<PAGE>
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. CAPITAL APPRECIATION FUND
AIM V.I. DIVERSIFIED INCOME FUND
AIM V.I. GLOBAL UTILITIES FUND
AIM V.I. GOVERNMENT SECURITIES FUND
AIM V.I. GROWTH FUND
AIM V.I. GROWTH AND INCOME FUND
AIM V.I. INTERNATIONAL EQUITY FUND
AIM V.I. MONEY MARKET FUND
AIM V.I. VALUE FUND
Supplement dated November 30, 1995
to the Prospectus dated May 1, 1995
The section under the caption "Management - Portfolio Management" of the
Prospectus is revised in its entirety to read as follows:
"PORTFOLIO MANAGEMENT. AIM uses a team approach and a disciplined
investment process in providing investment advisory services to all its
accounts, including the Funds. AIM's investment staff consists of 87
individuals. While individual members of AIM's investment staff are assigned
primary responsibility for the day-to-day management of each of AIM's accounts,
all accounts are reviewed on a regular basis by AIM's Investment Policy
Committee to ensure that they are being invested in accordance with the
account's and AIM's investment policies. The individuals who are primarily
responsible for the day-to-day management of the Funds (except the Money Market
Fund, for which no such disclosure is required) and their titles, if any, with
AIM or its affiliates and the Fund, the length of time they have been
responsible for the management, their years of investment experience and prior
experience (if they have been with AIM for less than five years) are shown
below:
Robert M. Kippes, Jonathan C. Schoolar and Mr. David P. Barnard are
responsible for the day-to-day management of the CAPITAL APPRECIATION FUND'S
portfolio securities. Mr. Kippes is Vice President of AIM Capital and has been
responsible for the Fund since its inception in 1993. Mr. Kippes has been
associated with AIM and/or its affiliates since 1989 and has over 6 years of
experience as an investment professional. Mr. Schoolar is Senior Vice President
and Director of A I M Capital Management, Inc. ("AIM Capital"), a wholly-owned
subsidiary of AIM, Vice President of AIM and Vice President of the Company and
has been responsible for the Fund since its inception in 1993. He has been with
AIM and/or its affiliates since 1986 and has 12 years of experience as an
investment professional. Mr. Barnard is Vice President of AIM Capital and has
been responsible for the Fund since 1993. Mr. Barnard has been associated with
AIM and/or its affiliates since 1982 and has 21 years of experience as an
investment professional.
Robert G. Alley, John L. Pessara and Carolyn L. Gibbs are responsible for
day-to-day management of the DIVERSIFIED INCOME FUND'S portfolio securities.
Mr. Alley is Senior Vice President of AIM Capital, Vice President of AIM and
Vice President of the Company, and has been affiliated with AIM and/or its
affiliates since 1992. Prior to that, Mr. Alley was Senior Fixed Income Money
Manager for Waddell and Reed, Inc. Mr. Alley has been responsible for the Fund
since its inception in 1993, and has 23 years of experience as an investment
professional. Mr. Pessarra is currently Vice President of AIM Capital and has
been associated with AIM and/or its affiliates since 1990. Mr. Pessarra has been
responsible for the Fund since its inception in 1993, and has 11 years of
experience as an investment professional. Ms. Gibbs is currently Assistant Vice
President of AIM Capital and has been associated with AIM and/or its affiliates
since 1992. Prior to joining AIM, she was a financial analyst for Northwest
Airlines. Ms. Gibbs has been responsible for the Fund since 1995, and has over
10 years of experience as an investment professional.
<PAGE>
Claude C. Cody IV and Robert G. Alley are responsible for day-to-day
management of the GLOBAL UTILITIES FUND'S portfolio securities. Mr. Cody is Vice
President of AIM Capital and has been responsible for the Fund since its
inception in 1994. Mr. Cody has been associated with AIM and/or its affiliates
since 1992 and has 19 years of experience as an investment professional. Prior
to that Mr. Cody was associated with Kinder-Care Corporation where he
established an investment management operation and managed three portfolios. Mr.
Alley has been responsible for the Fund since its inception in 1994. Mr. Alley's
background is discussed above with respect to the management of the Diversified
Income Fund.
Karen Dunn Kelley and Meggan M. Walsh are responsible for day-to-day
management of the GOVERNMENT FUND'S portfolio securities. Ms. Kelley is Senior
Vice President of AIM Capital, Vice President of AIM and Vice President of the
Company and has been responsible for the Fund since its inception in 1993. Ms.
Kelley has been associated with AIM and/or its affiliates since 1989 and has 13
years of experience as an investment professional. Ms. Walsh is Vice President
of AIM Capital and has been responsible for the Fund since its inception in
1993. Ms. Walsh has been associated with AIM and/or its affiliates since 1991
and has 8 years of experience as an investment professional. Prior thereto, Ms.
Walsh was Manager of Short-Term U.S.-Commercial Paper and -Euro-Commercial Paper
Programs at Nationale-Nederlanden North America Corporation.
Jonathan C. Schoolar, Robert M. Kippes and David P. Barnard are primarily
responsible for day-to-day management of the GROWTH FUND'S portfolio securities.
Mr. Schoolar's background is discussed above with respect to the management of
the Capital Appreciation Fund. Mr. Schoolar has been responsible for the Fund
since its inception in 1993. Mr. Kippes' background is discussed above with
respect to the management of the Capital Appreciation Fund. Mr. Kippes has been
responsible for the Fund since its inception in 1993. Mr. Barnard is Vice
President of AIM Capital and has been responsible for the Fund since its
inception in 1993. Mr. Barnard has been associated with AIM and/or its
affiliates since 1982 and has 21 years experience as an investment professional.
Lanny H. Sachnowitz and Joel E. Dobberpuhl are primarily responsible for
day-today management of the GROWTH & INCOME FUND'S portfolio securities. Mr.
Sachnowitz is Vice President of AIM Capital and has been responsible for the
Fund since its inception in 1994. Mr. Sachnowitz has 8 years of experience as an
investment professional and has been associated with AIM and/or its affiliates
since 1987. Mr. Dobberpuhl is Vice President of AIM Capital and has been
responsible for the Fund since 1995. Mr. Dobberpuhl has 6 years of experience as
an investment professional and has been associated with AIM and/or its
affiliates since 1990.
A. Dale Griffin III, Paul A. Rogge, Barrett K. Sides and Dominic H. R.
Moross are responsible for day-to-day management of the INTERNATIONAL FUND'S
portfolio securities. Mr. Griffin is Vice President of AIM Capital and has been
responsible for the Fund since its inception in 1993. Mr. Griffin has been
associated with AIM and/or its affiliates since 1989 and has 9 years experience
as an investment professional. Mr. Rogge is Vice President of AIM Capital and
has been associated with AIM and/or its affiliates since 1991. Mr. Rogge has
been responsible for the Fund since its inception in 1993 and has 4 years of
experience as an investment professional. Prior to joining AIM, Mr. Rogge served
as an Assistant Portfolio Manager at Commerce Investment Management and a Global
Strategy Analyst for UBS -- Philips & Drew. Mr. Sides is Assistant Vice
President of AIM Capital and has been associated with AIM and/or its affiliates
since 1990. Mr. Sides has been responsible for the Fund since 1995 and has 6
years of experience as an investment professional. Mr. Moross is Assistant Vice
President of AIM Capital and has been associated with AIM and/or its affiliates
since 1993. Mr. Moross has been responsible for the Fund since 1995 and has 2
years of experience as an investment professional. Prior to joining AIM, he was
a management graduate trainee with Maxwell Communications PLC.
Joel E. Dobberpuhl and Claude Cody IV, are responsible for day-to-day
management of the VALUE FUND'S portfolio securities. Mr. Dobberpuhl's background
is discussed above with respect to the management of the Growth & Income Fund.
Mr. Dobberpuhl has been responsible for the Fund since its inception in 1993.
Mr. Cody's background is discussed above with respect to the management of the
Global Utilities Fund. Mr. Cody has been responsible for the Fund since its
inception in 1993.
<PAGE>
[LOGO OF AIM(R) APPEARS HERE]
AIM Variable Insurance Funds, Inc.
AIM V.I. CAPITAL APPRECIATION FUND
AIM V.I. DIVERSIFIED INCOME FUND
AIM V.I. GLOBAL UTILITIES FUND
AIM V.I. GOVERNMENT SECURITIES FUND
AIM V.I. GROWTH FUND
AIM V.I. GROWTH AND INCOME FUND
AIM V.I. INTERNATIONAL EQUITY FUND
AIM V.I. MONEY MARKET FUND
AIM V.I. VALUE FUND
PROSPECTUS
May 1, 1995
AIM V.I. Capital Appreciation Fund, AIM V.I. Diversified
Income Fund, AIM V.I. Global Utilities Fund (formerly known
as AIM V.I. Utilities Fund), AIM V.I. Government Securities
Fund, AIM V.I. Growth Fund, AIM V.I. Growth and Income Fund,
AIM V.I. International Equity Fund, AIM V.I. Money Market
Fund and AIM V.I. Value Fund (the "Funds") are nine
investment portfolios comprising series of AIM Variable
Insurance Funds, Inc. (the "Company"), an open-end, series,
management investment company. Shares of the Funds are sold
only to insurance company separate accounts to fund the
benefits of variable annuity contracts. The investment
objectives of the Funds are described on the inside cover
page. The address for AIM Variable Insurance Funds, Inc. is
11 Greenway Plaza, Suite 1919, Houston, Texas 77046-1173, and
its telephone number is (713) 626-1919.
UP TO 50% OF THE SECURITIES IN WHICH THE AIM V.I. DIVERSIFIED
INCOME FUND INVESTS MAY BE SECURITIES RATED IN THE LOWER
RATING CATEGORIES OF NATIONALLY RECOGNIZED STATISTICAL RATING
ORGANIZATIONS ("NRSROS"), OR ARE UNRATED, AND ARE COMMONLY
KNOWN AS "JUNK BONDS." INVESTMENT IN NON-INVESTMENT GRADE
DEBT SECURITIES ARE SUBJECT TO GREATER RISK OF LOSS OF
PRINCIPAL AND INTEREST, AND MAY ENTAIL OTHER RISKS THAT ARE
DIFFERENT FROM OR MORE PRONOUNCED THAN THOSE INVOLVED IN
HIGHER-RATED SECURITIES. INVESTORS SHOULD CAREFULLY ASSESS
THE RISKS ASSOCIATED WITH AN INVESTMENT IN THIS FUND. SEE
"RISK FACTORS" UNDER "INVESTMENT PROGRAMS."
This prospectus sets forth basic information about the Funds
that prospective investors should know before investing. It
should be read and retained for future reference. A Statement
of Additional Information dated May 1, 1995, has been filed
with the Securities and Exchange Commission and is
incorporated herein by reference. The Statement of Additional
Information is available without charge upon written request
to the Company at the address shown above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE FUNDS' SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK, AND THE FUNDS' SHARES
ARE NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. SHARES OF THE
FUNDS INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS
OF PRINCIPAL.
THERE IS NO ASSURANCE THAT THE AIM V.I. MONEY MARKET FUND
WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00
PER SHARE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
About the Funds......................... 2 Determination of Net Asset Value.................. 17
Financial Highlights.................... 3 Dividends, Distributions and Tax Matters.......... 18
Performance............................. 5 General Information............................... 18
Investment Objectives and Programs...... 5 Appendix A........................................ A-1
Risk Factors............................ 13 Appendix B........................................ B-1
Management.............................. 14 Appendix C........................................ C-1
Purchase and Redemption of Shares....... 17
</TABLE>
- -------------------------------------------------------------------------------
ABOUT THE FUNDS
The following is a brief description of the investment objectives and
programs of the Funds:
AIM V.I. CAPITAL APPRECIATION FUND ("CAPITAL APPRECIATION FUND") is a
diversified portfolio which seeks to provide capital appreciation through
investments in common stocks, with emphasis on medium-sized and smaller
emerging growth companies.
AIM V.I. DIVERSIFIED INCOME FUND ("DIVERSIFIED INCOME FUND") is a
diversified portfolio which seeks to achieve a high level of current income
primarily by investing in a diversified portfolio of foreign and U.S.
government and corporate debt securities, including lower rated high yield
debt securities (commonly known as "junk bonds").
AIM V.I. GLOBAL UTILITIES FUND ("GLOBAL UTILITIES FUND") is a non-
diversified portfolio which seeks to achieve a high level of current income,
and as a secondary objective to achieve capital appreciation, by investing
primarily in common and preferred stocks of public utility companies (either
domestic or foreign).
AIM V.I. GOVERNMENT SECURITIES FUND ("GOVERNMENT FUND") is a diversified
portfolio which seeks to achieve a high level of current income consistent
with reasonable concern for safety of principal by investing in debt
securities issued, guaranteed or otherwise backed by the U.S. Government.
AIM V.I. GROWTH FUND ("GROWTH FUND") is a diversified portfolio which seeks
to provide growth of capital through investments primarily in common stocks of
leading U.S. companies considered by AIM to have strong earnings momentum.
AIM V.I. GROWTH AND INCOME FUND ("GROWTH & INCOME FUND") is a diversified
portfolio which seeks to provide growth of capital, with current income as a
secondary objective by investing primarily in dividend paying common stocks
which have prospects for both growth of capital and dividend income.
AIM V.I. INTERNATIONAL EQUITY FUND ("INTERNATIONAL FUND") is a diversified
portfolio which seeks to provide long-term growth of capital by investing in
international equity securities, the issuers of which are considered by AIM to
have strong earnings momentum.
AIM V.I. MONEY MARKET FUND ("MONEY MARKET FUND") is a diversified portfolio
which seeks to provide as high a level of current income as is consistent with
the preservation of capital and liquidity by investing in a diversified
portfolio of money market instruments.
AIM V.I. VALUE FUND ("VALUE FUND") is a diversified portfolio which seeks to
achieve long-term growth of capital by investing primarily in equity
securities judged by AIM to be undervalued relative to the current or
projected earnings of the companies issuing the securities, or relative to
current market values of assets owned by the companies issuing the securities
or relative to the equity markets generally. Income is a secondary objective.
2
<PAGE>
The Capital Appreciation Fund, Diversified Income Fund, Global Utilities
Fund, Government Fund, Growth Fund, Growth & Income Fund, International Fund,
Money Market Fund and Value Fund are separate series of shares of AIM Variable
Insurance Funds, Inc., a Maryland corporation organized on January 22, 1993
and registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as an open-end management investment company (see "General
Information--Organization of the Company"). Each Fund has its own investment
objective(s) and policies designed to meet specific investment goals, operates
as an open-end management investment company and expects to be treated as a
regulated investment company for federal income tax purposes. Each Fund is
diversified except Global Utilities Fund. For more information on
diversification, see "Risk Factors" in this Prospectus.
Each Fund invests in securities of different issuers and industry
classifications in an attempt to spread and reduce the risks inherent in all
investing. Each Fund continuously offers new shares for sale to the public,
and stands ready to redeem its outstanding shares for cash at their net asset
value. A I M Advisors, Inc. ("AIM"), the investment advisor for each Fund,
continuously reviews and, from time to time, changes the portfolio holdings of
each of the Funds in pursuit of each Fund's objective(s).
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Shown below are the financial highlights for a share outstanding of each of
the Funds (except the Global Utilities Fund and the Growth & Income Fund) for
the period May 5, 1993 (date operations commenced) through January 31, 1994
and for the fiscal year ended January 31, 1995. Financial highlights for a
share outstanding of each of the Global Utilities Fund and the Growth & Income
Fund for the period May 2, 1994 (date operations commenced) through January
31, 1995, are also shown below. The financial highlights have been audited by
Tait, Weller & Baker, independent auditors, whose unqualified report thereon
is included in the Statement of Additional Information. Additional information
about the performance of the Funds is contained in the Funds' annual report to
shareholders, which may be obtained without charge upon request.
<TABLE>
<CAPTION>
CAPITAL DIVERSIFIED GLOBAL GOVERNMENT
APPRECIATION INCOME UTILITIES SECURITIES GROWTH
FUND FUND FUND FUND FUND
----------------------- ----------------------- ----------- ----------------------- -----------------------
JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,
1995 1994 1995 1994 1995 1995 1994 1995 1994
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period........... $ 12.58 $ 10.00 $ 10.46 $ 10.00 $10.00 $ 10.24 $ 10.00 $ 11.59 $ 10.00
Income from
investment
operations:
Net investment
income.......... 0.05 -- 0.76 0.54 0.27 0.53 0.38 0.06 0.02
Net gains
(losses) on
securities
(realized and
unrealized)..... (0.54) 2.59 (1.42) 0.29 (0.33) (0.88) 0.10 (0.88) 1.59
------- ------- ------- ------- ------ ------- ------- ------- -------
Total from
investment
operations..... (0.49) 2.59 (0.66) 0.83 (0.06) (0.35) 0.48 (0.82) 1.61
------- ------- ------- ------- ------ ------- ------- ------- -------
Less
distributions:
Dividends from
net investment
income.......... (0.04) (0.01) (0.68) (0.35) (0.25) (0.50) (0.24) (0.06) (0.02)
Distributions
from net
realized capital
gains........... -- -- -- (0.02) -- -- -- -- --
------- ------- ------- ------- ------ ------- ------- ------- -------
Total
distributions.. (0.04) (0.01) (0.68) (0.37) (0.25) (0.50) (0.24) (0.06) (0.02)
------- ------- ------- ------- ------ ------- ------- ------- -------
Net asset value,
end of period.... $ 12.05 $ 12.58 $ 9.12 $ 10.46 $ 9.69 $ 9.39 $ 10.24 $ 10.71 $ 11.59
======= ======= ======= ======= ====== ======= ======= ======= =======
Total return(a)... (3.91)% 25.90% (6.35)% 8.33% (0.56)% (3.42)% 4.78% (7.11)% 16.07%
======= ======= ======= ======= ====== ======= ======= ======= =======
Ratios/supplemental
data:
Net assets, end of
period (000s
omitted)......... $88,177 $35,354 $25,271 $14,530 $2,958 $12,887 $10,643 $45,497 $25,115
======= ======= ======= ======= ====== ======= ======= ======= =======
Ratio of expenses
to average net
assets(b)........ 0.84% 1.06% 0.91% 1.05% 1.31% 0.95% 1.00% 0.95% 0.85%
======= ======= ======= ======= ====== ======= ======= ======= =======
Ratio of net
investment income
to average net
assets(b)........ 0.46% 0.07% 8.07% 6.78% 4.39% 5.51% 4.74% 0.71% 0.51%
======= ======= ======= ======= ====== ======= ======= ======= =======
Portfolio turnover
rate............. 81% 34% 100% 57% 69% 29% 0% 179% 99%
======= ======= ======= ======= ====== ======= ======= ======= =======
<CAPTION>
GROWTH &
INCOME FUND
-----------
JANUARY 31,
1995
-----------
<S> <C>
Net asset value,
beginning of
period........... $10.00
Income from
investment
operations:
Net investment
income.......... 0.11
Net gains
(losses) on
securities
(realized and
unrealized)..... (0.02)
------
Total from
investment
operations..... 0.09
------
Less
distributions:
Dividends from
net investment
income.......... (0.11)
Distributions
from net
realized capital
gains........... --
------
Total
distributions.. (0.11)
------
Net asset value,
end of period.... $ 9.98
======
Total return(a)... 0.90%
======
Ratios/supplemental
data:
Net assets, end of
period (000s
omitted)......... $7,380
======
Ratio of expenses
to average net
assets(b)........ 1.07%
======
Ratio of net
investment income
to average net
assets(b)........ 1.95%
======
Portfolio turnover
rate............. 96%
======
</TABLE>
3
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
INTERNATIONAL MONEY
EQUITY MARKET VALUE
FUND FUND FUND
----------------------- ----------------------- ------------------------
JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,
1995 1994 1995 1994 1995 1994
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 12.49 $ 10.00 $ 1.00 $ 1.00 $ 12.17 $ 10.00
Income from investment
operations:
Net investment income.. 0.06 -- 0.04 0.02 0.10 0.02
Net gains (loss) on
securities (realized
and unrealized)....... (1.49) 2.49 -- -- (0.35) 2.17
------- ------- ------- ------- -------- -------
Total from investment
operations........... (1.43) 2.49 0.04 0.02 (0.25) 2.19
------- ------- ------- ------- -------- -------
Less distributions:
Dividends from net
investment income..... (0.03) -- (0.04) (0.02) (0.09) (0.02)
Distributions from net
realized capital
gains................. -- -- -- -- -- --
------- ------- ------- ------- -------- -------
Total distributions... (0.03) -- (0.04) (0.02) (0.09) (0.02)
------- ------- ------- ------- -------- -------
Net asset value, end of
period................. $ 11.03 $ 12.49 $ 1.00 $ 1.00 $ 11.83 $ 12.17
======= ======= ======= ======= ======== =======
Total return(a)......... (11.48)% 24.90% 3.98% 2.27% (2.03)% 21.94%
======= ======= ======= ======= ======== =======
Ratios/supplemental
data:
Net assets, end of
period (000s omitted).. $55,019 $23,533 $31,017 $13,891 $109,257 $38,255
======= ======= ======= ======= ======== =======
Ratio of expenses to
average net assets(b).. 1.27% 1.98% 0.63% 0.95% 0.82% 1.00%
======= ======= ======= ======= ======== =======
Ratio of net investment
income (loss) to
average net assets(b).. 0.60% (0.15)% 4.14% 2.29% 1.17% 0.51%
======= ======= ======= ======= ======== =======
Portfolio turnover rate. 64% 26% -- -- 143% 87%
======= ======= ======= ======= ======== =======
</TABLE>
(a) Total returns for less than one year, except for Money Market Fund, are
not annualized. Total returns do not reflect expenses that apply at the
separate account level. Inclusion of expenses at the separate account
level would reduce the total return figures for all periods shown.
(b) Ratios for periods less than a year are annualized. Ratios are based on
the following average net assets for the periods ended:
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1995 1994
----------- -----------
<S> <C> <C>
Capital Appreciation Fund.............................. $61,893,337 $12,095,128
Diversified Income Fund................................ $20,514,857 $ 6,276,018
Global Utilities Fund.................................. $ 1,891,665 N/A
Government Securities Fund............................. $12,267,302 $ 4,502,215
Growth Fund............................................ $35,561,827 $ 9,997,693
Growth & Income Fund................................... $ 4,248,532 N/A
International Equity Fund.............................. $43,034,277 $ 7,074,079
Money Market Fund...................................... $26,124,493 $ 6,533,606
Value Fund............................................. $72,235,391 $12,119,783
</TABLE>
Ratios of expenses and net investment income (loss) to average net assets
prior to waiver of advisory fees and/or expense reimbursement are as
follows:
<TABLE>
<CAPTION>
JANUARY 31, 1995 JANUARY 31, 1994
----------------------- -----------------------
NET INVESTMENT NET INVESTMENT
EXPENSES INCOME (LOSS) EXPENSES INCOME (LOSS)
-------- -------------- -------- --------------
<S> <C> <C> <C> <C>
Capital Appreciation
Fund................... 0.84% 0.46% 1.45% (0.32)%
Diversified Income Fund. 1.03% 7.95% 1.69% 6.14 %
Global Utilities Fund... 2.80% 2.90% N/A N/A
Government Securities
Fund................... 1.10% 5.35% 1.80% 3.94 %
Growth Fund............. 0.95% 0.71% 1.50% (0.14)%
Growth & Income Fund.... 1.72% 1.30% N/A N/A
International Equity
Fund................... 1.28% 0.59% 3.06% (1.23)%
Money Market Fund....... 0.70% 4.07% 1.53% 1.70 %
Value Fund.............. 0.82% 1.17% 1.35% 0.16 %
</TABLE>
4
<PAGE>
- -------------------------------------------------------------------------------
PERFORMANCE
Each Fund's performance may be quoted in advertising in terms of yield or
total return. See the Statement of Additional Information for further details
concerning performance comparisons used in advertisements by the Funds.
A Fund's total return shows its overall change in value, including changes
in share price and assuming all the Fund's dividends and capital gain
distributions are reinvested. Total return is computed in accordance with a
standardized formula described in the Statement of Additional Information. A
cumulative total return reflects the Fund's performance over a stated period
of time. An average annual total return reflects the hypothetical annually
compounded return that would have produced the same cumulative total return if
the Fund's performance had been constant over the entire period. Because
average annual total returns tend to even out variations in the Fund's return,
investors should recognize that such returns are not the same as actual year-
by-year results. To illustrate the components of overall performance, a Fund
may separate its cumulative and average annual total returns into income
results and capital gain or loss.
Yield is computed in accordance with a standardized formula described in the
Statement of Additional Information and can be expected to fluctuate from time
to time. Accordingly, the yield information may not provide a basis for
comparison with investments which pay a fixed rate of interest for a stated
period of time. Yield is the annualized percentage rate of net income
(exclusive of capital changes) earned by a Fund over a specified period. It is
a function of the type and quality of a Fund's investments, its maturity and
its operating expense ratio. A shareholder's investment in a Fund is not
insured or guaranteed. These factors should be carefully considered by the
investor before making an investment in a Fund.
From time to time and in its discretion, AIM may waive all or a portion of
its advisory fees and/or assume certain expenses of any Fund. Such a practice
will have the effect of increasing the Fund's yield and total return.
The performance of each Fund will vary from time to time and past results
are not necessarily indicative of future results. A 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. Quotations of a Fund's performance will not reflect charges
levied at the separate account level.
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND PROGRAMS
Set forth in this section is a statement of each Fund's investment objective
along with a description of the investment policies, strategies and practices
of each Fund. The investment objective of each Fund is deemed to be a
fundamental policy and, therefore, unless permitted by law, may not be changed
without the approval of a majority of that Fund's outstanding shares (within
the meaning of the 1940 Act). Each Fund's investment policies, strategies and
practices are not fundamental. The Board of Directors of the Company reserves
the right to change any of these non-fundamental investment policies,
strategies or practices without shareholder approval. Each Fund has adopted
investment restrictions, some of which are fundamental and cannot be changed
without shareholder approval. See "Investment Restrictions" in the Statement
of Additional Information. Individuals considering the purchase of shares of
any Fund should recognize that there are risks in the ownership of any
security and that no assurance can be given that any particular Fund will
achieve its investment objective(s).
AIM V.I. CAPITAL APPRECIATION FUND. The Fund's investment objective is to
seek capital appreciation through investments in common stocks, with emphasis
on medium-sized and smaller emerging growth companies. AIM will be
particularly interested in companies that are likely to benefit from new or
innovative products, services or processes that should enhance such companies'
prospects for future growth in earnings. As a result of this policy, the
market prices of many of the securities purchased and held by the Fund may
fluctuate widely. Any income received from securities held by the Fund will be
incidental, and an investor should not consider a purchase of shares of the
Fund as equivalent to a complete investment program. The Capital Appreciation
Fund's portfolio is primarily comprised of securities of two basic categories
of companies: (1) "core" companies, which AIM considers to have experienced
above-average and consistent long-term growth in earnings and to have
excellent prospects for outstanding future growth, and (2) "earnings
acceleration" companies which AIM believes are currently enjoying a dramatic
increase in profits.
AIM V.I. DIVERSIFIED INCOME FUND. The Fund's investment objective is to seek
to achieve a high level of current income. The Fund will seek to achieve its
investment objective by investing primarily in: (i) foreign government
securities, (ii) foreign and domestic corporate debt securities, (iii) U.S.
Government securities, including U.S. Government Agency Mortgage-Backed
Securities and (iv) lower-rated or unrated high yield debt securities
(commonly known as "junk bonds") of U.S. and foreign companies. Under normal
circumstances, the Fund's assets will be invested in each of these four
sectors. The Fund may invest up to 10% of its total assets in common stocks,
preferred stocks, convertible securities and similar equity securities of U.S.
and foreign companies. The Fund does not intend to invest more than 50% of its
total assets in lower-rated or unrated high yield securities or more than 50%
of its total assets in foreign debt securities. (For a description of the
various rating categories of corporate debt securities in which the Fund may
invest, see Appendix A to this Prospectus. For a description of U.S.
Government Agency Mortgage-Backed Securities, see Appendix B to this
Prospectus.) However, the Fund may from time to time invest up to 100% of its
total assets in U.S. Government securities and, as a defensive measure, may
invest up to 100% of its total assets in money market securities. For a
discussion of the investment risks associated with investments in high yield
securities and foreign securities, see "Risk Factors" in this Prospectus. For
further discussion of the extent of the Fund's intended investment, see
"Certain Investment Strategies and Techniques" in this Prospectus.
5
<PAGE>
During the fiscal year ended January 31, 1995, the percentage of average
annual assets of the Portfolio calculated on a dollar weighted basis, which
was invested in securities within each rating category of Moody's (as
described in Appendix A), and in unrated securities determined by AIM to be of
comparable quality, was as follows:
<TABLE>
<CAPTION>
PERCENTAGE
----------
<S> <C>
Aaa............................................................ 31.73%
Aa............................................................. 5.38%
A.............................................................. 5.23%
Baa............................................................ 10.52%
Ba............................................................. 8.87%
B.............................................................. 30.59%
Caa............................................................ 4.34%
Ca............................................................. 0.00%
C.............................................................. 0.00%
Unrated........................................................ 3.34%
------
Total Average Annual Assets.................................. 100%
</TABLE>
AIM V.I. Global Utilities Fund. The Fund's investment objective is to
achieve a high level of current income, and as a secondary objective the Fund
seeks to achieve capital appreciation, by investing primarily in the common
and preferred stocks of public utility companies (either domestic or foreign).
Under normal circumstances, at least 65% of the Fund's total assets will be
invested in securities of public utility companies (either domestic or
foreign). Public utility companies include companies that provide electricity,
natural gas or water and other sanitary services to the public, and telephone
or telegraph companies and other companies providing public communications
services. The Fund may also invest in developing utility technology companies
and in holding companies which derive a substantial portion of their revenues
from utility-related activities. Generally, a holding company will be
considered to derive a substantial portion of its revenues from utility-
related activities if such activities account for at least 40% of its
revenues. When AIM deems it appropriate, the Fund may also purchase the bonds
of such companies. Investments in bonds, however, will not exceed 25% of the
Fund's net assets. The Fund may invest up to 10% of its total assets in lower-
rated or unrated high yield securities. (For a description of the various
rating categories of corporate debt securities in which the Fund may invest,
see Appendix A to this Prospectus.) During the fiscal period ended January 31,
1995, the Fund invested less than 5% of its net assets in below investment
grade debt securities. The Fund may also invest up to 80% of its total assets
in securities of foreign utility companies, including investments in American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and
underlying securities of foreign issuers. For a discussion of the investment
risks associated with investments in non-investment grade debt securities and
foreign securities, see "Risk Factors" in this Prospectus. For a further
discussion of the Fund's intended investments, see "Certain Investment
Strategies and Techniques" in this Prospectus.
A portfolio of utility company securities is subject to a different degree
of volatility than a more broadly diversified portfolio. Economic, operational
or regulatory changes that affect utility companies will have a material
impact upon the value of the securities that the Fund owns. Events, such as
changing weather patterns, emergencies involving nuclear power plants, or
rapidly changing fuel prices that have no direct connection with companies
whose securities are owned by the Fund may affect the prices of those
securities.
Moreover, a portfolio of utilities industry securities is subject to the
risks unique to that industry, such as inflationary or other increases in fuel
and operating expenses, possible increases in the interest costs of loans
needed for capital construction programs, compliance with environmental
regulations, possible adverse changes in the regulatory climate and
availability of fuel sources.
A description of the utilities industry is contained in the Statement of
Additional Information.
AIM V.I. Government Securities Fund. The Fund's investment objective is to
achieve a high level of current income consistent with reasonable concern for
safety of principal by investing in debt securities issued, guaranteed or
otherwise backed by the United States Government. The government securities
which may be purchased by the Fund include but are not limited to (1) U.S.
Treasury obligations such as Treasury Bills (maturities of one year or less),
Treasury Notes (maturities of one to ten years) and Treasury Bonds (generally
maturities of greater than ten years) and (2) obligations issued or guaranteed
by U.S. Government agencies and instrumentalities ("Agency Securities") which
are supported by any of the following: (a) the full faith and credit of the
U.S. Treasury, such as obligations of the Government National Mortgage
Association ("GNMA"), (b) the right of the issuer to borrow an amount limited
to a specific line of credit from the U.S. Treasury, such as obligations of
the Federal National Mortgage Association ("FNMA"), the Federal Home Loan Bank
and the U.S. Postal Service or (c) the credit of the agency or
instrumentality, such as obligations of the Federal Home Loan Mortgage
Corporation ("FHLMC") and Federal Farm Credit System. For a listing of some of
the types of Agency Securities in which the Fund may invest, see Appendix B to
this Prospectus.
The Fund's investments include high coupon U.S. Government Agency Mortgage-
Backed Securities, which provide a higher coupon at the time of purchase than
the prevailing market rate yield. The prices of high coupon U.S. Government
Agency Mortgage-Backed Securities do not tend to rise as rapidly as those of
traditional fixed rate securities at times when interest rates are decreasing,
and tend to decline more slowly at times when interest rates are increasing.
The Fund may purchase such securities at a premium, which means that a faster
principal prepayment rate than expected will reduce the market value of and
income from such securities, while a slower prepayment rate will tend to
increase the market value of and income from such securities.
6
<PAGE>
The composition and weighted average maturity of the Fund's portfolio will
vary from time to time, based upon the determination of AIM of how best to
further the Fund's investment objective. The Fund may invest in government
securities of all maturities, short-term, intermediate-term and long-term.
AIM V.I. GROWTH FUND. The Fund's investment objective is to seek growth of
capital principally through investment in common stocks of seasoned and better
capitalized companies considered by AIM to have strong earnings momentum.
Current income will not be an important criterion of investment selection, and
any such income should be considered incidental. It is anticipated that common
stocks will be the principal form of investment by the Fund. For other types
of investments, see "Certain Investment Strategies and Techniques" in this
Prospectus. The Fund's portfolio is primarily comprised of securities of two
basic categories of companies: (1) "core" companies, which AIM considers to
have experienced above-average and consistent long-term growth in earnings and
to have excellent prospects for outstanding future growth, and (2) "earnings
acceleration" companies which Fund management believes are currently enjoying
a dramatic increase in profits.
AIM V.I. GROWTH AND INCOME FUND. The Fund's investment objective is to seek
growth of capital, with current income as a secondary objective. Although the
amount of the Fund's current income will vary from time to time, it is
anticipated that the current income realized by the Fund will generally be
greater than that realized by mutual funds whose sole objective is growth of
capital. The Fund seeks to achieve its objective by investing primarily in
common stocks of companies believed by management to have the potential for
above average growth in revenues and earnings. Generally, at least 90% of the
Fund's common stock investments will be in dividend paying stocks.
AIM V.I. INTERNATIONAL EQUITY FUND. The Fund's investment objective is to
seek to provide long-term growth of capital by investing in a diversified
portfolio of international equity securities the issuers of which are
considered by AIM to have strong earnings momentum. Any income realized by the
Fund will be incidental and will not be an important criterion in the
selection of portfolio securities.
In managing the Fund, AIM seeks to apply to a diversified portfolio of
international equity securities substantially the same investment strategy
which it applies to the Growth Fund with respect to that Fund's investment in
United States equities markets. The Fund will utilize to the extent
practicable a fully managed investment policy providing for the selection of
securities which meet certain quantitative standards determined by AIM. AIM
will review carefully the earnings history and prospects for growth of each
company considered for investment by the Fund. It is expected that the Fund's
portfolio, when fully invested, will generally be comprised of two basic
categories of foreign companies: (1) "core" companies, which AIM considers to
have experienced consistent long-term growth in earnings and to have strong
prospects for outstanding future growth, and (2) companies that AIM believes
are currently experiencing a greater than anticipated increase in earnings. If
a particular foreign company meets the quantitative standards determined by
AIM, its securities may be acquired by the Fund regardless of the location of
the company or the percentage of the Fund's investments in the company's
country or region. However, AIM will also consider other factors in making
investment decisions for the Fund, including such factors as the prospects for
relative economic growth among countries or regions, economic and political
conditions, currency exchange fluctuations, tax considerations and the
liquidity of a particular security. For a discussion of the investment risks
associated with investments in foreign securities, see "Risk Factors" in this
Prospectus. For a discussion of the extent of the Fund's intended investment
in foreign countries, see "Certain Investment Strategies and Techniques" in
this Prospectus.
AIM V.I. MONEY MARKET FUND. The Fund's investment objective is to seek to
provide as high a level of current income as is consistent with the
preservation of capital and liquidity. The Fund seeks to achieve its objective
by investing in a diversified portfolio of high quality U.S. dollar
denominated money market instruments and other similar instruments with
maturities of 397 days or less from the date of purchase, and will maintain a
dollar weighted-average portfolio maturity of 90 days or less. Securities
subject to repurchase agreements may bear longer maturities.
The Fund invests in a broad range of U.S. Government and foreign government
obligations, and bank and commercial instruments that may be available in the
money markets. Such obligations include U.S. Treasury obligations and
repurchase agreements secured by such obligations. The Money Market Fund
intends to invest in bankers' acceptances, certificates of deposit, repurchase
agreements, time deposits and commercial paper, and U.S. Government direct
obligations and U.S. Government agencies' securities. Bankers' acceptances,
certificates of deposit and time deposits may be purchased from U.S. or
foreign banks. All of these instruments, which are collectively referred to as
"Money Market Obligations," are briefly described in Appendix C to this
Prospectus and are described more fully in the Statement of Additional
Information.
The Fund will limit investments in Money Market Obligations to those which
are denominated in U.S. dollars and which at the date of purchase are "First
Tier" securities as defined in Rule 2a-7 under the 1940 Act, as such Rule may
be amended from time to time. Generally, "First Tier" securities are
securities that are rated in the highest rating category by two NRSROs, or, if
only rated by one NRSRO, are rated in the highest rating category by that
NRSRO, or, if unrated, are determined by AIM (under the supervision of and
pursuant to guidelines established by the Board of Directors) to be of
comparable quality to a rated security that meets the foregoing quality
standards. For a more complete definition of a "First Tier" security, see the
definition set forth in the Statement of Additional Information.
7
<PAGE>
The Money Market Fund may invest up to 100% of its total assets in
obligations issued by banks. While the Fund will limit its investments in bank
instruments to U.S. dollar denominated obligations, it may invest in
Eurodollar obligations (i.e., U.S. dollar-denominated obligations issued by a
foreign branch of a domestic bank), Yankee dollar obligations (i.e., U.S.
dollar-denominated obligations issued by a domestic branch of a foreign bank)
and obligations of foreign branches of foreign banks. The Money Market Fund
will limit its aggregate investments in foreign bank obligations, including
Eurodollar obligations and Yankee dollar obligations, to 25% of its total
assets at the time of purchase, provided that there is no limitation upon the
Fund's investments in (a) Eurodollar obligations, if the domestic parent of
the foreign branch issuing the obligation is unconditionally liable in the
event that the foreign branch for any reason fails to pay on the Eurodollar
obligation; and (b) Yankee dollar obligations, if the U.S. branch of the
foreign bank is subject to the same regulation as U.S. banks. Eurodollar,
Yankee dollar and other foreign bank obligations include time deposits, which
are non-negotiable deposits maintained in a bank for a specified period of
time at a stated interest rate. For a discussion of the risks pertaining to
investments in foreign securities, see "Risk Factors" in this Prospectus.
AIM V.I. VALUE FUND. The Fund's investment objective is to achieve long-term
growth of capital by investing primarily in equity securities judged by AIM to
be undervalued relative to the current or projected earnings of the companies
issuing the securities, or relative to current market values of assets owned
by the companies issuing the securities or relative to the equity market
generally. Income is a secondary objective and would be satisfied principally
from the income (interest and dividends) generated by the common stocks,
convertible bonds and convertible preferred stocks that make up the Fund's
portfolio. The Fund should not be purchased by those who seek income as their
primary investment objective.
In addition to the securities described above, the Fund may also acquire
preferred stocks and debt instruments having prospects for growth of capital.
Although these different types of securities can be expected to generate
amounts of income to satisfy the Fund's secondary objective, they will be
purchased for their potential for growth of capital.
The primary thrust of AIM's search for undervalued equity securities is in
four categories: (1) out-of-favor cyclical growth companies; (2) established
growth companies that are undervalued compared to historical relative
valuation parameters; (3) companies where there is early but tangible evidence
of improving prospects which are not yet reflected in the price of the
company's equity securities; and (4) companies whose equity securities are
selling at prices that do not reflect the current market value of its assets
and where there is reason to expect realization of this potential in the form
of increased equity values.
CERTAIN INVESTMENT STRATEGIES AND TECHNIQUES. Each of the Funds has the
---------------------------------------------
flexibility to invest, to the extent described below, in a variety of
instruments designed to enhance its investment capabilities. Each of the Funds
may invest in money market obligations, foreign securities (including ADRs and
EDRs), repurchase agreements, reverse repurchase agreements, illiquid
securities and Rule 144A securities; the Diversified Income Fund and the
Government Fund may invest in U.S. Government Agency Mortgage-Backed
Securities; each of the Funds may purchase or sell securities on a delayed
delivery or when-issued basis and may borrow money; each of the Funds, other
than the Money Market Fund, may lend portfolio securities and make short sales
"against the box." A short sale is "against the box" to the extent that the
Fund contemporaneously owns or has the right to obtain securities identical to
those sold short without payment of any further consideration.
Each of the Funds, other than the Money Market Fund, may write (i.e., sell)
"covered" put and call options and buy put and call options on domestic and
foreign securities, securities indices and currencies. Each of the Funds,
other than the Money Market Fund, may use exchange-traded financial futures
contracts, options thereon, and forward contracts as a hedge to protect
against possible changes in market values. A brief description of these
investment instruments and their risks appears below. See "Hedging and Other
Investment Techniques" in the Statement of Additional Information for more
detailed information.
Money Market Obligations. When deemed appropriate for temporary or defensive
purposes, each of the Funds may hold cash or cash equivalent Money Market
Obligations. Of course, the Money Market Fund invests exclusively in Money
Market Obligations. While none of the Funds other than the Money Market Fund
is required by regulation or fundamental policy to limit such investments to
those which, at the date of purchase, are "First Tier" securities as that term
is defined in Rule 2a-7 under the 1940 Act, it is the current intention of AIM
to limit such investments to those securities which, at the time of purchase,
are considered "First Tier" securities or securities which AIM has determined
to be of comparable credit quality.
In addition to the Money Market Obligations described above, as a temporary
or defensive measure, and without regard to their respective investment
objectives, AIM may invest all or substantially all of the assets of the
Diversified Income Fund, the Global Utilities Fund and the International Fund
in cash or Money Market Obligations, including repurchase agreements,
denominated in foreign currencies.
U.S. Government Agency Mortgage-Backed Securities. The Diversified Income
Fund and the Government Fund may invest in U.S. Government Agency Mortgage-
Backed Securities. These securities are obligations issued or guaranteed by
the United States Government or by one of its agencies or instrumentalities,
including but not limited to GNMA, the FNMA, or FHLMC. U.S. Government Agency
Mortgage-Backed Certificates provide for the pass-through to investors of
their pro-rata share of monthly payments (including any principal prepayments)
made by the individual borrowers on the pooled mortgage loans, net of any fees
paid to the guarantor of such securities and the servicers of the underlying
mortgage loans. GNMA, FNMA and FHLMC each guarantee timely distributions of
interest to certificate holders. GNMA and FNMA guarantee timely distributions
of scheduled principal. FHLMC has in the past guaranteed
8
<PAGE>
only the ultimate collection of principal of the underlying mortgage loan;
however, FHLMC Gold Participation Certificates now guarantee timely payment of
monthly principal reductions. Although their close relationship with the U.S.
Government is believed to make them high-quality securities with minimal
credit risks, the U.S. Government is not obligated by law to support either
FNMA or FHLMC. However, historically there have not been any defaults of FNMA
or FHLMC issues. See Appendix B for a more complete description of GNMA
securities.
Mortgage-backed securities consist of interests in underlying mortgages
generally with maturities of up to thirty years. However, due to early
unscheduled payments of principal on the underlying mortgages, the securities
have a shorter average life and, therefore, less volatility than a comparable
thirty-year bond. The value of U.S. Government Agency Mortgage-Backed
Securities, like other traditional debt instruments, will tend to move in the
opposite direction compared to interest rates.
Foreign Securities. To the extent consistent with their respective
investment objectives, each of the Funds may invest in foreign securities. It
is not anticipated that such foreign securities will constitute more than: (i)
20% of the value of the total assets of each Fund (except the Value Fund, the
Diversified Income Fund, the Global Utilities Fund and, the International
Fund); (ii) 25% of the value of the total assets of the Value Fund; (iii) 50% of
the value of the total assets of the Diversified Income Fund; and (iv) 80% of
the value of the total assets of the Global Utilities Fund.
The Diversified Income Fund may invest in debt obligations which may be
denominated in the U.S. dollar or in other currencies issued or guaranteed by
foreign corporations, certain supranational entities (such as the World Bank,
Asian Development Bank and European Economic Community), and foreign
governments (including political subdivisions having taxing authority) or
their agencies or instrumentalities. The Diversified Income Fund may also
invest in debt obligations issued by U.S. corporations denominated in non-U.S.
dollar currencies. No more than 25% of the Diversified Income Fund's total
assets, at the time of purchase, will be invested in government securities of
any one foreign country. At the present time, AIM does not intend to invest
more than 10% of the Diversified Income Fund's total assets in securities
issued by foreign governments or 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. Investments in emerging markets
or developing countries involve exposure to economic structures that are
generally less diverse and mature and to political systems which can be
expected to have less stability than those of more developed countries. Such
countries may have relatively unstable governments, economies based on only a
few industries, and securities markets which trade only a small number of
securities. Historical experience indicates that emerging markets have been
more volatile than the markets of more mature economies; such markets have
also from time to time provided higher rates of return and greater risks to
investors. AIM believes that these characteristics of emerging markets can be
expected to continue in the future.
The Global Utilities Fund may invest up to 80% of its total assets in
securities of foreign utility companies, including investments in ADRs, EDRs
and other securities representing underlying securities of foreign issuers.
Under normal market conditions, the Global Utilities Fund will be invested in
securities of issuers located in at least four countries, one of which will be
the United States, although for defensive purposes, it may invest 100% of its
total assets in securities of U.S. issuers. In some foreign countries, utility
companies are partially owned by government agencies. In some cases, foreign
government agencies may have significant investments in businesses other than
utility companies. Also, investments in securities of foreign issuers may
involve other risks which are not ordinarily associated with investments in
domestic issuers. See "Risk Factors" in this Prospectus. In addition,
investors should also be aware that the Global Utilities Fund may invest in
companies located within emerging or developing countries.
Under normal market conditions the International Fund will invest at least
80% of its total assets in marketable equity securities (including common and
preferred stock, depositary receipts for stock and securities exchangeable for
or convertible into stock) of foreign companies which, with their
predecessors, have been in continuous operation for three years or more and
which are listed on a recognized foreign securities exchange or traded in a
foreign over-the-counter market.
Under normal market conditions, the International Fund intends to invest in
the securities of foreign companies located in at least four countries outside
the United States. The International Fund will emphasize investment in foreign
companies in the developed countries of Western Europe and the Pacific Basin,
but the Fund may also invest to a lesser extent in the securities of companies
located in developing countries in various regions of the world. At the
present time, AIM does not intend to invest more than 20% of the International
Fund's total assets in securities issued by foreign governments or foreign
companies located in developing countries. For a discussion of the risks
pertaining to investments in foreign obligations, see "Risk Factors" in this
Prospectus.
ADRs and EDRs. To the extent consistent with their respective investment
objectives each of the Funds (except the International Fund which is discussed
separately below) may also invest in securities which are in the form of ADRs,
EDRs or other securities representing underlying securities of foreign
issuers. ADRs are receipts typically issued by a United States bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation. EDRs are receipts issued in Europe which evidence a similar
ownership arrangement. ADRs, EDRs and other securities representing underlying
securities of foreign issuers are treated as foreign securities for purposes
of determining the applicable limitation on investment in foreign securities.
9
<PAGE>
The International Fund normally will invest at least 80% of its total assets
in marketable equity securities, including common and preferred stock and
other securities having the characteristics of stock (such as an equity or
ownership interest in a company). The International Fund may satisfy the
foregoing requirement in part through the ownership of securities which are
convertible into, or exchangeable for, common stocks, or by investment in the
securities of foreign issuers which are in the form of ADRs, EDRs and other
securities representing underlying securities of foreign issuers.
Repurchase Agreements. Each of the Funds may enter into repurchase
agreements with institutions believed by the Company's Board of Directors to
present minimal credit risk. A repurchase agreement is an instrument under
which the Fund acquires ownership of a debt security and the seller 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. With regard to repurchase transactions, in the event of a bankruptcy
or other default of a seller of a repurchase agreement (such as the sellers'
failure to repurchase the obligation in accordance with the terms of the
agreement), a Fund could 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 while the Fund seeks to enforce its
rights thereto; (b) possible subnormal levels of income and lack of access to
income during this period; and (c) expenses of enforcing its rights.
Repurchase agreements are considered to be loans by the Fund under the 1940
Act. Repurchase agreements will be secured by U.S. Treasury securities, U.S.
Government agency securities (including, but not limited to, those which have
been stripped of their interest payments and mortgage-backed securities) and
commercial paper. For additional information on the use of repurchase
agreements, see the Statement of Additional Information.
Reverse Repurchase Agreements. Reverse repurchase agreements involve the
sale by the Fund of a portfolio security at an agreed upon price, date and
interest payment. The Funds will each enter into reverse repurchase agreements
solely for temporary or defensive purposes to facilitate the orderly sale of
portfolio securities to accommodate abnormally heavy redemption requests
should they occur. The Funds will use reverse repurchase agreements when the
interest income to be earned from the securities that would otherwise have to
be liquidated to meet redemption requests is greater than the interest expense
of the reverse repurchase transaction. Each of the Funds may enter into
reverse repurchase agreements in amounts not exceeding 33 1/3% of the value of
their respective total assets. To comply with certain state law requirements,
the Capital Appreciation Fund has no current intention of entering into
reverse repurchase agreements in amounts in excess of 25% of the value of the
Fund's total assets. Reverse repurchase agreements involve the risk that the
market value of securities retained by the Fund in lieu of liquidation may
decline below the repurchase price of the securities sold by the Fund which it
is obligated to repurchase. This risk, if encountered, could cause a reduction
in the net asset value of the Fund's shares. Reverse repurchase agreements are
considered to be borrowings under the 1940 Act. See "Borrowing" in this
Prospectus for percentage limitations on borrowings.
Delayed Delivery Agreements and When-Issued Securities. Each Fund may enter
into delayed delivery agreements and may purchase securities on a "when-
issued" basis.
Delayed delivery agreements are commitments by a Fund to dealers or issuers
to acquire securities beyond the customary settlement date for such
securities. These commitments fix the payment price and interest rate to be
received on the investment. Delayed delivery agreements will not be used as a
speculative or leverage technique. Rather, from time to time, the Fund's
investment adviser can anticipate that cash for investment purposes will
result from scheduled maturities of existing portfolio instruments or from net
sales of shares of the Fund and may enter into delayed delivery agreements to
assure that the Fund will be as fully invested as possible in instruments
meeting its investment objective.
Debt securities are sometimes offered on a "when-issued" basis; that is, the
date for delivery of and payment for the securities is not fixed at the date
of purchase, but is set after the securities are issued (normally within
forty-five days after the date of the transaction). The payment obligation and
the interest rate that will be received on the securities are fixed at the
time the buyer enters into the commitment. The Funds will only make
commitments to purchase such debt securities with the intention of actually
acquiring the securities, but a Fund may sell these securities before the
settlement date if it is deemed advisable.
If a Fund enters into a delayed delivery agreement or purchases a when-
issued security, the Fund will direct its custodian bank to segregate cash or
other high grade securities (including Money Market Obligations) in an amount
equal to its delayed delivery agreements or when-issued commitments. If the
market value of such securities declines, additional cash or securities will
be segregated on a daily basis so that the market value of the account will
equal the amount of such Fund's delayed delivery agreements and when-issued
commitments. To the extent that funds are segregated, they will not be
available for new investment or to meet redemptions. Investment in securities
on a when-issued basis and use of delayed delivery agreements may increase the
Fund's exposure to market fluctuation, or may increase the possibility that
the Fund will incur a short-term loss, if the Fund must engage in portfolio
transactions in order to honor a when-issued commitment or accept delivery of
a security under a delayed delivery agreement. The Fund will employ techniques
designed to minimize these risks. No additional delayed delivery agreements or
when-issued commitments will be made by a Fund if, as a result, more than 25%
of the Fund's net assets would become so committed.
Dollar Roll Transactions. In order to enhance portfolio returns and manage
prepayment risks, the Diversified Income Fund and the Government Fund may
engage in dollar roll transactions with respect to mortgage securities issued
by GNMA, FNMA and FHLMC. In a dollar roll transaction, the Fund sells a
mortgage security held in the portfolio to a financial institution such as a
bank or broker-dealer, and simultaneously agrees to repurchase a substantially
similar security (same type, coupon and maturity) from the institution at a
later date at an agreed upon price. The mortgage securities that are
repurchased will bear the same interest rate as
10
<PAGE>
those sold, but generally will be collateralized by different pools of
mortgages with different prepayment histories. During the period between the
sale and repurchase, the Fund will not be entitled to receive interest and
principal payments on the securities sold. Proceeds of the sale will be
invested in short-term instruments, and the income from these investments,
together with any additional fee income received on the sale, could generate
income for the Fund exceeding the yield on the sold security.
Dollar roll transactions involve the risk that the market value of the
securities retained by the Fund may decline below the price of the securities
that the Fund has sold but is obligated to repurchase under the agreement. In
the event the buyer of securities under a dollar roll transaction files for
bankruptcy or becomes insolvent, the Fund's use of the proceeds from the sale
of the securities may be restricted pending a determination by the other
party, or its trustee or receiver, whether to enforce the Fund's obligation to
repurchase the securities. See "Borrowing," below for the applicable
limitation on dollar roll transactions.
Borrowing. Each of the Funds may borrow money to a limited extent from banks
(including the Funds' custodian bank) for temporary or emergency purposes
subject to the limitations under the 1940 Act. Each Fund will restrict
borrowings, reverse repurchase agreements and dollar roll transactions to an
aggregate of 33 1/3% of the Fund's total assets at the time of the
transaction. To comply with certain state law requirements, the Capital
Appreciation Fund will restrict borrowings, reverse repurchase agreements and
dollar roll transactions not to exceed 25% of the value of the Fund's total
assets. No Fund will purchase additional securities when any borrowings from
banks exceed 5% of the Fund's total assets.
Illiquid Securities. None of the Funds will invest more than 15% of their
respective total assets in illiquid securities, including restricted
securities which are illiquid. The Money Market Fund will not invest more than
10% of its total assets in illiquid securities.
Rule 144A Securities. Each of the Funds may invest in securities that are
subject to restrictions on resale because they have not been registered under
the Securities Act of 1933 (the "1933 Act"). These securities are sometimes
referred to as private placements. Although securities which may be resold
only to "qualified institutional buyers" in accordance with the provisions of
Rule 144A under the 1933 Act are technically considered "restricted
securities," the Funds may each purchase Rule 144A securities without regard
to the limitation on investments in illiquid securities described above under
"Illiquid Securities," provided that a determination is made that such
securities have a readily available trading market. AIM will determine the
liquidity of Rule 144A securities under the supervision of the Company's Board
of Directors. The liquidity of Rule 144A securities will 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 exceed its applicable percentage limitation for investments in
illiquid securities.
Lending of Portfolio Securities. Each Fund (except the Money Market Fund)
may, from time to time, lend securities from their respective portfolios, with
a value not exceeding 33 1/3% of their respective total assets, to banks,
brokers and other financial institutions, and receive in return collateral in
the form of cash or securities issued or guaranteed by the U.S. Government
which will be maintained at all times in an amount equal to at least 100% of
the current market value of the loaned securities. During the period of the
loan, the applicable Fund receives the income on both the loaned securities
and the collateral (or a fee) and thereby increases its yield. In the event
that the borrower defaults on its obligation to return loaned securities
because of insolvency or otherwise, the Fund could experience delays and costs
in gaining access to the collateral and could suffer a loss to the extent that
the value of the collateral falls below the market value of the loaned
securities.
Short Sales. Each Fund (except the Money Market Fund), may make short sales
"against the box." A short sale is a transaction in which a party sells a
security it does not own in anticipation of a decline in the market value of
that security. A short sale is "against the box" to the extent that the Fund
contemporaneously owns or has the right to obtain securities identical to
those sold short without payment of any further consideration. The Funds will
enter into such transactions only to the extent the aggregate value of all
securities sold short does not represent more than 10% of the applicable
Fund's total assets at any given time.
Options. Each of the Funds, other than the Money Market Fund, may write
(sell) "covered" put and call options and buy put and call options, including
securities index and foreign currency options. A call option is a contract
that gives to the holder the right to buy a specified amount of the underlying
security at a fixed or determinable price (called the exercise or strike
price) upon exercise of the option. A put option is a contract that gives the
holder the right to sell a specified amount of the underlying security at a
fixed or determinable price upon exercise of the option. In the case of index
options, exercises are settled through the payment of cash rather than the
delivery of property. A call option is covered if, for example, the Fund owns
the underlying security covered by the call or, in the case of a call option
on an index, holds securities the price changes of which are expected to
substantially replicate the movement of the index. A put option is covered if,
for example, the Fund maintains in a segregated account with its custodian
cash, U.S. Treasury bills or other high-grade short-term debt obligations with
a value equal to the exercise price of the put option.
These Funds may write call options on securities or securities indexes for
the purpose of increasing their return (through receipt of premiums) or to
provide a partial hedge against a decline in the value of their portfolio
securities or both. These Funds may write put options on securities or
securities indexes in order to earn additional income or (in the case of put
options written on individual securities) to purchase the underlying security
at a price below the current market price. If a Fund writes an option which
expires unexercised or is closed out by the Fund at a profit, it will retain
all or part of the premium received for the option, which will increase its
gross income. If the price of the underlying security moves adversely to the
Fund's position, the option may be exercised and the Fund will be required to
sell or purchase the underlying security at a disadvantageous price, or, in
the case of index options, deliver an amount of cash, which loss may only be
partially offset by the amount of premium received.
11
<PAGE>
Each of the Funds noted above may also purchase put or call options on
securities and securities indexes in order to hedge against changes in
interest rates or stock prices which may adversely affect the prices of
securities that the Fund wants to purchase at a later date, to hedge its
existing investments against a decline in value, or to attempt to reduce the
risk of missing a market or industry segment advance. In the event that the
expected changes in interest rates or stock prices occur, the Fund may be able
to offset the resulting adverse effect on the Fund by exercising or selling
the options purchased. The premium paid for a put or call option plus any
transaction costs will reduce the benefit, if any, realized by the Fund upon
exercise or liquidation of the option. Unless the price of the underlying
security or level of the securities index changes by an amount in excess of
the premium paid, the option may expire without value to the Fund.
These Funds may also purchase and write options in combination with each
other to adjust the risk and return characteristics of certain portfolio
security positions. This technique is commonly referred to as a "straddle."
Options purchased or written by the Fund may be traded on the national
securities exchanges or negotiated with a dealer. Options traded in the over-
the-counter market may not be as actively traded as those on an exchange, so
it may be more difficult to value such options. In addition, it may be
difficult to enter into closing transactions with respect to such options.
Such options and the securities used as "cover" for such options, unless
otherwise indicated, would be considered illiquid securities.
In instances in which a Fund has entered into agreements with primary
dealers with respect to the over-the-counter options it has written, and such
agreements would enable the Fund to have an absolute right to repurchase at a
pre-established formula price the over-the-counter option written by it, the
Fund would treat as illiquid only securities equal in amount to the formula
price described above less the amount by which the option is "in-the-money,"
i.e., the price of the option exceeds the exercise price.
Each of the Funds, except the Money Market Fund, may purchase put and call
options and write covered put and call options on foreign currencies for the
purpose of protecting against declines in the dollar value of portfolio
securities and against increases in the dollar cost of securities to be
acquired. Such investment strategies will be used as a hedge and not for
speculation. As in the case of other types of options, the writing of an
option on foreign currency will constitute a hedge, however it differs in that
it is only a partial hedge, up to the amount of the premium received.
Moreover, the Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements
adverse to the Fund's position, it may forfeit the entire amount of the
premium plus related transaction costs. Options on foreign currencies may be
traded on the national securities exchanges or in the over-the-counter market.
As described above, options traded in the over-the-market may not be as
actively traded as those on an exchange, so it may be more difficult to value
such options. In addition, it may be difficult to enter into closing
transactions with respect to options traded over-the-counter.
Options are subject to certain risks, including the risk of imperfect
correlation between the option and the applicable Fund's other investments and
the risk that there may not be a liquid secondary market for the option when
the Fund seeks to hedge against adverse market movements. This may cause the
Fund to lose the entire premium on purchase options or reduce its ability to
effect closing transactions at favorable prices.
The Funds will not write options if, immediately after such sale, the
aggregate value of the securities or obligations underlying the outstanding
options exceeds 25% of the applicable Fund's total assets. The Funds will not
purchase options if, at the time of the investment, the aggregate premiums
paid for outstanding options will exceed 5% of the applicable Fund's total
assets.
Futures and Forward Contracts. Each of the Funds, other than the Money
Market Fund, may purchase and sell futures contracts on debt securities and on
indexes of debt securities to hedge against anticipated changes in interest
rates that might otherwise have an adverse effect on the value of their assets
or assets they intend to acquire. In addition, they may purchase and sell
stock index futures contracts to hedge the equity portion of their assets or
equity assets they intend to acquire with regard to market risk as
distinguished from stock-specific risk. These Funds may also purchase put and
call options on futures contracts and write "covered" put and call options on
futures contracts in order to hedge against changes in interest rates or stock
prices. Although the Funds are authorized to invest in futures contracts and
related options with respect to non-U.S. instruments, they will limit such
investments to those which have been approved by the Commodity Futures Trading
Commission ("CFTC") for investment by U.S. investors. These Funds may enter
into futures contracts and buy and sell related options, provided that the
futures contracts and related options investments are made for "bona fide
hedging" purposes, as defined under CFTC regulations. When a Fund purchases or
sells a futures contract or writes a put or call option on a futures contract,
the Fund will cover such positions by, for example, segregating with its
custodian cash or cash equivalents (less any related margin deposits) equal to
the cost of the futures contract it intends to sell or purchase.
To the extent that any of the Funds invests in securities denominated in
foreign currencies (which is substantially all of the securities held by the
International Fund and a significant portion of securities held by the
Diversified Income Fund and the Global Utilities Fund), the value of the
Fund's portfolio will be affected by changes in exchange rates between
currencies (including the U.S. dollar), as well as by changes in the market
value of the securities themselves. In order to mitigate the effects of such
changes, each of the Funds, other than the Money Market Fund, may enter into
futures contracts on foreign currencies (and related options) and may
12
<PAGE>
enter into forward contracts for the purchase or sale of a specific currency
at a future date at a price set at the time of the 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 with respect to them.
In managing their currency exposure, the Funds may each buy and sell
currencies either in the spot (cash) market or in the forward market (through
forward contracts generally expiring within one year). The Funds may each also
enter into forward contracts with respect to a specific purchase or sale of a
security, or with respect to its portfolio positions generally. When such a
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 applicable 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.
Unlike futures contracts, forward contracts are generally individually
negotiated and privately traded. A forward contract obligates the seller to
sell a specific security or currency at a specified price on a future date,
which may be any fixed number of days from the date of the contract.
The Global Utilities Fund and the International Fund may enter into forward
contracts for transaction hedging purposes with respect to all or a
substantial portion of their trades. The other Funds will commit no more than
their respective portfolio investments in foreign securities to foreign
exchange hedges.
There are risks associated with hedging transactions. During certain market
conditions, a hedging transaction may not completely offset a decline or rise
in the value of the Fund's portfolio securities or currency being hedged. In
addition, changes in the market value of securities or currencies may differ
substantially from the changes anticipated by the Fund when hedged positions
were established. Successful use of hedging transactions is dependent upon
AIM's ability to predict correctly movements in the direction of the
applicable markets. No assurance can be given that AIM's judgment in this
respect will be correct. Accordingly, a Fund may lose the expected benefit of
hedging if markets move in an unanticipated manner. Moreover, in the futures
and options on futures markets, it may not always be possible to execute a put
or sell at the desired price, or to close out an open position due to market
conditions, limits on open positions, and/or daily price fluctuations.
INVESTMENT RESTRICTIONS. Each of the Funds has adopted a number of
------------------------
investment restrictions, as set forth in the Statement of Additional
Information, some of which restrictions may not be changed without shareholder
approval.
PORTFOLIO TURNOVER. Any particular security will be sold, and the proceeds
-------------------
reinvested, whenever such action is deemed prudent from the viewpoint of a
Fund's investment objective(s), without regard to the impact on the portfolio
turnover rate.
- -------------------------------------------------------------------------------
RISK FACTORS
Investors should consider carefully the following special factors before
investing in any of the Funds.
NON-INVESTMENT GRADE DEBT SECURITIES. The Diversified Income Fund, and to a
lesser extent the Global Utilities Fund, seek to meet their respective
investment objectives by investing in non-investment grade debt securities,
commonly known as "junk bonds." While generally providing greater income and
opportunity for gain, non-investment grade debt securities may be subject to
greater risks than higher-rated securities. Economic downturns tend to disrupt
the market for junk bonds and adversely affect their values. Such economic
downturns may be expected to result in increased price volatility for junk
bonds and of the value of shares of the above-named Funds, and increased
issuer defaults on junk bonds.
In addition, many issuers of junk bonds are substantially leveraged, which
may impair their ability to meet their obligations. In some cases, junk bonds
are subordinated to the prior payment of senior indebtedness, which
potentially limits a Fund's ability to fully recover principal or to receive
payments when senior securities are subject to a default.
The credit rating of a junk bond does not necessarily address its market
value risk, and ratings may from time to time change to reflect developments
regarding the issuer's financial condition. Junk bonds have speculative
characteristics which are likely to increase in number and significance with
each successive lower rating category.
When the secondary market for junk bonds becomes more illiquid, or in the
absence of readily available market quotations for such securities, the
relative lack of reliable objective data makes it more difficult for the
directors to value a Fund's securities, and judgment plays a more important
role in determining such valuations. Increased illiquidity in the junk bond
market also may affect a Fund's ability to dispose of such securities at
desirable prices.
In the event a Fund experiences an unexpected level of net redemptions, the
Fund could be forced to sell its junk bonds without regard to their investment
merits, thereby decreasing the asset base upon which the Fund's expenses can
be spread and possibly reducing the Fund's rate of return. Prices of junk
bonds have been found to be less sensitive to fluctuations in interest rates,
and more sensitive to adverse economic changes and individual corporate
developments, than those of higher-rated debt securities.
13
<PAGE>
FOREIGN SECURITIES. Investments by a Fund in foreign securities whether
denominated in U.S. dollars or foreign currencies, may entail the following
risks set forth below. Investments by a Fund in ADRs, EDRs or similar
securities also may entail some or all of the risks described below.
Currency Risk. The value of the Fund's foreign investments may be
affected by changes in currency exchange rates. The U.S. dollar value of a
foreign security generally decreases when the value of the U.S. dollar
rises against the foreign currency in which the security is denominated,
and tends to increase 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 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 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. Income from foreign securities owned by the Fund may be
reduced by a withholding tax at the source, which tax would reduce dividend
income payable to the Fund's shareholders.
Market Risk. The securities markets in many of the countries in which the
Fund invests will have substantially less trading volume than the major
United States markets. As a result, the securities of some foreign
companies and governments may be less liquid and experience more price
volatility than comparable domestic securities. Increased custodian costs
as well as administrative difficulties (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.
In addition, there are risks associated with certain investment strategies
employed by the Funds as discussed in the previous section.
NON-DIVERSIFIED PORTFOLIO (GLOBAL UTILITIES FUND ONLY). The Global Utilities
Fund is a non-diversified portfolio, which means that it may invest a greater
proportion of its assets in the securities of a smaller number of issuers and
therefore may be subject to greater market and credit risk than a more broadly
diversified portfolio. (A diversified portfolio may not invest more than 5% of
its assets in obligations of one issuer, with respect to 75% of its total
assets.)
- -------------------------------------------------------------------------------
MANAGEMENT
The overall management of the business and affairs of the Funds is vested
with the Company's Board of Directors. The Board of Directors approves all
significant agreements between each of the Funds and persons or companies
furnishing services to a Fund or the Company, including the Master Advisory
Agreement with AIM, the Master Distribution Agreement with A I M Distributors,
Inc. ("AIM Distributors"), the Custodian Agreement with State Street Bank and
Trust Company (the "Custodian"), and the Transfer Agency Agreement with State
Street Bank and Trust Company (the "Transfer Agent"). The day-to-day
operations of each Fund are delegated to its officers and to AIM, subject
always to the objectives and policies of the Fund and to the general
supervision of the Company's Board of Directors. Certain directors and
officers of the Company are affiliated with AIM and A I M Management Group
Inc. ("AIM Management"), the parent of AIM. Information concerning the Board
of Directors may be found in the Statement of Additional Information.
INVESTMENT ADVISOR. A I M Advisors, Inc., 11 Greenway Plaza, Suite 1919,
Houston, TX 77046-1173, serves as the investment advisor to each Fund pursuant
to a new master investment advisory agreement (the "Advisory Agreement"),
dated October 18, 1993, as amended April 28, 1994 to include the Global
Utilities Fund and the Growth & Income Fund. AIM was organized in 1976, and,
together with its affiliates, manages or advises 37 investment company
portfolios (including the Funds). As of April 3, 1995, the total assets of the
mutual funds advised or managed by AIM and its affiliates were approximately
$28.5 billion. AIM is a wholly-owned subsidiary of AIM Management, a holding
company.
Under the terms of the Funds' Advisory Agreement, AIM supervises all aspects
of each Fund's operations and provides investment advisory services to the
Fund. The Advisory Agreement also provides that, upon the request of the
Company's Board of Directors, AIM may perform or arrange for the provision of
certain accounting and other administrative services to each Fund which are
not required to be performed by AIM under the Advisory Agreement. Pursuant to
a master administrative services agreement (the "Administrative Services
Agreement") between the Company and AIM with respect to each Fund dated
October 18, 1993, as amended April 28, 1994 to include the Global Utilities
Fund and the Growth & Income Fund, AIM provides the services of the Company's
principal financial
14
<PAGE>
officer (including related office, facilities and equipment) and may provide
other administrative services requested by the Company's Board of Directors
from time to time. AIM is entitled to receive from each Fund reimbursement of
its costs or such reasonable compensation as may be approved by the Company's
Board of Directors.
For a discussion of AIM's brokerage allocation policies and practices, see
"Portfolio Transactions and Brokerage" in the Statement of Additional
Information. In accordance with policies established by the directors, AIM may
pay brokerage commissions to broker-dealers that may be affiliated with the
Company and may take into account sales of shares of the Funds and other funds
advised by AIM in selecting broker-dealers to effect portfolio transactions on
behalf of the Funds.
PORTFOLIO MANAGEMENT. AIM uses a team approach and a disciplined investment
process in providing investment advisory services to all its accounts,
including the Funds. AIM's investment staff consists of 81 individuals. While
individual members of AIM's investment staff are assigned primary
responsibility for the day-to-day management of each of AIM's accounts, all
accounts are reviewed on a regular basis by AIM's Investment Policy Committee
to ensure that they are being invested in accordance with the account's and
AIM's investment policies. The individuals who are primarily responsible for
the day-to-day management of the Funds (except the Money Market Fund, for
which no such disclosure is required) and their titles, if any, with AIM or
its affiliates and the Fund, the length of time they have been responsible for
the management, their years of investment experience and prior experience (if
they have been with AIM for less than five years) are shown below:
Jonathan C. Schoolar and Robert M. Kippes are responsible for the day-to-day
management of the CAPITAL APPRECIATION FUND'S portfolio securities. Mr.
Schoolar, a chartered financial analyst, is Senior Vice President and Director
of A I M Capital Management, Inc. ("AIM Capital"), a wholly-owned subsidiary
of AIM, Vice President of AIM and Vice President of the Company and has been
responsible for the Fund since its inception in 1993. He currently serves as
Chief Equity Officer and has been associated with AIM and/or its affiliates
since 1986 and has 10 years of experience as an investment professional. Mr.
Kippes is Assistant Vice President of AIM Capital. He currently serves as co-
manager of the CAPITAL APPRECIATION FUND and has been responsible for the Fund
since its inception in 1993. Mr. Kippes has been associated with AIM and/or
its affiliates since 1989 and has over five years of experience as an
investment professional.
Robert G. Alley and John L. Pessarra are responsible for day-to-day
management of the DIVERSIFIED INCOME FUND'S portfolio securities. Mr. Alley, a
chartered financial analyst, is Senior Vice President of AIM Capital, Vice
President of AIM and Vice President of the Company, and has been affiliated
with AIM and/or its affiliates since 1992. Prior to that, Mr. Alley was the
senior fixed income manager for Waddell and Reed, Inc. Mr. Alley has been
responsible for the Fund since its inception in 1993, and has 23 years of
experience as an investment professional. Mr. Pessarra is currently an
Assistant Vice President of AIM Capital and has been associated with AIM
and/or its affiliates since 1990. Mr. Pessarra has been responsible for the
Fund since its inception in 1993, and has 10 years of experience as an
investment professional. He currently serves as a co-manager of the
DIVERSIFIED INCOME FUND. Prior to that, Mr. Pessarra was a high yield
investment analyst for United Savings of Texas, FSB.
Robert G. Alley and Claude C. Cody IV are responsible for day-to-day
management of the GLOBAL UTILITIES FUND'S portfolio securities. Mr. Alley's
background is discussed above with respect to the management of the
Diversified Income Fund. Mr. Cody is Vice President of AIM Capital. Since
1992, he has served as Equity Administrative Officer. Mr. Cody is Vice
President of AIM Capital and has been responsible for the Fund since its
inception in 1994. Mr. Cody has been assoicated with AIM and/or its affiliates
since 1992 and has 18 years of experience as an investment professional. Prior
to that, Mr. Cody was associated with Kinder-Care Corporation where he
established an investment management operation and managed three portfolios.
Karen Dunn Kelley and Meggan Walsh are responsible for day-to-day management
of the GOVERNMENT FUND'S portfolio securities. Ms. Kelley is Senior Vice
President of AIM Capital, Vice President of AIM and Vice President of the
Company and has been responsible for the Fund since its inception in 1993.
Prior to holding such positions, Ms. Kelley was a trader with Federated
Investors, Inc. Ms. Kelley has been associated with AIM and/or its affiliates
since 1989 and has 12 years of experience as an investment professional. Ms.
Walsh has been an investment officer with AIM Capital since 1990 and has been
responsible for the Fund since its inception in 1993. Prior thereto, Ms. Walsh
was Manager of Short-Term U.S. and Commercial Paper Programs at Nationale-
Nederlanden North America Corporation. Ms. Walsh has 7 years of experience as
an investment professional.
Jonathan C. Schoolar and David P. Barnard are primarily responsible for day-
to-day management of the GROWTH FUND'S portfolio securities. Mr. Schoolar's
background is discussed above with respect to the management of the Capital
Appreciation Fund. Mr. Barnard is Vice President of AIM Capital. He currently
serves as co-manager of the GROWTH FUND and has been responsible for the Fund
since its inception in 1993. Mr. Barnard has been associated with AIM and/or
its affiliates since 1982. Mr. Barnard has 21 years experience as an
investment professional.
Lanny H. Sachnowitz is primarily responsible for day-to-day management of
the GROWTH & INCOME FUND'S portfolio securities. Mr. Sachnowitz is Vice
President of AIM Capital and has been responsible for the Fund since its
inception in 1994. Mr. Sachnowitz has 7 years of experience as an investment
professional. Mr. Sachnowitz has been associated with AIM and/or its
affiliates since 1987.
15
<PAGE>
A. Dale Griffin, III and Paul A. Rogge are responsible for day-to-day
management of the International Fund's portfolio securities. Mr. Griffin, a
chartered financial analyst, is Vice President of AIM Capital and has been
responsible for the Fund since its inception in 1993. Mr. Griffin has been
associated with AIM and/or its affiliates since 1989 and has 9 years
experience as an investment professional. Mr. Rogge is Assistant Vice
President of AIM Capital. He currently serves as co-manager of the
International Fund and has been associated with AIM and/or its affiliates
since 1991. Mr. Rogge has been responsible for the Fund since its inception in
1993 and has 5 years of experience as an investment professional. Prior to
joining AIM, Mr. Rogge served as an Assistant Portfolio Manager at Commerce
Investment Management and a Global Strategy Analyst for UBS -- Philips & Drew.
Claude Cody IV and Joel E. Dobberpuhl are responsible for day-to-day
management of the Value Fund's portfolio securities. Mr. Cody's background is
discussed above with respect to the management of the Global Utilities Fund.
Mr. Dobberpuhl is Assistant Vice President of AIM Capital and has been
associated with AIM and/or its affiliates since 1990. Mr. Dobberpuhl has been
responsible for the Fund since its inception in 1993 and has 6 years of
experience as an investment professional. Prior to joining AIM, Mr. Dobberpuhl
served as Branch Manager for NationsBank Texas, Account Representative with
Fidelity Investment Southwest, Inc., and Commodities Trading Assistant for
A.G. Edwards and Sons.
Advisory Fees. As compensation for its services AIM is paid an investment
advisory fee, which is calculated separately for each Fund at an annual rate
of the applicable Fund's average daily net assets. For the fiscal year ended
January 31, 1995, for the Funds other than the Global Utilities Fund and the
Growth & Income Fund, and for the period May 2, 1994 (date operations
commenced) through January 31, 1995, for the Global Utilities Fund and the
Growth & Income Fund, compensation paid to AIM pursuant to the Advisory
Agreement and the total expenses of each Fund, annualized for the Global
Utilities Fund and the Growth & Income Fund, stated as a percentage of each
Fund's average daily net assets, were as follows:
<TABLE>
<CAPTION>
COMPENSATION EXPENSE COMPENSATION EXPENSE
TO AIM RATIO TO AIM RATIO
(AFTER WAIVER AND (AFTER WAIVER AND (BEFORE WAIVER AND (BEFORE WAIVER AND
REIMBURSEMENT) REIMBURSEMENT) REIMBURSEMENT) REIMBURSEMENT)
----------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
AIM V.I. Capital
Appreciation Fund...... 0.65% 0.84% 0.65% 0.84%
AIM V.I. Diversified
Income Fund............ 0.48% 0.91% 0.60% 1.03%
AIM V.I. Global
Utilities Fund......... 0.00% 1.31% 0.65% 2.80%
AIM V.I. Government
Securities Fund........ 0.35% 0.95% 0.50% 1.10%
AIM V.I. Growth Fund.... 0.65% 0.95% 0.65% 0.95%
AIM V.I. Growth and
Income Fund............ 0.00% 1.07% 0.65% 1.72%
AIM V.I. International
Equity Fund............ 0.74% 1.27% 0.75% 1.28%
AIM V.I. Money Market
Fund................... 0.33% 0.63% 0.40% 0.70%
AIM V.I. Value Fund..... 0.65% 0.82% 0.65% 0.82%
</TABLE>
AIM may from time to time voluntarily waive or reduce their respective fees.
Fee waivers or reductions, other than those contained in the Advisory
Agreement, may be modified or terminated at any time upon 60 days' notice to
the Company's Board of Directors.
Administrator. The Company has entered into an Administrative Services
Agreement, with AIM, pursuant to which AIM has agreed to provide certain
accounting and other administrative services to the Funds, including the
services of a principal financial officer of the Funds and related staff. As
compensation to AIM for its services under the Administrative Services
Agreement, the Funds reimburse AIM for expenses incurred by AIM or its
affiliates in connection with such services.
AIM received reimbursement of administrative services costs from the Company
on behalf of each of the Funds, pursuant to the Administrative Services
Agreement for the fiscal year ended January 31, 1995, for the Funds other than
the Global Utilities Fund and the Growth & Income Fund, and for the period May
2, 1994 (date operations commenced) through January 31, 1995, for the Global
Utilities Fund and the Growth & Income Fund, as follows:
<TABLE>
<CAPTION>
PERCENTAGE
OF AVERAGE
NET ASSETS
----------
<S> <C>
AIM V.I. Capital Appreciation Fund............................. 0.04%
AIM V.I. Diversified Income Fund............................... 0.17%
AIM V.I. Global Utilities Fund................................. 0.96%*
AIM V.I. Government Securities Fund............................ 0.19%
AIM V.I. Growth Fund........................................... 0.07%
AIM V.I. Growth and Income Fund................................ 0.43%*
AIM V.I. International Equity Fund............................. 0.03%
AIM V.I. Money Market Fund..................................... 0.08%
AIM V.I. Value Fund............................................ 0.03%
</TABLE>
* Annualized
16
<PAGE>
DISTRIBUTOR. The Company has entered into a master distribution agreement
(the "Distribution Agreement"), dated October 18, 1993, as amended April 28,
1994 to include the Global Utilities Fund and the Growth & Income Fund, with
AIM Distributors, a registered broker-dealer and a wholly-owned subsidiary of
AIM, to act as the distributor of the shares of the Funds. The address of AIM
Distributors is 11 Greenway Plaza, Suite 1919, Houston, TX 77046-1173. Certain
directors and officers of the Company are affiliated with AIM Distributors and
AIM Management. The Distribution Agreement provides that AIM Distributors has
the exclusive right to distribute shares of the Funds to insurance company
separate accounts.
- -------------------------------------------------------------------------------
PURCHASE AND REDEMPTION OF SHARES
The shares of the Funds are sold in a continuous offering and are authorized
to be offered to both registered and unregistered separate accounts of
affiliated and unaffiliated insurance companies to fund variable annuity
contracts (the "Contracts"). Each separate account contains divisions, each of
which corresponds to a Fund in the Company. Net purchase payments under the
Contracts are placed in one or more of the divisions of the relevant separate
account and the assets of each division are invested in the shares of the Fund
which corresponds to that division. Each separate account purchases and
redeems shares of these Funds for its divisions at net asset value without
sales or redemption charges. Currently more than one insurance company
separate account is authorized to invest in the Funds.
For each day on which a Fund's net asset value is calculated, each separate
account transmits to the Company any orders to purchase or redeem shares of
such Fund based on the purchase payments, redemption (surrender) requests, and
transfer requests from Contract owners, annuitants and beneficiaries which the
separate account processes on that day. The separate accounts purchase and
redeem shares of each Fund at the applicable Fund's net asset value per share
calculated as of the previous business day. Any orders to purchase or redeem
Fund shares which are not based on actions by Contract owners, annuitants, and
beneficiaries will be effected at the Fund's net asset value per share next
computed after the order is placed.
Please refer to the appropriate separate account prospectus related to your
Contract for more information regarding the Contract.
In the future, shares of the Funds may, be offered to insurance company
separate accounts to fund variable life insurance policies ("Policies") as
well as Contracts. The Company does not foresee any disadvantage to purchasers
of Contracts or Policies arising out of these arrangements. Nevertheless, the
Board of Directors intends to monitor events in order to identify any material
irreconcilable conflicts which may possibly arise and to determine what
action, if any, should be taken in response thereto.
- -------------------------------------------------------------------------------
DETERMINATION OF NET ASSET VALUE
The net asset value per share (or share price) of each of the Funds is
determined as of 4:15 p.m. Eastern time on each "business day of the Fund." A
"business day of a Fund" is any day on which the New York Stock Exchange is open
for business. It is expected that the New York Stock Exchange will be closed
during the next twelve months on Saturdays and Sundays and on the observed
holidays of New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. If the New York
Stock Exchange 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 15 minutes
following the close of the New York Stock Exchange on such day. The net asset
value per share of a Fund is determined by subtracting the liabilities (e.g.,
the expenses) of the Fund from the assets of the Fund and dividing the result by
the total number of shares outstanding of such Fund. The determination of a
Fund's net asset value per share is made in accordance with generally accepted
accounting principles.
VALUATION OF INVESTMENTS OF ALL FUNDS EXCEPT THE MONEY MARKET FUND. Among
other items, a Fund's liabilities include accrued expenses and dividends
payable, and its total assets include portfolio securities valued at their
market value as well as income accrued but not received. Securities for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the supervision of the Company's officers
and in accordance with methods which are specifically authorized by the Board
of Directors of the Company. Short-term obligations with maturities of 60 days
or less are valued at amortized cost as reflecting fair value.
VALUATION OF THE MONEY MARKET FUND'S INVESTMENTS. The Money Market Fund uses
the amortized cost method of valuing the securities held by the Fund and
rounds the Fund's per share net asset value to the nearest whole cent;
therefore, it is anticipated that the net asset value of the shares of the
Fund will remain constant at $1.00 per share. However, the Company can give no
assurance that the Fund can maintain a $1.00 net asset value per share.
FUTURES CONTRACTS. Initial margin deposits made upon entering into futures
contracts are recognized as assets due from the broker (the Fund's agent in
acquiring the futures position). During the period the futures contract is
open, changes in the value of the contract are recognized as unrealized gains
or losses by "marking-to-market" on a daily basis to reflect the market value
of the contract 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 contract is closed, the Fund that has entered into the
futures contract records 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.
17
<PAGE>
- -------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAX MATTERS
DIVIDENDS AND DISTRIBUTIONS. The Funds declare and distribute dividends
representing substantially all net investment income as follows:
<TABLE>
<CAPTION>
DIVIDENDS DIVIDENDS
DECLARED PAID
---------- ----------
<S> <C> <C>
AIM V.I. Capital Appreciation Fund................... annually annually
AIM V.I. Diversified Income Fund..................... annually annually
AIM V.I. Global Utilities Fund....................... annually annually
AIM V.I. Government Securities Fund.................. annually annually
AIM V.I. Growth Fund................................. annually annually
AIM V.I. Growth and Income Fund...................... annually annually
AIM V.I. International Equity Fund................... annually annually
AIM V.I. Money Market Fund........................... daily daily
AIM V.I. Value Fund.................................. annually annually
</TABLE>
Substantially all net realized capital gains, if any, are distributed on an
annual basis, except for the Money Market Fund, which may distribute net
realized short-term gains more frequently. Supplemental distributions may be
made in order to avoid the imposition of federal income tax at the Fund level.
All such distributions will be automatically reinvested in shares of the
Fund issuing the distribution at the net asset value determined on the
reinvestment date.
TAX MATTERS. Each series of shares of the Company is treated as a separate
association taxable as a corporation. Each Fund intends to qualify under the
Internal Revenue Code of 1986, as amended (the "Code"), as a regulated
investment company ("RIC") for each taxable year. As a RIC, a Fund will not be
subject to federal income tax to the extent it distributes to its shareholders
its net investment income and net capital gains.
In order to qualify as a regulated investment company, each Fund must
satisfy certain requirements concerning the nature of its income,
diversification of its assets and distribution of its income to shareholders.
In order to ensure that individuals holding the Contracts whose assets are
invested in a Fund will not be subject to federal income tax on distributions
made by the Fund prior to the receipt of payments under the Contracts, each
Fund intends to comply with additional requirements of Section 817(h) of the
Code relating to diversification of its assets. These requirements in the
aggregate may limit the ability of a Fund to engage in transactions involving
options, futures contracts, forward contracts and foreign currency and related
deposits.
Any Fund's transactions in non-equity options, forward contracts, futures
contracts and foreign currency will be subject to special tax rules, the
effect of which may be to accelerate income to the Fund, defer Fund losses,
cause adjustments in the holding periods of fund securities and convert short-
term capital losses into long-term capital losses. These losses could
therefore affect the amount, timing and character of distributions.
The holding of the foreign currencies and investments by a Fund in certain
"passive foreign investment companies" may be limited in order to avoid
imposition of a tax on such Fund.
Each Fund investing in foreign securities may be subject to foreign
withholding taxes on income from its investments. In any year in which more
than 50% in value of a Fund's total assets at the close of the taxable year
consists of securities of foreign corporations, the Fund may elect to treat
any foreign taxes paid by it as if they had been paid by its shareholders. The
insurance company segregated asset accounts holding Fund shares should
consider the impact of this election.
Holders of Contracts under which assets are invested in the Funds should
refer to the prospectus for the Contracts for information regarding the tax
aspects of ownership of such Contracts.
- -------------------------------------------------------------------------------
GENERAL INFORMATION
ORGANIZATION OF THE COMPANY. The Company was organized on January 22, 1993
as a Maryland corporation, and is registered with the Securities and Exchange
Commission as a diversified, open-end, series, management investment company.
The Company currently consists of nine separate portfolios (i.e., the Funds).
The authorized capital stock of the Company consists of 2,500,000,000 shares
of common stock with a par value of $.001 per share, of which 250,000,000
shares are classified AIM V.I. CAPITAL APPRECIATION FUND shares, 250,000,000
shares are classified AIM V.I. DIVERSIFIED INCOME FUND shares, 250,000,000
shares are classified AIM V.I. GLOBAL UTILITIES FUND shares, 250,000,000
18
<PAGE>
shares are classified AIM V.I. Government Securities Fund shares, 250,000,000
are classified AIM V.I. Growth Fund shares, 250,000,000 shares are classified
AIM V.I. Growth and Income Fund shares, 250,000,000 shares are classified AIM
V.I. International Equity Fund shares, 250,000,000 shares are classified AIM
V.I. Money Market Fund shares, 250,000,000 shares are classified AIM V.I.
Value Fund shares, and the balance of which are unclassified.
The shares of each Fund have equal rights with respect to voting, except
that (i) the holders of shares of all classes of a particular Fund voting
together will have the exclusive right to vote on matters (such as advisory
fees) pertaining solely to that Fund, and (ii) the holders of shares of a
particular class will have the exclusive right to vote on matters pertaining
to distribution plans, if any such plans are adopted, relating solely to such
class. Shareholders of the Funds do not have cumulative voting rights.
The Company understands that insurance company separate accounts owning
shares of the Funds will vote their shares in accordance with instructions
received from Contract owners, annuitants and beneficiaries. Fund shares held
by a registered separate account as to which no instructions have been
received will be voted for or against any proposition, or in abstention, in
the same proportion as the shares of that separate account as to which
instructions have been received. Fund shares held by a registered separate
account that are not attributable to Contracts will also be voted for or
against any proposition in the same proportion as the shares for which voting
instructions are received by that separate account. If an insurance company
determines, however, that it is permitted to vote any such shares of the Funds
in its own right, it may elect to do so, subject to the then current
interpretation of the 1940 Act and the rules thereunder.
Under Maryland law and the Company's By-Laws, the Company need not hold an
annual meeting of shareholders unless a meeting is required under the 1940 Act
to elect directors. Shareholders may remove directors from office, and a
meeting of shareholders may be called at the request of the holders of 10% or
more of the Company's outstanding shares.
There are no preemptive or conversion rights applicable to any of the
Company's shares. Each Fund's shares, when issued, are fully paid and non-
assessable.
Custodian and Transfer Agent. State Street Bank and Trust Company, 225
Franklin Street, Boston, MA 02110, serves as custodian for the Funds'
portfolio securities and cash and also serves as the transfer agent and as
dividend paying agent.
Legal Counsel. Freedman, Levy, Kroll & Simonds, Washington, D.C. has advised
the Company on certain federal securities law matters.
Other Information. This Prospectus sets forth basic information that
investors should know about the Funds prior to investing. A Statement of
Additional Information has been filed with the Securities and Exchange
Commission and is available upon request and without charge by writing or
calling AIM Distributors. This Prospectus omits certain information contained
in the registration statement filed with the Securities and Exchange
Commission. Copies of the registration statement, including items omitted from
this Prospectus, may be obtained from the Securities and Exchange Commission
by paying the charges prescribed under its rules and regulations.
19
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
APPENDIX A
- -------------------------------------------------------------------------------
DESCRIPTION OF CORPORATE BOND RATINGS
Investment grade debt securities are those rating categories indicated by an
asterisk (*).
Moody's Investors Service, Inc.'s corporate bond ratings are as follows:
*Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
*Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
*A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
*Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
Standard and Poor's Corporation classifications are as follows:
*AAA -- Debt rated 'AAA' has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
*AA -- Debt rated 'AA' has a very stong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
*A -- Debt rated 'A' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
*BBB -- Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher categories.
BB, B, CCC, CC, C -- Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation.
'BB' indicates the lowest degree of speculation and 'C' the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
A-1
<PAGE>
BB -- Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB --' rating.
B -- Debt rated 'B' has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The 'B' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'BB' or 'BB --' rating.
CCC -- Debt rated 'CCC' has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, finan cial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The 'CCC'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'B' or 'B --' rating.
CC -- The rating 'CC' is typically applied to debt subordinated to senior
debt that is assigned an actual or implied 'CCC' rating.
C -- The rating 'C' is typically applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC--' debt rating. The 'C' rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
C1 -- The rating 'C1' is reserved for income bonds on which no interest is
being paid.
D -- Debt rated 'D' is in payment default. The 'D' rating category is used
when interest payments or principal or principal payments are not made on the
date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The 'D'
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
Plus (+) or Minus (-): The rating from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
Duff & Phelps fixed-income ratings are as follows:
*AAA -- Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
*AA+, AA, AA- -- High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
*A+, A, A- -- Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
*BBB+, BBB, BBB- -- Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB- -- Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B- -- Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in quality rating within this category
or into a higher or lower quality rating grade.
CCC -- Well below investment grade securities. May be in default or have
considerable uncertainty as to timely payment of interest, preferred dividends
and/or principal. Protection factors are narrow and risk can be substantial
with unfavorable economic/industry conditions, and/or with unfavorable company
developments.
Fitch Investors Service, Inc.'s bond ratings are as follows:
*AAA -- Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
*AA -- Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated 'AAA'. Because bonds rated
in the 'AAA' and 'AA' categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated 'F-1+'.
A-2
<PAGE>
*A -- Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions
and circumstances than bonds with higher ratings.
*BBB -- Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore impair timely payment. The likelihood that the ratings of these
bonds will fall below investment grade is higher than for bonds with higher
ratings.
BB -- Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B -- Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued
timely payment of principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic activity
throughout the life of the issue.
CCC -- Bonds have certain identifiable characteristics which, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC -- Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
C -- Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D -- Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or reorganization of the
obligor. 'DDD' represents the highest potential for recovery on these bonds,
and 'D' represents the lowest potential for recovery.
Plus (+) Minus (-) -- Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus
and minus signs, however, are not used in the 'AAA', 'DDD', 'DD', or 'D'
categories.
A-3
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
APPENDIX B
- -------------------------------------------------------------------------------
DESCRIPTION OF OBLIGATIONS ISSUED OR GUARANTEED BY
U.S. GOVERNMENT AGENCIES OR INSTRUMENTALITIES
The following list includes certain common Agency Securities, as defined in
the Prospectus, and does not purport to be exhaustive.
Export-Import Bank Certificates -- are certificates of beneficial interest
and participation certificates issued and guaranteed by the Export-Import Bank
of the United States.
Federal Farm Credit System Notes and Bonds -- are bonds issued by a
cooperatively owned, nationwide system of banks and associations supervised by
the Farm Credit Administration, an independent agency of the U. S. Government.
Federal Home Loan Bank Notes and Bonds -- are notes and bonds issued by the
Federal Home Loan Bank System.
FHA Debentures -- are debentures issued by the Federal Housing Authority of
the U. S. Government.
FHA Insured Notes -- are bonds issued by the Farmers Home Administration of
the U. S. Government.
Federal Home Loan Mortgage Corporation ("FHLMC") Bonds -- are bonds issued
and guaranteed by FHLMC, a corporate instrumentality of the U.S. Government.
The Federal Home Loan Banks own all the capital stock of FHLMC, which obtains
its funds by selling mortgages (as well as participation interests in the
mortgages) and by borrowing funds through the issuance of debentures and
otherwise.
FHLMC Participation Certificates or "Freddie Macs" -- represent undivided
interests in specified groups of conventional mortgage loans (and/or
participation interests in those loans) underwritten and owned by FHLMC. At
least 95% of the aggregate principal balance of the whole mortgage loans
and/or participations in a group formed by FHLMC typically consists of single-
family mortgage loans, and not more than 5% consists of multi-family loans.
FHLMC Participation Certificates are not guaranteed by, and do not constitute
a debt or obligation of, the U.S. Government or any Federal Home Loan Bank.
FHLMC Participation Certificates are issued in fully registered form only, in
original unpaid principal balances of $25,000, $100,000, $200,000, $500,000,
$1 million and $5 million. FHLMC guarantees to each registered holder of a
Participation Certificate, to the extent of such holder's pro rata share (i)
the timely payment of interest accruing at the applicable certificate rate on
the unpaid principal balance outstanding on the mortgage loans, and (ii)
collection of all principal on the mortgage loans without any offset or
deductions. Pursuant to these guaranties, FHLMC indemnifies holders of
Participation Certificates against any reduction in principal by reason of
charges for property repairs, maintenance, and foreclosure.
Federal National Mortgage Association ("FNMA") Bonds -- are bonds issued and
guaranteed by FNMA, a federally chartered and privately-owned corporation.
FNMA Pass-Through Certificates or "Fannie Maes" are mortgage pass-through
certificates issued and guaranteed by FNMA. FNMA Certificates represent a
fractional undivided ownership interest in a pool of mortgage loans either
provided from FNMA's own portfolio or purchased from primary lenders. The
mortgage loans included in the pool are conventional, insured by the Federal
Housing Administration or guaranteed by the Veterans Administration. FNMA
Certificates are not backed by, nor entitled to, the full faith and credit of
the U.S. Government.
Loans not provided from FNMA's own portfolio are purchased only from primary
lenders that satisfy certain criteria developed by FNMA, including depth of
mortgage origination experience, servicing experience and financial capacity.
FNMA may purchase an entire loan pool from a single lender, and issue
Certificates backed by that loan pool alone, or may package a pool made up of
loans purchased from various lenders.
Various types of mortgage loans, and loans with varying interest rates, may
be included in a single pool, although each pool will consist of mortgage
loans related to one-family or two-to-four family residential properties.
Substantially all FNMA mortgage pools currently consist of fixed interest rate
and growing equity mortgage loans, although FNMA mortgage pools may also
consist of adjustable interest rate mortgage loans or other types of mortgage
loans. Each mortgage loan must conform to FNMA's published requirements or
guidelines with respect to maximum principal amount, loan-to-value ratio, loan
term, underwriting standards and insurance coverage.
All mortgage loans are held by FNMA as trustee pursuant to a trust indenture
for the benefit of Certificate holders. The trust indenture gives FNMA
responsibility for servicing and administering the loans in a pool. FNMA
contracts with the lenders or other servicing institutions to perform all
services and duties customary to the servicing of mortgages, as well as duties
specifically prescribed by FNMA, all under FNMA supervision. FNMA may remove
service providers for cause.
The pass-through rate on FNMA Certificates is the lowest annual interest
rate borne by an underlying mortgage loan in the pool, less a fee to FNMA as
compensation for servicing and for FNMA's guarantee. Lenders servicing the
underlying mortgage loans receive as compensation a portion of the fee paid to
FNMA, the excess yields on pooled loans with coupon rates above the lowest
rate borne by any mortgage loan in the pool and certain other amounts
collected, such as late charges.
B-1
<PAGE>
The minimum size of a FNMA pool is $1 million of mortgage loans. Registered
holders purchase Certificates in amounts not less than $25,000.
FNMA Certificates are marketed by the servicing lender banks, usually
through securities dealers. The lender of a single lender pool typically
markets all Certificates based on that pool, and lenders of multiple lender
pools market Certificates based on a pro rata interest in the aggregate pool.
The amount of FNMA Certificates currently outstanding is limited.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION ("GNMA") CERTIFICATES OR "GINNIE
MAES" -- are mortgage-backed securities which represent a partial ownership
interest in a pool of mortgage loans issued by lenders such as mortgage
bankers, commercial banks and savings and loan associations. Each mortgage
loan included in the pool is either insured by the Federal Housing
Administration or guaranteed by the Veterans Administration. A "pool" or group
of such mortgages is assembled, and, after being approved by GNMA, is offered
to investors through securities dealers. GNMA is a U.S. Government corporation
within the Department of Housing and Urban Development.
GNMA Certificates differ from bonds in that the principal is paid back
monthly by the borrower over the term of the loan rather than returned in a
lump sum at maturity. GNMA Certificates are called "modified pass-through"
securities because they entitle the holder to receive its proportionate share
of all interest and principal payments owed on the mortgage pool, net of fees
paid to the issuer and GNMA, regardless of whether or not the mortgagor
actually makes the payment. Payment of principal of and interest on GNMA
Certificates of the "modified pass-through" type is guaranteed by GNMA and
backed by the full faith and credit of the U.S. Government.
The average life of a GNMA Certificate is likely to be substantially less
than the original maturity of the mortgage pools underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return on the greater part of principal invested far in advance
of the maturity of the mortgages in the pool. Foreclosures impose little risk
to principal investment because of the GNMA guarantee.
As the prepayment rates of individual mortgage pools will vary widely, it is
not possible to accurately predict the average life of a particular issue of
GNMA Certificates. However, statistics published by the FHA indicate that the
average life of a single-family dwelling mortgage with 25- to 30-year
maturity, the type of mortgage which backs the vast majority of GNMA
Certificates, is approximately 12 years. It is therefore customary practice to
treat GNMA Certificates as 30-year mortgage-backed securities which prepay
fully in the twelfth year.
As a consequence of the fees paid to GNMA and the issuer of GNMA
Certificates, the coupon rate of interest of GNMA Certificates is lower than
the interest paid on the VA-guaranteed or FHA-insured mortgages underlying the
Certificates.
The yield which will be earned on GNMA Certificates may vary from their
coupon rates for the following reasons: (i) Certificates may be issued at a
premium or discount, rather than at par; (ii) Certificates may trade in the
secondary market at a premium or discount after issuance; (iii) interest is
earned and compounded monthly which has the effect of raising the effective
yield earned on the Certificates; and (iv) the actual yield of each
Certificate is affected by the prepayment of mortgages included in the
mortgage pool underlying the Certificates and the rate at which principal so
prepaid is reinvested. In addition, prepayment of mortgages included in the
mortgage pool underlying a GNMA Certificate purchased at a premium may result
in a loss to the Fund.
Due to the large amount of GNMA Certificates outstanding and active
participation in the secondary market by securities dealers and investors,
GNMA Certificates are highly liquid instruments. Prices of GNMA Certificates
are readily available from securities dealers and depend on, among other
things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate.
GENERAL SERVICES ADMINISTRATION ("GSA") PARTICIPATION CERTIFICATES -- are
participation certificates issued by the General Services Administration of
the U.S. Government.
MARITIME ADMINISTRATION BONDS -- are bonds issued and provided by the
Department of Transportation of the U.S. Government.
NEW COMMUNITIES DEBENTURES -- are debentures issued in accordance with the
provisions of Title IV of the Housing and Urban Development Act of 1968, as
supplemented and extended by Title VII of the Housing and Urban Development
Act of 1970, the payment of which is guaranteed by the U.S. Government.
PUBLIC HOUSING NOTES AND BONDS -- are short-term project notes and long-
term bonds issued by public housing and urban renewal agencies in connection
with programs administered by the Department of Housing and Urban Development
of the U.S. Government, the payment of which is secured by the U.S.
Government.
SBA DEBENTURES -- are debentures fully guaranteed as to principal and
interest by the Small Business Administration of the U.S. Government.
SLMA DEBENTURES -- are debentures backed by the Student Loan Marketing
Association.
TITLE XI BONDS -- are bonds issued in accordance with the provisions of
Title XI of the Merchant Marine Act of 1936, as amended, the payment of which
is guaranteed by the U.S. Government.
WASHINGTON METROPOLITAN AREA TRANSIT AUTHORITY BONDS -- are bonds issued by
the Washington Metropolitan Area Transit Authority and are guaranteed by the
Secretary of Transportation of the U.S. Government.
B-2
<PAGE>
APPENDIX C
- -------------------------------------------------------------------------------
DESCRIPTION OF MONEY MARKET OBLIGATIONS
The following list does not purport to be an exhaustive list of all Money
Market Obligations, and the Funds reserve the right to invest in Money Market
Obligations other than those listed below:
1. GOVERNMENT OBLIGATIONS.
U.S. Government Direct Obligations -- Bills, notes, and bonds issued by the
U.S. Treasury.
U.S. Government Agencies Securities -- Certain federal agencies such as the
Government National Mortgage Association have been established as
instrumentalities of the U.S. Government to supervise and finance certain
types of activities. Issues of these agencies, while not direct obligations of
the U.S. Government, are either backed by the full faith and credit of the
United States or are guaranteed by the Treasury or supported by the issuing
agencies' right to borrow from the Treasury.
Foreign Government Obligations -- These are U.S. dollar denominated
obligations issued or guaranteed by one or more foreign governments or any of
their political subdivisions, agencies or instrumentalities that are
determined by the Fund's investment advisor to be of comparable quality to the
other obligations in which the Fund may invest. Such securities also include
debt obligations of supranational entities. Supranational entities include
international organizations designated or supported by governmental entities
to promote economic reconstruction or development and international banking
institutions and related government agencies. Examples include the
International Bank for Reconstruction and Development (the World Bank), the
European Coal and Steel Community, the Asian Development Bank and the
InterAmerican Development Bank. The percentage of the Fund's assets invested
in securities issued by foreign governments will vary depending on the
relative yields of such securities, the economic and financial markets of the
countries in which the investments are made and the interest rate climate of
such countries.
2. BANK INSTRUMENTS.
Bankers' Acceptances -- A bill of exchange or time draft drawn on and
accepted by a commercial bank. It is used by corporations to finance the
shipment and storage of goods and to furnish dollar exchange. Maturities are
generally six months or less.
Certificates of Deposit -- A negotiable interest-bearing instrument with a
specific maturity. Certificates of deposit are issued by banks and savings and
loan institutions in exchange for the deposit of funds and normally can be
traded in the secondary market, prior to maturity.
Time Deposits -- A non-negotiable receipt issued by a bank in exchange for
the deposit of funds. Like a certificate of deposit, it earns a specified rate
of interest over a definite period of time; however, it cannot be traded in
the secondary market.
Eurodollar Obligations -- A Eurodollar obligation is a U.S. dollar-
denominated obligation issued by a foreign branch of a domestic bank.
Yankee Dollar Obligations -- A Yankee dollar obligation is a U.S. dollar-
denominated obligation issued by a domestic branch of a foreign bank.
3. COMMERCIAL INSTRUMENTS.
Commercial Paper -- The term used to designate unsecured short-term
promissory notes issued by corporations and other entities. Maturities on
these issues vary from a few days to nine months.
Variable Rate Master Demand Notes -- Variable rate master demand notes are
unsecured demand notes that permit investment of fluctuating amounts of money
at variable rates of interest pursuant to arrangements with issuers who meet
the foregoing quality criteria as discussed in the Statement of Additional
Information under "Investment Programs." The interest rate on a variable
amount master demand note is periodically redetermined according to a
prescribed formula. Although there is no secondary market in master demand
notes, the payee may demand payment of the principal amount of the note on
relatively short notice. All variable rate master demand notes acquired by the
Money Market Fund will be payable within a prescribed notice period not to
exceed seven days.
4. REPURCHASE AGREEMENTS -- A repurchase agreement is a contractual
undertaking whereby the seller of securities (limited to U.S. Government
securities, including securities issued or guaranteed by the U.S. Treasury or
the various agencies and instrumentalities of the U.S. Government) agrees to
repurchase the securities at a specified price on a future date determined by
negotiations.
C-1
