<PAGE> 1
STATEMENT OF ADDITIONAL INFORMATION
AIM SUMMIT FUND, INC.
CLASS II SHARES
11 Greenway Plaza
Suite 100
Houston, Texas 77046-1173
(713) 626-1919
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT
A PROSPECTUS, AND IT SHOULD BE READ IN CONJUNCTION
WITH A PROSPECTUS OF THE ABOVE-NAMED FUND,
A COPY OF WHICH MAY BE OBTAINED FREE OF CHARGE FROM
AUTHORIZED DEALERS OR BY WRITING
A I M DISTRIBUTORS, INC., P.O. BOX 4264,
HOUSTON, TEXAS 77210-4264.
STATEMENT OF ADDITIONAL INFORMATION DATED JULY 1, 1999,
AS REVISED AUGUST 16, 1999
RELATING TO THE CLASS II SHARES PROSPECTUS DATED JULY 1, 1999
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TABLE OF CONTENTS
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INTRODUCTION................................................................................. 1
PERFORMANCE INFORMATION...................................................................... 1
Total Return Quotations............................................................. 3
GENERAL INFORMATION ABOUT THE FUND........................................................... 4
The Fund and its Capital Stock...................................................... 4
MANAGEMENT OF THE FUND....................................................................... 4
Directors and Officers.............................................................. 4
The Investment Advisor..............................................................10
Expenses ...........................................................................12
Transfer Agent and Custodian........................................................12
Reports ...........................................................................12
DIVIDENDS, DISTRIBUTIONS AND TAX MATTERS.....................................................12
Reinvestment of Dividends and Distributions.........................................12
Qualification as a Regulated Investment Company.....................................13
Determination of Taxable Income of a Regulated Investment Company...................14
Excise Tax on Regulated Investment Companies........................................15
Fund Distributions..................................................................15
Sale or Redemption of Fund Shares...................................................17
Foreign Shareholders................................................................17
Effect of Future Legislation; Local Tax Considerations..............................18
SHARE PURCHASES, REDEMPTIONS AND REPURCHASES.................................................18
Purchases and Redemptions...........................................................18
Suspension of Right of Redemption...................................................18
Valuation of Shares.................................................................19
The Distribution Plan...............................................................19
The Distribution Agreement..........................................................21
INVESTMENT STRATEGIES AND RISKS..............................................................22
Investment Program..................................................................23
Common Stocks.......................................................................23
Preferred Stocks....................................................................23
Convertible Securities..............................................................23
Corporate Debt Securities...........................................................24
U.S. Government Securities..........................................................24
Real Estate Investment Trusts ("REITs").............................................24
Warrants ...........................................................................25
Foreign Securities..................................................................25
Foreign Exchange Transactions.......................................................26
Repurchase Agreements...............................................................26
Rule 144A Securities................................................................27
Illiquid Securities.................................................................27
Lending of Fund Securities..........................................................27
Portfolio Turnover..................................................................27
</TABLE>
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<TABLE>
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OPTIONS, FUTURES AND CURRENCY STRATEGIES.....................................................28
Introduction........................................................................28
General Risks of Options, Futures and Currency Strategies...........................28
Cover ...........................................................................29
Writing Call Options................................................................29
Index Options.......................................................................30
Limitations on Options..............................................................30
Interest Rate, Currency and Stock Index Futures Contracts...........................31
Call Options on Futures Contracts...................................................32
Forward Contracts...................................................................32
Limitations on Use of Futures, Call Options on Futures and Certain
Call Options on Currencies..........................................................32
PORTFOLIO TRANSACTIONS AND BROKERAGE.........................................................33
INVESTMENT RESTRICTIONS......................................................................35
MISCELLANEOUS INFORMATION....................................................................37
Shareholder Inquiries...............................................................37
Legal Matters.......................................................................37
FINANCIAL STATEMENTS.........................................................................FS
</TABLE>
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INTRODUCTION
AIM Summit Fund, Inc. (the "Fund") is a mutual fund. The rules and
regulations of the Securities and Exchange Commission (the "SEC") require
all mutual funds to furnish prospective investors certain information
concerning the activities of the fund being considered for investment. The
information for the for the Class II Shares (the "Class"), of the Fund is
included in a Prospectus dated July 1, 1999, which may be obtained without
charge by written request to A I M Distributors, Inc. ("AIM Distributors").
Investors may also call AIM Distributors at (800) 995-4246 or dealers
authorized by AIM Distributors to distribute the Fund's shares.
Investors must receive a Prospectus before they invest.
This Statement of Additional Information is intended to furnish
prospective investors with additional information concerning the Class.
Some of the information required to be in this Statement of Additional
Information is also included in the Class' current prospectus and, in order
to avoid repetition, reference will be made to sections of the Prospectus.
Additionally, the Prospectus and this Statement of Additional Information
omit certain information contained in the registration statement filed with
the SEC. Copies of the registration statement, including items omitted from
the Prospectus and this Statement of Additional Information, may be
obtained from the SEC by paying the charges prescribed under its rules and
regulations.
PERFORMANCE INFORMATION
All advertisements of the Fund will disclose the maximum creation
and sales charges, imposed by AIM Summit Investors Plans II (the "Plan")
and other fees (collectively, the "Sales Charges") on purchases of shares
of the Class. If any advertised performance data does not reflect the
maximum Sales Charges, such advertisement will disclose that the Sales
Charges have not been deducted in computing the performance data, and that,
if reflected, the maximum Sales Charges would reduce the performance
quoted. Further information regarding the Class' performance is contained
in the Fund's annual report to shareholders, which is available upon
request and without charge.
From time to time, A I M Advisors, Inc. ("AIM") or its affiliates
may waive all or a portion of their fees and/or assume certain expenses of
any Class. Voluntary fee waivers or reductions or commitments to assume
expenses may be rescinded at any time without further notice to investors.
During periods of voluntary fee waivers or reductions or commitments to
assume expenses, AIM will retain its ability to be reimbursed for such fee
prior to the end of each fiscal year. Contractual fee waivers or reductions
or reimbursement of expenses set forth in the Fee Table in the Prospectus
may not be terminated or amended to the Funds' detriment during the period
stated in the agreement between AIM and the Fund. Fee waivers or reductions
or commitments to reduce expenses will have the effect of increasing that
Fund's yield and total return.
The performance of the Fund will vary from time to time and past
results are not necessarily indicative of future results. The Fund's
performance is a function of its portfolio management in selecting the type
and quality of portfolio securities and is affected by operating expenses
of the Fund and market conditions. A shareholder's investment in the Class
is not insured or guaranteed. These factors should be carefully considered
by the investor before making an investment in the Class.
Total return is calculated in accordance with a standardized
formula for computation of annualized total return. Standardized total
return for the shares of the Class reflects the deduction of the Class'
maximum Sales Charges at the time of purchase.
The Class' total return shows its overall change in value,
including changes in share price and assuming all dividends and capital
gain distributions are reinvested. A cumulative total return reflects the
Class' performance over a stated period of time. An average annual total
return reflects the hypothetical compounded annual rate of return that
would have produced the same cumulative total return if the fund's
performance had been constant over the entire period. BECAUSE AVERAGE
ANNUAL RETURNS TEND TO EVEN OUT
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VARIATIONS IN THE CLASS' RETURN, INVESTORS SHOULD RECOGNIZE THAT SUCH
RETURNS ARE NOT THE SAME AS ACTUAL YEAR-BY-YEAR RESULTS. To illustrate the
components of overall performance, the Class may separate its cumulative
and average annual returns into income results and capital gains or losses.
Total return figures for the Class are neither fixed nor
guaranteed, and no principal is insured. The Class may provide performance
information in reports, sales literature and advertisements. The Class may
also, from time to time, quote information published or aired by
publications or other media entities which contain articles or segments
relating to investment results or other data. The following is a list of
such publications or media entities:
Barron's Fortune USA Today
Bloomberg Investor's Business Daily U.S. News & World Report
Business Week Money Wall Street Journal
Economist Mutual Fund Forecaster Washington Post
Financial World Mutual Fund Magazine CNN
Forbes New York Times CNBC
The Class may also compare its performance to performance data of
similar mutual funds as published by the following services:
Bank Rate Monitor Mutual Fund Values (Morningstar)
CDA Weisenberger Ibbotson Associates
Donoghue's Lipper, Inc.
The Class' performance may also be compared in advertising to the
performance of comparative benchmarks such as the following:
Standard & Poor's 400 Index Consumer Price Index
Standard & Poor's 500 Stock Index Russell Midcap
Dow Jones Industrial Average NASDAQ
The Class may also compare its performance to rates on
Certificates of Deposit and other fixed rate investments such as the
following:
10 year Treasury Notes
30 year Treasury Bond
90 day Treasury Bills
Advertising for the Class may from time to time include
discussions of general economic conditions and interest rates, and may also
include references to the use of the Class as part of an individual's
overall retirement investment program. From time to time, sales literature
and/or advertisements may disclose (i) the largest holdings in the Class'
portfolio, (ii) certain selling group members and/or (iii) certain
institutional shareholders.
From time to time, the Class' sales literature and/or
advertisements may discuss generic topics pertaining to the mutual fund
industry. This includes, but is not limited to, literature addressing
general information about mutual funds, variable annuities, dollar-cost
averaging, stocks, bonds, money markets, certificates of deposit,
retirement, retirement plans, asset allocation, tax-free investing, college
planning, or inflation.
Although performance data may be useful to prospective investors
when comparing the Class' performance with other funds and other potential
investments, investors should note that the methods of
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computing performance of other potential investments are not necessarily
comparable to the methods employed by the Class.
Additional performance information is contained in the Fund's
Annual Report to Shareholders, which is available upon request without
charge.
TOTAL RETURN QUOTATIONS
The standard formula for calculating total return, as described in
the Prospectus, is as follows:
n
P(1+T) =ERV
Where P = a hypothetical initial payment of $1,000.
T = average annual total return (assuming the
applicable maximum sales load is deducted at the
beginning of the 1, 5, or 10 year periods).
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000
payment at the end of the 1, 5, or 10 year periods
(or fractional portion of such period).
Shares of the Class may be acquired by the general public only
through the Plan. Investors should consult the Prospectus of the Plan for
complete information regarding Creation and Sales Charges and Custodian
Fees.
As of October 31, 1998, Class II Shares were not available to the
public.
Standard total return quotes may be accompanied by total return
figures calculated by alternative methods. For example, average annual
total return may be calculated without assuming payment of the full sales
load according to the following formula:
n
P(1+U) =ERV
Where P = a hypothetical initial payment of $1,000.
U = average annual total return assuming payment of
only a stated portion of, or none of, the
applicable maximum sales load at the beginning of
the stated period.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000
payment at the end of the stated period.
Cumulative total return across a stated period may be calculated as
follows:
n
P(1+V) =ERV
Where P = a hypothetical initial payment of $1,000.
V = cumulative total return assuming payment of all
of, a stated portion of, or none of, the
applicable maximum sales load at the beginning of
the stated period.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000
payment at the end of the stated period.
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GENERAL INFORMATION ABOUT THE FUND
THE FUND AND ITS CAPITAL STOCK
The Fund is an open-end, diversified management investment company
organized as a corporation under the laws of the State of Maryland on
February 17, 1982 and has an authorized capital of 1,000,000,000 shares of
common stock, par value $.01 per share. The Class and Class I Shares of the
Fund have equal rights and privileges. Each share of a particular class is
entitled to one vote, to participate equally in dividends and distributions
declared by the Fund's Board of Directors with respect to that class and,
upon liquidation or dissolution of the Fund, to participate proportionately
in the net assets of the Fund allocable to such class remaining after
satisfaction of outstanding liabilities of the Fund allocable to such
class. Fractional shares have the same rights as full shares to the extent
of their proportionate interest. Shareholders of the Fund do not have
cumulative voting rights. There are no preemptive or conversion rights
applicable to any of the Fund's shares. The Fund's shares, when issued, are
fully paid and non-assessable. Shares of the Fund are redeemable at the net
asset value thereof at the option of the holders thereof.
The term "majority vote" means the affirmative vote of the Fund or
of a particular class of the Fund (a) more than 50% of the outstanding
shares of the Fund or class (b) 67% or more of the shares of the Fund or
such class present at a meeting if more than 50% of the outstanding shares
of the Fund or class are represented at the meeting in person or by proxy,
whichever is less.
The Board of Directors of the Fund may classify or reclassify any
unissued shares into shares of any class or classes in addition to that
already authorized by setting or changing in any one or more respects, from
time to time, prior to the issuance of such shares, the preference,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualification, or terms or conditions of redemption, of such
shares. Any such classification or reclassification will comply with the
provisions of the laws of the State of Maryland and the Investment Company
Act of 1940, as amended (the "1940 Act").
MANAGEMENT OF THE FUND
The overall management of the business and affairs of the Fund is
vested with the Board of Directors. The Board of Directors approves all
significant agreements between the Fund and persons or companies furnishing
services to the Fund, including the Fund's agreements with the Fund's
advisor, distributor, custodian and transfer agent. The day-to-day
operations of the Fund are delegated to the Fund's officers and to AIM,
subject always to the investment objective and policies of the Fund and to
the general supervision of the Fund's Board of Directors.
DIRECTORS AND OFFICERS
The directors and officers of the Fund and their principal
occupations during the last five years are set forth below. All of the
Fund's executive officers hold similar offices with some or all of the
other investment companies advised by A I M Advisors, Inc. (the "AIM
Funds"). Unless otherwise indicated, the address of each director and
officer is 11 Greenway Plaza, Suite 100, Houston, Texas 77046-1173.
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Position(s) Held Principal Occupation(s) During,
Name, Address and Age with Registrant At Least, the Past 5 years
- --------------------- --------------- --------------------------
<S> <C> <C>
*Charles T. Bauer (80) Chairman and Chairman of the Board of Directors, A I M
Director Management Group Inc., A I M Advisors, Inc.,
A I M Capital Management, Inc., A I M Distributors,
Inc., A I M Fund Services, Inc. and Fund
Management Company; and Director and Vice
Chairman of AMVESCAP PLC.
Bruce L. Crockett, (55) Director Director, ACE Limited (insurance company).
906 Frome Lane Formerly Director, President and Chief Executive
McLean, VA 22102 Officer, COMSAT Corporation; and Chairman,
Board of
Governors of
INTELSAT
(international
communications
company).
Owen Daly II (74) Director Director, Cortland Trust Inc. (investment company).
Six Blythewood Road Formerly, Director, CF & I Steel Corp., Monumental
Baltimore, MD 21210 Life Insurance Company and Monumental General
Insurance Company; and Chairman of the Board of
Equitable Bancorporation
Edward K. Dunn, Jr. (64) Director Chairman of the Board of Directors, Mercantile
2 Hopkins Plaza, 20th Floor Mortgage Corp. Formerly, Vice Chairman of the
Baltimore, MD 21201 Board of Directors and President, Mercantile - Safe
Deposit & Trust Co.; and President, Mercantile
Bankshares.
Jack Fields (47) Director Chief Executive Officer, Texana Global, Inc.
Jetero Plaza, Suite E (foreign trading company) and Twenty-First
8810 Will Clayton Parkway Century Group, Inc. (governmental affairs
Humble, TX 77338 company). Formerly, Member of the U.S. House of
Representatives.
**Carl Frischling (62) Director Partner, Kramer, Levin, Naftalis & Frankel LLP (law
919 Third Avenue firm). Formerly, Partner, Reid & Priest (law firm).
New York, NY 10022
</TABLE>
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* A director who is an "interested person" of the Fund and A I M Advisors,
Inc. as defined in the 1940 Act.
** A director who is an "interested person" of the Fund as defined in the
1940 Act.
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Position(s) Held Principal Occupation(s) During,
Name, Address and Age with Registrant At Least, the Past 5 years
- --------------------- --------------- --------------------------
<S> <C> <C>
*Robert H. Graham (52) Director and Director, President and Chief Executive Officer,
President A I M Management Group Inc.; Director and
President, A I M Advisors, Inc.; Director and Senior
Vice President, A I M Capital Management, Inc.,
A I M Distributors, Inc., A I M Fund Services, Inc.
and Fund Management Company; and Director,
AMVESCAP PLC.
Prema Mathai-Davis (48) Director Chief Executive Officer YWCA of the U.S.A.;
350 Fifth Avenue, Suite 301 Commissioner, New York City Department for the
New York, NY 10118 Aging; and Member of the Board of Directors,
Metropolitan Transportation Authority of New York
State.
Lewis F. Pennock (56) Director Attorney, private practice in Houston, Texas.
6363 Woodway, Suite 825
Houston, Texas 77057
Louis S. Sklar (59) Director Executive Vice President, Development and
Transco Tower, 50th Floor Operations, Hines Interests Limited Partnership
2800 Post Oak Blvd. (real estate development).
Houston, Texas 77056
Gary T. Crum (51) Senior Vice Director and President, A I M Capital Management,
President Inc.; Director and Senior Vice President, A I M
Management Group Inc. and A I M Advisors, Inc.;
and Director, A I M Distributors, Inc. and
AMVESCAP PLC.
Carol F. Relihan (44) Senior Vice Director, Senior Vice President, General Counsel
President and and Secretary, A I M Advisors, Inc.; Senior Vice
Secretary President, General Counsel and Secretary,
A I M Management Group Inc.; Director,
Vice President and General Counsel,
Fund ManagementCompany; General Counsel and Vice
President, A I M Fund Services, Inc.; and Vice
President A I M Capital Management, Inc. and A I M
Distributors, Inc.
Dana R. Sutton (40) Vice President Vice President and Fund Controller, A I M
and Treasurer Advisors, Inc.; and Assistant Vice President and
Assistant Treasurer, Fund Management Company.
</TABLE>
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* A director who is an "interested person" of the Fund and A I M Advisors,
Inc. as defined in the 1940 Act.
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<PAGE> 10
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation(s) During,
Name, Address and Age with Registrant At Least, the Past 5 years
- --------------------- --------------- --------------------------
<S> <C> <C>
Melville B. Cox (55) Vice President Vice President and Chief Compliance Officer, A I M
Advisors, Inc., A I M Capital Management, Inc.,
A I M Distributors, Inc., A I M Fund Services, Inc.
and Fund Management Company.
Edgar M. Larsen (59) Vice President Vice President, A I M Capital Management, Inc.
</TABLE>
The Board of Directors has an Audit Committee, an Investments
Committee, and a Nominating and Compensation Committee.
The members of the Audit Committee are Messrs. Crockett, Daly, Dunn
(Chairman), Fields, Frischling, Pennock, Sklar and Ms. Mathai-Davis. The
Audit Committee is responsible for meeting with the Fund's auditors to
review audit procedures and results and to consider any matters arising
from an audit to be brought to the attention of the directors as a whole
with respect to the Fund's fund accounting or its internal accounting
controls, or for considering such matters as may from time to time be set
forth in a charter adopted by the Board of Directors and such committee.
The members of the Investments Committee are Messrs. Bauer,
Crockett, Daly, Dunn, Fields, Frischling, Pennock, Sklar (Chairman) and Ms.
Mathai-Davis. The Investments Committee is responsible for reviewing
portfolio compliance, brokerage allocation, portfolio investment pricing
issues, interim dividend and distribution issues, or considering such
matters as may from time to time be set forth in a charter adopted by the
Board of Directors and such committee.
The members of the Nominating and Compensation Committee are
Messrs. Crockett (Chairman), Daly, Dunn, Fields, Pennock, Sklar and Ms.
Mathai-Davis. The Nominating and Compensation Committee is responsible for
considering and nominating individuals to stand for election as directors
who are not interested persons, reviewing from time to time the
compensation payable to the disinterested directors, or considering such
matters as may from time to time be set forth in a charter adopted by the
board and such committee.
Remuneration of Directors
Each director is reimbursed for expenses incurred in connection
with each meeting of the Board of Directors or any Committee attended. Each
director of the Fund is compensated for his or her services according to a
fee schedule which recognizes the fact that such director also serves as a
director or trustee of certain other AIM Funds. Each such director receives
a fee, allocated among the AIM Funds for which he or she serves as a
director or trustee, which consists of an annual retainer component and a
meeting fee component.
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<PAGE> 11
Set forth below is information regarding compensation paid or
accrued for each director of the Fund:
RETIREMENT TOTAL
BENEFITS COMPENSATION
ESTIMATED ACCRUED FROM ALL AIM
COMPENSATION BY ALL AIM FUNDS(3)
DIRECTOR FROM FUND (1) FUNDS(2)
-------- -------------- ----------- -------------
Charles T. Bauer $ 0 $ 0 $ 0
Bruce L. Crockett 1,913 37,485 96,000
Owen Daly II 1,913 122,898 96,000
Edward K. Dunn 1,231 0 78,889
Jack Fields 1,903 15,826 95,500
Carl Frischling(4) 1,913 97,791 95,500
Robert H. Graham 0 0 0
John F. Kroeger (5) 1,818 107,896 91,654
Prema Mathai-Davis 177 0 32,636
Lewis F. Pennock 1,913 45,766 95,500
Ian Robinson(6) 1,882 94,442 94,500
Louis S. Sklar 1,892 90,232 95,500
==================== ========= =========== ==========
- --------------
(1) The total amount of compensation deferred by all Directors of the Fund
during the fiscal year ended October 31, 1998, including interest earned
thereon, was $9,860.
(2) During the fiscal year ended October 31, 1998, the total amount of
expenses allocated to the Fund in respect of such retirement benefits was
$12,272. Data reflects compensation for the calendar year ended December
31, 1998.
(3) Each Director serves as director or trustee of a total of 12 registered
investment companies advised by AIM (comprised of over 50 portfolios). Data
reflects compensation earned during the calendar year ended December 31,
1998.
(4) During the fiscal year ended October 31, 1998, the Fund paid $6,861 in
legal fees for services rendered by Kramer, Levin, Naftalis & Frankel LLP.
Mr. Frischling is a partner in such firm.
(5) Mr. Kroeger was a director until June 11, 1998, when he resigned. On
that date he became a consultant to the Fund. Of the amount listed above,
$1,060 was compensation for services as a director and the remainder as a
consultant. Mr. Kroeger passed away on November 26, 1998, Mr. Kroeger's
widow will receive his pension as described below under "AIM Fund
Retirement Plan for Eligible Directors/Trustees."
(6) Mr. Robinson was a director until March 12, 1999, when he retired.
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<PAGE> 12
AIM Funds Retirement Plan for Eligible Directors/Trustees
Under the terms of the AIM Funds Retirement Plan for Eligible
Directors/Trustees (the "Plan"), each director (who is not an employee of
any of the AIM Funds, A I M Management Group Inc., or any of its
subsidiaries) may be entitled to certain benefits upon retirement from the
Board of Directors. Pursuant to the Plan, the normal retirement date is the
date on which the eligible director has attained age 65 and has completed
at least five years of continuous service with one or more of the regulated
investment companies managed, administered or distributed by AIM or its
subsidiaries (the "Applicable AIM Funds"). Each eligible director is
entitled to receive an annual benefit from the Applicable AIM Funds
commencing on the first day of the calendar quarter coincident with or
following his date of retirement equal to a maximum of 75% of the annual
retainer paid or accrued by the Applicable AIM Funds for such director
during the twelve-month period immediately preceding the director's
retirement (including amounts deferred under a separate agreement between
the AIM Funds and the director) and based on the number of such Director's
years of service (not in excess of 10 years of service) completed with
respect to any of the Applicable AIM Funds. Such benefit is payable to each
eligible director in quarterly installments. If an eligible director dies
after attaining the normal retirement date but before receipt of any
benefits under the Plan commences, the director's surviving spouse (if any)
shall receive a quarterly survivor's benefit equal to 50% of the amount
payable to the deceased director, for no more than ten years beginning the
first day of the calendar quarter following the date of the director's
death. Payments under the Plan are not secured or funded by any AIM Fund.
Set forth below is a table that shows the estimated annual benefits
payable to an eligible director upon retirement assuming the retainer
amount reflected below and various years of service. The estimated credited
years of service for Messrs. Crockett, Daly, Dunn, Fields, Frischling,
Kroeger, Pennock, Robinson, Sklar and Ms. Mathai-Davis are 11, 11, 0, 1,
21, 20, 17, 11, 9 and 0 years, respectively.
ESTIMATED ANNUAL BENEFITS UPON RETIREMENT
Annual Retirement
Number of Years of Compensation Paid By
Service With the All Applicable AIM
Applicable AIM Funds Funds
10 $67,500
9 $60,750
8 $54,000
7 $47,250
6 $40,500
5 $33,750
==================== =======================
Deferred Compensation Agreements
Messrs. Daly, Dunn, Fields, Frischling, Robinson and Sklar (for
purposes of this paragraph only, the "deferring directors") have each
executed a Deferred Compensation Agreement (collectively, the
"Agreements"). Pursuant to the Agreements, the deferring directors may
elect to defer receipt of up to 100% of their compensation payable by the
Fund, and such amounts are placed into a deferral account. Currently, the
deferring directors may select various AIM Funds in which all or part of
his deferral account shall be deemed to be invested. Distributions from the
deferring directors' deferral accounts will be paid in cash, in
9
<PAGE> 13
generally equal quarterly installments over a period of five (5) or ten
(10) years (depending on the Agreement) beginning on the date the deferring
director's retirement benefits commence under the Plan. The Fund's Board of
Directors, in its sole discretion, may accelerate or extend the
distribution of such deferral accounts after the deferring director's
termination of service as a director of the Fund. If a deferring director
dies prior to the distribution of amounts in his deferral account, the
balance of the deferral account will be distributed to his designated
beneficiary in a single lump sum payment as soon as practicable after such
deferring director's death. The Agreements are not funded and, with respect
to the payments of amounts held in the deferral accounts, the deferring
directors have the status of unsecured creditors of the Fund and of each
other AIM Fund from which they are deferring compensation.
THE INVESTMENT ADVISOR
The Fund has entered into an Investment Advisory Agreement, (the
"Advisory Agreement") with AIM. AIM is a wholly owned subsidiary of A I M
Management Group Inc. ("AIM Management"), 11 Greenway Plaza, Suite 100,
Houston, Texas 77046-1173. AIM was organized in 1976, and, together with
its subsidiaries, advises or manages over 110 investment company portfolios
encompassing a broad range of investment objectives. AIM Management is an
indirect wholly owned subsidiary of AMVESCAP PLC, 11 Devonshire Square,
London EC2M 4YR, United Kingdom. AMVESCAP PLC and its subsidiaries are an
independent investment management group engaged in institutional investment
management and retail mutual fund businesses in the United States, Europe
and the Pacific Region. Certain of the directors and officers of AIM are
also executive officers of the Fund and their affiliations are shown under
"Directors and Officers."
AIM and the Fund have adopted a Code of Ethics which requires
investment personnel and certain other employees (a) to pre-clear all
personal securities transactions subject to the Code of Ethics; (b) to file
reports or duplicate confirmations regarding such transactions; (c) to
refrain from personally engaging in (i) short-term trading of a security,
(ii) transactions involving a security within seven days of an AIM Fund
transaction involving the same security, and (iii) transactions involving
securities being considered for investment by an AIM Fund; and (d) to abide
by certain other provisions under the Code of Ethics. The Code of Ethics
also prohibits investment personnel and all other AIM employees from
purchasing securities in an initial public offering. Personal trading
reports are reviewed periodically by AIM, and the Board of Directors
reviews quarterly and annual reports (including information on any
substantial violations of the Code of Ethics). Sanctions for violations of
the Code of Ethics may include censure, monetary penalties, suspension or
termination of employment.
A I M Capital Management, Inc., ("AIM Capital") a wholly owned
subsidiary of AIM, is engaged in the business of providing investment
advisory services to investment companies, corporations, institutions and
other accounts. AIM Distributors, a registered broker-dealer and a wholly
owned subsidiary of AIM, acts as principal underwriter of other registered
investment companies advised or managed by AIM.
Pursuant to the terms of the Advisory Agreement, AIM: (a)
supervises all aspects of the operations of the Fund; (b) obtains and
evaluates pertinent information about significant developments and
economic, statistical and financial data, domestic, foreign or otherwise,
whether affecting the economy generally or the Fund, and whether concerning
the individual issuers whose securities are included in the Fund or the
activities in which such issuers engage, or with respect to securities
which AIM considers desirable for inclusion in the Fund; (c) determines
which issuers and securities shall be represented in the Fund's investment
portfolio and regularly reports thereon to the Fund's Board of Directors;
and (d) formulates and implements continuing programs for the purchases and
sales of the securities of such issuers and regularly reports thereon to
the Fund's Board of Directors; and takes, on behalf of the Fund, all
actions which appear to the Fund necessary to carry into effect such
purchase and sale programs and supervisory functions as aforesaid,
including but not limited to the placing of orders for the purchase and
sale of securities for the Fund. Subject to the approval of the Board of
Directors and the shareholders of the Fund, AIM may delegate to a
sub-advisor certain of its duties, provided that AIM shall continue to
supervise the performance of any such sub-advisor.
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<PAGE> 14
As compensation for its services, AIM receives an annual fee,
calculated daily and paid monthly, at the annual rate of 1.00% of the first
$10 million of the Fund's average daily net assets, 0.75% of the next $140
million of the Fund's average daily net assets and 0.625% of the Fund's
average daily net assets in excess of $150 million. Although the advisory
fee rate paid by the Fund is higher than that paid by other investment
companies, many of those investment companies are a different size or have
different objectives than the Fund. The effective rate of fees and expenses
paid by the Fund at its current size is lower than that for other funds
with similar investment objectives.
AIM may from to time waive or reduce its fee. Voluntary fee waivers
or reductions, may be rescinded at any time without further notice to
investors. During periods of voluntary fee waivers or reductions, AIM will
retain its ability to be reimbursed for such fee prior to the end of each
fiscal year. Contractual fee waivers or reductions set forth in the Fee
Tables in the Prospectus may not be terminated or amended to the Fund's
detriment during the period stated in the agreement between AIM and the
Fund.
The Advisory Agreement will continue from year to year, provided
that it is specifically approved at least annually by (i) the Fund's Board
of Directors or the vote of a "majority of the outstanding voting
securities" of the Fund (as defined in the 1940 Act) and (ii) the
affirmative vote of a majority of the directors who are not parties to the
agreement or "interested persons" of any such party (the "Non-Interested
Directors") by votes cast in person at a meeting called for such purpose.
The Fund or AIM may terminate the Advisory Agreement on 60 days' written
notice without penalty. The Advisory Agreement terminates automatically in
the event of assignment, as defined in the 1940 Act.
The Advisory Agreement provides that upon the request of the Fund's
Board of Directors, AIM may perform, or arrange for the performance of,
certain accounting, shareholder servicing and other administrative services
to the Fund that are not required to be performed by AIM under the Advisory
Agreement. For such services, AIM is entitled to receive from the Fund
reimbursement of its costs or such reasonable compensation as may be agreed
upon by AIM and the Fund's Board of Directors upon a finding by the Board
of Directors that the provision of such services is in the best interests
of the Fund and its shareholders.
The Board of Directors has made such a finding and, accordingly,
has entered into an Administrative Services Agreement, with AIM (the
"Administrative Services Agreement"). Under the Administrative Services
Agreement, AIM currently provides the services of a principal financial
officer and his staff, who maintain the financial accounts and books and
records of the Fund, including the calculation of the daily net asset value
of the Fund, and prepare tax returns and financial statements for the Fund
and also is reimbursed for any expenses related to providing such services,
as well as the services of staff responding to various shareholder
inquiries. The Administrative Services Agreement will continue year to
year, provided that it is specifically approved at least annually by (i)
the Fund's Board of Directors or the vote of a "majority of the outstanding
voting securities" of the Fund (as defined in the 1940 Act) and (ii) the
affirmative vote of a majority of the Non- Interested Directors by votes
cast in person at a meeting called for such purpose. In addition, a
sub-contract between AIM and A I M Fund Services, Inc. ("AFS"), a
registered transfer agent and wholly owned subsidiary of AIM, provides that
AFS may perform certain shareholders services for the Fund which are not
required to be performed by AIM under the Advisory Agreement. Currently,
AFS provides certain shareholders services for the Fund. For such services,
while AFS is entitled to receive from AIM such reimbursement of its costs
associated with providing those services as may be approved by the Board of
Directors, AFS does not presently receive any such reimbursement.
During the fiscal years ended October 31, 1998, 1997 and 1996, AIM
received management and advisory fees from the Fund of $11,372,220, $9,353,715
and $7,360,028, respectively. See "Expenses."
For the fiscal years ended October 31, 1998, 1997 and 1996, AIM was
reimbursed $72,766, $67,450 and $63,439, respectively, for costs associated
with performing administrative services.
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<PAGE> 15
Prior to July 1, 1999, TradeStreet Investment Associates, Inc.
("TradeStreet"), 101 South Tryon Street, Suite 1000, Charlotte, North Carolina
28255, served as Sub-Advisor. TradeStreet is a wholly owned subsidiary of
NationsBank, N.A. and a registered investment advisor.
For the period November 1, 1995 through March 31, 1996, NationsBank
Texas received fees from AIM of $958,342. For the fiscal year ended October
31, 1998 and 1997 and for the period April 1, 1996 through the fiscal year
ended October 31, 1996, TradeStreet received fees from AIM of $3,405,833,
$2,921,391 and $1,454,982, respectively. See "Expenses."
EXPENSES
All of the ordinary business expenses incurred in the operations of
the Fund and the offering of its shares shall be borne by the Fund unless
specifically provided otherwise in the Advisory Agreement. These expenses
borne by the Fund include but are not limited to brokerage commissions,
taxes, legal, auditing, or governmental fees, the cost of preparing share
certificates, custodian, transfer and shareholder service agent costs,
expenses of issue, sale, redemption and repurchase of shares, expenses of
registering and qualifying shares for sale, expenses relating to directors'
and shareholders' meetings, the cost of preparing and distributing reports
and notices to shareholders, the fees and other expenses incurred by the
Fund in reports and notices to shareholders, the fees and other expenses
incurred by the Fund in connection with membership in investment company
organizations and the cost of pricing copies of prospectuses and statements
of additional information distributed to the Fund's shareholders.
TRANSFER AGENT AND CUSTODIAN
A I M Fund Services, Inc. ("AFS"), a wholly owned subsidiary of
AIM, 11 Greenway Plaza, Suite 100, Houston, Texas 77046-1173, acts as a
transfer and dividend disbursing agent for the Class. These services do not
include any supervisory function over management or provide any protection
against any possible depreciation of assets.
State Street Bank and Trust Company ("State Street Bank") acts as
custodian for the Fund's portfolio securities and cash. The Fund pays State
Street Bank, BFDS, and AFS such compensation as may be agreed upon from
time to time.
REPORTS
The Fund will furnish shareholders semi-annually with a list of the
investments held in the Class' portfolio and its financial statements. The
annual financial statements will be audited by the Fund's independent
certified public accountants. The Board of Directors has selected KPMG LLP,
700 Louisiana, Houston, Texas 77002, as the Fund's independent certified
public accountants to audit the Fund's books and review the Fund's tax
returns.
DIVIDENDS, DISTRIBUTIONS AND TAX MATTERS
REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
It is the present policy of the Fund to declare and pay annually
net investment income dividends and capital gains distributions. It is the
Fund's intention to distribute substantially all of its net investment
income and capital gains by the end of the calendar year. In determining
the amount of capital gains, if any, available for distribution, net
capital gains will be offset against available net capital losses, if any,
carried forward from previous fiscal periods. All dividends and
distributions will be automatically reinvested at the net asset value
determined on the record date in full and fractional shares of the Class
unless the shareholder has elected prior to the record date, by written
notice to Boston Financial Data Services, Inc. ("BFDS"), P.O. Box 8300,
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<PAGE> 16
Boston, Massachusetts 02266-8300, Attention: AIM Summit Fund, Inc., to
receive all such payments in cash. Such reinvestments will not be subject
to sales charges and shares so purchased will be automatically credited to
the account of the shareholder.
Changes in the form of dividend and distribution payments may be
made by the shareholder at any time and will be effective as to any
subsequent payment if such notice is received by BFDS prior to the
applicable record date. Any dividend and distribution election will remain
in effect until BFDS receives a revised written election by the
shareholder.
No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its shareholders, and the discussion here is not
intended as a substitute for careful tax planning. Because shares of the
Fund may be purchased by individual investors through the Plan, the
following discussion is addressed only to individual (rather than
corporate) investors.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The Fund has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, the Fund is not subject to
federal income tax on the portion of its net investment income (i.e.,
taxable interest, dividends and other taxable ordinary income, net of
expenses) and capital gain net income (i.e., the excess of capital gains
over capital losses) that it distributes to shareholders, provided that it
distributes at least 90% of its investment company taxable income (i.e.,
net investment income and the excess of net short-term capital gain over
net long-term capital loss) for the taxable year (the "Distribution
Requirement"), and satisfies certain other requirements of the Code that
are described below. Distributions by the Fund made during the taxable year
or, under specified circumstances, within twelve months after the close of
the taxable year, will be considered distributions of income and gains of
the taxable year and can therefore satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans,
gains from the sale or other disposition of stock or securities or foreign
currencies (to the extent such currency gains are directly related to the
regulated investment company's principal business of investing in stock or
securities) and other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business
of investing in such stock, securities or currencies (the "Income
Requirement").
The Fund may use "equalization accounting" in determining the
portion of its net investment income and capital gain net income that has
been distributed. If the Fund that elects to use equalization accounting,
it will allocate a portion of its realized investment income and capital
gains to redemptions of Fund shares and will correspondingly reduce the
amount of such income and gains that it distributes in cash. However, the
Fund intends to make cash distributions for each taxable year in an
aggregate amount that is sufficient to satisfy the Distribution Requirement
without taking into account its use of equalization accounting. The
Internal Revenue Service has not published any guidance concerning the
methods to be used in allocating investment income and capital gains to
redemptions of shares. In the event that the Internal Revenue Service
determines that the Fund is using an improper method of allocation and has
underdistributed its net investment income and capital gain net income for
any taxable year, the Fund may be liable for additional federal income tax.
In addition to satisfying the requirements described above, the
Fund must satisfy an asset diversification test in order to qualify as a
regulated investment company. Under this test, at the close of each quarter
of the Fund's taxable year, at least 50% of the value of the Fund's assets
must consist of cash and cash items, U.S. Government securities, securities
of other regulated investment companies, and securities of other issuers
(as to which the Fund has not invested more than 5% of the value of the
Fund's total assets in securities of such issuer and as to which the Fund
does not hold more than 10% of the outstanding voting securities of such
issuer), and no more than 25% of the value of its total assets may be
invested in the securities of any one issuer (other than U.S. Government
securities and securities of other regulated investment companies), or in
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<PAGE> 17
two or more issuers which the Fund controls and which are engaged in the
same or similar trades or businesses.
If for any taxable year the Fund does not qualify as a regulated
investment company, all of its taxable income (including its net capital
gain) will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will be
taxable as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits.
DETERMINATION OF TAXABLE INCOME OF A REGULATED INVESTMENT COMPANY
In general, gain or loss recognized by the Fund on the disposition
of an asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by the Fund at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued during the period of time the Fund held the debt obligation unless
the Fund made an election to accrue market discount into income. In
addition, under the rules of Code Section 988, gain or loss recognized on
the disposition of a debt obligation denominated in a foreign currency or
an option with respect thereto (but only to the extent attributable to
changes in foreign currency exchange rates), and gain or loss recognized on
the disposition of a foreign currency forward contract or of foreign
currency itself, will generally be treated as ordinary income or loss.
In general, for purposes of determining whether capital gain or
loss recognized by the Fund on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (a) the
asset is used to close a "short sale" (which includes for certain purposes
the acquisition of a put option) or is substantially identical to another
asset so used, (b) the asset is otherwise held by the Fund as part of a
"straddle", or (c) the asset is stock and the Fund grants certain call
options with respect thereto. In addition, a Fund may be required to defer
the recognition of a loss on the disposition of an asset held as part of a
straddle to the extent of any unrecognized gain on the offsetting position.
Any gain recognized by a Fund on the lapse of, or any gain or loss
recognized by a Fund from a closing transaction with respect to, an option
written by the Fund will generally be treated as a short-term capital gain
or loss. In the case of covered options, gain or loss may be long-term.
Some of the forward foreign currency exchange contracts, options
and futures contracts that the Fund may enter into will be subject to
special tax treatment as "Section 1256 contracts." Section 1256 contracts
are treated as if they are sold for their fair market value on the last
business day of the taxable year, regardless of whether a taxpayer's
obligations (or rights) under such contracts have terminated (by delivery,
exercise, entering into a closing transaction or otherwise) as of such
date. Any gain or loss recognized as a consequence of the year-end deemed
disposition of Section 1256 contracts is combined with any other gain or
loss that was previously recognized upon the termination of Section 1256
contracts during that taxable year. The net amount of such gain or loss for
the entire taxable year (including gain or loss arising as a consequence of
the year-end deemed sale of such contracts) is deemed to be 60% long-term
(taxable at a maximum rate of 20% for non-corporate shareholders) and 40%
short-term gain or loss. However, in the case of Section 1256 contracts
that are forward foreign currency exchange contracts, the net gain or loss
is separately determined and (as discussed above) generally treated as
ordinary income or loss.
Other hedging transactions that may be engaged in by the Fund (such
as short sales "against the box") may be subject to special tax treatment
as "constructive sales" under Section 1259 of the Code if a Fund holds
certain "appreciated financial positions" (defined generally as any
interest (including a futures or forward contract, short sale or option)
with respect to stock, certain debt instruments, or partnership interests
if there would be a gain were such interest sold, assigned, or otherwise
terminated at its fair market value). Upon entering into a constructive
sales transaction with respect to an appreciated financial position, a Fund
will be deemed to have constructively sold such appreciated financial
position and will recognize gain as if such position were sold, assigned,
or otherwise terminated at its fair market value on the date of such
constructive
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<PAGE> 18
sale (and will take into account any gain for the taxable year which
includes such date) unless the closed transaction exception applies.
Because application of the rules governing Section 1256 contracts
and constructive sales may affect the character of gains or losses and/or
accelerate the recognition of gains or losses from the affected investment
positions, the amount which must be distributed to shareholders and which
will be taxed to shareholders as ordinary income or long-term capital gain
may be increased as compared to a fund that did not engage in transactions
involving Section 1256 contracts or constructive sales.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on regulated investment
companies that fail to distribute in each calendar year an amount equal to
98% of ordinary taxable income for the calendar year and 98% of capital
gain net income for the one-year period ended on October 31 of such
calendar year (or, at the election of a regulated investment company having
a taxable year ending November 30 or December 31, for its taxable year (a
"taxable year election")). The balance of such income must be distributed
during the next calendar year. For the foregoing purposes, a regulated
investment company is treated as having distributed any amount on which it
is subject to income tax for any taxable year ending in such calendar year.
For purposes of the excise tax, a regulated investment company must
(1) reduce its capital gain net income (but not below its net capital gain)
by the amount of any net ordinary loss for any calendar year and (2) unless
it has made a taxable year election, exclude foreign currency gains and
losses incurred after October 31 of any year in determining the amount of
ordinary taxable income for the current calendar year (and, instead,
include such gains and losses in determining ordinary taxable income for
the succeeding calendar year).
The Fund intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income
prior to the end of each calendar year to avoid liability for the excise
tax. However, in the event that the Internal Revenue Service determines
that the Fund is using an improper method of allocation for purposes of
equalization accounting (as discussed above), such Fund may be liable for
excise tax. Moreover, investors should note that the Fund may in certain
circumstances be required to liquidate portfolio investments to make
sufficient distributions to avoid excise tax liability.
FUND DISTRIBUTIONS
The Fund anticipates distributing substantially all of its
investment company taxable income for each taxable year. Such distributions
will be taxable to shareholders as ordinary income and treated as dividends
for federal income tax purposes, but they will qualify for the 70%
dividends received deduction for corporations only to the extent discussed
below.
The Fund may either retain or distribute to shareholders its net
capital gain for each taxable year. The Fund currently intends to
distribute any such amounts. If net capital gain is distributed and
designated as a capital gain dividend, it will be taxable to shareholders
as long-term capital gain (taxable at a maximum rate of 20%), regardless of
the length of time the shareholder has held his shares or whether such gain
was recognized by the Fund prior to the date on which the shareholder
acquired his shares. If the Fund elects to use equalization accounting,
however, a shareholder will be less likely to be taxed on gain recognized
prior to the date the shareholder acquires his shares since such gain will
in many cases have been allocated to shares of the Fund that have
previously been redeemed. Conversely, if the Fund elects to retain its net
capital gain, the Fund will be taxed thereon (except to the extent of any
available capital loss carryovers) at the 35% corporate tax rate. If the
Fund elects to retain its net capital gain, it is expected that the Fund
also will elect to have shareholders treated as if each received a
distribution of its pro rata share of such gain, with the result that each
shareholder will be required to report its pro rata share of such gain on
its tax return as long-term
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<PAGE> 19
capital gain, will receive a refundable tax credit for its pro rata share
of tax paid by the Fund on the gain, and will increase the tax basis for
its shares by an amount equal to the deemed distribution less the tax
credit.
Ordinary income dividends paid by the Fund with respect to a
taxable year will qualify for the 70% dividends received deduction
generally available to corporations (other than corporations, such as "S"
corporations, which are not eligible for the deduction because of their
special characteristics and other than for purposes of special taxes such
as the accumulated earnings tax and the personal holding company tax) to
the extent of the amount of qualifying dividends received by the Fund from
domestic corporations for the taxable year. A dividend received by the Fund
will not be treated as a qualifying dividend (a) if it has been received
with respect to any share of stock that the Fund has held for less than 46
days (91 days in the case of certain preferred stock), excluding for this
purpose under the rules of Code Section 246(c)(3)and(4) (i) any day more
than 45 days (or 90 days in the case of certain preferred stock) after the
date on which the stock becomes ex-dividend, and (ii) any period during
which the Fund has an option to sell, is under a contractual obligation to
sell, has made and not closed a short sale of, has granted certain options
to buy or has otherwise diminished its risk of loss by holding other
positions with respect to, such (or substantially identical) stock; (b) to
the extent that the Fund is under an obligation (pursuant to a short sale
or otherwise) to make related payments with respect to positions in
substantially similar or related property; or (c) to the extent the stock
on which the dividend is paid is treated as debt-financed under the rules
of Code Section 246A. Moreover, the dividends received deduction for a
corporate shareholder may be disallowed or reduced (a) if the corporate
shareholder fails to satisfy the foregoing requirements with respect to its
shares of the Fund, or (b) by application of Code Section 246(b) which in
general limits the dividends received deduction to 70% of the shareholder's
taxable income (determined without regard to the dividends received
deduction and certain other items).
Alternative minimum tax ("AMT") is imposed in addition to, but only
to the extent it exceeds, the regular tax and is computed at a maximum rate
of 28% for non-corporate taxpayers and 20% for corporate taxpayers on the
excess of the taxpayer's alternative minimum taxable income ("AMTI") over
an exemption amount. The corporate dividends received deduction is not
itself an item of tax preference that must be added back to taxable income
or is otherwise disallowed in determining a corporation's AMTI. However,
corporate shareholders will generally be required to take the full amount
of any dividend received from the Fund into account (without a dividend
received deduction) in determining their adjusted current earnings, which
are used in computing an additional corporate preference item (i.e., 75% of
the excess of a corporate taxpayer's adjusted current earnings over its
AMTI (determined without regard to this item and the AMTI net operating
loss deduction)) that is includable in AMTI. For taxable years beginning
after 1997, however, certain small corporations are wholly exempt from the
AMT.
Investment income that may be received by certain of the Funds from
sources within foreign countries may be subject to foreign taxes withheld
at the source. The United States has entered into tax treaties with many
foreign countries which entitle any such Funds to a reduced rate of, or
exemption from, taxes on such income. It is impossible to determine the
effective rate of foreign tax in advance since the amount of any such
Fund's assets to be invested in various countries is not known.
Distributions by the Fund that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital
to the extent of (and in reduction of) the shareholder's tax basis in his
shares; any excess will be treated as gain from the sale of his shares, as
discussed below.
Distributions by the Fund will be treated in the manner described
above regardless of whether such distributions are paid in cash or
reinvested in additional shares of the Fund. Shareholders receiving a
distribution in the form of additional shares will be treated as receiving
a distribution in an amount equal to the fair market value of the shares
received, determined as of the reinvestment date.
In addition, if the net asset value at the time a shareholder
purchases shares of the Fund reflects undistributed net investment income
or recognized capital gain net income, or unrealized appreciation in the
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<PAGE> 20
value of the assets of the Fund, distributions of such amounts will be
taxable to the shareholder in the manner described above, although such
distributions economically constitute a return of capital to the
shareholder.
Ordinarily, shareholders are required to take distributions by the
Fund into account in the year in which the distributions are made. However,
dividends declared in October, November or December of any year and payable
to shareholders of record on a specified date in such a month will be
deemed to have been received by the shareholders (and made by the Fund) on
December 31 of such calendar year if such dividends are actually paid in
January of the following year. Shareholders will be advised annually as to
the U.S. federal income tax consequences of distributions made (or deemed
made) during the year in accordance with the guidance that has been
provided by the Internal Revenue Service ("IRS").
The Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of ordinary income dividends and capital gain
dividends, and the proceeds of redemption of shares, paid to any
shareholder (1) who has provided either an incorrect tax identification
number or no number at all, (2) who is subject to backup withholding by the
Internal Revenue Service for failure to report the receipt of interest or
dividend income properly, or (3) who has failed to certify to the Fund that
he is not subject to backup withholding or that it is an "exempt
recipient."
SALE OR REDEMPTION OF FUND SHARES
A shareholder will recognize gain or loss on the sale or redemption
of shares of the Fund in an amount equal to the difference between the
proceeds of the sale or redemption and the shareholder's adjusted tax basis
in the shares. All or a portion of any loss so recognized may be disallowed
if the shareholder purchases other shares of the Fund within 30 days before
or after the sale or redemption. In general, any gain or loss arising from
(or treated as arising from) the sale or redemption of shares of the Fund
will be considered capital gain or loss and will be long-term capital gain
or loss if the shares were held for longer than one year. Except to the
extent otherwise provided in future Treasury regulations, any long-term
capital gain recognized by a non-corporate shareholder will be subject to
tax at a maximum rate of 20%. However, any capital loss arising from the
sale or redemption of shares held for six months or less will be treated as
a long-term capital loss to the extent of the amount of capital gain
dividends received on such shares. For this purpose, the special holding
period rules of Code Section 246(c)(3) and (4) generally will apply in
determining the holding period of shares. Long-term capital gains of
non-corporate taxpayers are currently taxed at a maximum rate that in some
cases may be 19.6% lower than the maximum rate applicable to ordinary
income. Capital losses in any year are deductible only to the extent of
capital gains plus, in the case of a non-corporate taxpayer, $3,000 of
ordinary income.
If a shareholder (i) incurs a sales load in acquiring shares of the
Fund, (ii) disposes of such shares less than 91 days after they are
acquired and (iii) subsequently acquires shares of the same or another Fund
at a reduced sales load pursuant to a right to reinvest at such reduced
sales load acquired in connection with the acquisition of the shares
disposed of, then the sales load on the shares disposed of (to the extent
of the reduction in the sales load on the shares subsequently acquired)
shall not be taken into account in determining gain or loss on the shares
disposed of but shall be treated as incurred on the acquisition of the
shares subsequently acquired.
FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate ("foreign
shareholder"), depends on whether the income from the Fund is "effectively
connected" with a U.S. trade or business carried on by such shareholder. If
the income from the Fund is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, ordinary income dividends
will be subject to U.S. withholding tax at the rate of 30% (or lower treaty
rate) upon the gross amount of the dividend. Such a foreign shareholder
would generally be exempt from U.S. federal income tax on gains
17
<PAGE> 21
realized on the sale of shares of the Fund, capital gain dividends and
amounts retained by the Fund that are designated as undistributed capital
gains.
If the income from the Fund is effectively connected with a U.S.
trade or business carried on by a foreign shareholder, then ordinary income
dividends, capital gain dividends and any gains realized upon the sale of
shares of the Fund will be subject to U.S. federal income tax at the rates
applicable to U.S. citizens or domestic corporations.
In the case of foreign shareholders, the Fund may be required to
withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Fund with proper notification of their
foreign status.
Foreign persons who file a United States tax return after December
31, 1996, for a U.S. tax refund and who are not eligible to obtain a social
security number must apply to the IRS for an individual taxpayer
identification number, using IRS Form W-7. For a copy of the IRS Form W-7
and accompanying instructions, please contact your tax advisor.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers
with respect to the particular tax consequences to them of an investment in
the Fund, including the applicability of foreign taxes.
EFFECT OF FUTURE LEGISLATION; LOCAL TAX CONSIDERATIONS
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and the regulations issued thereunder as
in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions
may have a retroactive effect with respect to the transactions contemplated
herein.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ
from the rules for U.S. federal income taxation described above.
Shareholders are urged to consult their tax advisers as to the consequences
of these and other state and local tax rules affecting investment in the
Fund.
SHARE PURCHASES, REDEMPTIONS AND REPURCHASES
PURCHASES AND REDEMPTIONS
The terms of offering of shares of the Class and the methods of
accomplishing redemption are set forth in full in the Class' Prospectus and
in the Plan's Prospectus.
SUSPENSION OF RIGHT OF REDEMPTION
The right of redemption may be suspended or the date of payment
postponed when (a) trading on the New York Stock Exchange (the "NYSE") is
restricted, as determined by applicable rules and regulations of the SEC;
(b) the NYSE is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency as determined by the SEC exists making disposal of portfolio
securities or the valuation of the net assets of the Fund not reasonably
practicable.
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<PAGE> 22
VALUATION OF SHARES
In accordance with the current rules and regulations of the SEC,
the net asset value of a Fund share is determined as of the close of
trading of the NYSE (generally 4:00 p.m. Eastern Time) on each day in which
the NYSE is open for trading. Net asset value is determined by dividing the
value of the Fund's securities, cash and other assets (including accrued
expenses but excluding capital and surplus), by the number of shares
outstanding. In the event the NYSE closes early (i.e. before 4:00 p.m.
Eastern Time) on a particular day, the net asset value of a Fund share is
determined as of the close of the NYSE on such day. Determination of the
Fund's net asset value per share is made in accordance with generally
accepted accounting principles. Portfolio securities are valued using
market values, if available. For purposes of determining net asset value
per share, futures and options contract closing prices which are available
15 minutes after the close of trading of the NYSE are generally used. The
net asset values per share of the Class and Class I Shares of the Fund will
differ from each other because different expenses are attributable to each
class. The income or loss and the expenses (except those listed below) of
the Fund are allocated to each class on the basis of the net assets of the
Fund allocable to each such class, calculated as of the close of business
on the previous business day, as adjusted for the current day's shareholder
activity of each class. Distribution, service fees and transfer agency fees
(to the extent different rates are charged to different classes) and
certain other fees are allocated only to the class to which such expenses
relate. The net asset value per share of the Class is determined by
subtracting the liabilities (e.g., the expenses) of the Fund allocated to
the Class from the assets of the Fund allocated to the Class and dividing
the result by the total number of shares outstanding of the Class.
Determination of the Fund's net asset value per share is made in accordance
with generally accepted accounting principles.
A security listed or traded on an exchange (except convertible
bonds) is valued at its last sale price on the exchange where the security
is principally traded, or lacking any sales on a particular day, the
security is valued at the closing bid price on that day. Each security
traded in the over-the-counter market (but not including securities
reported on the NASDAQ National Market System) is valued on the basis of
prices provided by independent pricing services. Each security reported on
the NASDAQ National Market System is valued at the last sale price on the
valuation date, or absent a last sales price, at the closing bid price on
that day, option contracts are valued at the mean between the closing bid
and asked prices on the exchange where the contracts are principally
traded; and futures contracts are valued at final settlement price
quotations from the primary exchange on which they are traded. Debt
obligations (including convertible bonds) are valued on the basis of prices
provided by an independent pricing service. Prices provided by the
independent pricing service may be determined without exclusive reliance on
quoted prices, and may reflect appropriate factors such as dividend rate,
yield, type of issue, coupon rate and maturity. Securities for which market
quotations are not readily available or for which market quotations are not
reflective of fair market value are valued at fair value as determined in
good faith by or under the supervision of the Fund's officers in a manner
specifically authorized by the Board of Directors of the Fund.
Notwithstanding the above, short-term obligations with maturities of 60
days or less are valued at amortized cost which approximates market value.
Generally, trading in foreign securities, as well as corporate
bonds, U.S. Government securities and money market instruments, is
substantially completed each day at various times prior to the close of the
NYSE. The values of such securities used in computing the net asset value
of the Fund's shares are determined as of such times. Foreign currency
exchange rates are also generally determined prior to the close of the
NYSE. Occasionally, events affecting the values of such securities and such
exchange rates may occur between the times at which they are determined and
the close of the NYSE which will not be reflected in the computation of the
Fund's net asset value. If events materially affecting the value of such
securities occur during such period, then these securities will be valued
at their fair value as determined in good faith by or under the supervision
of the Board of Directors.
THE DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1
under the 1940 Act relating to the Class of the Fund (the "Distribution
Plan"). The Distribution Plan provides that the Class pay 0.30% per
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<PAGE> 23
annum of its average daily net assets as compensation to AIM Distributors
for the purpose of financing any activity which is primarily intended to
result in the sale of the shares of the Class. The Distribution Plan is
designed to compensate AIM Distributors, on a quarterly basis, for certain
promotional and other sales-related costs, and to implement a dealer
incentive program which provides for periodic payments to selected dealers
who furnish continuing personal shareholder services to their customers who
purchase and own the shares of the Class. Payments can also be directed by
AIM Distributors to selected institutions who have entered into service
agreements with respect to the Class and who provides continuing personal
services to their customers who own shares of the Class. The service fees
payable to selected institutions are calculated at the annual rate of 0.25%
of the average daily net asset value of those Class shares that are held in
such institution's customers' accounts which were purchased on or after a
prescribed date set forth in the Distribution Plan. Activities appropriate
for financing under the Distribution Plan include, but are not limited to,
the following: printing of prospectuses and statements of additional
information and reports for other than existing shareholders; overhead;
preparation and distribution of advertising material and sales literature;
expenses of organizing and conducting sales seminars; supplemental payments
to dealers and other institutions such as asset-based sales charges or as
payments of service fees under shareholder service arrangements; and costs
of administering the Distribution Plan.
Of the aggregate amount payable under the Distribution Plan,
payments to dealers and other financial institutions that provide
continuing personal shareholder services to their customers who purchase
and own shares of the Class, in amounts of up to 0.25% of the average daily
net assets of the Class attributable to the customers of such dealers or
financial institutions, are characterized as a service fee, and payments to
dealers and other financial institutions in excess of such amount and
payments to AIM Distributors would be characterized as an asset-based sales
charge pursuant to the Distribution Plan. Payments pursuant to the
Distribution Plan are subject to any applicable limitations imposed by
rules of the National Association of Securities Dealers, Inc.
Pursuant to an incentive program, AIM Distributors may enter into
agreements ("Shareholder Service Agreements") with investment dealers
selected from time to time by AIM Distributors for the provision of
distribution assistance in connection with the sale of the shares of the
Class to such dealers' customers, and for the provision of continuing
personal shareholder services to customers who may from time to time
directly or beneficially own shares of the Class. The distribution
assistance and continuing personal shareholder services to be rendered by
dealers under the Shareholder Service Agreements may include, but shall not
be limited to, the following: distributing sales literature; answering
routine customer inquiries concerning the Fund; assisting customers in
changing dividend options, account designations and addresses, and in
enrolling in any of several special investment plans offered in connection
with the purchase of the shares of the Class; assisting in the
establishment and maintenance of customer accounts and records and in the
processing of purchase and redemption transactions; investing dividends and
any capital gains distributions automatically in shares of the Class; and
providing such other information and services as the Class or the customer
may reasonably request.
Under a Shareholder Service Agreement, the Fund agrees to pay
periodically fees to selected dealers and other institutions who render the
foregoing services to their customers. The fees payable under a Shareholder
Service Agreement generally will be calculated at the end of each payment
period for each business day of the Class during such period at the annual
rate of 0.25% of the average daily net asset value of the Fund's shares
purchased. Fees calculated in this manner shall be paid only to those
selected dealers or other institutions who are dealers or institutions of
record at the close of business on the last business day of the applicable
payment period for the account in which the shares of the Class are held.
The Distribution Plan is subject to any applicable limitations
imposed from time to time by rules of the National Association of
Securities Dealers, Inc.
AIM Distributors may from time to time waive or reduce any portion of
its 12b-1 fee for the Class. Voluntary fee waivers or reductions may be
rescinded at any time without further notice to investors. During
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<PAGE> 24
periods of voluntary fee waivers or reductions, AIM Distributors will
retain its ability to be reimbursed for such fee prior to the end of each
fiscal year. Contractual fee waivers or reductions set forth in the Fee
Table in the Prospectus may not be terminated or amended to the Fund's
detriment during the period stated in the agreement between AIM
Distributors and the Fund.
Under the Distribution Plan, certain financial institutions which
have entered into service agreements and which sell shares of the Class on
an agency basis, may receive payments from the Fund pursuant to the
Distribution Plan. AIM Distributors does not act as principal, but rather
as agent for the Class, in making dealer incentive and shareholder
servicing payments under the Distribution Plan. These payments are an
obligation of the Fund on behalf of the Class and not of AIM Distributors.
The Distribution Plan requires AIM Distributors to provide the
Board of Directors at least quarterly with a written report of the amounts
expended pursuant to the Distribution Plan and the purposes for which such
expenditures were made. The Board of Directors reviews these reports in
connection with their decisions with respect to the Distribution Plan.
As required by Rule 12b-1, the Distribution Plan and related form
of Shareholder Service Agreement were approved by the Board of Directors,
including a majority of the directors who are not "interested persons" (as
defined in the 1940 Act) of the Fund and who have no direct or indirect
financial interest in the operation of the Distribution Plan or in any
agreements related to the Distribution Plan ("Non-Interested Directors").
In approving the Distribution Plan in accordance with the requirements of
Rule 12b-1, the directors considered various factors and determined that
there is a reasonable likelihood that the Distribution Plan would benefit
the Class and its respective shareholders.
The Distribution Plan does not obligate the Fund on behalf of the
Class to reimburse AIM Distributors for the actual expenses AIM
Distributors may incur in fulfilling its obligations under the Distribution
Plan. Thus, even if AIM Distributors' actual expenses exceed the fee
payable to AIM Distributors thereunder at any given time, the Fund on
behalf of the Class will not be obligated to pay more than that fee. If AIM
Distributors' expenses are less than the fee it receives, AIM Distributors
will retain the full amount of the fee.
Unless the Distribution Plan is terminated earlier in accordance
with its terms, the Distribution Plan continues as long as such continuance
is specifically approved at least annually by the Board of Directors,
including a majority of the Non-Interested Directors.
The Distribution Plan may be terminated by the vote of a majority
of the Non-Interested Directors, or by the majority of the outstanding
voting securities.
Any change in the Distribution Plan that would increase materially
the distribution expenses paid by the applicable class requires shareholder
approval; otherwise, it may be amended by the directors, including a
majority of the Non-Interested Directors, by votes cast in person at a
meeting called for the purpose of voting upon such amendment. As long as
the Distribution Plan is in effect, the selection or nomination of the Non-
Interested Directors is committed to the discretion of the Non-Interested
Directors.
THE DISTRIBUTION AGREEMENT
The Fund has entered into a Distribution Agreement (the
"Distribution Agreement") with AIM Distributors, a registered broker-dealer
and a wholly owned subsidiary of AIM, which in turn is a wholly owned
subsidiary of AIM Management, under which the Fund will issue shares at net
asset value primarily to State Street Bank and Trust Company, as custodian
for the Plan ("State Street Bank" or the "Custodian"). The address of AIM
Distributors is P.O. Box 4264, Houston, Texas 77210-4264. AIM Distributors
acts as sponsor and principal underwriter of the Plan. AIM Distributors
does not receive any fee from the Fund pursuant to the Distribution
Agreement. The Distribution Agreement provides that AIM Distributors will
pay promotional expenses, including the incremental costs of printing
prospectuses, statements of additional information,
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<PAGE> 25
annual reports and other periodic reports for distribution to persons who
are not shareholders of the Fund and the costs of preparing and
distributing any other supplemental sales literature. AIM Distributors has
not undertaken to sell any specified number of shares of the Fund. The Fund
or AIM Distributors may terminate the Distribution Agreement on 60 days'
written notice without penalty. The Distribution Agreement will terminate
automatically in the event of assignment. Certain directors and officers of
the Fund are affiliated with AIM Distributors and AIM Management.
INVESTMENT STRATEGIES AND RISKS
Consistent with the Fund's objective of capital growth, the Fund's
assets will tend to be fully invested in:
1. Core Stocks -- These are securities issued by companies
which have established a long-term record of earnings growth and
which are believed by AIM, as the Fund's advisor, to be capable of
sustaining such growth in the future. Generally (but not always)
the common stocks of these companies will be listed on a national
securities exchange.
2. Emerging Growth Stocks -- These securities are issued by
smaller growth-oriented companies. The securities of a number of
such companies are traded only in the over-the-counter market. Such
securities may not have widespread interest among institutional
investors. Accordingly, such securities may present increased
opportunity for gain if significant institutional investor interest
subsequently develops, but may also involve additional risk of loss
in the event of adverse developments because of the limited market
for such securities. The business prospects and earnings of
emerging growth companies may be subject to more rapid or
unanticipated changes than in the case of larger, better
established concerns.
3. Value-Oriented Stocks -- These are stocks which are
believed to be currently undervalued relative to other available
investments. Since this belief may be based upon projections made
by the Fund's advisor of earnings, dividends or price-earnings
ratios (which projections may differ significantly from similar
projections made by other investors), the Fund's ability to realize
capital appreciation on value-oriented stocks may be more dependent
upon the advisor's capabilities than is the case with other types
of securities in which the Fund may invest.
In anticipation of or in response to adverse market conditions or
for cash management purposes, the Fund may hold all or a portion of its
assets in cash, money market securities, bond or other debt securities. As
a result, the Fund may not achieve its investment objective. Such money
market instruments will consist of obligations of, or guaranteed by, the
United States Government or its agencies or instrumentalities; certificates
of deposit, bankers' acceptances, time deposits, master notes and other
obligations of domestic banks having total assets of at least $500 million;
and commercial paper rated in the highest category by a nationally
recognized statistical rating organization.
The Fund may make short sales or maintain a short position in
securities if at all times when such a short position is open the Fund owns
at least an equal amount of such securities or securities convertible into
or exchangeable at no added cost for at least an equal amount of such
securities.
The receipt by the Fund of new money primarily through the medium
of continuing investments under systematic investment plans may tend to
produce a more even rate of influx than is the case with other funds. This
may furnish a base for a gradual and planned accumulation of positions in
individual portfolio securities when such a program is deemed to be
appropriate. One example of how this concept could be employed is through a
program of "dollar-cost averaging" in the purchase of securities for the
Class. "Dollar-cost averaging" involves the purchase of a fixed dollar
amount of stock of a company at regular intervals. The number of shares of
stock obtained upon each purchase will therefore vary with the price of the
stock, with more shares being obtained as the price to the stock declines
and fewer shares being obtained as the price
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<PAGE> 26
of the stock increases. Such a program could be hampered by increased
redemptions of the Fund's shares which would reduce amounts available for
investment by the Fund.
As of February 1, 1999, no person owned of record or is known by
the Fund to own of record or beneficially 5% or more of the Class'
outstanding equity securities. As of February 1, 1999, the directors and
officers of the Fund as a group owned beneficially less than 1% of each
Class of the Fund's outstanding shares.
INVESTMENT PROGRAM
The Fund's investment objective and the methods by which the Fund
seeks to achieve that objective is set forth in the Prospectus under the
caption "Investment Objectives and Strategies" and "Principal Risks of
Investing in the Fund." It is the current policy of the Fund not to
purchase or own the common stock of any company which, in the opinion of
AIM, derives a substantial portion of its revenues from the manufacture of
alcoholic beverages or tobacco products or the operation of gambling
establishments. In the opinion of management based upon current conditions,
such policy will not have a significant effect on the investment
performance of the Fund. This policy may be modified or rescinded by the
Fund's Board of Directors without shareholder approval.
COMMON STOCKS
The Fund may invest in common stocks. Common stocks represent the
residual ownership interest in the issuer and are entitled to the income
and increase in the value of the assets and business of the entity after
all of its obligations and preferred stocks are satisfied. Common stocks
generally have voting rights. Common stocks fluctuate in price in response
to many factors including historical and prospective earnings of the
issuer, the value of its assets, general economic conditions, interest
rates, investor perceptions and market liquidity.
PREFERRED STOCKS
The Fund may invest in preferred stocks. Preferred stock has a
preference over common stock in liquidation (and generally dividends as
well) but is subordinated to the liabilities of the issuer in all respects.
As a general rule the market value of preferred stock with a fixed dividend
rate and no conversion element varies inversely with interest rates and
perceived credit risk, while the market price of convertible preferred
stock generally also reflects some element of conversion value. Because
preferred stock is junior to debt securities and other obligations of the
issuer, deterioration in the credit quality of the issuer will cause
greater changes in the value of a preferred stock than in a more senior
debt security with similar stated yield characteristics. Unlike interest
payments on debt securities, preferred stock dividends are payable only if
declared by the issuer's board of directors. Preferred stock also may be
subject to optional or mandatory redemption provisions.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities. A convertible
security is a bond, debenture, note, preferred stock or other security that
may be converted into or exchanged for a prescribed amount of common stock
or other equity security of the same or a different issuer within a
particular period of time at a specified price or formula. A convertible
security entitles the holder to receive interest paid or accrued on debt or
the dividend paid on preferred stock until the convertible security matures
or is redeemed, converted or exchanged. Before conversion, convertible
securities have characteristics similar to nonconvertible income securities
in that they ordinarily provide a stable stream of income with generally
higher yields than those of common stocks of the same or similar issuers.
Convertible securities rank senior to common stock in a corporation's
capital structure but are usually subordinated to comparable nonconvertible
securities. Convertible securities may be subject to redemption at the
option of the issuer at a price established in the convertible security's
governing instrument. Although the Fund will only purchase convertible
securities that
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<PAGE> 27
AIM considers to have adequate protection parameters, including an adequate
capacity to pay interest and repay principal in a timely manner, it invests
without regard to corporate bond ratings.
CORPORATE DEBT SECURITIES
The Fund may invest in corporate debt securities. Corporations
issue debt securities of various types, including bonds and debentures
(which are long-term), notes (which may be short- or long-term), bankers
acceptances (indirectly secured borrowings to facilitate commercial
transactions) and commercial paper (short-term unsecured notes). These
securities typically provide for periodic payments of interest, at a rate
which may be fixed or adjustable, with payment of principal upon maturity
and are generally not secured by assets of the issuer or otherwise
guaranteed. The values of fixed rate income securities tend to vary
inversely with changes in interest rates, with longer-term securities
generally being more volatile than shorter-term securities. Corporate
securities frequently are subject to call provisions that entitle the
issuer to repurchase such securities at a predetermined price prior to
their stated maturity. In the event that a security is called during a
period of declining interest rates, the Fund may be required to reinvest
the proceeds in securities having a lower yield. In addition, in the event
that a security was purchased at a premium over the call price, the Fund
will experience a capital loss if the security is called. Adjustable rate
corporate debt securities may have interest rate caps and floors.
U.S. GOVERNMENT SECURITIES
The Fund may invest in securities issued or guaranteed by the
United States government or its agencies or instrumentalities. These
include Treasury securities (bills, notes, bonds and other debt securities)
which differ only in their interest rates, maturities and times of
issuance. U.S. Government agency and instrumentality securities include
securities which are supported by the full faith and credit of the U.S.,
securities that are supported by the right of the agency to borrow from the
U.S. Treasury, securities that are supported by the discretionary authority
of the U.S. Government to purchase certain obligations of the agency or
instrumentality and securities that are supported only by the credit of
such agencies. While the U.S. Government may provide financial support to
such U.S. government-sponsored agencies or instrumentalities, no assurance
can be given that it always will do so. The U.S. government, its agencies
and instrumentalities do not guarantee the market value of their securities
and consequently the values of such securities fluctuate.
REAL ESTATE INVESTMENT TRUSTS ("REITS")
The Fund may invest in equity and/or debt securities issued by
REITs. Such investments will not exceed 10% of the total assets of the
Fund.
REITs are trusts which sell equity or debt securities to investors
and use the proceeds to invest in real estate or interests therein. A REIT
may focus on particular projects, such as apartment complexes, or
geographic regions, such as the Southeastern United States, or both.
To the extent that the Fund has the ability to invest in REITs, the
Fund could conceivably own real estate directly as a result of a default on
the securities it owns. The Fund, therefore, may be subject to certain
risks associated with the direct ownership of real estate including
difficulties in valuing and trading real estate, declines in the value of
real estate, risks related to general and local economic condition, adverse
change in the climate for real estate, environmental liability risks,
increases in property taxes and operating expense, changes in zoning laws,
casualty or condemnation losses, limitations on rents, changes in
neighborhood values, the appeal of properties to tenants, and increases in
interest rates.
In addition to the risks described above, equity REITs may be
affected by changes in the value of the underlying property owned by the
trusts, while mortgage REITs may be affected by the quality of any credit
extended. Equity and mortgage REITs are dependent upon management skill,
are not diversified, and are therefore subject to the risk of financing
single or a limited number of projects. Such trusts are also subject
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<PAGE> 28
to heavy cash flow dependency, defaults by borrowers, self-liquidation, and
the possibility of failing to maintain exemption from the 1940 Act. Changes
in interest rates may also affect the value of debt securities held by the
Fund. By investing in REITs indirectly through the Fund, a shareholder will
bear not only his/her proportionate share of the expenses of the Fund, but
also, indirectly, similar expenses of the REITs.
WARRANTS
The Fund may, from time to time, invest in warrants. Warrants are,
in effect, longer-term call options. They give the holder the right to
purchase a given number of shares of a particular company at specified
prices within certain periods of time. The purchaser of a warrant expects
that the market price of the security will exceed the purchase price of the
warrant plus the exercise price of the warrant, thus giving him a profit.
Of course, since the market price may never exceed the exercise price
before the expiration date of the warrant, the purchaser of the warrant
risks the loss of the entire purchase price of the warrant. Warrants
generally trade in the open market and may be sold rather than exercised.
Warrants are sometimes sold in unit form with other securities of an
issuer. Units of warrants and common stock may be employed in financing
young, unseasoned companies. The purchase price of a warrant varies with
the exercise price of a warrant, the current market value of the underlying
security, the life of the warrant and various other investment factors.
FOREIGN SECURITIES
The Fund has reserved the investment flexibility to invest up to
20% of its total assets in foreign securities. These securities will be
marketable equity securities (including common and preferred stock,
depositary receipts for stock and fixed income or equity securities
exchangeable for or convertible into stock) of foreign companies which
generally are listed on a recognized foreign securities exchange or traded
in a foreign over-the-counter market. The Fund may also invest in foreign
securities listed on recognized U.S. securities exchanges or traded in the
U.S. over-the-counter market. Such foreign securities may be issued by
foreign companies located in developing countries in various regions of the
world. A "developing country" is a country in the initial stages of its
industrial cycle. As compared to investment in the securities markets of
developed countries, investment in the securities markets of developing
countries involves exposure to markets that may have substantially less
trading volume and greater price volatility, economic structures that are
less diverse and mature, and political systems that may be less stable. The
Fund may also purchase securities of foreign issuers which are in the form
of American Depository Receipts ("ADRs"), European Depository receipts
("EDRs"), or other securities representing underlying securities of foreign
issuers. ADRs, EDRs, and other securities representing underlying
securities of foreign issuers are included in the percentage limitations
applicable to the Fund's investments in foreign securities. To the extent
it invests in securities denominated in foreign currencies, the Fund bears
the risks of changes in the exchange rates between U.S. currency and the
foreign currency, as well as the availability and status of foreign
securities markets.
Investments by the Fund in foreign securities, whether denominated
in U.S. dollars or foreign currencies including Eurodollar, Yankee dollar
and other foreign obligations, may entail some or all of the risks set
forth below. Investments by the Fund in ADRs and EDRs may entail certain
political and economic risks and regulatory risks described below.
Currency Risk. The value of the Fund's foreign investments will be
affected by changes in currency exchange rates. The U.S. dollar value of a
foreign security decreases when the value of the U.S. dollar rises against the
foreign currency in which the security is denominated, and increases when the
value of the U.S. dollar falls against such currency.
Political and Economic Risk. The economies of many of the countries
in which the Fund may invest are not as developed as the United States
economy and may be subject to significantly different economic and
political forces. Political or social instability, expropriation or
confiscatory taxation, and limitations on the removal of funds or other
assets could also adversely affect the value of the Fund's investments.
25
<PAGE> 29
Regulatory Risk. Foreign companies are not registered with the SEC
and are generally not subject to the regulatory controls imposed on United
States issuers and, as a consequence, there is generally less publicly
available information about foreign securities than is available about
domestic securities. Foreign companies are not subject to uniform
accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to domestic companies. In
addition, income from foreign securities owned by the Fund may be reduced
by a withholding tax at the source, which tax would reduce dividend income
payable to the Fund's shareholders.
Market Risk. The securities markets in many of the countries in
which the Fund may invest will have substantially less trading volume than
the major United States markets. As a result, the securities of some
foreign companies may be less liquid and experience more price volatility
than comparable domestic securities. Increased custodian costs as well as
administrative costs (such as the need to use foreign custodians) may be
associated with the maintenance of assets in foreign jurisdictions. There
is generally less government regulation and supervision of foreign stock
exchanges, brokers and issuers which may make it difficult to enforce
contractual obligations. In addition, transaction costs in foreign
securities markets are likely to be higher, since brokerage commission
rates in foreign countries are likely to be higher than in the United
States.
On January 1, 1999, certain members of the European Economic and
Monetary Union ("EMU"), namely Austria, Belgium, Finland, France, Germany,
Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain
established a common European currency known as the "euro" and each
member's local currency became a denomination of the euro. It is
anticipated that each participating country will replace its local currency
with the euro on July 1, 2002. Any other European country that is a member
of the European Union and satisfies the criteria for participation in the
EMU may elect to participate in the EMU and may supplement its existing
currency with the euro. The anticipated replacement of existing currencies
with the euro on July 1, 2002 could cause market disruptions before or
after July 1, 2002 and could adversely affect the value of securities held
by the Fund.
FOREIGN EXCHANGE TRANSACTIONS
Purchases and sales of foreign securities are usually made with
foreign currencies, and consequently the Fund may from time to time hold
cash balances in the form of foreign currencies and multinational currency
units. Such foreign currencies and multinational currency units will
usually be acquired on a spot (i.e. cash) basis at the spot rate prevailing
in foreign exchange markets and will result in currency conversion costs to
the Fund. The Fund attempts to purchase and sell foreign currencies on as
favorable a basis as practicable; however, some price spread on foreign
exchange transactions (to cover service charges) may be incurred,
particularly when the Fund changes investments from one country to another,
or when U.S. dollars are used to purchase foreign securities. Certain
countries could adopt policies which would prevent the Fund from
transferring cash out of such countries, and the Fund may be affected
either favorably or unfavorably by fluctuations in relative exchange rates
while the Fund holds foreign currencies.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements. A repurchase
agreement is an instrument under which the Fund acquires ownership of a
debt security and the seller (usually a broker or a bank) agrees, at the
time of the sale, to repurchase the obligation at a mutually agreed upon
time and price, thereby determining the yield during the Fund's holding
period. In the event of bankruptcy or other default of a seller of a
repurchase agreement, the Fund may experience both delays in liquidating
the underlying securities and losses, including: (a) a possible decline in
the value of the underlying security during the period in which the Fund
seeks to enforce its rights thereto; (b) a possible subnormal level of
income and lack of access to income during this period; and (c) expenses of
enforcing its rights. A repurchase agreement is collateralized by the
security acquired by the Fund and its value is marked to market daily in
order to minimize the Fund's risk. Repurchase agreements usually are for
short periods, such as one or two days, but may be entered into for
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longer periods of time. Repurchase agreements are not included in the Fund's
restrictions on lending. Repurchase agreements are considered to be loans by
the Fund under the 1940 Act.
RULE 144A SECURITIES
The Fund may purchase securities which, while privately placed, are
eligible for purchase and sale pursuant to Rule 144A under the Securities
Act of 1933 (the "1933 Act"). This Rule permits certain qualified
institutional buyers, such as the Fund, to trade in privately placed
securities even though such securities are not registered under the 1933
Act. AIM, under the supervision of the Fund's Board of Directors, will
consider whether securities purchased under Rule 144A are illiquid and thus
subject to the Fund's restriction of investing no more than 15% of its
assets in illiquid securities. Determination of whether a Rule 144A
security is liquid or not is a question of fact. In making this
determination AIM will consider the trading markets for the specific
security taking into account the unregistered nature of a Rule 144A
security. In addition, AIM could consider the (i) frequency of trades and
quotes, (ii) number of dealers and potential purchasers, (iii) dealer
undertakings to make a market, and (iv) nature of the security and of
market place trades (for example, the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer).
The liquidity of Rule 144A securities will also be monitored by AIM and, if
as a result of changed conditions, it is determined that a Rule 144A
security is no longer liquid, the Fund's holdings of illiquid securities
will be reviewed to determine what, if any, action is required to assure
that the Fund does not invest more than 15% of its assets in illiquid
securities. Investing in Rule 144A securities could have the effect of
increasing the amount of the Fund's investments in illiquid securities if
qualified institutional buyers are unwilling to purchase such securities.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in securities that
are illiquid. Illiquid securities include securities that cannot be
disposed of promptly (within seven days) in the normal course of business
at a price at which they are valued. Illiquid securities may include
securities that are subject to restrictions on resale because they have not
been registered under the Securities Act of 1933. Restricted securities
may, in certain circumstances, be resold pursuant to Rule 144A, and thus
may or may not constitute illiquid securities. The Fund's Board of
Directors is responsible for developing and establishing guidelines and
procedures for determining the liquidity of Rule 144A restricted securities
on behalf of the Fund and monitoring AIM's implementation of the guidelines
and procedures. Limitations on the resale of restricted securities may have
an adverse effect on their marketability, which may prevent the Fund from
disposing of them promptly at reasonable prices. The Fund may have to bear
the expense of registering such securities for resale, and the risk of
substantial delays in effecting such registrations.
LENDING OF FUND SECURITIES
The Fund may also lend its portfolio securities in amounts up to 33
1/3% of its total assets to financial institutions in accordance with the
investment restrictions of the Fund. Such loans would involve risks of
delay in receiving additional collateral in the event the value of the
collateral decreased below the value of the securities loaned or of delay
in recovering the securities loaned or even loss of rights in the
collateral should the borrower of the securities fail financially. However,
loans will be made only when, in AIM's judgment, the income to be earned
from the loans justifies the attendant risks.
PORTFOLIO TURNOVER
Consistent with its objective of capital growth, the Fund does not
intend to engage in substantial short-term trading. However, the Fund
reserves the right to dispose of any security without regard to the period
of time it has been held and to take short-term or long-term profits when
such action is consistent with its investment program. The Fund's
historical portfolio turnover rates are included in the Financial
Highlights table in the Prospectus. A higher rate of portfolio turnover may
result in higher transaction costs, including
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<PAGE> 31
brokerage commissions. The Fund's turnover may vary greatly from year to
year and may exceed 100% during years when the Fund has taken a significant
defensive position or otherwise makes changes in the investment strategies
which it pursues consistent with its overall investment objective. Also, to
the extent that higher portfolio turnover results in a higher rate of net
realized capital gains to the Fund, the portion of the Fund's distributions
constituting taxable capital gains may increase.
OPTIONS, FUTURES AND CURRENCY STRATEGIES
INTRODUCTION
The Fund may use forward contracts, futures contracts, call options on
securities, call options on indices, call options on currencies, and call
options on futures contracts to attempt to hedge against the overall level of
investment and currency risk normally associated with the Fund's
Investments. These instruments are often referred to as "derivatives,"
which may be defined as financial instruments whose performance is derived,
at least in part, from the performance of another asset (such as a
security, currency or an index of securities).
GENERAL RISKS OF OPTIONS, FUTURES AND CURRENCY STRATEGIES
The use by the Fund of call options, futures contracts and forward
currency contracts involves special considerations and risks, as described
below. Risks pertaining to particular strategies are described in the
sections that follow.
(1) Successful use of hedging transactions depends upon AIM's
ability to correctly predict the direction of changes in the value of the
applicable markets and securities, contracts and/or currencies. While AIM
is experienced in the use of these instruments, there can be no assurance
that any particular hedging strategy will succeed.
(2) There might be imperfect correlation, or even no correlation,
between the price movements of an instrument (such as a call option contract)
and the price movements of the investments being hedged. Such a lack of
correlation might occur due to factors unrelated to the value of the
investments being hedged, such as changing interest rates, market
liquidity, and speculative or other pressures on the markets in which the
hedging instrument is traded.
(3) Hedging strategies, if successful, can reduce risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies can
also reduce opportunity for gain by offsetting the positive effect of
favorable price movements in the hedged investments.
(4) There is no assurance that a liquid secondary market will exist
for any particular call option, futures contract, forward contract or call
option thereon at any particular time.
(5) As described below, the Fund is required to maintain
assets as "cover," and might be required to maintain segregated accounts or
make margin payments when it takes positions in instruments involving
obligations to third parties. If the Fund were unable to close out its
positions in such instruments, it might be required to continue to maintain
such assets or accounts or make such payments until the position expired or
matured. The requirements might impair the Fund's ability to sell a portfolio
security or make an investment at a time when it would otherwise be favorable
to do so, or require that the Fund sell a portfolio security at a
disadvantageous time.
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(6) There is no assurance that the Fund will use hedging
transactions. For example, if the Fund determines that the cost of hedging
will exceed the potential benefit to the Fund, the Fund will not enter into
such transaction.
COVER
Transactions using forward contracts, futures contracts and call options
expose the Fund to an obligation to another party. The Fund will not enter
into any such transactions unless it owns either (1) an offsetting ("covered")
position in securities, currencies, forward contracts or futures contracts or
(2) cash, liquid assets and/or short-term debt securities with a value
sufficient at all times to cover its potential obligations not covered as
provided in (1) above. The Fund will comply with SEC guidelines regarding
cover for these instruments and, if the guidelines so require, set aside
cash or liquid securities.
Assets used as cover cannot be sold while the position in the
corresponding forward contract, futures contract or call option is open, unless
they are replaced with other appropriate assets. If a large portion of the
Fund's assets is used for cover or otherwise set aside, it could affect
portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
WRITING CALL OPTIONS
The Fund may write (sell) covered call options on securities,
futures contracts, forward contracts, indices and currencies. As the writer
of a call option, the Fund would have the obligation to deliver the
underlying security, cash or currency (depending on the type of derivative)
to the holder (buyer) at a specified price (the exercise price) at any time
until (American style) or on (European style) a certain date (the
expiration date). So long as the obligation of the Fund continues, it may
be assigned an exercise notice, requiring it to deliver the underlying
security, cash or currency against payment of the exercise price. This
obligation terminates upon the expiration of the call option, or such
earlier time at which the Fund effects a closing purchase transaction by
purchasing an option identical to that previously sold.
When writing a call option the Fund, in return for the premium,
gives up the opportunity for profit from a price increase in the underlying
security, contract or currency above the exercise price, and retains the
risk of loss should the price of the security, contract or currency
decline. Unlike one who owns securities, contracts or currencies not
subject to an option, the Fund has no control over when it may be required
to sell the underlying securities, contracts or currencies, since most
options may be exercised at any time prior to the option's expiration. If a
call option that the Fund has written expires, it will realize a gain in
the amount of the premium; however, such gain may be offset by a decline in
the market value of the underlying security, contract or currency during
the option period. If the call option is exercised, the Fund will realize a
gain or loss from the sale of the underlying security, contract or
currency, which will be increased or offset by the premium received.
Writing call options can serve as a limited hedge because declines
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option.
Closing transactions may be effected in order to realize a profit
on an outstanding call option, to prevent an underlying security, contract
or currency from being called or to permit the sale of the underlying
security, contract or currency. Furthermore, effecting a closing
transaction will permit the Fund to write another call option on the
underlying security, contract or currency with either a different exercise
price or expiration date, or both.
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Options may be either listed on an exchange or traded in
over-the-counter ("OTC") markets. Listed options are third-party contracts
(i.e., performance of the obligations of the purchaser and seller is
guaranteed by the exchange or clearing corporation) and have standardized
strike prices and expiration dates. OTC options are two-party contracts
with negotiated strike prices and expiration dates. OTC options differ from
exchange-traded options in that OTC options are transacted with dealers
directly and not through a clearing corporation (which guarantees performance).
Consequently, there is a risk of non-performance by the dealer. Since no
exchange is involved, OTC options are valued on the basis of an average of
the last bid prices obtained from dealers, unless a quotation from only one
dealer is available, in which case only that dealer's price will be used.
In the case of OTC options, there can be no assurance that a liquid
secondary market will exist for any particular option at any specific time.
Although the Fund will enter into OTC options only with dealers that are
expected to be capable of entering into closing transactions with it, there
is no assurance that the Fund will in fact be able to close out an OTC
option position at a favorable price prior to expiration. In the event of
insolvency of the dealer, a Fund might be unable to close out an OTC option
position at any time prior to its expiration.
The Fund may sell OTC options and, in connection therewith, segregate
assets or cover its obligations with respect to OTC options written by it.
The assets used as cover for OTC options written by the Fund will be
considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Fund may repurchase any OTC option it writes at a maximum price
to be calculated by a formula set forth in the option agreement. The cover for
an OTC option written subject to this procedure would be considered illiquid
only to the extent that the maximum repurchase price under the formula exceeds
the intrinsic value of the option.
INDEX OPTIONS
Calls on indices are similar to calls on securities or futures
contracts except that all settlements are in cash and gain or loss depends on
changes in the index in question (and thus on price movements in the
securities market or a particular market sector generally) rather than on
price movements in individual securities or futures contracts. The amount of
cash is equal to the difference between the closing price of the index and the
exercise price of the call times a specified multiple (the "multiplier"),
which determines the total dollar value for each point of such difference.
The risks of investment in index options may be greater than
options on securities. Because index options are settled in cash, when the
Fund writes a call on an index it cannot provide in advance for its
potential settlement obligations by acquiring and holding the underlying
securities. The Fund can offset some of the risk of writing a call index
option position by holding a diversified portfolio of securities similar to
those on which the underlying index is based. However, the Fund cannot, as
a practical matter, acquire and hold a portfolio containing exactly the
same securities as underlie the index and, as a result, bears a risk that
the value of the securities held will not be perfectly correlated with the
value of the index.
LIMITATIONS ON OPTIONS
The Fund will not write call options if, immediately after such sale,
the aggregate value of securities or obligations underlying the outstanding
options exceeds 20% of the Fund's total assets.
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<PAGE> 34
INTEREST RATE, CURRENCY AND STOCK INDEX FUTURES CONTRACTS
The Fund may enter into interest rate, currency or stock index
futures contracts (collectively, "Futures" or "Futures Contracts") as a
hedge against changes in prevailing levels of interest rates, currency
exchange rates or stock price levels, respectively, in order to establish
more definitely the effective return on securities or currencies held or
intended to be acquired by it. The Fund's hedging may include sales of
Futures as an offset against the effect of expected increases in interest
rates, and decreases in currency exchange rates and stock prices, and
purchases of Futures as an offset against the effect of expected declines
in interest rates, and increases in currency exchange rates or stock
prices.
A Futures Contract is a two party agreement to buy or sell a
specified amount of a specified security or currency (or delivery of a cash
settlement price, in the case of an index future) for a specified price at
a designated date, time and place. A stock index future provides for the
delivery, at a designated date, time and place, of an amount of cash equal
to a specified dollar amount times the difference between the stock index
value at the close of trading on the contract and the price agreed upon in
the Futures Contract; no physical delivery of stocks comprising the index
is made. Brokerage fees are incurred when a Futures Contract is bought or
sold, and margin deposits must be maintained at all times the Future is
outstanding.
The Fund will only enter into Futures Contracts that are traded on
futures exchanges and are standardized as to maturity date and underlying
financial instrument. Futures exchanges and trading thereon in the United
States are regulated under the Commodity Exchange Act and by the Commodity
Futures Trading Commission ("CFTC").
Closing out an open Future is effected by entering into an
offsetting Future for the same aggregate amount of the identical financial
instrument or currency and the same delivery date. There can be no
assurance, however, that the Fund will be able to enter into an offsetting
transaction with respect to a particular Future at a particular time. If
the Fund is not able to enter into an offsetting transaction, it will
continue to be required to maintain the margin deposits on the Future.
A Fund's Futures transactions will be entered into for hedging
purposes only; that is, Futures will be sold to protect against a decline
in the price of securities or currencies that the Fund owns, or Futures
will be purchased to protect the Fund against an increase in the price of
securities or currencies it has committed to purchase or expects to
purchase.
"Margin" with respect to Futures is the amount of funds that must
be deposited by the Fund in order to initiate Futures trading and maintain
its open positions in Futures. A margin deposit made when the Futures
Contract is entered ("initial margin") is intended to ensure the Fund's
performance under the Futures Contract. The margin required for a
particular Future is set by the exchange on which the Future is traded and
may be significantly modified from time to time by the exchange during the
term of the Futures Contract.
Subsequent payments, called "variation margin," to and from the
futures commission merchant through which the Fund entered into the Futures
Contract will be made on a daily basis as the price of the underlying
security, currency or index fluctuates making the Futures more or less
valuable, a process known as marking-to-market.
If the Fund were unable to liquidate a Future or an option on a
Futures position due to the absence of a liquid secondary market or the
imposition of price limits, it could incur substantial losses. The Fund
would continue to be subject to market risk with respect to the position.
In addition, except in the case of purchased options, the Fund would
continue to be required to make daily variation margin payments and might
be required to maintain the position being hedged by the Future or option
or to maintain cash or securities in a segregated account.
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CALL OPTIONS ON FUTURES CONTRACTS
Call options on Futures Contracts are similar to options on securities
or currencies except that call options on Futures Contracts give the purchaser
the right, in return for the premium paid, to assume a long position in a
Futures Contract at a specified exercise price at any time during the period
of the option. Upon exercise of the call option, the delivery of the Futures
position by the writer of the call option (the Fund) to the holder of the
option will be accompanied by delivery of the accumulated balance in the
writer's Futures margin account.
FORWARD CONTRACTS
A forward contract is an obligation, usually arranged with a
commercial bank or other currency dealer, to purchase or sell a currency
against another currency at a future date and price as agreed upon by the
parties. The Fund either may accept or make delivery of the currency at the
maturity of the forward contract. The Fund may also, if its contra party
agrees prior to maturity, enter into a closing transaction involving the
purchase or sale of an offsetting contract. Forward contracts are traded
over-the-counter, and not on organized commodities or securities exchanges.
As a result, it may be more difficult to value such contracts, and it may
be difficult to enter into closing transactions.
The Fund may engage in forward currency transactions in
anticipation of, or to protect itself against, fluctuations in exchange
rates. The Fund may enter into forward contracts with respect to a specific
purchase or sale of a security, or with respect to its portfolio positions
generally. When the Fund purchases a security denominated in a foreign
currency for settlement in the near future, it may immediately purchase in
the forward market the currency needed to pay for and settle the purchase.
By entering into a forward contract with respect to the specific purchase
or sale of a security denominated in a foreign currency, the Fund can
secure an exchange rate between the trade and settlement dates for that
purchase or sale transaction. This practice is sometimes referred to as
"transaction hedging." Position hedging is the purchase or sale of foreign
currency with respect to portfolio security positions denominated or quoted
in a foreign currency.
The cost to the Fund of engaging in forward contracts varies with
factors such as the currencies involved, the length of the contract period
and the market conditions then prevailing. Because forward contracts are
usually entered into on a principal basis, no fees or commissions are
involved. The use of forward contracts does not eliminate fluctuations in
the prices of the underlying securities the Fund owns or intends to
acquire, but it does establish a rate of exchange in advance. In addition,
while forward contract sales limit the risk of loss due to a decline in the
value of the hedged currencies, they also limit any potential gain that
might result should the value of the currencies increase.
LIMITATIONS ON USE OF FUTURES, CALL OPTIONS ON FUTURES AND CERTAIN CALL
OPTIONS ON CURRENCIES
To the extent that the Fund enters into Futures Contracts, call options
on Futures Contracts and call options on foreign currencies traded on a
CFTC-regulated exchange, in each case other than for bona fide hedging
purposes (as defined by the CFTC), the aggregate initial margin and
premiums required to establish those positions (excluding the amount by
which options are "in-the-money") will not exceed 5% of the total assets of
the Fund, after taking into account unrealized profits and unrealized
losses on any contracts it has entered into. This guideline may be modified
by the Board of Directors, without a shareholder vote. This limitation does
not limit the percentage of the Fund's assets at risk to 5%.
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PORTFOLIO TRANSACTIONS AND BROKERAGE
General Brokerage Policy
AIM makes decisions to buy and sell securities for the Fund,
selects broker-dealers, effects the Fund's investment portfolio
transactions, allocates brokerage fees in such transactions, and where
applicable, negotiates commissions and spreads on transactions. AIM's
primary consideration in effecting a security transaction is to obtain the
most favorable execution of the order, which includes the best price on the
security and a low commission rate. While AIM seeks reasonably competitive
commission rates, the Fund may not pay the lowest commission or spread
available. See "Section 28(e) Standards" below.
Some of the securities in which the Fund invests are traded in
over-the-counter markets. In such transactions, the Fund deals directly
with dealers who make markets in the securities involved, except when
better prices are available elsewhere. Portfolio transactions placed
through dealers who are primary market makers are effected at net prices
without commissions, but which include compensation in the form of a mark
up or mark down.
Traditionally, commission rates have not been negotiated on stock
markets outside the United States. Although in recent years many overseas
stock markets have adopted a system of negotiated rates, a number of
markets maintain an established schedule of minimum commission rates.
AIM may determine target levels of commission business with various
brokers on behalf of its clients (including the Fund) over a certain time
period. The target levels will be based upon the following factors, among
others: (1) the execution services provided by the broker; (2) the research
services provided by the broker; and (3) the broker's interest in mutual
funds in general and in the Fund and other mutual funds advised by AIM or
AIM Capital (collectively, the "AIM Funds") in particular, including sales
of the Fund and of the other AIM Funds. In connection with (3) above, the
Fund's trades may be executed directly by dealers that sell shares of the
AIM Funds or by other broker-dealers with which such dealers have clearing
arrangements. AIM will not use a specific formula in connection with any of
these considerations to determine the target levels.
AIM will seek, whenever possible, to recapture for the benefit of
the Fund any commissions, fees, brokerage or similar payments paid by the
Fund on portfolio transactions. Normally, the only fees which AIM can
recapture are the soliciting dealer fees on the tender of a Fund's
portfolio securities in a tender or exchange offer.
The Fund may engage in certain principal and agency transactions
with banks and their affiliates that own 5% or more of the outstanding
voting securities of the Fund, provided the conditions of an exemptive
order received by the Fund from the SEC are met. In addition, the Fund may
purchase or sell a security from or to another AIM Fund provided the Fund
follows procedures adopted by the Boards of Directors/Trustees of the
various AIM Funds, including the Fund. These inter-fund transactions do not
generate brokerage commissions but may result in custodial fees or taxes or
other related expenses.
Allocation of Portfolio Transactions
AIM and its affiliates manage several other investment accounts.
Some of these accounts may have investment objectives similar to the Fund.
Occasionally, identical securities will be appropriate for investment by
the Fund and by another AIM Fund or one or more of these investment
accounts. However, the position of each account in the same securities and
the length of time that each account may hold its investment in the same
securities may vary. The timing and amount of purchase by each account will
also be determined by its cash position. If the purchase or sale of
securities is consistent with the investment policies of the Fund(s) and
one or more of these accounts, and is considered at or about the same time,
AIM will fairly allocate transactions in such securities among the Fund(s)
and these accounts. AIM may combine such transactions, in accordance with
applicable laws and regulations, to obtain the most favorable execution.
Simultaneous
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<PAGE> 37
transactions could, however, adversely affect a Fund's ability to obtain or
dispose of the full amount of a security which it seeks to purchase or
sell.
Sometimes the procedure for allocating portfolio transactions among
the various investment accounts advised by AIM could have an adverse effect
on the price or amount of securities available to a Fund. In making such
allocations, AIM considers the investment objectives and policies of its
advisory clients, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held, and the judgments of the persons
responsible for recommending the investment.
Section 28(e) Standards
Section 28(e) of the Securities Exchange Act of 1934 provides that
AIM, under certain circumstances, lawfully may cause an account to pay a
higher commission than the lowest available. Under Section 28(e), AIM must
make a good faith determination that the commissions paid are "reasonable
in relation to the value of the brokerage and research services provided
... viewed in terms of either that particular transaction or [AIM's]
overall responsibilities with respect to the accounts as to which it
exercises investment discretion." The services provided by the broker also
must lawfully and appropriately assist AIM in the performance of its
investment decision-making responsibilities. Accordingly, in recognition of
research services provided to it, the Fund may pay a broker higher
commissions than those available from another broker.
Research services received from broker-dealers supplement AIM's own
research (and the research of its affiliates), and may include the
following types of information: statistical and background information on
the U.S. and foreign economies, industry groups and individual companies;
forecasts and interpretations with respect to the U.S. and foreign
economies, securities, markets, specific industry groups and individual
companies; information on federal, state, local and foreign political
developments; portfolio management strategies; performance information on
securities, indexes and investment accounts; information concerning prices
of securities; and information supplied by specialized services to AIM and
to the Fund's directors with respect to the performance, investment
activities, and fees and expenses of other mutual funds. Broker- dealers
may communicate such information electronically, orally, in written form or
on computer software. Research services may also include the providing of
custody services, as well as the providing of equipment used to communicate
research information, the providing of specialized consultations with AIM
personnel with respect to computerized systems and data furnished to AIM as
a component of other research services, the arranging of meetings with
management of companies, and the providing of access to consultants who
supply research information.
The outside research assistance is useful to AIM since the
broker-dealers used by AIM tend to follow a broader universe of securities
and other matters than AIM's staff can follow. In addition, the research
provides AIM with a diverse perspective on financial markets. Research
services provided to AIM by broker-dealers are available for the benefit of
all accounts managed or advised by AIM or by its affiliates. Some
broker-dealers may indicate that the provision of research services is
dependent upon the generation of certain specified levels of commissions
and underwriting concessions by AIM's clients, including the Fund. However,
the Fund is not under any obligation to deal with any broker-dealer in the
execution of transactions in portfolio securities.
In some cases, the research services are available only from the
broker-dealer providing them. In other cases, the research services may be
obtainable from alternative sources in return for cash payments. AIM
believes that the research services are beneficial in supplementing AIM's
research and analysis and that they improve the quality of AIM's investment
advice. The advisory fee paid by the Fund is not reduced because AIM
receives such services. However, to the extent that AIM would have
purchased research services had they not been provided by broker-dealers,
the expenses to AIM could be considered to have been reduced accordingly.
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Transaction With Regular Brokers
As of October 31, 1998, the Fund held an amount of common stock
issued by Morgan Stanley & Co., Inc. and PaineWebber, Inc. having a market
value of $9,971,500 and $8,927,812, respectively. Both are regular brokers
of the Fund, as that term is defined in Rule 10b-1 under the 1940 Act.
Brokerage Commissions Paid
For the fiscal years ended October 31, 1998, 1997 and 1996, the
Fund paid brokerage commissions of $3,027,892, $2,573,656 and $3,138,280,
respectively. For the fiscal year ended October 31, 1998, AIM allocated
certain of the Fund's brokerage transactions to certain broker-dealers that
provided AIM with certain research, statistical and other information. Such
transactions amounted to $238,490,666 and the related brokerage commissions
were $303,996.
No brokerage commissions were paid by the Fund to any broker who is
an affiliated person of the Fund, an affiliated person of such person or an
affiliated person of the Fund, the Fund's principal underwriter, or AIM.
Portfolio Turnover
The decrease in portfolio turnover rate from 1996 to 1997 resulted
from strong corporate earnings and thus a reduced need to restructure the
Fund's portfolio holdings.
INVESTMENT RESTRICTIONS
The Fund's investment program is subject to a number of investment
restrictions which reflect self- imposed standards as well as federal and
state regulatory limitations. These restrictions are designed to minimize
(but cannot eliminate) certain risks associated with investing in specified
types of securities or engaging in certain transactions and to limit the
amount of the Fund's assets which may be concentrated in any specific
industry or issue. The most significant of these restrictions provide that
the Fund will not purchase a security if as a result of such purchase:
(1) More than 25% of the value of the Fund's total assets would
be invested in the securities of issuers primarily engaged
in the same industry, except that this restriction does not
apply to obligations issued or guaranteed by the United
States Government or its agencies or instrumentalities;
(2) More than 5% of the value of the Fund's total assets would
be invested in the securities of a single issuer, except
that this restriction does not apply to obligations issued
or guaranteed by the United States Government or its
agencies or instrumentalities, or repurchase agreements
pertaining to such securities, and except that the Fund may
purchase securities of other investment companies to the
extent permitted by applicable law or exemptive order; or
(3) The Fund would own more than 10% of the outstanding voting
securities of any issuer or more than 10% of any class of
securities of an issuer, with the debt and preferred stock
of an issuer each considered to be a separate single class
for this purpose, except that the Fund may purchase
securities of other investment companies to the extent
permitted by applicable law or exemptive order.
Also the Fund will not:
(4) Purchase or hold securities of any issuer if the Fund has
knowledge that the officers and directors of the Fund and
its investment advisor collectively own beneficially more
than 5% of
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<PAGE> 39
the outstanding securities of such issuer. (Individual
holdings of less than 1/2 of 1% will not be counted for the
purpose of this restriction.)
(5) Borrow money or issue senior securities, except that the
Fund may borrow from banks for temporary or emergency
purposes in amounts up to 10% of the value of its total
assets at the time of borrowing. (This provision is included
solely to facilitate the orderly sale of portfolio
securities to accommodate abnormally heavy redemption
requests if they should occur and is not for leverage
purposes. Any borrowings by the Fund will be repaid prior to
the purchase of additional portfolio securities.)
(6) Underwrite securities issued by any other person.
(7) Invest in real estate or purchase oil, gas or mineral
interests, except that this restriction does not apply to
marketable securities secured by real estate or interests
therein or issued by issuers which invest in real estate or
interests therein, or to securities issued by companies
engaged in the exploration, development, production,
refining, transporting and marketing of oil, gas or
minerals.
(8) Buy or sell commodities or commodity futures contracts.
(9) Make loans of money or securities other than (a) through the
purchase of securities in accordance with the Fund's
investment program, and (b) by entering into repurchase
agreements; provided that the Fund may lend its portfolio
securities so long as the value of securities loaned by it
does not exceed an amount equal to 331/3% of the Fund's
total assets.
(10) Purchase securities on margin, except to the extent
necessary for the clearance of its securities transactions.
(11) Make short sales of securities or maintain a short position
in securities unless at all times when a short position is
open, the Fund owns at least an equal amount of such
securities or owns securities convertible into or
exchangeable for at least an equal amount of such
securities, and unless not more than 10% of the Fund's total
assets (taken at current value) is held as collateral for
such short sales at any one time.
(12) Invest in companies for the purpose of exercising control or
management except that the Fund may purchase securities of
other investment companies to the extent permitted by
applicable law or exemptive order.
(13) Purchase or sell puts or purchase calls.
The foregoing percentage limitations will be calculated by giving
effect to such purchase and will be based upon values at the time of
purchase. The Fund may retain any security purchased by it notwithstanding
changes in the value of its assets occurring subsequent to the time of any
such purchase.
The foregoing investment restrictions are matters of fundamental
policy which may not be changed without the vote of a majority of the
Fund's outstanding shares.
36
<PAGE> 40
MISCELLANEOUS INFORMATION
SHAREHOLDER INQUIRIES
Shareholder inquiries concerning the status of an account should be
directed to AIM Distributors by calling (800) 995-4246.
LEGAL MATTERS
Legal matters for the Fund have been passed upon by Ballard Spahr
Andrews & Ingersoll, LLP, 1735 Market Street, Philadelphia, Pennsylvania
19103.
37
<PAGE> 41
FINANCIAL STATEMENTS
FS
<PAGE> 42
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
AIM Summit Fund, Inc:
We have audited the accompanying statement of assets and
liabilities of the AIM Summit Fund, Inc., including the
schedule of investments, as of October 31, 1998, the
related statement of operations for the year then ended,
the statement of changes in net assets for each of the
years in the two-year period then ended, and financial
highlights for each of the years in the five-year period
then ended. These financial statements and financial
highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion
on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and
financial highlights are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of
securities owned as of October 31, 1998, by
correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used
and significant estimates made by management, as well as
evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial
highlights referred to above present fairly, in all
material respects, the financial position of AIM Summit
Fund, Inc. as of October 31, 1998, and the results of its
operations for the year then ended, the changes in its
net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the
years in the five-year period then ended, in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
December 4, 1998
FS-1
<PAGE> 43
SCHEDULE OF INVESTMENTS
October 31, 1998
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
<S> <C> <C>
DOMESTIC COMMON STOCKS-95.13%
AEROSPACE/DEFENSE-1.59%
General Dynamics Corp. 270,000 $ 15,980,625
- ---------------------------------------------------------------
Gulfstream Aerospace Corp.(a) 100,000 4,425,000
- ---------------------------------------------------------------
Sundstrand Corp. 185,000 8,683,438
- ---------------------------------------------------------------
29,089,063
- ---------------------------------------------------------------
AIRLINES-0.68%
Southwest Airlines Co. 60,000 1,271,250
- ---------------------------------------------------------------
UAL Corp. 173,000 11,234,188
- ---------------------------------------------------------------
12,505,438
- ---------------------------------------------------------------
AUTOMOBILES-0.67%
Ford Motor Co. 225,000 12,206,250
- ---------------------------------------------------------------
BANKS (MAJOR REGIONAL)-0.15%
Northern Trust Corp. 36,000 2,655,000
- ---------------------------------------------------------------
BANKS (REGIONAL)-0.51%
AmSouth Bancorporation 52,500 2,103,281
- ---------------------------------------------------------------
First Tennessee National Corp. 29,100 922,106
- ---------------------------------------------------------------
Hibernia Corp.-Class A 85,000 1,418,438
- ---------------------------------------------------------------
North Fork Bancorporation, Inc. 100,000 1,987,500
- ---------------------------------------------------------------
Star Banc Corp. 37,000 2,798,125
- ---------------------------------------------------------------
9,229,450
- ---------------------------------------------------------------
BIOTECHNOLOGY-1.15%
Amgen, Inc.(a) 112,000 8,799,000
- ---------------------------------------------------------------
Biogen, Inc.(a) 175,000 12,162,500
- ---------------------------------------------------------------
20,961,500
- ---------------------------------------------------------------
BROADCASTING (TELEVISION, RADIO & CABLE)-2.90%
Chancellor Media Corp.(a) 300,000 11,512,500
- ---------------------------------------------------------------
Clear Channel Communications,
Inc.(a) 80,000 3,645,000
- ---------------------------------------------------------------
Comcast Corp.-Class A 400,000 19,750,000
- ---------------------------------------------------------------
Liberty Media Group(a) 125,000 4,757,813
- ---------------------------------------------------------------
Tele-Communications, Inc.-Class
A(a) 300,000 12,637,500
- ---------------------------------------------------------------
Univision Communications, Inc.(a) 25,600 755,200
- ---------------------------------------------------------------
53,058,013
- ---------------------------------------------------------------
BUILDING MATERIALS-0.47%
USG Corp. 180,000 8,583,750
- ---------------------------------------------------------------
CHEMICALS-0.43%
Rohm & Haas Co. 231,600 7,816,500
- ---------------------------------------------------------------
COMMUNICATIONS EQUIPMENT-1.49%
Andrew Corp.(a) 19,300 316,037
- ---------------------------------------------------------------
General Instrument Corp.(a) 175,000 4,495,313
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
<S> <C> <C>
COMMUNICATIONS EQUIPMENT-(CONTINUED)
Lucent Technologies, Inc. 280,000 $ 22,452,500
- ---------------------------------------------------------------
27,263,850
- ---------------------------------------------------------------
COMPUTERS (HARDWARE)-5.50%
Apple Computer, Inc.(a) 150,000 5,568,750
- ---------------------------------------------------------------
Comdisco, Inc. 262,600 4,053,887
- ---------------------------------------------------------------
Dell Computer Corp.(a) 840,000 55,125,000
- ---------------------------------------------------------------
Gateway 2000, Inc.(a) 200,000 11,162,500
- ---------------------------------------------------------------
IDX Systems Corp.(a) 150,000 6,356,250
- ---------------------------------------------------------------
International Business Machines
Corp. 123,600 18,346,875
- ---------------------------------------------------------------
100,613,262
- ---------------------------------------------------------------
COMPUTERS (NETWORKING)-4.09%
3Com Corp.(a) 500,000 18,031,250
- ---------------------------------------------------------------
Ascend Communications, Inc.(a) 448,750 21,652,187
- ---------------------------------------------------------------
Broadcom Corp.(a) 140,000 11,611,250
- ---------------------------------------------------------------
Cisco Systems, Inc.(a) 375,000 23,625,000
- ---------------------------------------------------------------
74,919,687
- ---------------------------------------------------------------
COMPUTERS (PERIPHERALS)-2.71%
EMC Corp.(a) 400,000 25,750,000
- ---------------------------------------------------------------
Jabil Circuit, Inc.(a) 200,000 9,262,500
- ---------------------------------------------------------------
Lexmark International Group,
Inc.(a) 160,000 11,190,000
- ---------------------------------------------------------------
Storage Technology Corp.(a) 100,000 3,343,750
- ---------------------------------------------------------------
49,546,250
- ---------------------------------------------------------------
COMPUTERS (SOFTWARE & SERVICES)-13.77%
America Online, Inc. 220,000 27,953,750
- ---------------------------------------------------------------
Aspect Development, Inc.(a) 100,000 3,159,375
- ---------------------------------------------------------------
AT Home Corporation(a) 100,000 4,425,000
- ---------------------------------------------------------------
BMC Software, Inc.(a) 330,000 15,860,625
- ---------------------------------------------------------------
Cadence Design Systems, Inc.(a) 150,000 3,206,250
- ---------------------------------------------------------------
Citrix Systems, Inc.(a) 80,000 5,670,000
- ---------------------------------------------------------------
Computer Sciences Corp.(a) 130,000 6,857,500
- ---------------------------------------------------------------
Compuware Corp.(a) 460,000 24,926,250
- ---------------------------------------------------------------
Concord EFS, Inc.(a) 407,650 11,618,025
- ---------------------------------------------------------------
Electronic Arts, Inc.(a) 50,000 2,056,250
- ---------------------------------------------------------------
Electronics for Imaging, Inc.(a) 200,000 4,812,500
- ---------------------------------------------------------------
Engineering Animation, Inc.(a) 200,000 8,762,500
- ---------------------------------------------------------------
GeoCities(a) 67,800 1,995,862
- ---------------------------------------------------------------
HBO & Co. 300,000 7,875,000
- ---------------------------------------------------------------
Inktomi Corp.(a) 60,000 5,058,750
- ---------------------------------------------------------------
Intuit, Inc.(a) 150,000 7,575,000
- ---------------------------------------------------------------
J.D. Edwards & Co.(a) 60,000 1,965,000
- ---------------------------------------------------------------
Jack Henry & Associates, Inc. 220,000 10,037,500
- ---------------------------------------------------------------
</TABLE>
FS-2
<PAGE> 44
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
<S> <C> <C>
COMPUTERS (SOFTWARE & SERVICES)-(CONTINUED)
Lycos, Inc.(a) 250,000 $ 10,156,250
- ---------------------------------------------------------------
Microsoft Corp.(a) 450,000 47,643,750
- ---------------------------------------------------------------
Network Associates, Inc.(a) 42,300 1,797,750
- ---------------------------------------------------------------
Sterling Commerce, Inc.(a) 109,211 3,849,687
- ---------------------------------------------------------------
Sterling Software, Inc.(a) 78,000 2,042,625
- ---------------------------------------------------------------
Unisys Corp.(a) 450,000 11,981,250
- ---------------------------------------------------------------
Wind River Systems(a) 100,000 4,381,250
- ---------------------------------------------------------------
Yahoo! Inc.(a) 125,000 16,355,468
- ---------------------------------------------------------------
252,023,167
- ---------------------------------------------------------------
CONSUMER (JEWELRY, NOVELTIES & GIFTS)-0.15%
Blyth Industries, Inc.(a) 100,000 2,762,500
- ---------------------------------------------------------------
CONSUMER FINANCE-0.31%
Capital One Financial Corp. 54,900 5,586,075
- ---------------------------------------------------------------
DISTRIBUTORS (FOOD &
HEALTH)-0.79%
Cardinal Health, Inc. 124,800 11,801,400
- ---------------------------------------------------------------
SUPERVALU, INC 79,200 1,900,800
- ---------------------------------------------------------------
Sysco Corp. 27,000 727,312
- ---------------------------------------------------------------
14,429,512
- ---------------------------------------------------------------
ELECTRICAL EQUIPMENT-1.90%
American Power Conversion
Corp.(a) 100,000 4,243,750
- ---------------------------------------------------------------
General Electric Co. 140,000 12,250,000
- ---------------------------------------------------------------
Sanmina Corp.(a) 23,300 955,300
- ---------------------------------------------------------------
Solectron Corp.(a) 200,000 11,450,000
- ---------------------------------------------------------------
Symbol Technologies, Inc. 130,000 5,817,500
- ---------------------------------------------------------------
34,716,550
- ---------------------------------------------------------------
ELECTRONIC COMPANIES-0.70%
DTE Energy Co. 300,000 12,787,500
- ---------------------------------------------------------------
ELECTRONICS
(INSTRUMENTATION)-0.19%
Perkin-Elmer Corp. 11,900 1,003,319
- ---------------------------------------------------------------
Waters Corp.(a) 32,600 2,396,100
- ---------------------------------------------------------------
3,399,419
- ---------------------------------------------------------------
ELECTRONICS
(SEMICONDUCTORS)-1.29%
Intel Corp. 125,000 11,148,437
- ---------------------------------------------------------------
Maxim Integrated Products,
Inc.(a) 157,000 5,602,937
- ---------------------------------------------------------------
Microchip Technology, Inc.(a) 175,500 4,749,469
- ---------------------------------------------------------------
PMC-Sierra, Inc.(a) 50,000 2,243,750
- ---------------------------------------------------------------
23,744,593
- ---------------------------------------------------------------
ENTERTAINMENT-0.84%
Pixar, Inc.(a) 50,000 2,375,000
- ---------------------------------------------------------------
Time Warner, Inc. 115,000 10,673,437
- ---------------------------------------------------------------
Viacom, Inc.-Class B(a) 40,500 2,424,937
- ---------------------------------------------------------------
15,473,374
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
<S> <C> <C>
FINANCIAL (DIVERSIFIED)-3.93%
American Express Co. 50,000 $ 4,418,750
- ---------------------------------------------------------------
Associates First Capital
Corp.-Class A 58,969 4,157,314
- ---------------------------------------------------------------
Fannie Mae 104,600 7,406,987
- ---------------------------------------------------------------
FINOVA Group, Inc. 51,600 2,515,500
- ---------------------------------------------------------------
Freddie Mac 280,000 16,100,000
- ---------------------------------------------------------------
MGIC Investment Corp. 260,000 10,140,000
- ---------------------------------------------------------------
Morgan Stanley, Dean Witter,
Discover & Co. 154,000 9,971,500
- ---------------------------------------------------------------
SunAmerica, Inc. 245,000 17,272,500
- ---------------------------------------------------------------
71,982,551
- ---------------------------------------------------------------
HEALTH CARE (DIVERSIFIED)-2.41%
Abbott Laboratories 127,000 5,961,063
- ---------------------------------------------------------------
Allergan, Inc. 260,000 16,233,750
- ---------------------------------------------------------------
American Home Products Corp. 80,000 3,900,000
- ---------------------------------------------------------------
Johnson & Johnson 64,000 5,216,000
- ---------------------------------------------------------------
Warner-Lambert Co. 164,100 12,861,337
- ---------------------------------------------------------------
44,172,150
- ---------------------------------------------------------------
HEALTH CARE (DRUGS-GENERIC & OTHER)-1.44%
Mylan Laboratories, Inc. 440,000 15,152,500
- ---------------------------------------------------------------
Watson Pharmaceuticals, Inc.(a) 200,000 11,125,000
- ---------------------------------------------------------------
26,277,500
- ---------------------------------------------------------------
HEALTH CARE (DRUGS-MAJOR
PHARMACEUTICALS)-2.21%
Lilly (Eli) & Co. 76,800 6,216,000
- ---------------------------------------------------------------
Merck & Co., Inc. 67,500 9,129,375
- ---------------------------------------------------------------
Pfizer, Inc. 160,000 17,170,000
- ---------------------------------------------------------------
Schering-Plough Corp. 77,600 7,983,100
- ---------------------------------------------------------------
40,498,475
- ---------------------------------------------------------------
HEALTH CARE (HOSPITAL MANAGEMENT)-0.49%
Health Management Associates,
Inc.-Class A(a) 285,000 5,076,562
- ---------------------------------------------------------------
Universal Health Services,
Inc.-Class B(a) 77,100 3,956,194
- ---------------------------------------------------------------
9,032,756
- ---------------------------------------------------------------
HEALTH CARE (MEDICAL PRODUCTS &
SUPPLIES)-3.45%
Allegiance Corp. 142,600 5,302,938
- ---------------------------------------------------------------
Arterial Vascular Engineering,
Inc.(a) 139,400 4,286,550
- ---------------------------------------------------------------
Becton, Dickinson & Co. 490,000 20,641,250
- ---------------------------------------------------------------
Boston Scientific Corp.(a) 50,000 2,721,875
- ---------------------------------------------------------------
Guidant Corp. 310,000 23,715,000
- ---------------------------------------------------------------
Sofamor Danek Group, Inc.(a) 13,000 1,321,125
- ---------------------------------------------------------------
Stryker Corp. 91,100 3,820,506
- ---------------------------------------------------------------
Sybron International Corp.(a) 53,500 1,324,125
- ---------------------------------------------------------------
63,133,369
- ---------------------------------------------------------------
HEALTH CARE (SPECIALIZED SERVICES)-0.60%
Alza Corp.(a) 68,000 3,255,500
- ---------------------------------------------------------------
Omnicare, Inc. 100,900 3,487,356
- ---------------------------------------------------------------
</TABLE>
FS-3
<PAGE> 45
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
<S> <C> <C>
HEALTH CARE (SPECIALIZED SERVICES)-(CONTINUED)
Orthodontic Centers of America,
Inc.(a) 100,000 $ 1,893,750
- ---------------------------------------------------------------
Quintiles Transnational Corp.(a) 53,400 2,416,350
- ---------------------------------------------------------------
11,052,956
- ---------------------------------------------------------------
HOMEBUILDING-0.17%
Clayton Homes, Inc. 196,300 3,030,381
- ---------------------------------------------------------------
HOUSEHOLD FURNISHINGS & APPLIANCES-0.72%
Maytag Corp. 265,000 13,100,938
- ---------------------------------------------------------------
HOUSEHOLD PRODUCTS (NON-DURABLES)-0.42%
Clorox Co. 21,700 2,370,725
- ---------------------------------------------------------------
Procter & Gamble Co. (The) 60,000 5,332,500
- ---------------------------------------------------------------
7,703,225
- ---------------------------------------------------------------
INSURANCE (LIFE/HEALTH)-1.10%
Equitable Companies, Inc. 254,000 12,446,000
- ---------------------------------------------------------------
Nationwide Financial Services,
Inc.-Class A 50,500 2,095,750
- ---------------------------------------------------------------
Provident Companies, Inc. 100,000 2,906,250
- ---------------------------------------------------------------
ReliaStar Financial Corp. 62,000 2,716,375
- ---------------------------------------------------------------
20,164,375
- ---------------------------------------------------------------
INSURANCE (MULTI-LINE)-0.70%
American International Group,
Inc. 30,000 2,557,500
- ---------------------------------------------------------------
Lincoln National Corp. 135,000 10,243,125
- ---------------------------------------------------------------
12,800,625
- ---------------------------------------------------------------
INSURANCE (PROPERTY-CASUALTY)-0.61%
Allstate Corp. (The) 240,000 10,335,000
- ---------------------------------------------------------------
Progressive Corp. 6,200 912,950
- ---------------------------------------------------------------
11,247,950
- ---------------------------------------------------------------
INVESTMENT BANKING/BROKERAGE-1.01%
Paine Webber Group, Inc. 267,000 8,927,812
- ---------------------------------------------------------------
Schwab (Charles) Corp. 200,000 9,587,500
- ---------------------------------------------------------------
18,515,312
- ---------------------------------------------------------------
INVESTMENT MANAGEMENT-0.71%
Franklin Resources, Inc. 88,000 3,327,500
- ---------------------------------------------------------------
T. Rowe Price Associates, Inc. 272,200 9,680,112
- ---------------------------------------------------------------
13,007,612
- ---------------------------------------------------------------
LODGING-HOTELS-0.48%
Carnival Corp. 272,000 8,806,000
- ---------------------------------------------------------------
MACHINERY (DIVERSIFIED)-0.93%
Caterpillar, Inc. 185,000 8,325,000
- ---------------------------------------------------------------
Ingersoll-Rand Co. 172,500 8,711,250
- ---------------------------------------------------------------
17,036,250
- ---------------------------------------------------------------
MANUFACTURING (DIVERSIFIED)-1.81%
Hillenbrand Industries, Inc. 34,800 2,059,725
- ---------------------------------------------------------------
Pentair, Inc. 19,200 722,400
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
<S> <C> <C>
MANUFACTURING (DIVERSIFIED)-(CONTINUED)
Premark International, Inc. 285,000 $ 9,030,937
- ---------------------------------------------------------------
Tyco International Ltd. 100,000 6,193,750
- ---------------------------------------------------------------
United Technologies Corp. 158,000 15,049,500
- ---------------------------------------------------------------
33,056,312
- ---------------------------------------------------------------
NATURAL GAS-1.35%
Coastal Corp. (The) 420,000 14,805,000
- ---------------------------------------------------------------
Columbia Energy Group 171,900 9,948,713
- ---------------------------------------------------------------
24,753,713
- ---------------------------------------------------------------
OIL & GAS (DRILLING & EQUIPMENT)-0.49%
Cooper Cameron Corp.(a) 100,000 3,475,000
- ---------------------------------------------------------------
Varco International, Inc.(a) 500,000 5,406,250
- ---------------------------------------------------------------
8,881,250
- ---------------------------------------------------------------
OIL & GAS (EXPLORATION & PRODUCTION)-0.15%
Apache Corp. 97,000 2,746,313
- ---------------------------------------------------------------
OIL & GAS (REFINING & MARKETING)-1.03%
Ashland, Inc. 200,000 9,625,000
- ---------------------------------------------------------------
Sun Company, Inc. 270,000 9,264,375
- ---------------------------------------------------------------
18,889,375
- ---------------------------------------------------------------
PERSONAL CARE-0.09%
Rexall Sundown, Inc.(a) 96,200 1,725,588
- ---------------------------------------------------------------
PHOTOGRAPHY/IMAGING-0.59%
Eastman Kodak Co. 139,000 10,772,500
- ---------------------------------------------------------------
PUBLISHING-0.15%
McGraw-Hill Companies, Inc. (The) 30,000 2,698,125
- ---------------------------------------------------------------
PUBLISHING (NEWSPAPERS)-0.58%
Knight-Ridder, Inc. 210,000 10,696,875
- ---------------------------------------------------------------
RAILROADS-0.25%
Kansas City Southern Industries,
Inc. 120,000 4,635,000
- ---------------------------------------------------------------
RESTAURANTS-0.26%
Starbucks Corp.(a) 45,000 1,951,875
- ---------------------------------------------------------------
Tricon Global Restaurants,
Inc.(a) 65,000 2,827,500
- ---------------------------------------------------------------
4,779,375
- ---------------------------------------------------------------
RETAIL (BUILDING SUPPLIES)-1.29%
Home Depot, Inc. 278,800 12,127,800
- ---------------------------------------------------------------
Lowe's Companies, Inc. 340,000 11,453,750
- ---------------------------------------------------------------
23,581,550
- ---------------------------------------------------------------
RETAIL (COMPUTERS & ELECTRONICS)-1.65%
Best Buy Co., Inc.(a) 317,400 15,235,200
- ---------------------------------------------------------------
CDW Computer Centers, Inc.(a) 90,000 6,744,375
- ---------------------------------------------------------------
Ingram Micro, Inc.-Class A(a) 121,300 5,519,150
- ---------------------------------------------------------------
Tandy Corp. 55,000 2,725,938
- ---------------------------------------------------------------
30,224,663
- ---------------------------------------------------------------
</TABLE>
FS-4
<PAGE> 46
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
<S> <C> <C>
RETAIL (DEPARTMENT STORES)-0.82%
Federated Department Stores,
Inc.(a) 265,000 $ 10,185,938
- ---------------------------------------------------------------
Kohl's Corp.(a) 100,000 4,781,250
- ---------------------------------------------------------------
14,967,188
- ---------------------------------------------------------------
RETAIL (DISCOUNTERS)-0.44%
Dollar General Corp. 91,656 2,188,287
- ---------------------------------------------------------------
Dollar Tree Stores, Inc.(a) 150,000 5,784,375
- ---------------------------------------------------------------
7,972,662
- ---------------------------------------------------------------
RETAIL (DRUG STORES)-0.74%
CVS Corp. 102,160 4,667,435
- ---------------------------------------------------------------
Rite Aid Corp. 223,000 8,850,313
- ---------------------------------------------------------------
13,517,748
- ---------------------------------------------------------------
RETAIL (FOOD CHAINS)-1.84%
Albertson's, Inc. 27,400 1,522,413
- ---------------------------------------------------------------
Kroger Co.(a) 275,500 15,290,250
- ---------------------------------------------------------------
Safeway, Inc.(a) 351,314 16,797,200
- ---------------------------------------------------------------
33,609,863
- ---------------------------------------------------------------
RETAIL (GENERAL MERCHANDISE)-2.31%
Costco Companies, Inc.(a) 250,000 14,187,500
- ---------------------------------------------------------------
Dayton Hudson Corp. 289,000 12,246,375
- ---------------------------------------------------------------
Fred Meyer, Inc.(a) 135,700 7,234,506
- ---------------------------------------------------------------
Wal-Mart Stores, Inc. 125,000 8,625,000
- ---------------------------------------------------------------
42,293,381
- ---------------------------------------------------------------
RETAIL (SPECIALTY)-1.80%
Bed Bath & Beyond, Inc.(a) 225,000 6,201,563
- ---------------------------------------------------------------
Linens 'N Things, Inc.(a) 100,000 3,093,750
- ---------------------------------------------------------------
Office Depot, Inc.(a) 380,000 9,500,000
- ---------------------------------------------------------------
Staples, Inc.(a) 372,900 12,165,862
- ---------------------------------------------------------------
Williams-Sonoma, Inc.(a) 70,000 1,907,500
- ---------------------------------------------------------------
32,868,675
- ---------------------------------------------------------------
RETAIL (SPECIALTY-APPAREL)-1.33%
Abercrombie & Fitch Co.-Class
A(a) 43,000 1,706,563
- ---------------------------------------------------------------
Gap, Inc. 135,000 8,116,875
- ---------------------------------------------------------------
Men's Wearhouse, Inc. (The)(a) 157,500 3,819,375
- ---------------------------------------------------------------
TJX Companies, Inc. 568,000 10,756,500
- ---------------------------------------------------------------
24,399,313
- ---------------------------------------------------------------
SAVINGS & LOAN COMPANIES-1.72%
Dime Bancorp, Inc. 185,000 4,405,313
- ---------------------------------------------------------------
GreenPoint Financial Corp. 200,000 6,562,500
- ---------------------------------------------------------------
Washington Mutual, Inc. 546,000 20,440,875
- ---------------------------------------------------------------
31,408,688
- ---------------------------------------------------------------
SERVICES (ADVERTISING/MARKETING)-0.85%
Omnicom Group, Inc. 150,000 7,415,625
- ---------------------------------------------------------------
Outdoor Systems, Inc.(a) 300,000 6,618,750
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
<S> <C> <C>
SERVICES (ADVERTISING/MARKETING)-(CONTINUED)
Snyder Communications, Inc.(a) 45,000 $ 1,605,938
- ---------------------------------------------------------------
15,640,313
- ---------------------------------------------------------------
SERVICES (COMMERCIAL & CONSUMER)-1.46%
Cintas Corp. 101,900 5,451,650
- ---------------------------------------------------------------
G & K Services, Inc.-Class A 20,000 915,000
- ---------------------------------------------------------------
IMS Health, Inc. 30,000 1,995,000
- ---------------------------------------------------------------
Service Corp. International 334,700 11,923,687
- ---------------------------------------------------------------
Stewart Enterprises, Inc.-Class A 176,000 4,059,000
- ---------------------------------------------------------------
Viad Corp. 84,400 2,315,725
- ---------------------------------------------------------------
26,660,062
- ---------------------------------------------------------------
SERVICES (COMPUTER SYSTEMS)-0.33%
Gartner Group, Inc.-Class A(a) 65,000 1,291,875
- ---------------------------------------------------------------
Policy Management Systems
Corp.(a) 31,700 1,440,369
- ---------------------------------------------------------------
SunGard Data Systems, Inc.(a) 99,000 3,341,250
- ---------------------------------------------------------------
6,073,494
- ---------------------------------------------------------------
SERVICES (DATA PROCESSING)-1.68%
Ceridian Corp.(a) 54,900 3,149,888
- ---------------------------------------------------------------
CSG Systems International,
Inc.(a) 65,500 3,569,750
- ---------------------------------------------------------------
DST Systems, Inc.(a) 49,700 2,485,000
- ---------------------------------------------------------------
Equifax, Inc. 120,600 4,665,713
- ---------------------------------------------------------------
Fiserv, Inc.(a) 124,650 5,796,224
- ---------------------------------------------------------------
National Data Corp. 80,000 2,710,000
- ---------------------------------------------------------------
NOVA Corp.(a) 71,500 2,064,563
- ---------------------------------------------------------------
Paychex, Inc. 128,025 6,369,243
- ---------------------------------------------------------------
30,810,381
- ---------------------------------------------------------------
TELECOMMUNICATIONS (CELLULAR/WIRELESS)-0.13%
Level 3 Communications, Inc.(a) 75,000 2,442,188
- ---------------------------------------------------------------
TELECOMMUNICATIONS (LONG DISTANCE)-1.86%
AT&T Corp. 170,000 10,582,500
- ---------------------------------------------------------------
MCI WorldCom, Inc.(a) 422,926 23,366,662
- ---------------------------------------------------------------
33,949,162
- ---------------------------------------------------------------
TELEPHONE-3.25%
BellSouth Corp. 215,000 17,159,688
- ---------------------------------------------------------------
Century Telephone Enterprises,
Inc. 260,000 14,771,250
- ---------------------------------------------------------------
Qwest Communications
International, Inc.(a) 350,000 13,693,750
- ---------------------------------------------------------------
US West, Inc. 240,000 13,770,000
- ---------------------------------------------------------------
59,394,688
- ---------------------------------------------------------------
TEXTILES (APPAREL)-0.48%
VF Corp. 210,000 8,780,625
- ---------------------------------------------------------------
TEXTILES (HOME FURNISHINGS)-0.09%
Shaw Industries, Inc. 100,000 1,737,500
- ---------------------------------------------------------------
WASTE MANAGEMENT-0.65%
Allied Waste Industries, Inc.(a) 190,500 4,119,563
- ---------------------------------------------------------------
</TABLE>
FS-5
<PAGE> 47
<TABLE>
<CAPTION>
MARKET
SHARES VALUE
<S> <C> <C>
WASTE MANAGEMENT-(CONTINUED)
Waste Management, Inc. 172,825 $ 7,798,728
- ---------------------------------------------------------------
11,918,291
- ---------------------------------------------------------------
Total Domestic Common Stocks
(Cost $1,199,747,436) 1,740,817,989
- ---------------------------------------------------------------
FOREIGN STOCKS & OTHER EQUITY INTERESTS-2.18%
FINLAND-0.58%
Nokia Oyj A.B.-Class A-ADR
(Communications Equipment) 115,000 10,702,188
- ---------------------------------------------------------------
FRANCE-0.23%
Renault S.A.
(Automobiles) 100,000 4,276,428
- ---------------------------------------------------------------
GERMANY-0.97%
Daimler-Benz A.G.-ADR
(Automobiles) 110,000 8,669,375
- ---------------------------------------------------------------
Porsche A.G.
(Automobiles) 5,000 8,851,429
- ---------------------------------------------------------------
17,520,804
- ---------------------------------------------------------------
IRELAND-0.40%
Elan Corp. PLC-ADR(a)(Health
Care-Drugs-Generic & Other) 105,000 7,356,562
- ---------------------------------------------------------------
Total Foreign Stocks & Other
Equity Interests (Cost
$32,977,810) 39,855,982
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<S> <C> <C>
CONVERTIBLE CORPORATE BONDS-0.23%
COMPUTERS (PERIPHERALS)-0.23%
EMC Corp., Conv. Sub. Notes,
3.25%, 03/15/02 (Cost
$1,963,721) $ 1,450,000 $ 4,188,688
- ---------------------------------------------------------------
RIGHTS & WARRANTS-0.01%
BANKS (REGIONAL)-0.01%
Golden State Bancorp, Litigation
Wts., expiring 01/01/01(a)
(Cost $281,640) 50,000 243,750
- ---------------------------------------------------------------
REPURCHASE AGREEMENT-2.40%(b)
Dean Witter Reynolds, Inc.,
5.55%, 11/02/98(c) (Cost
$43,998,698) 43,998,698 43,998,698
- ---------------------------------------------------------------
TOTAL INVESTMENTS-99.95% 1,829,105,107
- ---------------------------------------------------------------
OTHER ASSETS LESS
LIABILITIES-0.05% 927,121
- ---------------------------------------------------------------
NET ASSETS-100.00% $1,830,032,228
===============================================================
</TABLE>
Abbreviations:
ADR - American Depositary Receipt
Conv. - Convertible
Sub. - Subordinated
Wts. - Warrants
Notes to Schedule of Investments:
(a) Non-income producing security.
(b) Collateral on repurchase agreements, including the Fund's pro-rata interest
in joint repurchase agreements, is taken into possession by the Fund upon
entering into the repurchase agreement. The collateral is marked to market
daily to ensure its market value is at least 102% of the sales price of the
repurchase agreement. The investments in some repurchase agreements are
through participation in joint accounts with other mutual funds, private
accounts, and certain non-registered investment companies managed by the
investment advisor or its affiliates.
(c) Joint repurchase agreement entered into 10/30/98 with a maturing value of
$300,138,750. Collateralized by $307,841,000 U.S. Government obligations, 0%
to 10.35% due 11/06/98 to 01/21/28 with an aggregate market value at
10/31/98 of $306,000,942.
See Notes to Financial Statements.
FS-6
<PAGE> 48
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investments, at market value (cost
$1,278,969,305) $1,829,105,107
- -------------------------------------------------------------
Receivables for:
Investments sold 3,181,065
- -------------------------------------------------------------
Capital stock sold 671,854
- -------------------------------------------------------------
Dividends and interest 974,357
- -------------------------------------------------------------
Investment for deferred compensation plan 37,349
- -------------------------------------------------------------
Other assets 14,821
- -------------------------------------------------------------
Total assets 1,833,984,553
- -------------------------------------------------------------
LIABILITIES:
Payables for:
Investments purchased 1,635,755
- -------------------------------------------------------------
Capital stock reacquired 1,160,787
- -------------------------------------------------------------
Deferred compensation 37,349
- -------------------------------------------------------------
Accrued advisory fees 912,099
- -------------------------------------------------------------
Accrued administrative services fees 6,377
- -------------------------------------------------------------
Accrued directors' fees 1,450
- -------------------------------------------------------------
Accrued operating expenses 198,508
- -------------------------------------------------------------
Total liabilities 3,952,325
- -------------------------------------------------------------
Net assets applicable to shares outstanding $1,830,032,228
=============================================================
Capital stock, $0.01 par value per share:
Authorized 1,000,000,000
- -------------------------------------------------------------
Outstanding 122,336,309
- -------------------------------------------------------------
Net asset value and redemption price per
share $ 14.96
=============================================================
</TABLE>
STATEMENT OF OPERATIONS
For the year ended October 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of $280,834 foreign withholding
tax) $ 11,487,830
- ------------------------------------------------------------
Interest 4,521,585
- ------------------------------------------------------------
Total investment income 16,009,415
- ------------------------------------------------------------
EXPENSES:
Advisory fees 11,372,220
- ------------------------------------------------------------
Administrative services fees 72,766
- ------------------------------------------------------------
Custodian fees 178,755
- ------------------------------------------------------------
Directors' fees 18,269
- ------------------------------------------------------------
Transfer agent fees 39,271
- ------------------------------------------------------------
Other 271,355
- ------------------------------------------------------------
Total expenses 11,952,636
- ------------------------------------------------------------
Less: Expenses paid indirectly (26,905)
- ------------------------------------------------------------
Net expenses 11,925,731
- ------------------------------------------------------------
Net investment income 4,083,684
- ------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) FROM
INVESTMENT SECURITIES, FOREIGN CURRENCIES,
FUTURES AND OPTION CONTRACTS:
Net realized gain (loss) from:
Investment securities 125,907,818
- ------------------------------------------------------------
Foreign currencies 265,909
- ------------------------------------------------------------
Futures contracts (2,274,503)
- ------------------------------------------------------------
Option contracts written (531,869)
- ------------------------------------------------------------
123,367,355
- ------------------------------------------------------------
NET UNREALIZED APPRECIATION OF:
Investment securities 30,375,403
- ------------------------------------------------------------
Foreign currencies 3,322
- ------------------------------------------------------------
30,378,725
- ------------------------------------------------------------
Net gain from investment securities,
foreign currencies, futures and option
contracts 153,746,080
- ------------------------------------------------------------
Net increase in net assets resulting from
operations $157,829,764
============================================================
</TABLE>
See Notes to Financial Statements.
FS-7
<PAGE> 49
STATEMENT OF CHANGES IN NET ASSETS
For the years ended October 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 4,083,684 $ 1,608,756
- ----------------------------------------------------------------------------------------------
Net realized gain from investment securities, foreign
currencies, futures and option contracts 123,367,355 151,798,786
- ----------------------------------------------------------------------------------------------
Net unrealized appreciation of investment securities and
foreign currencies 30,378,725 212,044,735
- ----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 157,829,764 365,452,277
- ----------------------------------------------------------------------------------------------
Distributions to shareholders from net investment income (1,659,397) (3,131,614)
- ----------------------------------------------------------------------------------------------
Distributions to shareholders from net realized gains (156,547,424) (114,611,563)
- ----------------------------------------------------------------------------------------------
Net equalization credits (See Note 1) -- 2,437,968
- ----------------------------------------------------------------------------------------------
Share transactions-net 180,175,249 139,078,724
- ----------------------------------------------------------------------------------------------
Net increase in net assets 179,798,192 389,225,792
==============================================================================================
NET ASSETS:
Beginning of period 1,650,234,036 1,261,008,244
- ----------------------------------------------------------------------------------------------
End of period $1,830,032,228 $1,650,234,036
- ----------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Capital (par value and additional paid-in) $1,158,384,602 $ 956,102,084
- ----------------------------------------------------------------------------------------------
Undistributed net investment income 4,164,155 23,591,883
- ----------------------------------------------------------------------------------------------
Undistributed net realized gain from investment
securities, foreign currencies, futures and option
contracts 117,344,347 150,779,670
- ----------------------------------------------------------------------------------------------
Net unrealized appreciation of investment securities and
foreign currencies 550,139,124 519,760,399
- ----------------------------------------------------------------------------------------------
$1,830,032,228 $1,650,234,036
==============================================================================================
</TABLE>
NOTES TO FINANCIAL STATEMENTS
October 31, 1998
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES
AIM Summit Fund, Inc. (the "Fund") is a Maryland corporation registered under
the Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Fund's investment objective is capital
growth.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The
following is a summary of significant accounting policies followed by the Fund
in the preparation of its financial statements.
A. Security Valuations-A security listed or traded on an exchange (except
convertible bonds) is valued at the last sales price on the exchange on which
the security is principally traded, or lacking any sales on a particular day,
the security is valued at the mean between the closing bid and asked prices
on that day. Each security traded in the over-the-counter market (but not
including securities reported on the NASDAQ National Market System) is valued
at the mean between the last bid and asked prices based upon quotes furnished
by market makers for such securities. Each security reported on the NASDAQ
National Market System is valued at the last sales price on the valuation
date or absent a last sales price, at the mean of the closing bid and asked
prices. Debt obligations (including convertible bonds) are valued on the
basis of prices provided by an independent pricing service. Prices provided
by an independent pricing service may be determined without exclusive
reliance on quoted prices, and may reflect appropriate factors such as yield,
type of issue, coupon rate and maturity date. Securities for which market
quotations are not readily available or are questionable are valued at fair
value as determined in good faith by or under the supervision of the Fund's
officers in a manner specifically authorized by the Board of Directors of the
Fund. Short-term obligations having 60 days or less to maturity are valued at
amortized cost which approximates market value. Generally, trading in foreign
securities is substantially completed each day at various times prior to the
close of the New York Stock Exchange. The values of such securities used in
computing the net asset value of the Fund's shares are determined as of such
times. Foreign currency exchange rates are also generally determined prior to
the close of the New York Stock Exchange. Occasionally, events affecting the
values of such securities and such exchange rates may occur between the times
at which they are determined and the close of the New York Stock Exchange
which would not be reflected in the
FS-8
<PAGE> 50
computation of the Fund's net asset value. If events materially affecting the
value of such securities occur during such period, then these securities will
be valued at their fair value as determined in good faith by or under the
supervision of the Board of Directors.
B. Securities Transactions, Investment Income and Distributions-Securities
transactions are accounted for on a trade date basis. Realized gains or
losses on sales are computed on the basis of specific identification of the
securities sold. Interest income is recorded as earned from settlement date
and is recorded on the accrual basis. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. On October 31, 1998,
undistributed net investment income was increased by $255,254 and
undistributed net realized gains decreased by $255,254 in order to comply
with the requirements of the American Institute of Certified Public
Accountants Statement of Position 93-2. Net assets of the Fund were
unaffected by the reclassifications discussed above.
C. Foreign Currency Translations-Portfolio securities and other assets and
liabilities denominated in foreign currencies are translated into U.S. dollar
amounts at the date of valuation. Purchases and sales of portfolio securities
and income items denominated in foreign currencies are translated into U.S.
dollar amounts on the respective dates of such transactions.
D. Foreign Currency Contracts-A foreign currency contract is an obligation to
purchase or sell a specific currency for an agreed-upon price at a future
date. The Fund may enter into a foreign currency contract to attempt to
minimize the risk to the Fund from adverse changes in the relationship
between currencies. The Fund may also enter into a foreign currency contract
for the purchase or sale of a security denominated in a foreign currency in
order to "lock in" the U.S. dollar price of that security. The Fund could be
exposed to risk if counterparties to the contracts are unable to meet the
terms of their contracts or if the value of the foreign currency changes
unfavorably.
E. Federal Income Taxes-The Fund intends to comply with the requirements of the
Internal Revenue Code necessary to qualify as a regulated investment company
and, as such, will not be subject to federal income taxes on otherwise
taxable income (including net realized capital gains) which is distributed to
shareholders. Therefore, no provision for federal income taxes is recorded in
the financial statements.
F. Equalization-The Fund previously followed the accounting practice known as
equalization by which a portion of the proceeds from sales and costs of
repurchases of Fund shares, equivalent on a per share basis to the amount of
undistributed net investment income, is credited or charged to undistributed
net income when the transaction is recorded so that the undistributed net
investment income per share is unaffected by sales or redemptions of Fund
shares. Effective November 1, 1997, the Fund discontinued equalization
accounting and reclassified the cumulative equalization credits of
$22,107,269 from undistributed net investment income to paid-in capital. This
change has no effect on the net assets, the results of operations or the net
asset value per share of the Fund.
G. Stock Index Futures Contracts-The Fund may purchase or sell stock index
futures contracts as a hedge against changes in market conditions. Initial
margin deposits required upon entering into futures contracts are satisfied
by the segregation of specific securities as collateral for the account of
the broker (the Fund's agent in acquiring the futures position). During the
period the futures contracts are open, changes in the value of the contracts
are recognized as unrealized gains or losses by "marking to market" on a
daily basis to reflect the market value of the contracts at the end of each
day's trading. Variation margin payments are made or received depending upon
whether unrealized gains or losses are incurred. When the contracts are
closed, the Fund recognizes a realized gain or loss equal to the difference
between the proceeds from, or cost of, the closing transaction and the Fund's
basis in the contract. Risks include the possibility of an illiquid market
and that a change in the value of contracts may not correlate with changes in
the value of the securities being hedged.
H. Covered Call Options-The Fund may write call options, but only on a covered
basis; that is, the Fund will own the underlying security. Options written by
the Fund normally will have expiration dates between three and nine months
from the date written. The exercise price of a call option may be below,
equal to, or above the current market value of the underlying security at the
time the option is written. When the Fund writes a covered call option, an
amount equal to the premium received by the Fund is recorded as an asset and
an equivalent liability. The amount of the liability is subsequently
"marked-to-market" to reflect the current market value of the option written.
The current market value of a written option is the mean between the last bid
and asked prices on that day. If a written call option expires on the
stipulated expiration date, or if the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or a loss if the closing purchase
transaction exceeds the premium received when the option was written) without
regard to any unrealized gain or loss on the underlying security, and the
liability related to such option is extinguished. If a written option is
exercised, the Fund realizes a gain or a loss from the sale of the underlying
security and the proceeds of the sale are increased by the premium originally
received.
A call option gives the purchaser of such option the right to buy, and the
writer (the Fund) the obligation to sell, the underlying security at the
stated exercise price during the option period. The purchaser of a call
option has the right to acquire the security which is the subject of the call
option at any time during the option period. During the option period, in
return for the premium paid by the purchaser of the option, the Fund has
given up the opportunity for capital appreciation above the exercise price
should the market price of the underlying security increase, but has retained
the risk of loss should the price of the underlying security decline. During
the option period, the Fund may be required at any time to deliver the
underlying security against payment of the exercise price. This obligation is
terminated upon the expiration of the option period or at such earlier time
at which the Fund effects a
FS-9
<PAGE> 51
closing purchase transaction by purchasing (at a price which may be higher
than that received when the call option was written) a call option identical
to the one originally written.
NOTE 2-ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund has entered into an investment advisory agreement with A I M Advisors,
Inc. ("AIM"). Under the terms of the master investment advisory agreement, the
Fund pays AIM a fee at the annual rate of 1.0% of the first $10 million of the
Fund's average daily net assets, 0.75% of the next $140 million of the Fund's
average daily net assets and 0.625% of the Fund's average daily net assets in
excess of $150 million. Under the terms of a sub-advisory agreement between AIM
and TradeStreet Investment Associates, Inc. ("TradeStreet"), AIM pays
TradeStreet a fee at an annual rate of 0.50% of the first $10 million of the
Fund's average daily net assets, 0.35% of the next $140 million of the Fund's
average daily net assets, 0.225% of the next $550 million of the Fund's average
daily net assets and 0.15% of the Fund's average daily net assets in excess of
$700 million.
The Fund, pursuant to an administrative services agreement with AIM, has
agreed to reimburse AIM for certain costs incurred in providing accounting
services to the Fund. During the year ended October 31, 1998, the Fund
reimbursed AIM $72,766 for such services.
During the year ended October 31, 1998, the Fund paid legal fees of $6,861 for
services rendered by Kramer, Levin, Naftalis & Frankel as counsel to the Board
of Directors. A member of that firm is a director of the Fund.
Substantially all shares of the Fund are held of record by State Street Bank &
Trust Company as custodian for Summit Investors Plans, a unit investment trust
that is sponsored by A I M Distributors, Inc. (an affiliated company of AIM).
Certain officers and directors of the Fund are officers of AIM and A I M
Distributors, Inc.
NOTE 3-INDIRECT EXPENSES
During the year ended October 31, 1998, the Fund received reductions in
custodian fees of $26,905 under an expense offset arrangement. The effect of the
above arrangement resulted in a reduction of the Fund's total expenses of
$26,905 during the year ended October 31, 1998.
NOTE 4-DIRECTORS' FEES
Directors' fees represent remuneration paid or accrued to each director who is
not an "interested person" of AIM. The Fund may invest directors' fees, if so
elected by a director, in mutual fund shares in accordance with a deferred
compensation plan.
NOTE 5-BANK BORROWINGS
The Fund is a participant in a committed line of credit facility with a
syndicate administered by The Chase Manhattan Bank. The Fund may borrow up to
the lesser of (i) $1,000,000,000 or (ii) the limits set by its prospectus for
borrowings. The Fund and other funds advised by AIM which are parties to the
line of credit may borrow on a first come, first served basis. Interest on
borrowings under the line of credit is payable on maturity or prepayment date.
Prior to an amendment of the line of credit on May 1, 1998, the Fund was limited
to borrowing up to the lesser of (i) $500,000,000 or (ii) the limits set by its
prospectus for borrowings. During the year ended October 31, 1998, the Fund did
not borrow under the line of credit agreement. The funds which are party to the
line of credit are charged a commitment fee of 0.05% on the unused balance of
the committed line. The commitment fee is allocated among the funds based on
their respective average net assets for the period.
NOTE 6-INVESTMENT SECURITIES
The aggregate amount of investment securities (other than short-term securities)
purchased and sold by the Fund during the year ended October 31, 1998 was
$1,469,938,551 and $1,409,377,755, respectively.
The amount of unrealized appreciation (depreciation) of investment securities
as of October 31, 1998, on a tax basis, is as follows:
<TABLE>
<S> <C>
Aggregate unrealized appreciation of
investment securities $576,816,675
- ---------------------------------------------------------
Aggregate unrealized (depreciation) of
investment securities (27,900,704)
- ---------------------------------------------------------
Net unrealized appreciation of investment
securities $548,915,971
=========================================================
* Cost of investments for tax purposes is $1,280,189,136.
</TABLE>
NOTE 7-CAPITAL STOCK
Changes in capital stock outstanding during the years ended October 31, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Sold 13,962,660 $ 208,683,626 8,716,348 $114,553,393
- ------------------------------------------------------------------------------
Issued as reinvest-
ment of dividends 11,672,671 154,897,796 9,816,281 113,770,753
- ------------------------------------------------------------------------------
Reacquired (12,194,909) (183,406,173) (6,706,799) (89,245,422)
- ------------------------------------------------------------------------------
13,440,422 $ 180,175,249 11,825,830 $139,078,724
==============================================================================
</TABLE>
NOTE 8-OPTION CONTRACTS WRITTEN
Transactions in call options written during the year ended October 31, 1998 are
summarized as follows:
<TABLE>
<CAPTION>
OPTION CONTRACTS
-----------------------
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
------ ----------
<S> <C> <C>
Beginning of period -- $ --
- --------------------------------------- ------ ----------
Written 3,452 1,420,661
- --------------------------------------- ------ ----------
Closed (1,752) (458,918)
- --------------------------------------- ------ ----------
Exercised (1,700) (961,743)
- --------------------------------------- ------ ----------
End of period -- $ --
======================================= ====== ==========
</TABLE>
FS-10
<PAGE> 52
NOTE 9-FINANCIAL HIGHLIGHTS
Shown below are the financial highlights for a share of capital stock
outstanding during each of the years in the five-year period ended October 31,
1998.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 15.15 $ 12.99 $ 12.14 $ 9.78 $ 10.46
- --------------------------------------------- ---------- ---------- ---------- ---------- --------
Income from investment operations:
Net investment income 0.03 0.02 0.04 0.04 0.10
- --------------------------------------------- ---------- ---------- ---------- ---------- --------
Net gains (losses) on securities (both
realized and unrealized) 1.23 3.34 1.69 2.81 (0.04)
- --------------------------------------------- ---------- ---------- ---------- ---------- --------
Total from investment operations 1.26 3.36 1.73 2.85 0.06
- --------------------------------------------- ---------- ---------- ---------- ---------- --------
Less distributions:
Dividends from net investment income (0.02) (0.03) (0.03) (0.10) (0.10)
- --------------------------------------------- ---------- ---------- ---------- ---------- --------
Distributions from net realized gains (1.43) (1.17) (0.85) (0.39) (0.64)
- --------------------------------------------- ---------- ---------- ---------- ---------- --------
Total distributions (1.45) (1.20) (0.88) (0.49) (0.74)
- --------------------------------------------- ---------- ---------- ---------- ---------- --------
Net asset value, end of period $ 14.96 $ 15.15 $ 12.99 $ 12.14 $ 9.78
============================================= ========== ========== ========== ========== ========
Total return(a) 9.49% 28.53% 15.61% 31.03% 0.61%
============================================= ========== ========== ========== ========== ========
Ratios/supplemental data:
Net assets, end of period (000s omitted) $1,830,032 $1,650,234 $1,261,008 $1,050,011 $765,073
============================================= ========== ========== ========== ========== ========
Ratio of expenses to average net assets 0.67%(b) 0.68% 0.70% 0.71% 0.72%
============================================= ========== ========== ========== ========== ========
Ratio of net investment income to average net
assets 0.23%(b) 0.11% 0.29% 0.33% 1.04%
============================================= ========== ========== ========== ========== ========
Portfolio turnover rate 83% 88% 118% 126% 122%
============================================= ========== ========== ========== ========== ========
</TABLE>
(a) Does not deduct sales charges.
(b) Ratios are based on average net assets of $1,785,555,221.
FS-11
