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AIM VARIABLE INSURANCE
FUNDS, INC.
AIM V.I. GROWTH AND INCOME FUND
AIM V.I. Growth and Income Fund (the "Fund") is one of nine investment
portfolios comprising series of AIM Variable Insurance Funds, Inc. (the
"Company"), an open-end, series, management investment company. Shares of the
Fund are currently offered only to insurance company separate accounts to fund
the benefits of variable annuity contracts and variable life insurance
policies. Shares of the Fund may be offered, in the future, to certain pension
or retirement plans. The Fund is a diversified portfolio which seeks to provide
growth of capital, with current income as a secondary objective. The Fund seeks
to achieve it by investing primarily in dividend paying common stocks which
have prospects for both growth of capital and dividend income. 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.
This prospectus sets forth basic information about the Fund that prospective
investors should know before investing. It should be read and retained for
future reference. A Statement of Additional Information dated May 1, 1996, 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.
PROSPECTUS
May 1, 1996
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TABLE OF CONTENTS
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About the Fund 3p
Financial Highlights 3p
Performance 4p
Investment Objective and Programs 5p
Risk Factors 11p
Management 12p
Purchase and Redemption of Shares 14p
Determination of Net Asset Value 15p
Dividends, Distributions and Tax Matters 16p
General Information 17p
Appendix A 19p
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ABOUT THE FUND
The Fund, 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. International Equity Fund, AIM V.I. Money Market Fund and
AIM V.I. Value Fund (collectively, the "Funds") 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"). The Fund has its own
investment objective and policies designed to meet specific investment goals,
operates as a diversified, open-end management investment company and expects
to be treated as a regulated investment company for federal income tax
purposes.
The Fund invests in securities of different issuers and industry
classifications in an attempt to spread and reduce the risks inherent in all
investing. The Fund continuously offers new shares for sale to separate
accounts of participating life insurance companies ("Participating Insurance
Companies"), 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
the Fund, continuously reviews and, from time to time, changes the portfolio
holdings of the Fund in pursuit of the Fund's objective.
The AIM Family of Funds, The AIM Family of Funds and Design (i.e., the AIM
logo), AIM and Design, AIM LINK and AIM Institutional Funds are registered
service marks of A I M Management Group Inc.
FINANCIAL HIGHLIGHTS
Shown below are the financial highlights for a share outstanding of the Fund
for the eleven months ended December 31, 1995 and the period May 2, 1994 (date
operations commenced) through January 31, 1995. 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 Fund is contained in the
Fund's annual report to shareholders, which may be obtained without charge upon
request.
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DECEMBER 31, JANUARY 31,
1995 1995
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Net asset value, beginning of period $ 9.98 $10.00
Income from investment operations:
Net investment income 0.14 0.11
Net gains (losses) on securities (both
realized and unrealized) 3.11 (0.02)
Total from investment operations 3.25 0.09
Less distributions:
Dividends from net investment income (0.14) (0.11)
Distributions from capital gains (0.41) --
Total distributions (0.55) (0.11)
Net asset value, end of period $ 12.68 $ 9.98
Total return(a) 32.65% 0.90%
Ratios/supplemental data:
Net assets, end of period (000s omitted) $38,567 $7,380
Ratio of expenses to average net assets 0.78%(b) 1.07%(c)(d)
Ratio of net investment income to average net
assets 1.92%(b) 1.95%(c)(d)
Portfolio turnover rate 145% 96%
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(a) Total return is not annualized.
(b) Ratios for annualized and based on average net assets of $19,135,889.
Annualized ratios of expenses and net investment income to average net
assets prior to waiver of advisory fees are 1.71% and 1.53%, respectively.
(c) Annualized.
(d) Annualized ratios of expenses and net investment income to average net
assets prior to waiver of advisory fees are 1.72% and 1.30%, respectively.
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PERFORMANCE
The 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 Fund.
The 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, the 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 the Fund over a specified period. It
is a function of the type and quality of the Fund's investments, their maturity
and its operating expense ratio. A shareholder's investment in the Fund is not
insured or guaranteed. These factors should be carefully considered by the
investor before making an investment in the 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 the Fund. Such a practice will
have the effect of increasing the Fund's yield and total return.
The performance of the Fund will vary from time to time and past results are
not necessarily indicative of future results. The Fund's performance is a
function of its portfolio management in selecting the type and quality of
portfolio securities and is affected by operating expenses of the Fund and
market conditions. Quotations of the Fund's performance will not reflect
charges levied at the separate account level.
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INVESTMENT OBJECTIVE AND PROGRAMS
Set forth in this section is a statement of the Fund's investment objective
along with a description of its investment policies, strategies and practices.
The investment objective of the 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 the Fund's outstanding shares (within the meaning of the 1940
Act). The 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. The 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 the Fund should
recognize that there are risks in the ownership of any security and that no
assurance can be given that the Fund will achieve its investment objective.
INVESTMENT OBJECTIVE. 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 generally investing at least 65% of its net
assets in stocks of companies believed by management to have the potential for
above average growth in revenues and earnings. The Fund generally will also
invest at least 80% of its net assets in securities which pay income to the
Fund.
CERTAIN INVESTMENT STRATEGIES AND TECHNIQUES. The Fund has the flexibility to
invest, to the extent described below, in a variety of instruments designed to
enhance its investment capabilities. The Fund may: (1) invest in money market
obligations, foreign securities (including ADRs and EDRs), repurchase
agreements, reverse repurchase agreements, illiquid securities and Rule 144A
securities; (2) purchase or sell securities on a delayed delivery or when-
issued basis and may borrow money; and (3) 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.
The 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. The 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. Bankers' acceptances, certificates of deposit,
repurchase agreements, time deposits and commercial paper, U.S. Government
direct obligations, including U.S. Treasury obligations and repurchase
agreements secured by such obligations, and U.S. Government agencies'
securities are collectively referred to as "Money Market Obligations," and are
briefly described in Appendix A to this Prospectus and are more fully described
in the Statement of Additional Information. When deemed appropriate for
temporary or defensive purposes, the Fund may hold cash or cash equivalent
Money Market Obligations. Although the Fund is not 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.
Foreign Securities. To the extent consistent with its investment objective, the
Fund may invest in foreign securities. It is not anticipated that such foreign
securities will constitute more than 20% of the value of the total assets of
the Fund.
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ADRs and EDRs. To the extent consistent with its investment objective, the Fund
may also invest in securities which are in the form of American Depository
Receipts ("ADRs"), European Depository Receipts, ("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.
Repurchase Agreements. The Fund 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), the 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 Fund will 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 Fund 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. The Fund may enter into reverse repurchase agreements
in amounts not exceeding 33-1/3% of the value of its 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. The Fund may enter into
delayed delivery agreements and may purchase securities on a "when-issued"
basis.
Delayed delivery agreements are commitments by the 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 advisor
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.
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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 Fund will only make commitments to
purchase such debt securities with the intention of actually acquiring the
securities, but the Fund may sell these securities before the settlement date
if it is deemed advisable.
If the 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 the 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 the Fund if, as a result, more than 25%
of the Fund's net assets would become so committed.
Borrowing. The Fund may borrow money to a limited extent from banks (including
the Fund's custodian bank) for temporary or emergency purposes subject to the
limitations under the 1940 Act. The Fund will restrict borrowings and reverse
repurchase agreements to an aggregate of 33-1/3% of the Fund's total assets at
the time of the transaction. The Fund will not purchase additional securities
when any borrowings from banks exceed 5% of the Fund's total assets.
Illiquid Securities. The Fund will not invest more than 15% of its total assets
in illiquid securities, including restricted securities which are illiquid.
Rule 144A Securities. The Fund 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
Fund may 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.
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Lending of Portfolio Securities. The Fund may, from time to time, lend
securities from its portfolio, with a value not exceeding 33-1/3% of its 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 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. The 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 Fund 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 Fund's total assets at any given time.
Options. The 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.
The Fund may write call options on securities or securities indexes for the
purpose of increasing its return (through receipt of premiums) or to provide a
partial hedge against a decline in the value of its portfolio securities or
both. The Fund 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 the 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.
The Fund 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.
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The Fund 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 the 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.
The 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 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 Fund 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 Fund's total assets. The Fund will not purchase options if,
at the time of the investment, the aggregate premiums paid for outstanding
options will exceed 5% of the Fund's total assets.
Futures and Forward Contracts. The 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 its assets or assets it intends to acquire. In addition,
the Fund may purchase and sell stock index futures contracts to hedge the
equity portion of its assets or equity assets it intends to acquire against
changes in market conditions as distinguished from stock-specific risk. The
Fund 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 Fund is authorized to
invest in futures contracts and related options with respect to non-U.S.
instruments, it will limit such investments to those which have been approved
by the Commodity Futures Trading Commission ("CFTC") for investment by U.S.
investors. The Fund may enter into futures contracts and buy and sell related
options, provided that the futures contracts and related options
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investments are made for "bona fide hedging" purposes, as defined under CFTC
regulations. When the 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. No more than 5% of the Fund's total assets will be
committed to initial margin deposits required pursuant to futures contracts.
Percentage investment limitations on the Fund's investment in options on
futures contracts are set forth above under "Options."
To the extent that the Fund invests in securities denominated in foreign
currencies, 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, the Fund may enter into futures contracts on
foreign currencies (and related options) and may 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 its currency exposure, the Fund may buy and sell currencies either
in the spot (cash) market or in the forward market (through forward contracts
generally expiring within one year). The Fund may 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 the Fund purchases a
security denominated in a foreign currency for settlement in the near future,
it may immediately purchase in the forward market the currency needed to pay
for and settle the purchase. By entering into a forward contract with respect
to the specific purchase or sale of a security denominated in a foreign
currency, the Fund can secure an exchange rate between the trade and settlement
dates for that purchase or sale transaction. This practice is sometimes
referred to as "transaction hedging." Position hedging is the purchase or sale
of foreign currency with respect to portfolio security positions denominated or
quoted in a foreign currency. 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 Fund will commit no more than its 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, the 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. The Fund 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 the
Fund's investment objective, without regard to the impact on the portfolio
turnover rate. The Fund's historical portfolio turnover rates are included in
the Financial Highlights table above. A higher rate of portfolio turnover may
result in higher transaction costs, including brokerage commissions. Also, to
the extent that higher portfolio turnover results in a higher rate of net
realized capital gains to the Fund, the portion of the Fund's distributions
constituting taxable capital gains may increase. See "Dividends, Distributions
and Tax Matters."
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<PAGE>
RISK FACTORS
Investors should consider carefully the following special factors before
investing in the Fund.
FOREIGN SECURITIES. Investments by the Fund in foreign securities whether
denominated in U.S. dollars or foreign currencies, may entail the following
risks set forth below. Investments by the 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 Fund as discussed in the previous section.
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<PAGE>
MANAGEMENT
The overall management of the business and affairs of the Fund is vested with
the Company's Board of Directors. The Board of Directors approves all
significant agreements between the Fund and persons or companies furnishing
services to the 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 the
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 the Fund pursuant
to a master investment advisory agreement (the "Advisory Agreement"), dated
October 18, 1993, as amended April 28, 1994. AIM was organized in 1976, and,
together with its affiliates, manages or advises 43 investment company
portfolios (including the Fund). As of April 1, 1996, the total assets of the
mutual funds advised or managed by AIM and its affiliates were approximately
$48.2 billion. AIM is a wholly-owned subsidiary of AIM Management, a holding
company.
Under the terms of the Fund's Advisory Agreement, AIM supervises all aspects of
the 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 the 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 the Fund dated October 18, 1993, as
amended April 28, 1994, AIM provides the services of the Company's principal
financial 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 the 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 Fund and other funds
advised by AIM in selecting broker-dealers to effect portfolio transactions on
behalf of the Fund.
PORTFOLIO MANAGEMENT. AIM uses a team approach and a disciplined investment
process in providing investment advisory services to all its accounts,
including the Fund. AIM's investment staff consists of 85 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 Fund 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:
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<PAGE>
Lanny H. Sachnowitz and Joel E. Dobberpuhl are primarily responsible for day-
to-day management of the Fund's portfolio securities. Mr. Sachnowitz is Vice
president of A I M Capital Management, Inc. ("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 7
years of experience as an investment professional and has been associated with
AIM and/or its affiliates since 1990.
ADVISORY FEES. As compensation for its services AIM is paid an investment
advisory fee, which is calculated for the Fund at an annual rate of the Fund's
average daily net assets. For the eleven months ended December 31, 1995,
compensation paid to AIM pursuant to the Advisory Agreement and the total
expenses of the Fund (annualized) stated as a percentage of the 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>
0.26% 0.78% 0.65% 1.17%
</TABLE>
AIM may from time to time voluntarily waive or reduce its fees. Fee waivers or
reductions, other than those contained in the Advisory Agreement, may be
modified or terminated at any time.
ADMINISTRATOR. The Company has entered into a master administrative services
agreement (the "Administrative Services Agreement") dated October 18, 1993, as
amended April 28, 1994, with AIM, pursuant to which AIM has agreed to provide
certain accounting and other administrative services to the Fund, including the
services of a principal financial officer of the Fund and related staff. As
compensation to AIM for its services under the Administrative Services
Agreement, the Fund reimburses AIM for expenses incurred by AIM or its
affiliates in connection with such services.
AIM received reimbursement of administrative services costs from the Company of
0.18% (annualized) on behalf of the Fund, pursuant to the Administrative
Services Agreement for the eleven months ended December 31, 1995.
DISTRIBUTOR. The Company has entered into a master distribution agreement (the
"Distribution Agreement"), dated October 18, 1993, as amended April 28, 1994,
with AIM Distributors, a registered broker-dealer and a wholly-owned subsidiary
of AIM, to act as the distributor of the shares of the Fund. 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 Fund to insurance company
separate accounts.
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<PAGE>
PURCHASE AND REDEMPTION OF SHARES
The Company offers the shares of the Fund, on a continuous basis, to both
registered and unregistered separate accounts of affiliated and unaffiliated
life insurance companies to fund variable annuity contracts (the "Contracts")
and variable life insurance policies (the "Policies"). Each separate account
contains divisions, and one of the divisions corresponds to the Fund. Net
purchase payments under the Contracts and Policies are placed in one or more of
the divisions of the relevant separate account and the assets of the division
that corresponds to the Fund are invested in the shares of the Fund. Each
separate account purchases and redeems shares of the Fund for its respective
division at net asset value without sales or redemption charges. Currently more
than one insurance company separate account invests in the Fund.
For each day on which the Fund's net asset value is calculated, each separate
account transmits to the Company any orders to purchase or redeem shares of the
Fund based on the purchase payments, redemption (surrender) requests, and
transfer requests from Policy or Contract owners, annuitants and beneficiaries
which the separate account processes on that day. The separate accounts
purchase and redeem shares of the Fund at the Fund's net asset value per share
calculated as of the previous business day. Any orders to purchase or redeem
Fund shares that are not based on actions by Policy or 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.
The Company, in the future, may offer the shares of the Fund to certain pension
and retirement plans ("Plans") qualified under the Internal Revenue Code. The
relationships of Plans and Plan participants to the Fund would be subject, in
part, to the provisions of the individual plans and applicable law.
Accordingly, such relationships could be different from those described in this
Prospectus for separate accounts and owners of Contracts and Policies, in such
areas, for example, as tax matters and voting privileges. The Company does not
foresee any disadvantage to purchasers of Contracts or Policies arising out of
these arrangements. Nevertheless, differences in treatment under tax and other
laws, as well as other considerations, could cause the interests of various
purchasers of Contracts and Policies (and the Interests of any Plan
participants) to conflict. For example, violation of the federal tax laws by
one separate account investing in the Company could cause the Contracts and
Policies funded through another separate account to lose their tax-deferred
status, unless remedial action were taken. At the same time, the Company and
the separate accounts (and any Plans investing in the Company) are subject to
conditions imposed by the Securities and Exchange Commission and designed to
prevent or remedy any conflict of interest. In this connection, the Board of
Directors has the obligation to monitor events for any material irreconcilable
conflict that may possibly arise and to determine what action, if any, should
be taken to remedy or eliminate to conflict.
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<PAGE>
DETERMINATION OF NET ASSET VALUE
The net asset value per share (or share price) of the Fund will be determined
as of the close of regular trading of the New York Stock Exchange (generally
4:00 p.m. Eastern Time) on each "business day of the Fund." For purposes of
determining net asset value per share, futures and options contracts generally
will be valued 15 minutes after the close of trading of the New York Stock
Exchange. 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. The net asset
value per share of the 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 the Fund. The determination of the
Fund's net asset value per share is made in accordance with generally accepted
accounting principles.
VALUATION OF INVESTMENTS OF THE FUND. Among other items, the 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.
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 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.
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<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAX MATTERS
DIVIDENDS AND DISTRIBUTIONS. The Fund declares and distributes dividends
representing substantially all net investment income annually. Substantially
all net realized capital gains, if any, are distributed on an annual basis. All
such distributions will be automatically reinvested, at the election of
Participating Insurance Companies in shares of the Fund 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. The 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, the 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, the 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 or Policies whose assets are invested in
the Fund will not be subject to federal income tax on distributions made by the
Fund prior to the receipt of payments under the Contracts or Policies, the Fund
intends to comply with additional requirements of Section 817(h) of the Code
relating to both diversification of its assets and eligibility of an investor
to be its shareholder. Certain of these requirements in the aggregate may limit
the ability of the Fund to engage in transactions involving options, futures
contracts, forward contracts and foreign currency and related deposits.
The 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 the Fund in certain
"passive foreign investment companies" may be limited in order to avoid
imposition of a tax on the Fund.
The Fund may be subject to foreign withholding taxes on income from its
investments in foreign securities. In any year in which more than 50% in value
of the 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 and Policies under which assets are invested in the Fund
should refer to the prospectus for the Contracts and Policies for information
regarding the tax aspects of ownership of such Contracts and Policies.
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<PAGE>
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.
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 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 Fund do not have cumulative voting rights.
The Company understands that insurance company separate accounts owning shares
of the Fund will vote their shares in accordance with instructions received
from Policy or 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 Policies or 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 Fund 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. The Fund's shares, when issued, are fully paid and non-assessable.
As of April 1, 1996, Connecticut General Life Insurance Company owned more than
25 percent of the shares of the Fund and, therefore, could be deemed to
"control" the Fund, as that term is defined in the Investment Company Act of
1940. As explained above, however, insurance company separate accounts vote
their shares of the Fund in accordance with instructions received from Contract
owners, annuitants and beneficiaries and, in this sense, would not "control"
the Fund.
CUSTODIAN AND TRANSFER AGENT. State Street Bank and Trust Company, 225 Franklin
Street, Boston, MA 02110, serves as custodian for the Fund's 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.
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<PAGE>
OTHER INFORMATION. This Prospectus sets forth basic information that investors
should know about the Fund 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.
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<PAGE>
APPENDIX A
DESCRIPTION OF MONEY MARKET OBLIGATIONS
The following list does not purport to be an exhaustive list of all Money
Market Obligations, and the Fund reserves 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.
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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 rate
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.
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.
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