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[AIM LOGO APPEARS HERE]
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. DIVERSIFIED INCOME FUND
AIM V.I. Diversified Income 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 sold only to insurance company
separate accounts to fund the benefits of variable annuity
contracts and variable life insurance contracts. The Fund is a
diversified portfolio. The Fund's investment objective is to seek
to achieve a high level of current income. The Fund will seek to
achieve its 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. 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.
PROSPECTUS
UP TO 50% OF THE SECURITIES IN WHICH THE AIM V.I. DIVERSIFIED
May 1, 1995 INCOME FUND INVESTS MAY BE SECURITIES RATED IN THE LOWER RATING
as reprinted CATEGORIES OF NATIONALLY RECOGNIZED STATISTICAL RATING
April 1, 1996 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 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, 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 FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK, AND THE FUND'S 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 FUND INVOLVE INVESTMENT RISKS,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
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TABLE OF CONTENTS
<TABLE>
<S> <C> <S> <C>
About the Fund.......................... 2 Determination of Net Asset Value.................. 11
Financial Highlights.................... 2 Dividends, Distributions and Tax Matters.......... 11
Performance............................. 3 General Information............................... 12
Investment Objective and Programs....... 3 Appendix A........................................ A-1
Risk Factors............................ 8 Appendix B........................................ B-1
Management.............................. 9 Appendix C........................................ C-1
Purchase and Redemption of Shares....... 11
</TABLE>
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ABOUT THE FUND
The Fund, AIM V.I. Capital Appreciation Fund, AIM V.I. Global Utilities
Fund, AIM V.I. Government Securities Fund, AIM V.I. Growth Fund, AIM V.I.
Growth & Income Fund, AIM V.I. International Equity Fund, AIM V.I. Money
Market Fund and AIM V.I. 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"). 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 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 the Fund,
continuously reviews and, from time to time, changes the portfolio holdings of
the Fund in pursuit of the Fund's objective.
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FINANCIAL HIGHLIGHTS
Shown below are the financial highlights for a share outstanding of the Fund
for the period May 5, 1993 (date operations commenced) through January 31,
1994 and for the fiscal year ended 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.
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1995 1994
----------- -----------
<S> <C> <C>
Net asset value, beginning of period................... $ 10.46 $ 10.00
Income from investment operations:
Net investment income................................. 0.76 0.54
Net gains (losses) on securities (realized and
unrealized).......................................... (1.42) 0.29
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Total from investment operations..................... (0.66) 0.83
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Less distributions:
Dividends from net investment income.................. (0.68) (0.35)
Distributions from net realized capital gains......... -- (0.02)
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Total distributions.................................. (0.68) (0.37)
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Net asset value, end of period......................... $ 9.12 $ 10.46
======= =======
Total return(a)........................................ (6.35)% 8.33%
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Ratios/supplemental data:
Net assets, end of period (000s omitted)............... $25,271 $14,530
======= =======
Ratio of expenses to average net assets(b)............. 0.91% 1.05%
======= =======
Ratio of net investment income to average net
assets(b)............................................. 8.07% 6.78%
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Portfolio turnover rate................................ 100% 57%
======= =======
</TABLE>
(a) Total returns for less than one year 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
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<S> <C>
$20,514,857 $6,276,018
</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>
1.03% 7.95% 1.69% 6.14%
</TABLE>
2
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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 the investment policies, strategies and practices
of the Fund. 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 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.
3
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During the fiscal year ended January 31, 1995, the percentage of average
annual assets of the Fund 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%
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Total Average Annual Assets.................................. 100%
</TABLE>
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) invest in U.S. Government Agency Mortgage-Backed Securities,
(3) purchase or sell securities on a delayed delivery or when-issued basis and
may borrow money, (4) 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.
In addition to the Money Market Obligations described above, as a temporary
or defensive measure, and without regard to its investment objective, AIM may
invest all or substantially all of the assets of the Fund in cash or Money
Market Obligations, including repurchase agreements, denominated in foreign
currencies.
U.S. Government Agency Mortgage-Backed Securities. The 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 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.
4
<PAGE>
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 50% of the value of the total
assets of the Fund.
The 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 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 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 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.
ADRs and EDRs. To the extent consistent with its investment objective, the
Fund 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.
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), 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 Fund 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 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 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 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.
5
<PAGE>
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.
Dollar Roll Transactions. In order to enhance portfolio returns and manage
prepayment risks, the 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
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. 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, 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. 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.
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.
6
<PAGE>
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.
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.
7
<PAGE>
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
with regard to market risk 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 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.
To the extent that the Fund invests in securities denominated in foreign
currencies (which is a significant portion of securities held by the 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, 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.
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RISK FACTORS
Investors should consider carefully the following special factors before
investing in the Fund.
NON-INVESTMENT GRADE DEBT SECURITIES. The Fund seeks to meet its investment
objective 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 Fund, 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 the Fund's ability to fully recover principal or to receive
payments when senior securities are subject to a default.
8
<PAGE>
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 the Fund's securities, and judgment plays a more important
role in determining such valuations. Increased illiquidity in the junk bond
market also may affect the Fund's ability to dispose of such securities at
desirable prices.
In the event the 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.
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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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 new 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 37 investment company
portfolios (including the Fund). 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.
9
<PAGE>
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 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 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:
Robert G. Alley, John L. Pessarra and Carolyn L. Gibbs are responsible for
day-to-day management of the Fund's portfolio securities. Mr. Alley is Senior
Vice President of A I M Capital Management, Inc. ("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.
ADVISORY FEES. As compensation for its services AIM is paid an investment
advisory fee, which is calculated separately for the Fund at an annual rate of
the Fund's average daily net assets. For the fiscal year ended January 31,
1995, compensation paid to AIM pursuant to the Advisory Agreement and the
total expenses of the Fund 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>
0.48% 0.91% 0.60% 1.03%
</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 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 0.17% of the Fund's average net assets on behalf of the Fund, pursuant to
the Administrative Services Agreement for the fiscal year ended January 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.
10
<PAGE>
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PURCHASE AND REDEMPTION OF SHARES
The shares of the Fund 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") 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 is authorized to invest 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 which 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.
Shares of the Fund are offered to insurance company separate accounts to
fund 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.
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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 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.
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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.
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. 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.
11
<PAGE>
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 diversification of its assets. 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 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 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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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.
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.
12
<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.
13
<PAGE>
APPENDIX A
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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 weak-ened 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.
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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, financial 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+".
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*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
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APPENDIX B
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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.
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<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.
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<PAGE>
APPENDIX C
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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.
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. 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.
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