<PAGE> 1
STATEMENT OF ADDITIONAL INFORMATION
AIM SUMMIT FUND, INC.
CLASS I 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 MARCH 1, 1999 AS REVISED
MAY 4, 1999 RELATING TO THE CLASS I SHARES PROSPECTUS DATED MARCH 1, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
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................................................ 5
The Investment Advisor................................................ 10
The Sub-Advisor....................................................... 12
Expenses ............................................................. 12
Transfer Agent and Custodian.......................................... 13
Reports ............................................................. 13
DIVIDENDS, DISTRIBUTIONS AND TAX MATTERS....................................... 13
Reinvestment of Dividends and Distributions........................... 13
Qualification as a Regulated Investment Company....................... 14
Determination of Taxable Income of a Regulated Investment Company..... 14
Excise Tax on Regulated Investment Companies.......................... 15
Fund Distributions.................................................... 16
Sale or Redemption of Fund Shares..................................... 18
Foreign Shareholders.................................................. 18
Effect of Future Legislation; Local Tax Considerations................ 19
SHARE PURCHASES, REDEMPTIONS AND REPURCHASES................................... 19
Purchases and Redemptions............................................. 19
Suspension of Right of Redemption..................................... 19
Valuation of Shares................................................... 19
The Distribution Agreement............................................ 20
INVESTMENT STRATEGIES AND RISKS................................................ 21
Investment Program.................................................... 22
Common Stocks......................................................... 22
Preferred Stocks...................................................... 22
Convertible Securities................................................ 22
Corporate Debt Securities............................................. 22
U.S. Government Securities............................................ 23
Real Estate Investment Trusts ("REITs")............................... 23
Warrants ............................................................. 24
Foreign Securities.................................................... 24
Foreign Exchange Transactions......................................... 25
Repurchase Agreements................................................. 25
Rule 144A Securities.................................................. 26
Illiquid Securities................................................... 26
Lending of Fund Securities............................................ 26
Portfolio Turnover.................................................... 26
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
OPTIONS, FUTURES AND CURRENCY STRATEGIES....................................... 27
Introduction.......................................................... 27
General Risks of Options, Futures and Currency Strategies............. 27
Cover................................................................. 28
Writing Call Options.................................................. 28
Writing Put Options................................................... 28
Purchasing Put Options................................................ 29
Purchasing Call Options............................................... 29
Index Options......................................................... 30
Limitations on Options................................................ 30
Interest Rate, Currency and Stock Index Futures Contracts............. 30
Options on Futures Contracts.......................................... 31
Forward Contracts..................................................... 32
Limitations on Use of Futures, Options on Futures and Certain
Options on Currencies.............................................. 32
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................... 32
INVESTMENT RESTRICTIONS........................................................ 35
MISCELLANEOUS INFORMATION...................................................... 36
Shareholder Inquiries................................................. 36
Legal Matters......................................................... 36
FINANCIAL STATEMENTS........................................................... FS
</TABLE>
<PAGE> 4
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
Class I Shares (the "Class") of the Fund is included in a Prospectus dated March
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 I (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
Fund's 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 Class' performance had been constant over the entire period.
BECAUSE AVERAGE ANNUAL RETURNS TEND TO EVEN OUT VARIATIONS IN THE CLASS' RETURN,
INVESTORS SHOULD RECOGNIZE THAT SUCH RETURNS ARE NOT THE SAME AS ACTUAL
1
<PAGE> 5
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:
<TABLE>
<S> <C> <C>
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
</TABLE>
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 Bonds
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 computing performance of
other potential investments are not necessarily comparable to the methods
employed by the Class.
2
<PAGE> 6
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).
The average annual total return for the Class, for the one, five and ten
year periods ended October 31, 1998, was 9.00%, 15.91% and 16.53%, respectively.
These average annual total returns do not include the reinvestment of dividends
and capital gains, and the effect of paying the separate Creation and Sales
Charges and Custodian Fees associated with the purchase of the Class through the
Plan. Total returns would be lower if Creation and Sales Charges and Custodian
Fees were taken into account. 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.
The average annual total return for the Class, for the one, five and ten
year periods ended October 31, 1998, was 0.18%, 14.44% and 15.46%, respectively.
These average annual total returns include the reinvestment of dividends and
capital gains, and the effects of the separate Creation and Sales Charges and
Custodian Fees assessed through the Plan. The average annual total returns
assume an initial $1,000 lump sum investment at the beginning of each period
shown with no subsequent Plan investments. Because the illustrations assume lump
sum investments, they do not reflect what investors would have earned only had
they made regular monthly investments over the period. Consult the Plan's
Prospectus for more complete information on applicable charges and fees.
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.
3
<PAGE> 7
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.
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 II 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, sub-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.
4
<PAGE> 8
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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
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. (63) 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. (foreign
Jetero Plaza, Suite E trading company) and Twenty-First Century Group,
8810 Will Clayton Parkway Inc. (governmental affairs company). Formerly,
Humble, TX 77338 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>
- --------
* 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.
5
<PAGE> 9
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
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.
- ----------------------------------------------------------------------------------------------------------
</TABLE>
- --------
* A director who is an "interested person" of the Fund and A I M
Advisors, Inc. as defined in the 1940 Act.
6
<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>
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 Management Company;
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 Advisors,
and Treasurer Inc.; and Assistant Vice President and Assistant
Treasurer, Fund Management Company.
- ----------------------------------------------------------------------------------------------------------
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 (58) 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.
7
<PAGE> 11
Set forth below is information regarding compensation paid or accrued
for each director of the Fund:
<TABLE>
<CAPTION>
========================================================================================
DIRECTOR ESTIMATED RETIREMENT TOTAL
COMPENSATION BENEFITS COMPENSATION
FROM FUND(1) ACCRUED FROM ALL AIM
BY ALL AIM FUNDS(3)
FUNDS(2)
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------
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
========================================================================================
</TABLE>
(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.
8
<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
<TABLE>
<CAPTION>
================================================================================
Number of Years of Annual Retirement Compensation
Service With the Paid By All Applicable AIM Funds
Applicable AIM Funds
================================================================================
<S> <C>
10 $67,500
- --------------------------------------------------------------------------------
9 $60,750
- --------------------------------------------------------------------------------
8 $54,000
- --------------------------------------------------------------------------------
7 $47,250
- --------------------------------------------------------------------------------
6 $40,500
- --------------------------------------------------------------------------------
5 $33,750
================================================================================
</TABLE>
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 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
9
<PAGE> 13
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. AIM entered into a sub-advisory agreement
with TradeStreet Investment Associates, Inc. as described below. AIM maintains
a trading desk and selects the core stocks which generally comprise
approximately 50% of the
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<PAGE> 14
Fund's portfolio and the emerging growth
stocks which generally comprise 35% of the Fund's portfolio. The remainder of
the Fund's portfolio is invested in value-oriented stock selected by the
sub-advisor.
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.
The portion of the Fund's portfolio invested in core stocks and in
emerging growth and value oriented stocks is determined by AIM.
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.
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<PAGE> 15
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.
THE SUB-ADVISOR
NationsBank of Texas, N.A. ("NationsBank Texas"), served as the Fund's
sub-advisor, prior to April 1, 1996 pursuant to a sub-advisory agreement (the
"Sub-Advisory Agreement"). NationsBank, N.A., a bank holding company, indirectly
holds 100% of the voting stock of NationsBank Texas. Since April 1, 1996,
TradeStreet Investment Associates, Inc. ("TradeStreet"), 101 South Tryon Street,
Suite 1000, Charlotte, North Carolina 28255, has served as Sub-Advisor.
TradeStreet is a wholly owned subsidiary of NationsBank, N.A.
and a registered investment advisor.
Pursuant to the terms of the Sub-Advisory Agreement, AIM has appointed
TradeStreet to provide certain investment advisory services to the Fund, subject
to the overall supervision by AIM and the Fund's Board of Directors. As
Sub-Advisor, TradeStreet shall: (a) obtain and evaluate 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 it or AIM considers desirable for inclusion in the
Fund's investment portfolio; and (b) to the extent requested by AIM, determine
which issues and securities shall be represented in the Fund's investment
portfolio, formulate programs for the purchases and sales of such securities and
regularly report thereon to AIM. In performing these services, TradeStreet, is
required to comply with all applicable provisions of federal or state law,
including the applicable provisions of the 1940 Act and the Investment Advisers
Act of 1940, as amended (the "Advisers Act"). Pursuant to the terms of the
Sub-Advisory Agreement, TradeStreet, under AIM's supervision, will determine the
value-oriented stocks to be purchased or sold by the Fund. It is anticipated
that approximately 25% of the Fund's portfolio will be invested in
value-oriented stocks, although that percentage may change from time to time as
deemed advisable by AIM based upon current market conditions.
As compensation for its services, AIM pays TradeStreet an annual fee,
calculated daily and paid monthly, 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 Fund's average daily net
assets in excess of $150 million and less than $700 million and 0.15% of the
Fund's average daily net assets in excess of $700 million. The sub-advisor's fee
is paid to TradeStreet by AIM from the advisory fee which AIM receives from the
Fund.
The Sub-Advisory Agreement will continue year to year, provided that it
is specifically approved at least annually by (i) the Fund's Board of Directors
or a vote of "a majority of the outstanding voting securities" of the Fund (as
defined by the 1940 Act), and (ii) by the affirmative vote of a majority of the
Non-Interested Directors by votes cast in person at a meeting called for such
purpose.
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
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<PAGE> 16
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
State Street Bank and Trust Company ("State Street Bank") acts as a
transfer agent for the Class. The transfer agent's administrative duties have
been delegated by State Street Bank to its partially-owned affiliate, Boston
Financial Data Services, Inc. ("BFDS"). State Street Bank and BFDS receive such
compensation from the Class for their services in such capacities as are agreed
to from time to time by State Street Bank and the Fund on behalf of the Class.
The address of State Street Bank and of BFDS is P.O. Box 8300, Boston,
Massachusetts 02266-8300. These services do not include any supervisory function
over management or provide any protection against any possible depreciation of
assets.
State Street Bank acts as custodian for the Class' portfolio securities
and cash. The Fund pays State Street Bank and BFDS 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, 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.
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<PAGE> 17
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 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
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<PAGE> 18
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 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
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<PAGE> 19
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 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
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<PAGE> 20
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 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
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<PAGE> 21
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
noncorporate 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 noncorporate 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 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.
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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 Plans' 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.
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 II 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
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<PAGE> 23
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 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, 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.
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<PAGE> 24
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 or sub-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 and sub-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 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, 1998, 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.
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<PAGE> 25
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 Objective 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 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
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<PAGE> 26
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 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.
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<PAGE> 27
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.
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
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<PAGE> 28
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 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.
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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 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
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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, options on
securities, options on indices, options on currencies, and 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 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 an option contract) and
the price movements of the investments being hedged. For example, if a
"protective put" is used to hedge a potential decline in a security and the
security does decline in price, the put option's increased value may not
completely offset the loss in the underlying security. 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 option, futures contract, forward contract or option thereon at
any particular time.
(5) As described below, the Fund might be required to maintain assets
as "cover," maintain segregated accounts or make margin payments when it takes
positions in instruments involving obligations to third parties. If a 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.
(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.
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COVER
Transactions using forward contracts, futures contracts and options
(other than options purchased by the Fund) 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, or
other options, 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 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.
WRITING PUT OPTIONS
The Fund may write (sell) covered put options on securities, futures
contracts, forward contracts, indices and currencies. As the writer of a put
option, a Fund would have the obligation to buy the underlying security,
contract or currency (depending on the type of derivative) at the exercise price
at any time until (American style) or on (European style) the expiration date.
This obligation terminates upon the expiration
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of the put option, or such
earlier time at which the Fund effects a closing purchase transaction by
purchasing an option identical to that previously sold.
The Fund would write a put option at an exercise price that, reduced by
the premium received on the option, reflects the lower price it is willing to
pay for the underlying security, contract or currency. The risk in such a
transaction would be that the market price of the underlying security, contract
or currency would decline below the exercise price less the premium received.
PURCHASING PUT OPTIONS
The Fund may purchase put options on securities, futures contracts,
forward contracts, indices and currencies. As the holder of a put option, the
Fund would have the right to sell the underlying security, contract or currency
at the exercise price at any time until (American style) or on (European style)
the expiration date. The Fund may enter into closing sale transactions with
respect to such options, exercise such option or permit such option to expire.
The Fund may purchase a put option on an underlying security, contract
or currency ("protective put") owned by the Fund in order to protect against an
anticipated decline in the value of the security, contract or currency. Such
hedge protection is provided only during the life of the put option. The premium
paid for the put option and any transaction costs would reduce any profit
realized when the security, contract or currency is delivered upon exercise of
said option. Conversely, if the underlying security, contract or currency does
not decline in value, the option may expire worthless and the premium paid for
the protective put would be lost.
The Fund may also purchase put options on underlying securities,
contracts or currencies against which it has written other put options. For
example, where the Fund has written a put option on an underlying security,
rather than entering a closing transaction of the written option, it may
purchase a put option with a different exercise price and/or expiration date
that would eliminate some or all of the risk associated with the written put.
Used in combinations, these strategies are commonly referred to as "put
spreads." Likewise, the Fund may write call options on underlying securities,
contracts or currencies against which it has purchased protective put options.
This strategy is commonly referred to as a "collar."
PURCHASING CALL OPTIONS
The Fund may purchase covered call options on securities, futures
contracts, forward contracts, indices and currencies. As the holder of a call
option, the Fund would have the right to purchase the underlying security,
contract or currency at the exercise price at any time until (American style) or
on (European style) the expiration date. The Fund may enter into closing sale
transactions with respect to such options, exercise such options or permit such
options to expire.
Call options may be purchased by the Fund for the purpose of acquiring
the underlying security, contract or currency for its portfolio. Utilized in
this fashion, the purchase of call options would enable the Fund to acquire the
security, contract or currency at the exercise price of the call option plus the
premium paid. So long as it holds such a call option, rather than the underlying
security or currency itself, the Fund is partially protected from any unexpected
decline in the market price of the underlying security, contract or currency
and, in such event, could allow the call option to expire, incurring a loss only
to the extent of the premium paid for the option.
The Fund may also purchase call options on underlying securities,
contracts or currencies against which it has written other call options. For
example, where the Fund has written a call option on an underlying security,
rather than entering a closing transaction of the written option, it may
purchase a call option with a different exercise price and/or expiration date
that would eliminate some or all of the risk associated with the written call.
Used in combinations, these strategies are commonly referred to as "call
spreads."
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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. The Fund will not purchase an OTC option unless it
believes that daily valuations for such options are readily obtainable. 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 staff of the SEC considers purchased OTC options to be illiquid
securities. The Fund may also 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
Puts and calls on indices are similar to puts and 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 or put 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 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. The Fund will not purchase options if,
at any time of the investment, the aggregate premiums paid for the options will
exceed 5% of the Fund's total assets.
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
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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.
OPTIONS ON FUTURES CONTRACTS
Options on Futures Contracts are similar to options on securities or
currencies except that options on Futures Contracts give the purchaser the
right, in return for the premium paid, to assume a position in a Futures
Contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the period of
the option. Upon exercise of the option, the delivery of the
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Futures position by
the writer of the option 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 a 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, OPTIONS ON FUTURES AND CERTAIN OPTIONS ON
CURRENCIES
To the extent that the Fund enters into Futures Contracts, options on
Futures Contracts and 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%.
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.
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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 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.
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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.
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.
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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
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
35
<PAGE> 39
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 33 1/3% 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.
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.
36
<PAGE> 40
FINANCIAL STATEMENTS
FS
<PAGE> 41
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> 42
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> 43
<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> 44
<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> 45
<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> 46
<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> 47
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> 48
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> 49
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> 50
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> 51
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
