followed by the
purchase of shares in another. Therefore, any gain or loss realized on the
exchange is recognizable for federal income tax purposes (unless, of course,
your account is tax-deferred).
4) The Funds reserve the right to reject any exchange request, or to
modify or terminate the exchange ^ policy, when it is in the best interests of
the Funds and their shareholders. Notice of all such modifications or
terminations will be given at least 60 days prior to the effective date of the
change in policy, except for unusual instances (such as when redemptions of the
<PAGE>
exchanged shares are suspended under Section 22(e) of the Investment
Company Act of 1940, or when sales of the fund into which you are exchanging are
temporarily stopped).
Distribution Expenses. Each Fund is authorized under a Plan and Agreement
of Distribution pursuant to Rule 12b-1 under the Investment Company Act of 1940
(the "Plan") to use its assets to finance certain activities relating to the
distribution of its shares to investors. Under the Plan, monthly payments may be
made by each Fund to IDI to permit IDI, at its discretion, to engage in certain
activities, and provide certain services approved by the board of directors of
the Company in connection with the distribution of each Fund's shares to
investors. These activities and services may include the payment of compensation
(including incentive compensation and/or continuing compensation based on the
amount of customer assets maintained in a Fund) to securities dealers and other
financial institutions and organizations, which may include IDI-affiliated
companies, to obtain various distribution-related and/or administrative services
for the Funds. Such services may include, among other things, processing new
shareholder account applications, preparing and transmitting to the Fund's
Transfer Agent computer processable tapes of all transactions by customers, and
serving as the primary source of information to customers in answering questions
concerning the Fund and their transactions with the Fund.
In addition, other permissible activities and services include
advertising, the preparation, printing and distribution of sales literature ^,
printing and distribution of prospectuses to prospective investors and such
other services and promotional activities for the Funds as may from time to time
be agreed upon by the Company and its board of directors, including public
relations efforts and marketing programs to communicate with investors and
prospective investors. These services and activities may be conducted by the
staff of IDI or its affiliates or by third parties.
Under the Plan, the Company's payments to IDI on behalf of each Fund are
limited to an amount computed at an annual rate of 0.25% of each Fund's average
net assets ^. IDI is not entitled to payment for overhead expenses under the
Plan, but may be paid for all or a portion of the compensation paid for salaries
and other employee benefits for the personnel of IDI or IFG whose primary
responsibilities involve marketing shares of the INVESCO ^ funds, including the
Funds. Payment amounts by each Fund under the Plan, for any month, may be made
to compensate IDI for permissible activities engaged in and services provided by
IDI during the rolling 12-month period in which that month falls. Therefore, any
obligations incurred by IDI in excess of the limitations described above will
not be paid by the Funds under the Plan, and will be borne by IDI. In addition,
IDI and its affiliates may from time to time make additional payments from its
revenues to securities dealers and other financial institutions that provide
distribution- related and/or administrative services for the Funds. No further
<PAGE>
payments will be made by the Funds under the Plan in the event of its
termination. Also, any payments made by the Funds may not be used to finance
directly the distribution of shares of any other fund of the Company or other
mutual fund advised by IFG. Payments made by each Fund under the Plan for
compensation of marketing personnel, as noted above, are based on an allocation
formula designed to ensure that all such payments are appropriate. For more
information see "How Shares Can Be Purchased -- Distribution Plan" in the
Statement of Additional Information.
FUND SERVICES
Shareholder Accounts. IFG will maintain a separate share account for each
Fund whose shares you own 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 shares of
the Funds by telephone, unless they expressly decline these privileges. By
signing the new account Application, a Telephone Transaction Authorization Form,
or otherwise using these privileges, the investor has agreed that, if a Fund has
followed reasonable procedures, such as recording telephone instructions and
sending written transaction confirmations, it will not be liable for following ^
telephone instructions that it believes to be genuine. As a result of this
policy, the investor may bear the risk of any loss due to unauthorized or
fraudulent instructions.
<PAGE>
HOW TO SELL SHARES
The following chart shows several convenient ways to redeem your Fund
shares. Shares of either 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.
HOW TO SELL SHARES
================================================================================
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, owners of the the certificates
Denver, CO 80217- account. Payment must be sent to
3706. You may also will be mailed to IFG.
send your request your address of
by overnight record, or to a
courier to 7800 E. pre-designated
Union Ave., Denver, bank.
CO 80237.
<PAGE>
- --------------------------------------------------------------------------------
By Exchange $1,000 to open a See "Exchange
Between a Fund and new account; $50 Policy," page 14.
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.
- --------------------------------------------------------------------------------
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 Funds will attempt to process telephone redemptions promptly,
there may be times -- particularly in periods of severe economic or market
disruption -- when you may experience delays in redeeming shares by phone.
Payments of redemption proceeds will be mailed within seven days following
receipt of the redemption request in proper form. However, payment may be
postponed under unusual circumstances -- for instance, if normal trading is not
taking place on the New York Stock Exchange or during an emergency as defined by
the Securities and Exchange Commission. If your shares were purchased by a check
which has not yet cleared, payment will be made promptly upon clearance of the
purchase check (which will take up to 15 days).
<PAGE>
If you participate in EasiVest, the Funds' automatic monthly investment
program, and redeem all of the shares in your account, we will terminate any
further EasiVest purchases unless you instruct us otherwise.
Because of the high relative costs of handling small accounts, should the
value of any shareholder's account fall below $250 as a result of shareholder
action, the Funds reserve the right to involuntarily redeem all shares in such
account, in which case the account would be liquidated and the proceeds
forwarded to the shareholder. Prior to any such redemption, a shareholder will
be notified and given 60 days to increase the value of the account to $250 or
more.
TAXES, DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
Taxes. Each 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 Funds
do not expect to pay any federal income or excise taxes.
Exempt-interest dividends paid by each Fund are normally free of federal
income tax to shareholders, although they are subject to state and local income
taxes. Unless shareholders are exempt from income taxes, however, they must
include all distributions of net capital gains (both long-term and short-term),
as well as any dividends earned on a 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 one of the Funds or another fund in the INVESCO group.
Net realized capital gains are divided into short-term and long-term gains
depending upon how long a Fund held the security which gave rise to the gains.
The capital ^ gain distribution consists of long-term capital gains which are
taxed at the capital gains rate. Short-term capital gains are included with
income from dividends and interest as ordinary income and are paid to
shareholders as taxable dividends.
The Taxpayer Relief Act of 1997 ("Act"), enacted in August 1997,
dramatically changes the taxation of net capital gain (i.e.,the excess of net
long-term capital gain over net short-term capital loss), by applying different
rates thereto depending on the taxpayer's holding period and marginal rate of
federal income tax. The Act, however, does not address the application of these
rules to distributions by regulated investment companies. Accordingly,
shareholders should consult their tax advisers as to the effect of the Act on
distributions of net capital gain by a Fund to them ^.
<PAGE>
Shareholders also may realize capital gains or losses when they sell their
Fund shares at more or less than the price originally paid.
Interest on certain "private activity bonds" issued after August 7, 1986,
is an item of tax preference for purposes of the alternative minimum tax. Each
Fund intends to limit, and has limited in the past, its investments in such
bonds to not more than 20% of its total assets. The portion of exempt-interest
dividends paid by a Fund that is attributable to such bonds would be an item of
tax preference to shareholders.
At the end of each year, information regarding the tax status of
dividends, capital gain distributions and the portion, if any, of distributions
that is an item of tax preference is provided to shareholders.
Individuals and certain other non-corporate shareholders may be subject to
backup withholding of 31% on taxable dividends, 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(s) by ensuring
that we have a correct, certified tax identification number.
We encourage you to consult a tax adviser with respect to these matters.
For further information, see "Dividends, Capital Gain Distributions and Taxes"
in the Statement of Additional Information.
Dividends and Capital Gain Distributions. Each Fund earns daily net
investment income in the form of interest on its investments. Each 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 Company's board of
directors.
In addition, each 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), a 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. A Fund's share price will then drop by the amount of the distribution
on the ex- dividend date. If a shareholder purchases shares immediately prior to
such date, the shareholder will, in effect, have "bought" the dividend 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.
<PAGE>
ADDITIONAL INFORMATION
Voting Rights. All shares of the Funds of the Company have equal voting
rights based on one vote for each share owned and a corresponding fractional
vote for each fractional share owned. The Company is not generally required and
does not expect to hold regular annual meetings of shareholders. However, when
requested to do so in writing by the holders of 10% or more of the outstanding
shares of the Company or as may be required by applicable law or the Company's
Articles of Incorporation, the board of directors will call special meetings of
shareholders. Directors may be removed by action of the holders of a majority of
the outstanding shares of the Company. The ^ Funds will assist shareholders in
communicating with other shareholders as required by the Investment Company Act
of 1940.
<PAGE>
INVESCO TAX-FREE INCOME FUNDS^
Tax-Free Intermediate
Bond Fund
Tax-Free Long-Term
Bond Fund
^ Two no-load mutual funds seeking
as high a level of current income
exempt from federal taxes as is
consistent with the preservation of
capital.
PROSPECTUS
November 1, 1997
^ INVESCO FUNDS
INVESCO Distributors, Inc.
Distributor
Post Office Box 173706
Denver, Colorado 80217-3706
1-800-525-8085
PAL(R): 1-800-424-8085
http://www.invesco.com
^ In Denver, visit one of our
convenient Investor Centers:
Cherry Creek
155-B Fillmore Street
Denver Tech Center
7800 East Union Avenue
Lobby Level
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
November 1, 1997
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 ^ an open-end,
diversified, ^ investment management company, currently consisting of two
separate portfolios of investments: INVESCO Tax- Free Intermediate Bond Fund
(the "Intermediate Bond Fund") and INVESCO Tax-Free Long-Term Bond Fund (the
"Long-Term 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.
A Prospectus for both Funds dated November 1, 1997, which provides 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: INVESCO FUNDS GROUP, INC.
Distributor: INVESCO DISTRIBUTORS, INC.
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
INVESTMENT POLICIES AND RESTRICTIONS.........................................3
THE FUNDS AND THEIR MANAGEMENT..............................................15
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............................38
INVESTMENT PRACTICES........................................................40
ADDITIONAL INFORMATION......................................................43
APPENDIX....................................................................47
<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS
Municipal Obligations
As discussed in the Prospectus in the section entitled "Investment
Objective and Strategy," 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
<PAGE>
local, privately operated facilities. Such obligations are, in most cases,
revenue bonds that generally are secured by a lease with a particular private
corporation. A Fund's portfolio may consist of any combination of general
obligation and revenue bonds.
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 the 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, a division of The McGraw-Hill
Companies, Inc. ("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. Municipal Notes are debt obligations issued by
municipalities which normally have a maturity at the time of issuance from six
months to three years. 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.
<PAGE>
While the Funds' investment adviser attempts to limit purchases of lower
rated municipal securities to securities having an established retail secondary
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 the Funds'
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 segregated account with their custodian bank
consisting of cash, any liquid securities or a combination thereof marked to
market daily 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.
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 segregated account is
different from the risk of fluctuation in the value of the Funds' portfolio
securities. Each Fund may enter into commitments to purchase securities on a
when-issued basis when deemed advisable to further each Fund's pursuit of its
respective investment objective and policies. Such commitments will not
<PAGE>
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' Prospectus, 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 the investment advisers thereto, from registration as a commodity pool
operator. ^ 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.
^ Unlike when a Fund purchases or sells a security, no price is paid or
received by a Fund upon the purchase or sale of a futures contract. Instead, the
^ Fund will be required to deposit in a segregated asset account with 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
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
<PAGE>
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.
Options on Futures Contracts
Each Fund may buy and write options on futures contracts for hedging
purposes; options are also included in the types of instruments sometimes known
as derivatives. 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.
<PAGE>
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 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
(the "1933 Act") (hereinafter referred to as "Rule 144A Securities"). The
Company's board of directors has delegated to the Fund's adviser and sub-adviser
the authority to determine the liquidity of Rule 144A Securities pursuant to
guidelines approved by the board. The Intermediate Bond Fund may not invest more
than 15% of its net assets in restricted securities.
Investments in restricted securities involve certain risks to the extent
that the Intermediate Bond Fund might have to bear the expense and incur the
delays associated with effecting registration in order to sell the security.
<PAGE>
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 Funds' Prospectus, each Fund
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 Company'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 a Fund and is unrelated to the interest
rate on the underlying instrument. In these transactions, the securities
acquired by a Fund (including accrued interest earned thereon) must have a total
value at least equal to the value of the repurchase agreement, and are held as
collateral by the Funds' custodian bank until the repurchase agreement is
completed.
^ Lending of ^ Securities. Each Fund also may lend portfolio securities to
qualified brokers, dealers, banks, or other financial institutions. This
practice permits a Fund to earn income, which, in turn, can be invested in
additional securities to pursue the Fund's investment objective. Loans of
securities by a Fund will be collateralized by cash, letters of credit, or
securities issued or guaranteed by the U.S. government or its agencies equal to
at least 100% of the current market value of the loaned securities, determined
on a daily basis. Lending securities involves certain risks, the most
significant of which is the risk that a borrower may fail to return a portfolio
security. The 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 a Fund will
comply with all other applicable regulatory requirements^.
<PAGE>
Investment Restrictions. As described in the section of the Funds'
Prospectus entitled "Investment ^ Policies And Risks," the Funds operate under
certain investment restrictions. These restrictions are fundamental and may not
be changed with respect to a particular Fund without the prior approval of the
holders of a majority, as defined in the 1940 Act, of the outstanding voting
securities of that Fund. For purposes of the 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 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.
(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
<PAGE>
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 ^ a modified S&P industry code
classification schema which uses various sources to classify.
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.
(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
<PAGE>
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
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
<PAGE>
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 ^ whether 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. 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).
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 except as discussed in restriction (7);
(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
<PAGE>
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 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 net assets (taken at current value). No more
than 10% of the Fund's 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, at the time of purchase,
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;
<PAGE>
(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;
(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 futures contracts.
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 ("IFG") is employed as the Company's investment adviser. IFG was
established in 1932 and also serves as an investment adviser to INVESCO Capital
Appreciation Funds, Inc. (formerly INVESCO Dynamics Fund, Inc.), INVESCO
Diversified Funds, Inc., INVESCO Emerging Opportunity Funds, Inc., INVESCO
Growth Fund, Inc., INVESCO Income Funds, Inc., INVESCO Industrial Income Fund,
Inc., INVESCO International Funds, Inc., INVESCO Multiple Asset Funds, Inc.,
INVESCO Specialty Funds, Inc., INVESCO Strategic Portfolios, Inc., INVESCO
Tax-Free Income Funds, Inc., INVESCO Value Trust and INVESCO Variable Investment
Funds, Inc.
The Sub-Adviser. IFG, as investment adviser, has contracted with INVESCO
Trust Company ("INVESCO Trust") to provide investment advisory and research
services to the Company. INVESCO Trust has the primary responsibility for
providing portfolio investment management services to the Funds. INVESCO Trust,
a trust company founded in 1969, is a wholly owned subsidiary of IFG.
<PAGE>
The Distributor. Effective September 30, 1997, INVESCO Distributors, Inc.
("IDI") became the Funds' distributor. IDI, established in 1997, is a registered
broker-dealer that acts as distributor for all retail mutual funds advised by
IFG. Prior to September 30, 1997, IFG served as the Funds' distributor.
IFG, INVESCO Trust and IDI are indirect, wholly-owned subsidiaries ^ of
AMVESCAP PLC, a publicly-traded holding company that, through its subsidiaries,
engages in the business of investment management on an international basis.
INVESCO PLC changed its name to AMVESCO PLC on March 3, 1997 and to AMVESCAP PLC
on May 8, 1997, as part of a merger between a direct subsidiary of INVESCO PLC
and A I M Management Group, Inc. that created one of the largest independent
management businesses in the world with approximately ^ $177.5 billion in assets
under management. IFG was established in 1932 and as of June 30, 1997, managed
14 mutual funds, consisting of ^ 46 separate portfolios, on behalf of over
857,000 shareholders. AMVESCAP PLC's North American subsidiaries include the
following:
^
--INVESCO Capital Management, Inc. of Atlanta, Georgia manages
institutional investment portfolios, consisting primarily of discretionary
employee benefit plans for corporations and state and local governments, and
endowment funds. INVESCO Capital Management, Inc. is the sole shareholder of
INVESCO Services, Inc., a registered broker-dealer whose primary business is the
distribution of shares of two registered investment companies.
--INVESCO Management & Research, Inc. of Boston, Massachusetts primarily
manages pension and endowment accounts.
--PRIMCO Capital Management, Inc. of Louisville, Kentucky specializes in
managing stable return investments, principally on behalf of Section 401(k)
retirement plans.
--INVESCO Realty Advisors, Inc. of Dallas, Texas is responsible for
providing advisory services in the U.S. real estate markets for pension plans
and public pension funds, as well as endowment and foundation accounts.
--A I M Advisors, Inc. of Houston, Texas provides investment advisory and
administrative services for retail and institutional mutual funds.
--A I M Capital Management, Inc. of Houston, Texas provides investment
advisory services to individuals, corporations, pension plans and other private
investment advisory accounts and also serves as a sub-adviser to certain retail
and institutional mutual funds, one Canadian mutual fund and one portfolio of an
<PAGE>
open-end registered investment company that is offered to separate accounts
of variable insurance companies.
--A I M Distributors, Inc. and Fund Management Company of Houston, Texas
are registered broker-dealers that act as the principal underwriters for retail
and institutional mutual funds.
The corporate headquarters of AMVESCAP PLC are located at 11 Devonshire
Square, London, EC2M4YR, England.
^
As indicated in the Funds' Prospectus, IFG and INVESCO Trust permit
investment and other personnel to purchase and sell securities for their own
accounts in accordance with a compliance policy governing personal investing by
directors, officers and employees of IFG, INVESCO Trust and their North American
affiliates. The policy requires officers, inside directors, investment and other
personnel of IFG, INVESCO Trust and their North American affiliates to pre-clear
all transactions in securities not otherwise exempt under the policy. Requests
for trading authority will be denied when, among other reasons, the proposed
personal transaction would be contrary to the provisions of the policy or would
be deemed to adversely affect any transaction then known to be under
consideration for or to have been effected on behalf of any client account,
including the Funds.
In addition to the pre-clearance requirement described above, the policy
subjects officers, inside directors, investment and other personnel of IFG,
INVESCO Trust and their North American affiliates to various trading
restrictions and reporting obligations. All reportable transactions are reviewed
for compliance with the policy. The provisions of this policy are administered
by and subject to exceptions authorized by INVESCO or INVESCO Trust.
Investment Advisory Agreement. IFG serves as investment adviser to each of
the Funds pursuant to an investment advisory agreement dated February 28, 1997
(the "Agreement") with the Company which was approved by the board of directors
on November 6, 1996, by a vote cast in person by a majority of the directors of
the Company, including a majority of the directors who are not "interested
persons" of the Company or IFG, at a meeting called for such purpose.
Shareholders of each of the Funds approved the Agreement on January 31, 1997,
for an initial term expiring February 28, 1999. Thereafter, this Agreement may
be continued from year to year with respect 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
1940 Act, 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 1940 Act) of any such party,
<PAGE>
cast in person at a meeting called for the purpose of voting on such
continuance. The Agreement may be terminated at any time without penalty by
either party, or by a Fund with respect to that Fund, upon sixty (60) days'
written notice and terminates automatically in the event of an assignment to the
extent required by the 1940 Act and the Rules thereunder.
The Agreement provides that IFG shall manage the investment portfolios of
the Funds in conformity with each Fund's investment policies (either directly or
by delegation to a sub-adviser which may be a company affiliated with IFG).
Further, IFG shall perform all administrative, internal accounting (including
computation of net asset value), clerical, statistical, secretarial and all
other services necessary or incidental to the administration of the affairs of
the Funds excluding, however, those services that are the subject of separate
agreement between the Company and IFG or any affiliate thereof, including the
distribution and sale of shares of the Funds and provision of transfer agency,
dividend disbursing agency, and registrar services, and services furnished under
an Administrative Services Agreement with IFG discussed below. Services provided
under the Agreement include, but are not limited to: supplying the Company with
officers, clerical staff and other employees, if any, who are necessary in
connection with the Funds' operations; furnishing office space, facilities,
equipment, and supplies; providing personnel and facilities required to respond
to inquiries related to shareholder accounts; conducting periodic compliance
reviews of the Funds' operations; preparation and review of required documents,
reports and filings by IFG's in-house legal and accounting staff (including the
prospectus, statement of additional information, proxy statements, shareholder
reports, tax returns, reports to the SEC, and other corporate documents of the
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 ^ IFG are borne by the Funds.
As full compensation for its advisory services to the Company, IFG is
entitled to receive a monthly fee. 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 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 greater than $500
million. For the fiscal years ended June 30, 1997, 1996 and 1995, the Tax-Free
Intermediate Bond Fund paid ^ IFG advisory fees (prior to the voluntary
absorption of certain Fund expenses by ^ IFG) of $23,630, $26,991 and $23,812,
respectively. The fee for the Long- Term Bond Fund is calculated daily at an
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 greater than $500 million. For the fiscal
years ended June 30, 1997, 1996, and 1995, the Tax-Free Long-Term Bond Fund paid
<PAGE>
IFG advisory fees (prior to the voluntary absorption of certain Fund
expenses by IFG) of $1,275,473, $1,389,027 and $1,471,474, respectively.
Sub-Advisory Agreement. INVESCO Trust serves as sub-adviser to each of the
Funds pursuant to a sub-advisory agreement dated February 28, 1997 (the
"Sub-Agreement") with IFG which was approved by the board of directors on
November 6, 1996, by a vote cast in person by a majority of the directors of the
Company, including a majority of the directors who are not "interested persons"
of the Company, IFG, or INVESCO Trust at a meeting called for such purpose.
Shareholders of each of the Funds approved the Sub- Advisory Agreement on
January 31, 1997, for an initial term expiring February 28, 1999. Thereafter,
the Sub-Agreement may be continued from year to year as to each Fund as long as
each such continuance is specifically approved by the board of directors of the
Company, or by a vote of the holders of a majority, as defined in the 1940 Act,
of the outstanding shares of 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 1940 Act and the rules
thereunder.
The Sub-Agreement provides that INVESCO Trust, subject to the supervision
of IFG and the Company's board of directors, 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 acquired, of each Fund, 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 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
(the "1933 Act"), as amended, and (ii) the Company's status as a regulated
investment company under the Internal Revenue Code of 1986, as amended; (c)
determining what securities are to be purchased or sold for each Fund, unless
otherwise directed by the directors of the Company or IFG, 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.
<PAGE>
The Sub-Agreement provides that as compensation for its services, INVESCO
Trust shall receive from IFG, at the end of each month, a fee based upon the
average daily value of the Tax-Free Intermediate Bond Fund's average net assets
at the following annual rates: ^ 0.25% on the Fund's average net assets up to
$300 million, ^ 0.20% on the next $200 million of the Fund's average net assets
and ^ 0.15% of the Fund's average net assets in excess of $500 million; and a
fee based upon the average daily value of the Tax- Free Long-Term Bond Fund at
the following annual rates: ^ 0.25% on the first $300 million of the Fund's
average net assets^ and 0.20% on the Fund's average net assets^ in excess of ^
$200 million. The Sub-Advisory fee is paid by IFG, NOT the Funds.
Administrative Services Agreement. IFG, either directly or through
affiliated companies, provides certain administrative, sub-accounting, and
recordkeeping services to the Funds pursuant to an Administrative Services
Agreement dated February 28, 1997 (the "Administrative Agreement"). The
Administrative Agreement was approved by the board of directors on November 6,
1996, by a vote cast in person by ^ a majority of the directors of the Company,
including ^ a majority of the directors who are not "interested persons" of the
Company or IFG at a meeting called for such purpose. The Administrative
Agreement is for an initial term expiring February 28, 1998, and has been
continued by action of the board of directors until May 15, 1998. The
Administrative Agreement may be continued from year to year as long as such
continuance is specifically approved by the board of directors of the Company,
including a majority of the directors who are not parties to the Administrative
Agreement or interested persons (as defined in the 1940 Act) of any such party,
cast in person at a meeting called for the purpose of voting on such
continuance. The Administrative Agreement may be terminated at any time without
penalty by IFG on sixty (60) days' written notice, or by the Company upon thirty
(30) days' written notice, and terminates automatically in the event of an
assignment unless the Company's board of directors approves such assignment.
The Administrative Agreement provides that IFG shall provide the following
services to the Funds: (A) such sub-accounting and recordkeeping services and
functions as are reasonably necessary for the operation of the Funds; and (B)
such sub-accounting, recordkeeping, and administrative services and functions
which may be provided by affiliates of IFG, 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 IFG consisting of a base fee of $10,000 per
year, plus an additional incremental fee computed daily and paid monthly at an
annual rate of 0.015% per year of the average net assets of each Fund.
<PAGE>
During the fiscal years ended June 30, 1997, 1996 and 1995, the Tax-Free
Intermediate Bond Fund paid ^ IFG administrative services fees (prior to the
voluntary absorption of certain Fund expenses by IFG) in the amount of $10,709,
$10,810 and $10,714, respectively. During the fiscal years ended June 30, 1997,
1996 and 1995, the Tax-Free Long-Term Bond Fund paid IFG administrative services
fees (prior to the voluntary absorption of certain Fund expenses by IFG) in the
amount of $44,786, $47,882 and $50,131, respectively.
Transfer Agency Agreement. IFG also performs transfer agent, dividend
disbursing agent, and registrar services for the Funds pursuant to a Transfer
Agency Agreement dated February 28, 1997, which was approved by the board of
directors of the Company, including a majority of the Company's directors who
are not parties to the Transfer Agency Agreement or "interested persons" of any
such party, on November 6, 1996, for an initial term expiring February 28, 1998
and has been extended by action of the board of directors until May 15, 1998.
Thereafter, the Transfer Agency Agreement may be continued from year to year as
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 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 IFG.
The Transfer Agency Agreement provides that each Fund shall pay to IFG a
fee of $26.00 per shareholder account or, where applicable, per participant in
an omnibus account ^. This fee is paid monthly at a rate of 1/12 of the annual
fee and is based upon the actual number of shareholder accounts or omnibus
account participants in existence at any time ^.
For the fiscal years ended June 30, 1997, 1996 and 1995, the Tax-Free
Intermediate Bond Fund paid ^ IFG transfer agency fees (prior to the voluntary
absorption of certain Fund expenses by INVESCO) of $15,084, $14,234 and
$12,446,respectively. For the fiscal years ended June 30, 1997, 1996 and 1995,
the Tax-Free Long- Term Bond Fund paid ^ IFG transfer agency fees (prior to the
voluntary absorption of certain Fund expenses by IFG) of $317,800, $324,030 and
$390,390, 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
<PAGE>
programs of each of the Funds are carried out and that the Funds'
portfolios are properly administered. The officers of the Company, all of whom
are officers and employees of, and are paid by, IFG, are responsible for the
day-to-day administration of the Company and each of the Funds. The investment
adviser for the Company has the primary responsibility for making investment
decisions on behalf the Company. These investment decisions are reviewed by the
investment committee of IFG.
All of the officers and directors of the Company hold comparable positions
with INVESCO Capital Appreciation Funds, Inc. (formerly, INVESCO Dynamics Fund,
Inc.), INVESCO Diversified Funds, Inc., INVESCO Emerging Opportunity Funds,
Inc., INVESCO Growth Fund, Inc., INVESCO Income Funds, Inc., INVESCO Industrial
Income Fund, Inc., INVESCO International Funds, Inc., INVESCO Multiple Asset
Funds, Inc., INVESCO Specialty Funds, Inc., INVESCO Strategic Portfolios, Inc.,
INVESCO Tax-Free Income Funds, Inc., and INVESCO Variable Investment Funds, Inc.
All of the directors of the Company also serve as trustees of INVESCO Value
Trust. In addition, all of the directors of the Company, with the exception of
Dan Hesser, serve as trustees of INVESCO Treasurer's Series Trust. All of the
officers of the Company also hold comparable positions with INVESCO Value Trust.
Set forth below is information with respect to each of the Company's officers
and directors. Unless otherwise indicated, the address of the directors and
officers is Post Office Box 173706, Denver, Colorado 80217-3706. Their
affiliations represent their principal occupations during the past five years.
CHARLES W. BRADY,*+** Chairman of the Board. Chief Executive Officer and
Director of AMVESCAP PLC, London, England, and of various subsidiaries thereof.
Chairman of the Board of INVESCO Treasurer's Series Trust. Address: 1315
Peachtree Street, NE, Atlanta, Georgia. Born: May 11, 1935.
FRED A. DEERING,+# Vice Chairman of the Board. Vice Chairman of INVESCO
Treasurer's Series Trust. Trustee of INVESCO Global Health Sciences Fund.
Formerly, Chairman of the Executive Committee and Chairman of the Board of
Security Life of Denver Insurance Company, Denver, Colorado; Director of ING
America Life Insurance Company, Urbaine Life Insurance Company and Midwestern
United Life Insurance Company. Address: Security Life Center, 1290 Broadway,
Denver, Colorado. Born: January 12, 1928.
DAN J. HESSER,+* President, CEO and Director. Chairman of the Board,
President, and Chief Executive Officer of INVESCO Funds Group, Inc. and INVESCO
Distributors, Inc.; President and Director of INVESCO Trust Company; President
and Chief Operating Officer of INVESCO Global Health Sciences Fund. Born:
December 27, 1939.
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.
<PAGE>
(consulting firm); since October 1984, Director of the Center for the Study
of Regulated Industry at Georgia State University; formerly, member of the
faculties of the Harvard Business School and the Sloan School of Management of
MIT. Dr. Andrews is also a director of the Southeastern Thrift and Bank Fund,
Inc. and The Sheffield Funds, Inc. Address: 4625 Jettridge Drive, Atlanta,
Georgia. Born: June 23, 1930.
BOB R. BAKER,+** Director. President and Chief Executive Officer of AMC
Cancer Research Center, Denver, Colorado, since January 1989; until mid-December
1988, Vice Chairman of the Board of First Columbia Financial Corporation (a
financial institution), Englewood, Colorado. Formerly, Chairman of the Board and
Chief Executive Officer of First Columbia Financial Corporation. Address: 1775
Sherman Street, #1000, Denver, Colorado. Born: August 7, 1936.
LAWRENCE H. BUDNER,# Director. Trust Consultant; prior to June 30, 1987,
Senior Vice President and Senior Trust Officer of InterFirst Bank, Dallas,
Texas. Address: 7608 Glen Albens Circle, Dallas, Texas. Born: July 25, 1930.
DANIEL D. CHABRIS,+# Director. Financial Consultant; Assistant Treasurer of
Colt Industries Inc., New York, New York, from 1966 to 1988. Address: 19
Kingsbridge Way, Madison, Connecticut. Born: August 1, 1923.
WENDY L. GRAMM, Ph.D.,** Director. Self-employed (since 1993); Professor of
Economics and Public Administration, University of Texas at Arlington. Formerly,
Chairman, Commodity Futures Trading Commission from 1988 to 1993, administrator
for Information and Regulatory Affairs at the Office of Management and Budget
from 1985 to 1988, Executive Director of the Presidential Task Force on
Regulatory Relief and Director of the Federal Trade Commission's Bureau of
Economics. Dr. Gramm is also a director of the Chicago Mercantile Exchange,
Enron Corporation, IBP, Inc., State Farm Insurance Company, State Farm Life
Insurance Company, Kinetic Concepts, Inc., Independant Women's Forum,
International Republic Institute, and the Republican Women's Federal Forum. Dr.
Gramm is also a member of the Board of Visitors, College of Business
Administration, University of Iowa, and a member of the Board of Visitors,
Center for Study of Public Choice, George Mason University. Address: 4201 Yuma
Street, N.W., Washington, D.C. Born: January 10, 1945.
HUBERT L. HARRIS, Jr.,* Director. ^ Chairman (since May 1996) and President
(January 1990 to May 1996) of INVESCO Services, Inc.^; Chief Executive Officer
of INVESCO Individual Services Group. Member of the Executive Committee of the
Alumni Board of Trustees of Georgia Institute of Technology. Address: 1315
Peachtree Street, NE, Atlanta, Georgia. Born: July 15, 1943.
<PAGE>
KENNETH T. KING,^# Director. Formerly, Chairman of the Board of The Capitol
Life Insurance Company, Providence Washington Insurance Company, and Director of
numerous subsidiaries thereof in the U.S. Formerly, Chairman of the Board of The
Providence Capitol Companies in the United Kingdom and Guernsey. Chairman of the
Board of the Symbion Corporation (a high technology company) until 1987.
Address: 4080 North Circulo Manzanillo, Tucson, Arizona. Born: November 16,
1925.
JOHN W. MCINTYRE,# Director. Retired. Formerly, Vice Chairman of the Board
of Directors of the Citizens and Southern Corporation and Chairman of the Board
and Chief Executive Officer of the Citizens and Southern Georgia Corporation and
Citizens and Southern National Bank. Director of Golden Poultry Co., Inc.
Trustee of INVESCO Global Health Sciences Fund and Gables Residential Trust.
Address: 7 Piedmont Center, Suite 100, Atlanta, Georgia 30305. Born: September
14, 1930.
LARRY SOLL, Ph.D.,** Director. Formerly, Chairman of the Board (1987 to
1994), Chief Executive Officer (1982 to 1989 and 1993 to 1994) and President
(1982 to 1989) of Synergen Corp. Director of Synergen since incorporation in
1982. Director of ISD Pharmaceuticals, Inc., Trustee of INVESCO Global Health
Sciences Fund. Address: 345 Poorman Road, Boulder, Colorado. Born:
April 26, 1942.
GLEN A. PAYNE, Secretary. Senior Vice President (since 1995), General
Counsel and Secretary of INVESCO Funds Group, Inc. ^ and INVESCO Trust Company
(since ^ 1989) and of INVESCO Distributors, Inc. (since 1997); Vice President
(May 1989 to April 1995)^ of INVESCO Funds Group, Inc.; formerly, employee of a
U.S. regulatory agency, Washington, D.C., (June 1973 through May 1989). Born:
September 25, 1947.
RONALD L. GROOMS, Treasurer. Senior Vice President and Treasurer of INVESCO
Funds Group, Inc. and INVESCO Trust Company (since 1988). Senior Vice President
and Treasurer of INVESCO Distributors, Inc. (since 1997). Born: October 1, 1946.
WILLIAM J. GALVIN, JR., Assistant Secretary. Senior Vice President of
INVESCO Funds Group, Inc. (since 1995) and of INVESCO Distributors, Inc. (since
1997) and Trust Officer of INVESCO Trust Company since July 1995 and formerly
(August 1992 to July 1995) Vice President of INVESCO Funds Group, Inc. and trust
officer of INVESCO Trust Company. Formerly,Vice President of 440 Financial Group
from June 1990 to August 1992; Assistant Vice President of Putnam Companies from
November 1986 to June 1990. Born: August 21, 1956.
ALAN I. WATSON, Assistant Secretary. Vice President of INVESCO Funds Group,
Inc. (since 1984) ^ and Trust Officer of INVESCO Trust Company. Born: September
14, 1941.
<PAGE>
JUDY P. WIESE, Assistant Treasurer. Vice President of INVESCO Funds Group,
Inc. (since 1984) and of INVESCO Distributors, Inc. (since 1997) and Trust
Officer of INVESCO Trust Company. Born: February 3, 1948.
#Member of the audit committee of the Company.
+Member of the executive committee of the Company. On occasion, the
executive committee acts upon the current and ordinary business of the Company
between meetings of the board of directors. Except for certain powers which,
under applicable law, may only be exercised by the full board of directors, the
executive committee may exercise all powers and authority of the board of
directors in the management of the business of the Company. All decisions are
subsequently submitted for ratification by the board of directors.
*These directors are "interested persons" of the Company as defined in the
1940 Act.
**Member of the management liaison committee of the Company.
As of August 13, 1997, officers and directors of the Company, as a group,
beneficially owned less than 1% of the Funds' outstanding shares.
Director Compensation
The following table sets forth, for the fiscal year ended June 30, 1997:
the compensation paid by the Company to its ^ independent directors for services
rendered in their capacities as directors of the Company; the benefits accrued
as Company expenses with respect to the Defined Benefit Deferred Compensation
Plan discussed below; and the estimated annual benefits to be received by these
directors upon retirement as a result of their service to the Company. In
addition, the table sets forth the total compensation paid by all of the mutual
funds distributed by INVESCO Distributors, Inc. (including the Company), INVESCO
Advisor Funds, Inc., INVESCO Treasurer's Series Trust and INVESCO Global Health
Sciences Fund (collectively, the "INVESCO Complex") to these directors for
services rendered in their capacities as directors or trustees during the year
ended December 31, 1996. As of December 31, 1996, there were 49 funds in the
INVESCO Complex. Dr. Soll became an independent director of the Company
effective May 15, 1997. Dr. Gramm became an independant director of the Company
effective July 29, 1997 and is not included in the table below.
<PAGE>
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, $2,719 $474 $462 $98,850
Vice Chairman of
the Board
Victor L. Andrews 2,678 448 535 84,350
Bob R. Baker 2,720 400 717 84,850
Lawrence H. Budner 2,639 448 535 80,350
Daniel D. Chabris 2,685 512 380 84,850
A. D. Frazier, Jr.(4) 1,247 0 0 81,500
Kenneth T. King 2,478 493 419 71,350
John W. McIntyre 2,616 0 0 90,350
Larry Soll 571 0 0 17,500
--------
Total $20,353 $2,775 $3,048 $693,950
% of Net Assets 0.0090%(5) 0.0012%(5) 0.0045%(6)
(1)The vice chairman of the board, the chairmen of the audit, management
liaison and compensation committees, and the members of the executive and
valuation committees, and the members of specially approved task forces of the
board of directors each receive compensation for serving in such capacities in
addition to the compensation paid to all independent directors.
(2)Represents benefits accrued with respect to the Defined Benefit Deferred
Compensation Plan discussed below, and not compensation deferred at the election
of the directors.
(3)These figures represent the Company's share of the estimated annual
benefits payable by the INVESCO Complex (excluding the INVESCO Global Health
Sciences Fund which does not participate in any retirement plan) upon the
directors' retirement, calculated using the current method of allocating
director compensation among the funds in the INVESCO Complex. These estimated
benefits assume retirement at age 72 and that the basic retainer payable to the
<PAGE>
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 and Drs. Soll and
Gramm, each of these directors has served as a director of one or more of the
funds in the INVESCO Complex for the minimum five-year period required to be
eligible to participate in the Defined Benefit Deferred Compensation Plan.
(4)Effective February 28, 1997, Mr. Frazier resigned as a director of the
Company. Effective November 1, 1996, Mr. Frazier was employed by INVESCO PLC,
(the predecessor to AMVESCAP PLC), a company affiliated with IFG^ and did not
receive any director's fees or other compensation from the Company or other
funds in the INVESCO Complex for his service as a director.
(5)Totals as a percentage of the Company's net assets as of June 30, 1997.
(6)Total as a percentage of the net assets of the INVESCO Complex as of
December 31, 1996.
Messrs. Brady, Harris, and Hesser, as "interested persons" of the Company
and other funds in the INVESCO Complex, receive compensation as officers or
employees of ^ IFG or its affiliated companies, and do not receive any
director's fees or other compensation from the Company or other funds in the
INVESCO Complex for their services as directors.
The boards of directors/trustees of the mutual funds managed by IFG and
INVESCO Treasurer's Series Trust have adopted a Defined Benefit Deferred
Compensation Plan for the non-interested directors and trustees of the funds.
Under this plan, each director or trustee who is not an interested person of the
funds (as defined in the 1940 Act) and who has served for at least five years (a
"qualified director") is entitled to receive, upon retiring from the boards at
the retirement age of 72 (or the retirement age of 73 to 74, if the retirement
date is extended by the boards for one or two years, but less than three years)
continuation of payment for one year (the "first year retirement benefit") of
the annual basic retainer payable by the funds to the qualified director at the
time of his retirement (the "basic retainer"). Commencing with any such
director's second year of retirement, and commencing with the first year of
retirement of a director whose retirement has been extended by the board for
three years, a qualified director shall receive quarterly payments at an annual
rate equal to 40% of the basic retainer. These payments will continue for the
remainder of the qualified director's life or ten years, whichever is longer
(the "reduced retainer payments"). If a qualified director dies or becomes
disabled after age 72 and before age 74 while still a director of the funds, the
first year retirement benefit and the reduced retainer payments will be made to
him or to his beneficiary or estate. If a qualified director becomes disabled or
dies either 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
<PAGE>
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 IFG and
Treasurer's Series Trust funds in a manner determined to be fair and equitable
by the committee. The Company is not making any payments to directors under the
plan as of the date of this Statement of Additional Information. The
Company has no stock options or other pension or retirement plans for management
or other personnel and pays no salary or compensation to any of its officers.
The Company has an audit committee ^ that is comprised of five of the
directors who are not interested persons of the Company. The committee meets
periodically with the Company's independent accountants and officers to review
accounting principles used by the Company, the adequacy of internal controls,
the responsibilities and fees of the independent accountants, and other matters.
The Company also has a management liaison committee which meets quarterly
with various management personnel of IFG in order (a) to facilitate better
understanding of management and operations of the Company, and (b) to review
legal and operational matters which have been assigned to the committee by the
board of directors, in furtherance of the board of directors' overall duty of
supervision.
HOW SHARES CAN BE PURCHASED
^ Shares of the Funds are sold on a continuous basis at the net asset
value per share of the Fund next calculated after receipt of a purchase order in
good form. The net asset value per share is computed once each day that the New
York Stock Exchange is open as of the close of regular trading on that Exchange,
but may also be computed at other times. See "How Shares Are Valued." IDI acts
as the Funds' Distributor under a distribution agreement with the Company under
which it receives no compensation and bears all expenses, including the 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 described in the section of the Funds' Prospectus
entitled "How To Buy Shares - Distribution Expenses," the Company has adopted a
Plan and Agreement of Distribution (the "Plan") pursuant to Rule 12b-1 under the
1940 Act, which was implemented on November 1, 1990. The initial Plan was
approved on April 21, 1993, at a meeting called for such purpose by a majority
of the directors of the Company, including a majority of the directors who
neither are "interested persons" of the Company nor have any financial interest
in the operation of the Plan ("12b-1 directors"). This Plan was approved by IFG
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 of the Tax-Free Long-Term Bond
Fund, approved the Agreement on October 27, 1993 for an initial term expiring
April 30, 1994. The board of directors, on February 4, 1997, approved amending
the Plan to a compensation type 12b-1 plan. This amendment of the Plan did not
<PAGE>
result in increasing the amount of the Funds' payments thereunder. The Plan was
continued by action of the board of directors until May 15, 1998. Pursuant to
authorization granted by the Company's board of directors on September 2, 1997,
a new Plan became effective on September 29, 1997, under which IDI has assumed
all obligations related to distribution that previously were performed by IFG.
The Plan provides that the Funds may make monthly payments to IDI of
amounts computed at an annual rate no greater than 0.25% of each Fund's average
net assets to permit IDI, at its discretion, to engage in certain activities and
provide services in connection with the distribution of a Fund's shares to
investors. Payment amounts by a Fund under the Plan, for any month, may be made
to compensate IDI for permissible activities engaged in and services provided by
IDI during the rolling 12-month period in which that month falls. For the fiscal
year ended June 30, 1997 the Tax-Free Intermediate Bond Fund and Tax-Free
Long-Term Bond Fund made payments to IFG (the predecessor of IDI^ as distributor
of shares of the Funds) under the 12b-1 Plan (prior to the voluntary absorption
of certain Fund expenses by IFG) in the amount of $11,861 and $893,896,
respectively. In addition, as of June 30, 1997, $906 and $43,979 of additional
distribution accruals had been incurred under the Plan for the Tax-Free
Intermediate Bond Fund and Tax-Free Long-Term Bond Fund, respectively, and will
be paid to IDI during the fiscal year ended June 30, 1998. As noted in the
Prospectus, one type of ^ expenditure permitted by the Plan is the payment of
compensation to securities companies, and other financial institutions and
organizations, which may include IDI- affiliated companies, in order to obtain
various distribution-related and/or administrative services for the Funds. Each
Fund is authorized by the Plan to use its assets to finance the payments made to
obtain those services. Payments will be made by IDI to broker-dealers who sell
shares of a Fund and may be made to banks, savings and loan associations and
other depository institutions. Although the Glass-Steagall Act limits the
ability of certain banks to act as underwriters of mutual fund shares, the
Company does not believe that these limitations would affect the ability of such
banks to enter into arrangements with IDI, but can give no assurance in this
regard. However, to the extent it is determined otherwise in the future,
arrangements with banks might have to be modified or terminated, and, in that
case, the size of one or more of the Funds possibly could decrease to the extent
that the banks would no longer invest customer assets in a particular Fund.
Neither the Company nor its investment adviser will give any preference to banks
or other depository institutions which enter into such arrangements when
selecting investments to be made by each Fund.
For the fiscal year ended June 30, 1997, allocations of 12b-1 amounts paid
by the Tax-Free Intermediate Bond Fund for the following categories of expenses
were: advertising -- $1,700; sales literature, printing and postage -- $3,705;
direct mail -- $977; public relations/promotion -- $554; compensation to
<PAGE>
securities dealers and other organizations -- $915; marketing personnel --
$4,010. For the fiscal year ended June 30, 1997 allocation of 12b-1 amounts paid
by the Tax-Free Long-Term Bond Fund for the following categories of expenses
were: advertising--$91,179; sales literature, printing and postage--$265,208;
direct mail--$52,633; public relations/promotion--$28,969; compensation to
securities dealers and other organizations--$212,727; marketing
personnel--$243,180.
The nature and scope of services which are provided by securities dealers
and other organizations may vary by dealer but include, among other things,
processing new stockholder account applications, preparing and transmitting to
the Company's Transfer Agent computer-processable tapes of each Fund's
transactions by customers, serving as the primary source of information to
customers in answering questions concerning each Fund, and assisting in other
customer transactions with each Fund.
^
The Plan provides that it shall continue in effect with respect to each
Fund for so long as such continuance is approved at least annually by the vote
of the board of directors of the Company cast in person at a meeting called for
the purpose of voting on such continuance. The Plan can also be terminated at
any time with respect to any Fund, without penalty, if a majority of the 12b-1
directors, or shareholders of such Fund, vote to terminate the Plan. The Company
may, in its absolute discretion, suspend, discontinue or limit the offering of
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 or her shares. So long as the Plan is in
effect, the selection and nomination of persons to serve as independent
directors of the Company shall be committed to the independent directors then in
office at the time of such selection or nomination. The Plan may not be amended
to increase materially the amount of any Fund's payments thereunder without
approval of the shareholders of that Fund, and all material amendments to the
Plan must be approved by the board of directors of the Company, including a
majority of the 12b-1 directors. Under the agreement implementing the Plan, IDI
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
<PAGE>
such agreement as to that Fund without penalty upon 30 days' written notice
to the other party. No further payments will be made by a Fund under the Plan in
the event of its termination as to that Fund.
To the extent that the Plan constitutes a plan of distribution adopted
pursuant to Rule 12b-1 under the 1940 Act, it shall remain in effect as such, so
as to authorize the use of each Fund's assets in the amounts and for the
purposes set forth therein, notwithstanding the occurrence of an assignment, as
defined by the 1940 Act, and rules thereunder. To the extent it constitutes an
agreement pursuant to a plan, each Fund's obligation to make payments to IDI
shall terminate automatically, in the event of such "assignment," in which case
the Funds may continue to make payments pursuant to the Plan to IDI or another
organization only upon the approval of new arrangements, which may or may not be
with IDI, regarding the use of the amounts authorized to be paid by it under the
Plan, by the directors, including a majority of the 12b-1 directors, by a vote
cast in person at a meeting called for such purpose.
Information regarding the services rendered under the Plan and the amounts
paid therefor by the Funds are provided to, and reviewed by, the directors on a
quarterly basis. On an annual basis, the directors consider the continued
appropriateness of the Plan 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 Funds And Their
Management-- Officers and Directors of the Company" who are also officers either
of ^ IDI or companies affiliated with ^ IDI. The benefits which the Company
believes will be reasonably likely to flow to 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 IDI and its affiliated companies:
(a) To have greater resources to make the financial commitments
necessary to improve the quality and level of each Fund's
shareholder services (in both systems and personnel),
<PAGE>
(b) To increase the number and type of mutual funds available to
investors from IDI and its affiliated companies (and support
them in their infancy), and thereby expand the investment
choices available to all shareholders, and
(c) To acquire and retain talented employees who desire
to be associated with a growing organization; and
(4) Increased Fund assets may result in reducing each investor's share
of certain expenses through economies of scale (e.g. exceeding
established breakpoints in the advisory fee schedule and allocating
fixed expenses over a larger asset base), thereby partially
offsetting the costs of the Plan.
HOW SHARES ARE VALUED
As described in the section of the Funds' Prospectus entitled "How To Buy
Shares," the net asset value of shares of each Fund 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 that Fund receives a request to purchase or redeem shares. Net
asset value per share is not calculated on days the New York Stock Exchange is
closed, such as federal holidays including New Year's Day, Martin Luther King,
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving, and Christmas. The net asset value per share of a Fund is
calculated by dividing the value of all securities held by that Fund plus other
assets (including interest accrued but not collected), less that Fund's
liabilities (including accrued expenses, but excluding capital and surplus), by
the number of shares outstanding of the Fund.
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
<PAGE>
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.
FUND PERFORMANCE
As discussed in the section of the Funds' 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, 1997 and the period December 1, 1993
(commencement of operations of the Fund) to June 30, 1997 (life of the Fund) was
5.96% and 4.00%, 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, 1997 was 7.05%, 6.24% and 8.19%, 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)exponent n = ERV
where: P = initial payment of $1000
T = average annual total return
n = number of years
ERV = ending redeemable value of initial payment
The average annual total return performance figures shown above were
determined by solving the above formula for "T" for each time period indicated.
The 30-day compounded yield at June 30, 1997, for the Tax-Free
Intermediate Bond Fund of 3.94% and for the Tax-Free Long-Term Bond Fund of
4.64%, 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).
<PAGE>
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.
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 Intermediate Bond Fund as of June 30, 1997
was 4.64% at the 15% tax bracket, 5.47% at the 28% tax bracket, and 5.88% at the
33% tax bracket. The tax equivalent yield of the Tax-Free Long-Term Bond Fund as
of June 30, 1997, was 5.46% at the 15% tax bracket, 6.44% at the 28% tax
bracket, and 6.93% 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,
<PAGE>
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-
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
<PAGE>
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 the Funds'
Prospectus entitled "How To Sell Shares," each Fund offers a Periodic Withdrawal
Plan. All dividends and distributions on shares owned by shareholders
participating in this Plan are reinvested in additional shares. Because
withdrawal payments represent the proceeds from sales of shares, the amount of
shareholders' investments in a 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
purposes. In each case, shares will be redeemed at the close of business on or
about the 20th day of each month preceding payment, and payments will be mailed
within five business days thereafter.
The Periodic Withdrawal Plan involves the use of principal and is not a
guaranteed annuity. Payments under such Plan do not represent income or a return
on investment.
Participation in the Periodic Withdrawal Plan may be terminated at any
time by sending a written request to IFG. Upon termination, all future dividends
and capital gain distributions will be reinvested in additional shares unless a
shareholder requests otherwise.
Exchange ^ Policy. As discussed in the section of the Funds' Prospectus
entitled "How To Buy Shares - Exchange ^ Policy," each Fund offers shareholders
the ^ ability to exchange shares of a Fund for shares of another fund or for
shares of certain other no-load mutual funds advised by IFG. 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
<PAGE>
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 (7) days
following receipt of the required documents as described in the section of the
Funds' Prospectus entitled "How To Sell Shares." The right of redemption may be
suspended and payment postponed when: (a) the New York Stock Exchange is closed
for other than customary weekends and holidays; (b) trading on that exchange is
restricted; (c) an emergency exists as a result of which disposal by 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 SEC by order so permits.
It is possible that in the future conditions may exist which would, in the
opinion of the Company's investment adviser, make it undesirable for a Fund to
pay for redeemed shares in cash. In such cases, the investment adviser may
authorize payment to be made in portfolio securities or other property of the
Funds. However, the Company is obligated under the 1940 Act to redeem for cash
all shares of a Fund presented for redemption by any one shareholder having a
value up to $250,000 (or 1% of the Fund's net assets if that is less) in any
90-day period. Securities delivered in payment of redemptions are selected
entirely by the investment adviser based on what is in the best interests of 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, 1997, 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.
Each Fund intends to qualify to pay "exempt-interest dividends" to its
shareholders. Each Fund will so qualify if at least 50% of its total assets are
invested in municipal securities at the close of each quarter of the Company's
fiscal year. The exempt interest portion of the income dividend which is payable
monthly may be based on the ratio of a Fund's tax-exempt income to taxable
income for the entire taxable year. In such case, the ratio would be determined
<PAGE>
and reported to shareholders after the close of each taxable year. Thus,
the exempt-interest portion of any particular dividend may be based upon the
tax-exempt portion of all distributions for the taxable year, rather than upon
the tax-exempt portion of that particular dividend. Exemption of exempt-interest
dividends for federal income tax purposes does not necessarily result in
exemption under the income or other tax laws of any state or local taxing
authority. Although these dividends generally may be subject to state and local
income taxes, the laws of the several states and local taxing authorities vary
with respect to the taxation of exempt-interest dividends, taxable dividends and
distributions of capital gains.
A corporation includes exempt-interest dividends in calculating its
alternative taxable income in situations where the "adjusted current earnings"
of the corporation exceeds its alternative minimum taxable income.
Any loss realized on the redemption of shares in the Funds that have been
held by the shareholder for six months or less is not deductible to the extent
of the amount of any exempt-interest dividend paid with respect to such shares
and the balance of the loss is treated as long-term, instead of short-term,
capital loss to the extent of any capital gain distributions received on those
shares.
Entries or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by private activity bonds or
industrial development bonds should consult their tax advisers before purchasing
shares of a Fund because, for users of certain of these facilities, the interest
on those bonds is not exempt from federal income tax. For these purposes, the
term "substantial user" is defined generally to include a "non-exempt person"
who regularly uses in trade or business a part of a facility financed from the
proceeds of such bonds.
Up to 85% of social security and railroad retirement benefits may be
included in taxable income for recipients whose adjusted gross income (including
income from tax-exempt sources such as a Fund) plus 50% of their benefits
exceeds certain base amounts. Exempt-interest dividends from a Fund still are
tax-exempt to the extent described above, they are only included in the
calculation of whether a recipient's income exceeds the established amounts.
IFG may provide shareholders of the Funds with information concerning the
average cost basis of their shares in order to help them prepare their tax
returns. This information is intended as a convenience to shareholders and will
not be reported to the Internal Revenue Service (the "IRS"). The IRS permits the
use of several methods to determine the cost basis of mutual fund shares. The
cost basis information provided by IFG will be computed using the
single-category average cost method, although neither IFG nor the Company
recommends any particular method of determining cost basis. Other methods may
result in different tax consequences. If a shareholder has reported gains or
<PAGE>
losses with respect to shares of 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 the method.
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,
1997, 1996 and 1995, the Tax-Free Long-Term Bond Fund's portfolio turnover rates
were 123%, 146% and 99%, respectively. For the fiscal years ended June 30, 1997,
1996 and 1995, the Tax-Free Intermediate Bond Fund's portfolio turnover rates
were 41%, 49% and 23%, respectively. The higher portfolio turnover rate for the
Tax-Free Long-Term Bond Fund during the fiscal year ended June 30, 1996, 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.
Placement of Portfolio Brokerage. Either IFG, as the Company's investment
adviser, or INVESCO Trust, as the Company's sub-adviser, places orders for the
purchase and sale of securities with brokers and dealers based upon IFG's or
INVESCO Trust's evaluation of their financial responsibility subject to their
ability to effect transactions at the best available prices. IFG or INVESCO
Trust evaluates the overall reasonableness of any brokerage commissions or
underwriting discounts (the difference between the full acquisition price to
acquire the new offering and the discount offered to members of the underwriting
syndicate) paid by reviewing the quality of executions obtained on each Fund's
portfolio transactions, viewed in terms of the size of transactions, prevailing
market conditions in the security purchased or sold, and general economic and
market conditions. In seeking to ensure that ^ the commissions or discounts
charged each Fund are consistent with prevailing and reasonable commissions or
<PAGE>
discounts, IFG or INVESCO Trust also endeavors to monitor brokerage
industry practices with regard to the commissions or discounts charged by
brokers and dealers on transactions effected for other comparable institutional
investors. While IFG or INVESCO Trust seeks reasonably competitive rates, a Fund
does not necessarily pay the lowest commission, discount 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, IFG or INVESCO Trust may select brokers that provide
research services to effect such transactions. Research services consist of
statistical and analytical reports relating to issuers, industries, securities
and economic factors and trends, which may be of assistance or value to IFG or
INVESCO Trust in making informed investment decisions. Research services
prepared and furnished by brokers through which the Fund effects securities
transactions may be used by IFG or INVESCO Trust in servicing all of its
accounts and not all such services may be used by IFG or INVESCO Trust in
connection with the Funds.
In recognition of the value of the above-described brokerage and research
services provided by certain brokers, IFG or INVESCO Trust, consistent with the
standard of seeking to obtain the best execution on portfolio transactions, may
place orders with such brokers for the execution of Fund transactions on which
the commissions are in excess of those which other brokers might have charged
for effecting the same transactions.
Portfolio transactions may be effected through qualified broker-dealers
that recommend the Funds to their clients, or that act as agent in the purchase
of a Fund's shares for their clients. When a number of 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 ^ Funds, or affiliates of such brokers) are paid a fee (the "Services Fee")
for recordkeeping, shareholder communications and other services provided by the
brokers to investors purchasing shares of the Funds through no transaction fee
<PAGE>
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
Company's directors have authorized the Funds to apply dollars generated from
the Company's Plan and Agreement of Distribution pursuant to Rule 12b-1 under
the 1940 Act (the "Plan") to pay the entire Services Fee, subject to the maximum
Rule 12b-1 fee permitted by the Plan. With respect to other NTF Programs, the
Company's directors have authorized the Fund to pay transfer agency fees to ^
IFG based on the number of investors who have beneficial interests in the NTF
Program Sponsor's omnibus accounts in the Fund. ^ IFG, in turn, pays these
transfer agency fees to the NTF Program Sponsor as a sub-transfer agency or
recordkeeping fee in payment of all or a portion of the Services Fee. In the
event that the sub-transfer agency or recordkeeping fee is insufficient to pay
all of the Services Fee with respect to these NTF Programs, the directors of the
Company have authorized the Funds to apply dollars generated from the Plan to
pay the remainder of the Services Fee, subject to the maximum Rule 12b-1 fee
permitted by the Plan. ^ IFG itself pays the portion of 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 Company's directors have further authorized ^ IFG to place a
portion of each Fund's brokerage transactions with certain NTF Program Sponsors
or their affiliated brokers, if ^ IFG reasonably believes that, in effecting the
Fund's transactions in portfolio securities, the broker is able to provide the
best execution of orders at the most favorable prices. A portion of the
commissions earned by such a broker from executing portfolio transactions on
behalf of a 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 such 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 IDI or IFG and the NTF Program Sponsor. Thus,
a 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 such Fund's credits. In the event that the transfer agency fee paid by a Fund
to ^ IFG with respect to investors who have beneficial interests in a particular
NTF Program Sponsor's omnibus accounts in a Fund exceeds the Services Fee
applicable to such Fund, after application of credits, ^ IFG may carry forward
the excess and apply it to future Services Fees payable to that NTF Program
Sponsor with respect to such Fund. The amount of excess transfer agency fees
carried forward will be reviewed for possible adjustment by ^ IFG prior to each
fiscal year-end of the Fund. The Company's board of directors has also
authorized each Fund to pay to IDI the full Rule 12b-1 fees contemplated by the
Plan to compensate IDI for expenses incurred by IDI in engaging in the
activities and providing the services on behalf of such 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
<PAGE>
12b-1 fee that would have been used to compensate IDI for payments to such
NTF Program Sponsor absent such credits.
The aggregate dollar amount of brokerage commissions paid by the Tax-Free
Intermediate Bond Fund for the fiscal years ended June 30, 1997, 1996 and 1995
was $0, $7,538 and $4,147, respectively, and for the fiscal years ended June 30,
1997, 1996 and 1995 were $748,918, $884,965 and $393,584, 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, 1997, no commissions were paid to brokers in connection
with their provision of research services to either Fund.
Neither IFG nor INVESCO Trust receive any brokerage commissions on
portfolio transactions effected on behalf of the Funds, and there is no
affiliation between IFG, INVESCO Trust, or any person affiliated with IFG,
INVESCO Trust, or the Funds, and any broker or dealer that executes transactions
for the Funds.
ADDITIONAL INFORMATION
Common Stock. The Company has 500,000,000 authorized shares of common
stock with a par value of $0.01 per share. Of the Company's authorized shares,
100,000,000 shares have been allocated to the Tax-Free Long-Term Bond Fund and
100,000,000 shares have been allocated to Tax-Free Intermediate Bond Fund. As of
June 30, 1997, 14,368,509 shares of the Tax-Free Long-Term Bond Fund and 469,281
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 series of common stock without seeking the approval of
shareholders and may classify and reclassify any authorized but unissued shares.
Shares of each series represent the interests of the shareholders of such
series in a particular portfolio of investments of the Company. Each series of
the Company's shares is preferred over all other series with respect to the
assets specifically allocated to that series, and all income, earnings, profits
and proceeds from such assets, subject only to the rights of creditors, are
allocated to shares of that series. The assets of each series are segregated on
the books of account and are charged with the liabilities of that series and
with a share of the Company's general liabilities. The board of directors
determines those assets and liabilities deemed to be general assets or
liabilities of the Company, and those items are allocated among series in a
manner deemed by the board to be fair and equitable. Generally, such allocation
will be made based upon the relative total net assets of each series. In the
unlikely event that a liability allocable to one class exceeds the assets
<PAGE>
belonging to the series, all or a portion of such liability may have to be
borne by the holders of shares of the Company's other series.
All dividends on shares of a particular series shall be paid only out of
the income belonging to that series, pro rata to the holders of that series. In
the event of the liquidation or dissolution of the Company or of a particular
series, the shareholders of each series that is being liquidated shall be
entitled to receive, as a series, when and as declared by the board of
directors, the excess of the assets belonging to that series over the
liabilities belonging to that series. The holders of shares of any series shall
not be entitled to any distribution upon liquidation of any other series. The
assets so distributable to the shareholders of any particular series shall be
distributed among such shareholders in proportion to the number of shares of
that series held by them and recorded on the books of the Company.
All Fund shares, regardless of series, have equal voting rights. Voting
with respect to certain matters, such as ratification of independent accountants
or election of directors, will be by all series of the Company. When not all
series are affected by a matter to be voted upon, such as approval of an
investment advisory contract or changes in a Fund's investment policies, only
shareholders of the series affected by the matter will be entitled to vote.
Company shares have noncumulative voting rights, which means that the holders of
a majority of the shares voting for the election of directors of the Company can
elect 100% of the directors if they choose to do so. In such event, the holders
of the remaining shares voting for the election of directors will not be able to
elect any person or persons to the board of directors. After they have been
elected by shareholders, the directors will continue to serve until their
successors are elected and have qualified or they are removed from office, in
either case by a shareholder vote, or until death, resignation or retirement.
They may appoint their own successors, provided that always at least a majority
of the directors have been elected by the Company's shareholders. It is the
intention of the Company not to hold annual meetings of shareholders. The
directors will call annual or special meetings of shareholders for action by
shareholder vote as may be required by the 1940 Act or the Company's Articles of
Incorporation, or at their discretion.
Principal Shareholders. As of August 1, 1997, 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. 45,754.5670 9.670%
Special Custody Account
<PAGE>
For The Exclusive Benefit
of Customers
101 Montgomery St.
San Francisco, CA 94104
John Canaday 35,658.9410 7.536%
745 Pine St.
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 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, LLP, 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, 1997, 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, 1997.
<PAGE>
Prospectus. The Company will furnish, without charge, a copy of the Funds'
Prospectus upon request. Such requests should be made to the Company at the
mailing address or telephone number set forth on the first page of this
Statement of Additional Information.
Registration Statement. This Statement of Additional Information and the
Prospectus do not contain all of the information set forth in the Registration
Statement the Company has filed with the SEC. The complete Registration
Statement may be obtained from the SEC upon payment of the fee prescribed by the
rules and regulations of, the SEC.
<PAGE>
APPENDIX A
Description of Moody'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.
<PAGE>
Rating Refinements: Moody's may apply the numerical modifier "1", for
municipally-backed bonds, and modifiers "1", "2" and "3", for 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 S&P'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.
<PAGE>
Description of Fitch's 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 D&P's 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.
Description of Moody's ratings of state and municipal notes:
<PAGE>
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 S&P'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 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 S&P's ratings for demand obligations and taxable and tax-exempt
commercial paper:
<PAGE>
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.
<PAGE>
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
<PAGE>
any particular time. In such event it might not be possible to effect
closing 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
<PAGE>
transaction. The Fund will engage in OTC option transactions only with
primary U.S. Government securities dealers recognized by the Federal Reserve
Bank of New York.
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.
<PAGE>
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.
