<PAGE> 1
AIM ADVISOR
INCOME FUND
[AIM LOGO APPEARS HERE] ANNUAL REPORT DECEMBER 31, 1997
<PAGE> 2
----------------------------------------------------------------
AIM ADVISOR INCOME FUND
For shareholders
who seek to achieve
a high total return on investment
through income-producing
securities, emphasizing securities
Fund management believes
to be of higher quality
than has been generally recognized
by the marketplace.
----------------------------------------------------------------
ABOUT FUND PERFORMANCE AND PORTFOLIO DATA THROUGHOUT THIS REPORT:
o AIM Advisor Income Fund's performance figures are historical and reflect
reinvestment of all distributions and changes in net asset value. Unless
otherwise indicated, the fund's performance is computed at net asset value
without a sales charge.
o When sales charges are included in performance figures, Class A share
performance reflects the maximum 4.75% sales charge, and Class C share
performance reflects the 1% contingent deferred sales charge, which is
applicable for 12 months following the date of each purchase. The
performance of the Fund's Class A and Class C shares will differ due to
differing fees and expenses.
o In 1997, the Fund paid distributions for Class A and Class C shares of
$2.9915 and $2.6349 per share, respectively.
o The Fund's annualized distribution rate reflects the Fund's most recent
monthly dividend distribution multiplied by 12 and divided by the most
recent month-end maximum offering price. The Fund's distribution rate and
30-day SEC yield will differ.
o The 30-day yield is calculated on the basis of a formula defined by the
Securities and Exchange Commission (SEC). The formula is based on the
portfolio's potential earnings from dividends, interest, and
yield-to-maturity or yield-to-call of its holdings, net of all expenses and
expressed on an annualized basis.
o The Fund's investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their
original cost.
o Past performance cannot guarantee comparable future results.
o The Fund's portfolio composition is subject to change and there is no
guarantee it will continue to hold any particular security.
ABOUT INDEXES AND OTHER PERFORMANCE BENCHMARKS CITED IN THIS REPORT:
o The Lehman Brothers Aggregate Bond Index is an unmanaged index generally
considered representative of corporate debt securities.
o The Lehman Corporate/Government Bond Index is an unmanaged index generally
considered representative of intermediate and long-term government and
investment-grade securities.
o The Consumer Price Index (CPI) is a measure of change in consumer prices as
determined by the U.S. Bureau of Labor Statistics.
o An investment cannot be made in any index listed. Unless otherwise
indicated, index results include reinvested dividends and do not reflect
sales charges.
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENTS
ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY;
ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY,
ANY BANK OR ANY AFFILIATE; AND ARE SUBJECT TO INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
This report may be distributed only to current shareholders
or to persons who have received a current prospectus of the Fund.
<PAGE> 3
The Chairman's Letter
Dear Fellow Shareholder:
1997 proved an eventful year in securities markets. The
[PHOTO OF Dow Jones Industrial Average reached its all-time high--and
Charles T. also had its largest one-day point drop ever, though not its
Bauer, largest percentage drop. Volatility was unabated, and we
Chairman of experienced the first 10% stock market correction in the
the Board of U.S. since 1991.
THE FUND Never dull and occasionally unsettling, 1997 was also a
APPEARS HERE] very good year for many investments. For an unprecedented
third year in a row, domestic equities rose more than 20%.
Late in the year, in the uncertainty brought on by events in
Asia, bond markets, especially the U.S. Treasury market,
fulfilled their usual role as relative safe havens, and a
bull market in bonds took hold. Overseas, though Asian
markets plummeted, Europe thrived.
Market expectations performed an about-face during the
year. Worry about the inflationary potential of vigorous
economic growth became concern about the potential negative impact of Asia's
financial crisis. At fiscal year end, there was no consensus about how serious
or widespread this impact would be.
An interview with your Fund's managers appears on the following pages. They
discuss their investment strategies, how your Fund performed in this context,
and their outlook for the future.
In uncertain times like these, your financial consultant remains your best
source for information on market trends and for advice on how to invest
strategically rather than emotionally. We encourage you to visit your financial
consultant regularly to make sure your chosen investments still suit your goals,
risk tolerance, and time horizon.
INVESTOR EDUCATION EVENTS
In addition to professional guidance, every investor needs fundamental
information about the saving and investing choices offered by the marketplace.
AIM has always championed investor education, convinced a more knowledgeable
shareholder is a better customer. A great deal of investment information will be
available during two upcoming events, and we hope our shareholders will
participate in and learn from them to the greatest extent possible.
First, from March 29 through April 4, the Securities and Exchange
Commission (SEC) will sponsor Saving and Investing Education Week. As the SEC
points out, financial markets are more stable when investors are confident in
them, and knowledge is a major confidence builder. The week's theme is "Get the
facts. It's your money. It's your future." The aim is to inform citizens about
the saving and investment possibilities available and to build understanding
about how one's financial needs and goals change throughout one's life. The
week's awareness and education events will culminate with a national investors
town meeting at satellite-linked locations across the nation. You can find out
more from the SEC's Web site at www.sec.gov.
The second event concerns citizens' financial planning for retirement, a
subject of growing urgency as the population ages and the solvency of the Social
Security system is increasingly debatable. In July, the first National Summit on
Retirement Savings will be held at the White House. Under the auspices of the
Department of Labor, working through public-private partnership, the summit's
goal is to advance the public's knowledge of retirement savings through
development of a broad-based education program and to develop recommendations
for public/private action to promote private retirement savings among American
workers.
Look for further information on both of these investor education events in
the national and local press.
We are pleased to send you this report on your Fund. Please contact our
Client Services department at 800-959-4246 if you have questions or comments.
Automated information about your account is available 24 hours a day on the AIM
Investor Line, 800-246-5463. Account information and much more can be found on
our Web site, www.aimfunds.com.
Sincerely,
/s/ CHARLES T. BAUER
Charles T. Bauer
Chairman
-----------------------------------------
In uncertain times like these,
your financial consultant
remains your best source
for information on market trends
and for advice on
how to invest strategically
rather than emotionally.
-----------------------------------------
<PAGE> 4
The Managers' Overview
THE FUND PROVIDES ATTRACTIVE CURRENT
INCOME IN VOLATILE MARKET
A roundtable discussion with the Fund management team for AIM Advisor Income
Fund for the 12 months ended December 31,1997
- --------------------------------------------------------------------------------
Q. ALTHOUGH FINANCIAL MARKETS WERE TURBULENT IN 1997, IT WAS A GOOD YEAR FOR
BONDS. WHAT CONTRIBUTED TO THEIR PERFORMANCE?
A. The major factor determining Treasury performance was the lowering of
inflation expectations. Inflation and price data were positive all year,
and much of the positive performance by bonds occurred during the second
half of 1997 as it became evident that the Federal Reserve Board (the Fed)
was showing no signs of tightening monetary policy. During the fourth
quarter, Treasury prices edged higher as all focus was on trouble abroad
and its potentially positive effect on inflation and growth.
Q. THE REPORTING PERIOD WAS CHARACTERIZED BY LOW INFLATION, LOW INTEREST RATES
AND A VOLATILE STOCK MARKET. HOW DID THOSE FACTORS AFFECT BOND INVESTMENTS?
A. News at mid-year that the Consumer Price Index had risen 0.1%--half the
increase expected by analysts--combined with a record six consecutive
declines in producer prices, encouraged the Fed to avoid tightening
monetary policy. Borrowing costs actually declined slightly during the
remainder of the year as inflation levels remained low. In addition,
investors looking for greater diversification amid the volatility of the
stock market turned to bonds.
In addition to leading investors back into the blue chip stock
universe, market turmoil also increased the attractiveness of less risky
investments such as Treasury bonds. A bond rally late in the year pushed
the yield on the 30-year U.S. Treasury bond below 6%, its lowest level in
more than four years. Bond performance was quite good for the fiscal year;
the Lehman Brothers Aggregate Bond Index's total return was 9.65%, a
respectable showing for bonds. Corporate bonds were the best performers for
1997.
In the course of the year, the yield curve flattened dramatically. The
spread between a two-year Treasury and a 30-year Treasury narrowed from 77
to 28 basis points (a basis point is one one-hundredth of a percentage
point).
Q. HOW DID THE FUND DO IN THIS ENVIRONMENT?
A. As of December 31,1997, the Fund's 30-day SEC yield on Class A shares was
4.74%; on Class C shares, 4.59%. SEC yields would have been lower had
advisory fees not been waived. The Fund's 30-day distribution rate was
6.03% (Class A shares) and 5.28% (Class C shares). Total return for Class A
shares was 7.88%; for C shares, 7.51%.
Fund management maintained a defensive posture, compared to the Lehman
Brothers Corporate/Government Bond Index, during the year, and this was a
drag on performance as longer-dated securities performed better during
1997.
There were no significant shifts among sectors during the fiscal year. At
fiscal year end, the portfolio's average maturity was 7.9 years, its
duration 5.07 years.
Q. WHAT IS YOUR OUTLOOK FOR THE BOND MARKET?
A. Although the U.S. economy reached a growth rate of about 3.5% in 1997, far
above the 2% to 2.75% range considered to be non-inflationary and
sustainable, inflation was mild during the year. The Consumer Price Index
rose a modest 1.7%, its smallest increase in 11 years. Consumer spending
has slowed in recent months, which may cause reductions in prices and drive
inflation to even lower levels in 1998.
-----------------------------------------------------
In managing the Fund,
we emphasize stability and
consistency of returns.
-----------------------------------------------------
PORTFOLIO COMPOSITION
As of 12/31/97
===============================================================================
Domestic Government Bonds 68.76%
Corporate Bonds 9.32%
Mortgage-Backed Securities 17.39%
Cash/Cash Equivalents 4.53%
Please keep in mind that the Fund's portfolio is subject to change and there is
no assurance the Fund will continue to hold any particular security.
===============================================================================
See important fund and index disclosures inside front cover.
<PAGE> 5
Forecasts call for the domestic economic growth rate to drop to about 2.5%,
at best, in 1998. If so, that would minimize the chances of an interest rate
increase by the Fed. Low interest-rate volatility benefits bonds generally and
could add fuel to the ongoing rally in the U.S. bond market.
However, in this environment we expect to see an increase in the number of
mortgage prepayments, which does not bode well for the mortgage securities
market. When rates are declining, homeowners tend to pre-pay their mortgages by
refinancing, which has a negative effect on the value of mortgage-backed
securities. In response to the relatively lower interest rate environment during
the fall compared with earlier in the year, the Fund pared down holdings in
mortgage-backed securities in anticipation of an increase in the number of
pre-payments.
1997 was the year of what Fed Chairman Alan Greenspan dubbed "the new
paradigm": strong growth, high productivity, full employment, and low inflation.
1998 brings new challenges as the market begins to question whether most of the
good news is behind us and how much longer this ideal environment can last.
On the positive side for the bond market, the financial difficulties Asian
countries are experiencing is ultimately deflationary, with higher trade
deficits and downward pressure on wages, especially in the manufacturing sector.
It is too early to tell how big the deflationary impact will be on the U.S. The
vastly improved U.S. budget deficit is more good news for the market as we can
expect reduced Treasury supply. On the negative side, the unemployment rate is
continuing to decline, which traditionally has signaled inflation. At a minimum,
the effects of Asian developments will not be apparent for several months and
the Fed will probably remain prudent in leaving rates unchanged until the
effects are known.
AIM ADVISOR INCOME FUND VS. BENCHMARK INDEX
The chart below compares your Fund's Class C shares to a benchmark index. It is
intended to give you a general idea of how your Fund performed compared to the
bond market over the period 12/31/87-12/31/97. It is important to understand the
difference between your Fund and an index. An index measures the performance of
a hypothetical portfolio, in this case the Lehman Brothers Corporate/Government
Bond Index. Unlike your Fund, an index is not managed; therefore, there are no
sales charges, expenses or fees. You cannot invest in an index. But if you could
buy all the securities that make up an index, you would incur expenses that
would affect the return of your investment.
GROWTH OF A $10,000 INVESTMENT
12/31/87-12/31/97
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AIM Advisor Income Fund, Lehman Brothers Corporate/
Class C Shares Government Bond Index
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
12/87 $10,000 $10,000
12/88 10,559 10,759
12/89 11,522 12,291
12/90 12,421 13,307
12/91 13,969 15,450
12/92 14,631 16,621
12/93 15,740 18,459
12/94 15,545 17,811
12/95 18,492 21,240
12/96 18,504 21,853
12/97 19,847 23,984
================================================================================
</TABLE>
Past performance cannot guarantee comparable future results.
================================================================================
AVERAGE ANNUAL TOTAL RETURNS
As of 12/31/97, including applicable sales charges
CLASS C SHARES
Inception (3/30/84) 8.07%
10 Years 7.09
5 Years 6.29
1 Year 6.92
CLASS A SHARES
1 Year 2.76%*
*7.88% excluding sales charge
================================================================================
Source: FundStation and Lipper Analytical Services, Inc. Your Fund's total
return includes sales charges, expenses, and management fees. The performance of
the Fund's Class A shares will differ from that of Class C shares due to
differing fees and expenses. For Fund performance calculations and descriptions
of the index cited on this page, please refer to the inside front cover.
See important fund and index disclosures inside front cover.
<PAGE> 6
SCHEDULE OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<S> <C> <C>
CORPORATE BONDS & NOTES-9.35%
AUTOMOBILES-2.20%
Ford Motor Co., Notes,
7.50%, 11/15/99 $ 500,000 $ 513,400
- ---------------------------------------------------------------
BANKS (MAJOR REGIONAL)-2.23%
National City Corp., Sub. Notes,
7.20%, 05/15/05 500,000 520,420
- ---------------------------------------------------------------
CONSUMER FINANCE-2.26%
Commercial Credit Co., Unsec.
Notes,
5.55%, 02/15/01 500,000 491,090
- ---------------------------------------------------------------
Ford Motor Credit, Deb.,
9.25%, 06/15/98 35,000 35,534
- ---------------------------------------------------------------
526,624
- ---------------------------------------------------------------
ELECTRICAL EQUIPMENT-2.19%
Boeing Co., Notes,
6.625%, 06/01/05 500,000 510,320
- ---------------------------------------------------------------
TELEPHONE-0.47%
GTE Corp., Deb.,
10.25%, 11/01/20 100,000 110,387
- ---------------------------------------------------------------
Total Corporate Bonds & Notes 2,181,151
- ---------------------------------------------------------------
U.S. GOVERNMENT AGENCY SECURITIES-20.48%
FEDERAL FARM CREDIT BANK-3.03%
6.15%, 09/01/00 700,000 706,118
- ---------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORP. ("FHLMC")-4.47%
Pass through certificates
12.00%, 04/01/00 3,752 4,029
- ---------------------------------------------------------------
6.50%, 07/01/01 423,706 426,218
- ---------------------------------------------------------------
8.00%, 10/01/10 591,665 611,444
- ---------------------------------------------------------------
1,041,691
- ---------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION ("FNMA")-0.62%
Pass through certificates
6.00%, 01/01/09 62,221 61,559
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
<S> <C> <C>
FEDERAL NATIONAL MORTGAGE ASSOCIATION ("FNMA")-(CONTINUED)
6.00%, 04/01/24 $ 85,826 $ 83,385
- ---------------------------------------------------------------
144,944
- ---------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ("GNMA")-12.36%
Pass through certificates
6.00%, 10/15/08 to 11/15/08 709,407 707,634
- ---------------------------------------------------------------
6.50%, 10/15/08 685,500 692,568
- ---------------------------------------------------------------
7.00%, 10/15/08 687,449 703,556
- ---------------------------------------------------------------
7.50%, 03/15/26 757,442 778,742
- ---------------------------------------------------------------
2,882,500
- ---------------------------------------------------------------
Total U.S. Government Agency Securities 4,775,253
- ---------------------------------------------------------------
U.S. TREASURY BONDS & NOTES-65.96%
6.125%, 03/31/98 600,000 601,158
- ---------------------------------------------------------------
7.125%, 10/15/98 1,000,000 1,011,540
- ---------------------------------------------------------------
7.00%, 04/15/99 1,000,000 1,016,800
- ---------------------------------------------------------------
8.00%, 08/15/99 1,000,000 1,035,690
- ---------------------------------------------------------------
6.375%, 01/15/00 1,500,000 1,520,535
- ---------------------------------------------------------------
7.50%, 11/15/01 1,000,000 1,061,040
- ---------------------------------------------------------------
6.375%, 08/15/02 1,500,000 1,539,555
- ---------------------------------------------------------------
6.25%, 02/15/03 1,800,000 1,841,670
- ---------------------------------------------------------------
10.75%, 08/15/05 1,250,000 1,626,300
- ---------------------------------------------------------------
9.375%, 02/15/06 1,000,000 1,230,740
- ---------------------------------------------------------------
9.25%, 02/15/16 1,200,000 1,628,508
- ---------------------------------------------------------------
7.25%, 08/15/22 1,100,000 1,271,072
- ---------------------------------------------------------------
Total U.S. Treasury Bonds & Notes 15,384,608
- ---------------------------------------------------------------
REPURCHASE AGREEMENT(a)-2.72%
Smith Barney, Inc.,
6.75%, 01/02/98(b) 634,139 634,139
- ---------------------------------------------------------------
TOTAL INVESTMENTS-98.51% 22,975,151
- ---------------------------------------------------------------
OTHER ASSETS LESS LIABILITIES-1.49% 348,583
- ---------------------------------------------------------------
NET ASSETS-100.00% $23,323,734
===============================================================
</TABLE>
Abbreviations:
Deb. - Debentures
Sub. - Subordinated
Unsec. - Unsecured
Notes to Schedule of Investments:
(a) 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 as being 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.
(b) Joint repurchase agreement entered into 12/31/97 with a maturing value of
$400,150,000. Collateralized by $395,097,000 U.S. Government obligations 0%
to 13.875% due 01/07/98 to 12/15/43 with an aggregate market value at
12/31/97 of $408,000,323.
See Notes to Financial Statements.
6
<PAGE> 7
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investments, at market value (cost
$22,589,426) $ 22,975,151
- ---------------------------------------------------------
Receivables for interest and dividends 422,396
- ---------------------------------------------------------
Investment for deferred compensation plan 1,936
- ---------------------------------------------------------
Other assets 1,057
- ---------------------------------------------------------
Total assets 23,400,540
- ---------------------------------------------------------
LIABILITIES:
Payables for:
Capital stock reacquired 19,678
- ---------------------------------------------------------
Deferred compensation plan 1,936
- ---------------------------------------------------------
Accrued advisory fees 7,992
- ---------------------------------------------------------
Accrued operating services fees 8,991
- ---------------------------------------------------------
Accrued distribution fees 36,349
- ---------------------------------------------------------
Accrued directors' fees and expenses 1,860
- ---------------------------------------------------------
Total liabilities 76,806
- ---------------------------------------------------------
Net assets applicable to shares outstanding $ 23,323,734
=========================================================
NET ASSETS:
Class A $ 44,385
=========================================================
Class C $ 23,279,349
=========================================================
SHARES OUTSTANDING:
CAPITAL STOCK, $.001 PAR VALUE PER SHARE:
Class A:
Authorized 100,000,000
- ---------------------------------------------------------
Outstanding 895
=========================================================
Class C
Authorized 100,000,000
- ---------------------------------------------------------
Outstanding 467,561
=========================================================
Class A:
Net asset value and redemption price per
share $ 49.59
- ---------------------------------------------------------
Offering price per share:
(Net asset value of $49.59 divided by
95.25%) $ 52.06
- ---------------------------------------------------------
Class C:
Net asset value and offering price per
share $ 49.79
=========================================================
</TABLE>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $ 1,704,145
- --------------------------------------------------------
EXPENSES:
Investment Advisory fees 160,576
- --------------------------------------------------------
Operating services fees 111,180
- --------------------------------------------------------
Distribution fees-Class A 108
- --------------------------------------------------------
Distribution fees-Class C 147,989
- --------------------------------------------------------
Directors' fees and expenses 3,496
- --------------------------------------------------------
Total expenses 423,349
- --------------------------------------------------------
Less: Fees waived by advisor (61,751)
- --------------------------------------------------------
Net expenses 361,598
- --------------------------------------------------------
Net investment income 1,342,547
- --------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) FROM
INVESTMENT SECURITIES:
Net realized gain (loss) on sales of
investment securities (148,701)
- --------------------------------------------------------
Net unrealized appreciation of investment
securities 574,120
- --------------------------------------------------------
Net gain from investment securities 425,419
- --------------------------------------------------------
Net increase in net assets resulting from
operations $ 1,767,966
=========================================================
</TABLE>
See Notes to Financial Statements.
7
<PAGE> 8
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
OPERATIONS:
Net investment income $ 1,342,547 $ 1,532,326
- ----------------------------------------------------------------------------------------
Net realized gain (loss) on sales of investment securities (148,701) 893,589
- ----------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investment
securities 574,120 (2,884,993)
- ----------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 1,767,966 (459,078)
- ----------------------------------------------------------------------------------------
Distributions to shareholders from net investment income:
Class A (2,259) --
- ----------------------------------------------------------------------------------------
Class C (1,322,755) (1,549,005)
- ----------------------------------------------------------------------------------------
Share transactions-net:
Class A 44,713 --
- ----------------------------------------------------------------------------------------
Class C (3,326,241) (3,815,146)
- ----------------------------------------------------------------------------------------
Net increase (decrease) in net assets (2,838,576) (5,823,229)
- ----------------------------------------------------------------------------------------
NET ASSETS:
Beginning of period 26,162,310 31,985,539
- ----------------------------------------------------------------------------------------
End of period $ 23,323,734 $26,162,310
========================================================================================
NET ASSETS CONSIST OF:
Capital (par value and additional paid-in) $ 23,993,670 $27,320,347
- ----------------------------------------------------------------------------------------
Undistributed net investment income (loss) 10,200 (39,504)
- ----------------------------------------------------------------------------------------
Undistributed net realized gain (loss) on sales of
investment securities (1,065,861) (930,138)
- ----------------------------------------------------------------------------------------
Unrealized appreciation (depreciation) of investment
securities 385,725 (188,395)
- ----------------------------------------------------------------------------------------
$ 23,323,734 $26,162,310
========================================================================================
</TABLE>
See Notes to Financial Statements.
8
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES
AIM Advisor Income Fund (the "Fund", formerly INVESCO Advisor Income Portfolio)
is a series portfolio of AIM Advisor Funds, Inc. (the "Company"). The Company is
a Maryland corporation registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as an open-end series management investment company
consisting of seven diversified portfolios. The Fund currently offers two
different classes of shares: Class A shares and Class C shares. Class A shares
are sold with a front-end sales charge. Class C shares are sold with a
contingent deferred sales charge. Matters affecting each portfolio or class will
be voted on exclusively by the shareholders of such portfolio or class. The
assets, liabilities and operations of each portfolio are accounted for
separately. The Fund's investment objective is to achieve a high total return on
investment through capital appreciation and current income, without regard to
federal income tax considerations. Information presented in these financial
statements pertains only to the Fund.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities at the date of the
financial statements and the reported amounts of income 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-Debt obligations (including convertible bonds) are
valued on the basis of prices provided by an independent pricing service.
Prices provided by the 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 prices are not provided by the above method are valued at the mean
between last bid and asked prices based upon quotes furnished by independent
sources. 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 Company's Board of Directors. Investments with
maturities of 60 days or less are valued on the basis of amortized cost
which approximates market value.
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 December 31, 1997,
undistributed net investment income was increased by $32,171, undistributed
net realized gain (loss) increased by $12,978 and paid-in-capital decreased
by $45,149 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. Bond Premiums-It is the policy of the Fund not to amortize market premiums
on bonds for financial reporting purposes.
D. 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. The Fund has a capital loss
carryforward of $1,046,637 (which may be carried forward to offset further
taxable gains, if any) which expires, if not previously utilized, through
the year 2004. The Fund cannot distribute capital gains to shareholders
until the tax loss carryforwards have been utilized.
E. Expenses-Distribution expenses directly attributable to a class of shares
are charged to that class' operations. All other expenses which are
attributable to more than one class are allocated between the classes.
NOTE 2-ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Company has entered into a master investment advisory agreement with A I M
Advisors, Inc. ("AIM"). Under the terms of the master agreement, the Fund pays
an advisory fee to AIM at the annual rate of 0.65% of the Fund's average daily
net assets. AIM has entered into a sub-advisory agreement with INVESCO Capital
Management, Inc. ("ICM") whereby AIM pays ICM an annual rate of 0.10% of the
Fund's average daily net assets. Prior to August 4, 1997, the Company had an
investment advisory agreement with INVESCO Services, Inc. ("ISI") to serve as
the Fund's investment advisor. Under the terms of the prior investment advisory
agreement, the Fund paid ISI an advisory fee equal to an annual rate of 0.40% of
the average daily net assets of the Fund. Under the terms of the prior
sub-advisory agreement between ISI and ICM, ISI paid ICM a sub-advisory fee
equal to an annual rate of 0.10% of the Fund's average daily net assets. ISI
agreed to waive advisory fees payable by the Fund for a three year period
beginning October 1, 1995, so that the advisory fees would not exceed 0.40% of
average daily net assets. AIM has voluntarily agreed to assume the remaining
term of this commitment. During the period January 1, 1997 to August 3, 1997,
ICM waived fees of $36,377. During the period August 4, 1997 to December 31,
1997, AIM waived fees of $25,374.
The Company, pursuant to an operating services agreement with AIM, has agreed
to pay AIM at an annual rate of 0.45% of the average daily net assets of the
Fund for providing or arranging to provide accounting, legal (except
litigation), dividend disbursing, transfer agency, registrar, custodial,
shareholder reporting, sub-accounting and recordkeeping services and functions.
This agreement provides that AIM pays all fees and expenses associated with
these and other functions, including, but not limited to, registration fees,
shareholder meeting fees, and proxy statement and shareholder report expenses.
During the period August 4, 1997 to December 31, 1997, AIM was paid $44,788 for
such
9
<PAGE> 10
services. Prior to August 4, 1997, the Company had an operating services
agreement with ISI whereby the Fund paid ISI an annual rate of 0.45% of average
daily net assets of the Fund. During the period January 1, 1997 through August
3, 1997, the Fund paid ISI $66,392.
The Company has entered into a master distribution agreement with A I M
Distributors, Inc. ("AIM Distributors") to serve as the distributor for the
Class A shares and Class C shares of the Fund. The Company has adopted a
distribution plan pursuant to Rule 12b-1 under the 1940 Act with respect to the
Fund's Class A shares and with respect to the Fund's Class C shares (the
"Plan"). The Fund, pursuant to the Plan, pays AIM Distributors compensation at a
maximum annual rate of 0.25% of the average daily net assets attributable to the
Class A shares. The Fund, pursuant to the Plan, pays AIM Distributors a maximum
annual rate of 0.60% of the Fund's average daily net assets attributable to the
Class C shares. Of these amounts, the Fund may pay a service fee of 0.25% of the
average daily net assets of the Class A and Class C shares to selected dealers
and financial institutions who furnish continuing personal shareholder services
to their customers who purchase and own shares of the Fund. Any amounts not paid
as a service fee under such Plan would constitute an asset-based sales charge.
The Plan also imposes a cap on the total sales charges, including asset-based
sales charges, that may be paid by the respective classes. During the period
August 4, 1997 to December 31, 1997, the Class A and Class C shares paid AIM
Distributors $49 and $59,614, respectively, as compensation under the Plan.
Prior to August 4, 1997, the Fund entered into a distribution plan with ISI in
accordance with Rule 12b-1 of the 1940 Act with substantially identical terms as
described for AIM Distributors above. During the period January 1, 1997 to
August 3, 1997 the Class A and Class C shares paid ISI $59 and $88,375
respectively, as compensation under the plans.
AIM Distributors received commissions of $27 from sales of Class A shares of
the Fund during the period August 4, 1997 to December 31, 1997. ISI received
commissions of $186 from sales of Class A shares of the Fund during the period
January 1, 1997 to August 3, 1997. Such commissions are not an expense to the
Fund. They are deducted from, and are not included in, the proceeds from sales
of Class A shares. During the period August 4, 1997 to December 31, 1997, AIM
Distributors received commissions of $2,834 in contingent deferred sales charges
imposed on redemptions of Fund shares. Certain officers and directors of the
Company are officers and directors of AIM, A I M Fund Services, Inc. and AIM
Distributors. During the period January 1, 1997 through August 3, 1997, ISI
received commissions of $961 in contingent deferred sales charges imposed on
redemptions of Fund shares.
The combined effect of the master investment advisory agreements, operating
services agreement and the distribution plan for the Fund is to place a cap or
ceiling on the total expenses of the Fund, other than brokerage commissions,
interest, taxes, litigation, directors' fees and expenses, and other
extraordinary expenses. AIM has voluntarily agreed to adhere to maximum expense
ratios for the Fund. To the extent that the Fund exceeds the amounts, AIM or its
affiliates will waive its fees to reimburse the Fund to assure that the Fund's
expenses do not exceed the designated maximum amounts except for those items
specifically identified above. In any calendar year, the Fund's expenses may not
exceed 1.35% for Class A and 1.70% for Class C. The prior advisor, INVESCO
Services, Inc. ("ISI") agreed to reimburse the Income Fund for a three-year
period beginning 10/01/95. AIM has agreed to assume this commitment, so that the
expenses shall not exceed 1.10% for Class A and 1.45% for Class C of average net
assets per annum.
During the period August 4, 1997 to December 31, 1997, the Fund paid legal
fees of $577 for services rendered by Kramer, Levin, Naftalis & Frankel as
counsel to the Company's directors. A member of that firm is a director of the
Company.
NOTE 3-DIRECTORS' FEES
Directors' fees represent remuneration paid or accrued to each director who is
not an "interested person" of AIM. The Company may invest directors' fees, if so
elected by a director, in mutual fund shares in accordance with a deferred
compensation plan.
NOTE 4-INVESTMENT SECURITIES
The aggregate amount of investment securities (other than short-term securities)
purchased and sold by the Fund during the year ended December 31, 1997 was
$2,733,625 and $6,259,582, respectively.
The amount of unrealized appreciation (depreciation) of investment securities,
on a tax basis, as of December 31, 1997 is as follows:
<TABLE>
<S> <C>
Aggregate unrealized appreciation of investment securities $624,696
- ------------------------------------------------------------------------
Aggregate unrealized (depreciation) of
investment securities (238,971)
- ------------------------------------------------------------------------
Net unrealized appreciation of investment
securities $385,725
========================================================================
</TABLE>
Investments have the same cost for tax and financial statement purposes.
10
<PAGE> 11
NOTE 5-CAPITAL STOCK
Changes in the Fund's capital stock outstanding for the years ended December 31,
1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sold:
Class A* 1,109 $ 55,696 -- $ --
- ------------------------------------------------------- ----------- ----------- ---------- -----------
Class C 59,824 2,914,634 92,901 4,592,854
- ------------------------------------------------------- ----------- ----------- ---------- -----------
Issued as reinvestment of dividends:
Class A* 41 1,633 -- --
- ------------------------------------------------------- ----------- ----------- ---------- -----------
Class C 22,777 1,111,545 26,073 1,278,365
- ------------------------------------------------------- ----------- ----------- ---------- -----------
Reacquired:
Class A* (255) (12,616) -- --
- ------------------------------------------------------- ----------- ----------- ---------- -----------
Class C (150,330) (7,352,420) (196,204) (9,686,365)
- ------------------------------------------------------- ----------- ----------- ---------- -----------
(66,834) $(3,281,528) (77,230) $(3,815,146)
======================================================= =========== =========== ========== ===========
</TABLE>
* Class A shares commenced operations on January 1, 1997.
NOTE 6-FINANCIAL HIGHLIGHTS
Shown below are the financial highlights for a share of Class A capital stock
outstanding during the year ended December 31, 1997 and for a share of Class C
capital stock outstanding during each of the years in the five-year period ended
December 31, 1997.
<TABLE>
<CAPTION>
1997(a)
-------
<S> <C>
CLASS A:
Net asset value, beginning of period $48.87
- ------------------------------------------------------------ ------
Income from investment operations:
Net investment income 3.20
- ------------------------------------------------------------ ------
Net gains on securities (both realized and unrealized) 0.51
- ------------------------------------------------------------ ------
Total from investment operations 3.71
- ------------------------------------------------------------ ------
Less distributions:
Dividends from net investment income (2.99)
- ------------------------------------------------------------ ------
Total distributions (2.99)
- ------------------------------------------------------------ ------
Net asset value, end of period $49.59
============================================================ ======
Total return(b) 7.88%
============================================================ ======
Ratios/supplemental data:
Net assets, end of period (000s omitted) $ 44
============================================================ ======
Ratio of expenses to average net assets(c) 1.11%
============================================================ ======
Ratio of net investment income to average net assets(c) 5.79%
============================================================ ======
Portfolio turnover rate 11%
============================================================ ======
</TABLE>
(a) The Fund changed investment advisors on August 4, 1997.
(b) Does not deduct sales charges.
(c) Ratios are based on average net assets of $43,477 and are after fee waivers.
Ratios of expenses and net investment income to average net assets prior to
fee waivers were 1.36% and 5.54%, respectively.
11
<PAGE> 12
NOTE 6-FINANCIAL HIGHLIGHTS-continued
CLASS C:
<TABLE>
<CAPTION>
1997(a) 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 48.87 $ 52.22 $ 45.33 $ 48.60 $ 47.41
- ------------------------------------------------------------ ------- ------- ------- ------- -------
Income from investment operations:
Net investment income 2.66 2.61 2.44 2.40 2.28
- ------------------------------------------------------------ ------- ------- ------- ------- -------
Net gains (losses) on securities (both realized and
unrealized) 0.89 (3.31) 6.91 (3.27) 1.20
- ------------------------------------------------------------ ------- ------- ------- ------- -------
Total from investment operations 3.55 (0.70) 9.35 (0.87) 3.48
- ------------------------------------------------------------ ------- ------- ------- ------- -------
Less distributions:
Dividends from net investment income (2.63) (2.65) (2.46) (2.40) (2.29)
- ------------------------------------------------------------ ------- ------- ------- ------- -------
Net asset value, end of period $ 49.79 $ 48.87 $ 52.22 $ 45.33 $ 48.60
============================================================ ======= ======= ======= ======= =======
Total return(b) 7.51% (1.23)% 21.12% (1.80)% 7.39%
============================================================ ======= ======= ======= ======= =======
Ratios/supplemental data:
Net assets, end of period (000s omitted) $23,279 $26,162 $31,986 $25,467 $42,872
============================================================ ======= ======= ======= ======= =======
Ratio of expenses to average net assets(c) 1.46%(d) 1.51% 2.19% 2.25% 2.25%
============================================================ ======= ======= ======= ======= =======
Ratio of net investment income to average net assets(e) 5.44%(d) 5.30% 4.94% 5.09% 4.56%
============================================================ ======= ======= ======= ======= =======
Portfolio turnover rate 11% 34% 24% 59% 92%
============================================================ ======= ======= ======= ======= =======
</TABLE>
(a) The Fund changed investment advisors on August 4, 1997.
(b) Does not deduct sales charges.
(c) After fee waivers and/or expense reimbursements. Ratio of expenses to
average net assets prior to fee waivers and/or expense reimbursements were
1.71%, 1.76%, 2.25%, and 2.29%, respectively, for the years 1997-1995 and
1993.
(d) Ratios are based on average net assets of $24,656,893.
(e) After fee waivers and/or expense reimbursements. Ratio of net investment
income to average net assets prior to fee waivers and/or expense
reimbursements were 5.19%, 5.05%, 4.88%, and 4.52%, respectively, for the
years 1997-1995 and 1993.
NOTE 7-SUBSEQUENT EVENT
On February 17, 1998, the shareholders approved an Agreement and Plan of
Reorganization providing for the transfer of the assets of the Fund to AIM
Intermediate Government Fund, a series of AIM Funds Group, a Delaware business
trust having the same advisor (AIM) as the Fund. On March 2, 1998 shareholders
of the Fund will receive Class A shares of Intermediate Government in a tax-free
transaction in exchange for their shares having an aggregate net asset value
equal to the net asset value of their holdings in the Fund.
12
<PAGE> 13
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of the AIM Advisor Funds, Inc.
In our opinion, the accompanying statement of assets and
liabilities, including the schedule of investments, and
the related statements of operations and of changes in
net assets and the financial highlights present fairly,
in all material respects, the financial position of the
AIM Advisor Income Fund, one of the portfolios of the AIM
Advisor Funds, Inc. (hereafter referred to as the "Fund")
at December 31, 1997, the results of its operations for
the year then ended, the changes in its net assets for
each of the two years in the period then ended and the
financial highlights for the periods indicated, in
conformity with generally accepted accounting principles.
These financial statements and financial highlights
(hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our
responsibility is to express an opinion on these
financial statements based on our audits. We conducted
our audits of these financial statements in accordance
with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made
by management, and evaluating the overall financial
statement presentation. We believe that our audits, which
included confirmation of securities at December 31, 1997
by correspondence with the custodian and the application
of alternative auditing procedures where securities
purchased had not been received, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Denver, Colorado
February 5, 1998
13
<PAGE> 14
Directors & Officers
<TABLE>
<CAPTION>
BOARD OF DIRECTORS OFFICERS OFFICE OF THE FUND
<S> <C> <C>
Charles T. Bauer Charles T. Bauer 11 Greenway Plaza
Chairman Chairman Suite 100
A I M Management Group Inc. Houston, TX 77046
Robert H. Graham
Bruce L. Crockett President INVESTMENT ADVISOR
Director
Ace Limited; John J. Arthur A I M Advisors, Inc.
Formerly Director, President, and Senior Vice President and Treasurer 11 Greenway Plaza
Chief Executive Officer Suite 100
COMSAT Corporation Carol F. Relihan Houston, TX 77046
Senior Vice President and Secretary
Owen Daly II SUB-ADVISOR
Director Gary T. Crum
Cortland Trust Inc. Senior Vice President INVESCO Capital Management
1315 Peachtree Street, N.E.
Jack Fields Dana R. Sutton Atlanta, GA 30309
Chief Executive Officer Vice President and Assistant Treasurer
Texana Global, Inc. TRANSFER AGENT
Formerly Member of the Robert G. Alley
U.S. House of Representatives Vice President A I M Fund Services, Inc.
P.O. Box 4739
Carl Frischling Stuart W. Coco Houston, TX 77210-4739
Partner Vice President
Kramer, Levin, Naftalis & Frankel CUSTODIAN
Melville B. Cox
Robert H. Graham Vice President State Street Bank and Trust Company
President and Chief Executive Officer 225 Franklin Street
A I M Management Group Inc. Karen Dunn Kelly Boston, MA 02110
Vice President
John F. Kroeger COUNSEL TO THE FUND
Formerly Consultant Jonathan C. Schoolar
Wendell & Stockel Associates, Inc. Vice President Ballard Spahr
Andrews & Ingersoll
Lewis F. Pennock P. Michelle Grace 1735 Market Street
Attorney Assistant Secretary Philadelphia, PA 19103
Ian W. Robinson Nancy L. Martin COUNSEL TO THE DIRECTORS
Consultant; Formerly Executive Assistant Secretary
Vice President and Kramer, Levin, Naftalis & Frankel
Chief Financial Officer Ofelia M. Mayo 919 Third Avenue
Bell Atlantic Management Assistant Secretary New York, NY 10022
Services, Inc.
Lisa A. Moss DISTRIBUTOR
Louis S. Sklar Assistant Secretary
Executive Vice President A I M Distributors, Inc.
Hines Interests Kathleen J. Pflueger 11 Greenway Plaza
Limited Partnership Assistant Secretary Suite 100
Houston, TX 77046
Samuel D. Sirko
Assistant Secretary ADVISOR
Stephen I. Winer Price Waterhouse LLP
Assistant Secretary 950 Seventeenth Street
Suite 2500
Mary J. Benson Denver, CO 80202
Assistant Treasurer
</TABLE>
REQUIRED FEDERAL INCOME TAX INFORMATION
AIM Advisor Income Fund Class A and Class C shares paid ordinary dividends in
the amount of $2.9915 and $2.6349 per share, respectively, to shareholders
during the Fund's tax year ended December 31, 1997.
STATE INCOME TAX INFORMATION
Of the total income dividends paid, 70.82% for Class A and Class C shares were
derived from U.S. Treasury obligations.
<PAGE> 15
<TABLE>
<S> <C>
THE AIM FAMILY OF FUNDS--Registered Trademark--
AGGRESSIVE GROWTH
AIM Aggressive Growth Fund*
AIM Asian Growth Fund
AIM Capital Development Fund
AIM Constellation Fund
AIM European Development Fund
AIM Global Aggressive Growth Fund
[PHOTO OF GROWTH OF CAPITAL
11 GREENWAY PLAZA AIM Advisor International Value Fund
APPEARS HERE] AIM Blue Chip Fund
AIM Global Growth Fund
AIM Growth Fund
AIM International Equity Fund
AIM Value Fund
AIM Weingarten Fund
GROWTH AND INCOME OR INCOME WITH CAPITAL GROWTH
AIM Advisor Flex Fund
AIM Advisor Large Cap Value Fund
AIM Advisor MultiFlex Fund
AIM Advisor Real Estate Fund
AIM Balanced Fund
AIM Charter Fund
AIM Global Utilities Fund
HIGH CURRENT INCOME OR CURRENT INCOME
AIM High Yield Fund
AIM Global Income Fund
AIM Income Fund
CURRENT TAX-FREE INCOME
AIM High Income Municipal Fund
AIM Municipal Bond Fund
AIM Tax-Exempt Bond Fund of Connecticut
AIM Tax-Free Intermediate Fund
CURRENT INCOME AND HIGH DEGREE OF SAFETY
AIM Advisor Cash Management Fund
AIM Advisor Income Fund
A I M Management Group Inc. has provided leadership in the AIM Intermediate Government Fund
mutual fund industry since 1976 and manages approximately AIM Limited Maturity Treasury Fund
$83 billion in assets for more than 3.7 million shareholders, AIM Money Market Fund
including individual investors, corporate clients, and financial AIM Tax-Exempt Cash Fund
institutions as of December 31, 1997. The AIM Family of
Funds--Registered Trademark-- is distributed nationwide, and *AIM Aggressive Growth Fund was closed to new investors on
AIM today ranks among the nation's top 15 mutual fund June 5, 1997. For more complete information about any AIM
companies in assets under management, according to Lipper Fund(s), including sales charges and expenses, ask your
Analytical Services, Inc. financial consultant or securities dealer for a free
prospectus(es). Please read the prospectus(es) carefully
before you invest or send money.
INVEST WITH DISCIPLINE-SM-
</TABLE>
