<PAGE> 1
STATEMENT OF
ADDITIONAL INFORMATION
A I M V A R I A B L E I N S U R A N C E F U N D S, I N C.
11 GREENWAY PLAZA
SUITE 100
HOUSTON, TX 77046-1173
(713) 626-1919
AIM V.I. AGGRESSIVE GROWTH FUND AIM V.I. BALANCED FUND
AIM V.I. CAPITAL APPRECIATION FUND AIM V.I. CAPITAL DEVELOPMENT FUND
AIM V.I. DIVERSIFIED INCOME FUND AIM V.I. GLOBAL GROWTH AND INCOME FUND
AIM V.I. GLOBAL UTILITIES FUND AIM V.I. GOVERNMENT SECURITIES FUND
AIM V.I. GROWTH AND INCOME FUND AIM V.I. GROWTH FUND
AIM V.I. HIGH YIELD FUND AIM V.I. INTERNATIONAL EQUITY FUND
AIM V.I. MONEY MARKET FUND AIM V.I. TELECOMMUNICATIONS FUND
AIM V.I. VALUE FUND
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS.
IT SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS, WHICH
MAY BE OBTAINED FROM AUTHORIZED DEALERS OR BY WRITING
A I M DISTRIBUTORS, INC., P. O. BOX 4739,
HOUSTON, TX 77210-4739
OR BY CALLING (713) 626-1919 (HOUSTON RESIDENTS)
OR (800) 347-1919 (ALL OTHERS).
--------------------
STATEMENT OF ADDITIONAL INFORMATION DATED: MAY 3, 1999,
AS REVISED OCTOBER 1, 1999 RELATING TO
THE AIM V.I. AGGRESSIVE GROWTH FUND PROSPECTUS DATED: MAY 3, 1999,
SUPPLEMENTED OCTOBER 1, 1999,
THE AIM V.I. BALANCED FUND PROSPECTUS DATED MAY 3, 1999,
SUPPLEMENTED OCTOBER 1, 1999,
THE AIM V.I. CAPITAL APPRECIATION FUND PROSPECTUS DATED MAY 3, 1999,
SUPPLEMENTED JULY 1, 1999 AND OCTOBER 1, 1999,
THE AIM V.I. CAPITAL DEVELOPMENT PROSPECTUS DATED MAY 3, 1999,
SUPPLEMENTED OCTOBER 1, 1999,
THE AIM V.I. DIVERSIFIED INCOME FUND PROSPECTUS DATED MAY 3, 1999,
SUPPLEMENTED JULY 1, 1999 AND OCTOBER 1, 1999,
THE AIM V.I. GLOBAL GROWTH AND INCOME FUND PROSPECTUS DATED MAY 3, 1999,
SUPPLEMENTED JULY 1, 1999, SEPTEMBER 14, 1999 AND OCTOBER 1, 1999
THE AIM V.I. GLOBAL UTILITIES FUND PROSPECTUS DATED MAY 3, 1999,
SUPPLEMENTED JULY 1, 1999 AND OCTOBER 1, 1999
THE AIM V.I. GOVERNMENT SECURITIES FUND PROSPECTUS DATED MAY 3, 1999,
SUPPLEMENTED OCTOBER 1, 1999
THE AIM V.I. GROWTH AND INCOME FUND PROSPECTUS DATED MAY 3, 1999,
SUPPLEMENTED OCTOBER 1, 1999,
THE AIM V.I. GROWTH FUND PROSPECTUS DATED MAY 3, 1999,
SUPPLEMENTED OCTOBER 1, 1999
THE AIM V.I. HIGH YIELD FUND PROSPECTUS DATED MAY 3, 1999,
SUPPLEMENTED OCTOBER 1, 1999,
THE AIM V.I. INTERNATIONAL EQUITY FUND PROSPECTUS DATED MAY 3, 1999,
SUPPLEMENTED JULY 1, 1999 AND OCTOBER 1, 1999,
THE AIM V.I. MONEY MARKET FUND PROSPECTUS DATED MAY 3, 1999,
REVISED JULY 1, 1999,
THE AIM V.I. TELECOMMUNICATIONS FUND PROSPECTUS DATED MAY 3, 1999,
SUPPLEMENTED JULY 1, 1999 AND OCTOBER 1, 1999, AND
THE AIM V.I. VALUE FUND PROSPECTUS DATED MAY 3, 1999,
SUPPLEMENTED OCTOBER 1, 1999
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TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
INTRODUCTION......................................................................................................1
GENERAL INFORMATION ABOUT THE FUNDS...............................................................................1
The Company and Its Shares...............................................................................1
PERFORMANCE.......................................................................................................2
Total Return Calculations................................................................................2
Historical Portfolio Results.............................................................................2
Allocation of IPO Securities Transactions................................................................3
Yield Information........................................................................................3
PORTFOLIO TRANSACTIONS AND BROKERAGE..............................................................................4
General Brokerage Policy.................................................................................4
Allocation of IPO Securities Transactions................................................................6
Section 28(e) Standards..................................................................................6
Portfolio Turnover.......................................................................................8
Brokerage Commissions Paid...............................................................................8
INVESTMENT STRATEGIES AND RISKS...................................................................................8
Aggressive Growth Fund...................................................................................9
Balanced Fund............................................................................................9
Capital Appreciation Fund...............................................................................10
Capital Development Fund................................................................................10
Diversified Income Fund.................................................................................10
Global Growth and Income Fund...........................................................................10
Global Utilities Fund...................................................................................11
Government Securities Fund..............................................................................12
Growth Fund.............................................................................................12
Growth and Income Fund..................................................................................13
High Yield Fund.........................................................................................13
International Equity Fund...............................................................................13
Money Market Fund.......................................................................................14
Telecommunications Fund.................................................................................15
Value Fund..............................................................................................16
CERTAIN INVESTMENT STRATEGIES AND TECHNIQUES.....................................................................16
Money Market Obligations................................................................................16
Repurchase Agreements...................................................................................17
U.S. Government Agency Mortgage-Backed Securities.......................................................17
Convertible Securities..................................................................................18
Real Estate Investments Trusts ("REITs")................................................................18
Foreign Securities......................................................................................19
Foreign Exchange Transactions...........................................................................20
ADRs and EDRs...........................................................................................20
Lending of Portfolio Securities.........................................................................20
Reverse Repurchase Agreements...........................................................................21
Delayed Delivery Agreements and When-Issued Securities..................................................21
Dollar Roll Transactions................................................................................22
Borrowing...............................................................................................23
</TABLE>
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<TABLE>
<S> <C>
Illiquid Securities.....................................................................................23
Special Situations......................................................................................23
Warrants............................................................................................... 23
Short Sales.............................................................................................23
Rule 144A Securities....................................................................................24
Investment in Other Investment Companies................................................................24
Temporary Defensive Investments.........................................................................24
Asset Allocation Among Countries........................................................................24
Utilities Industry......................................................................................24
OPTIONS, FUTURES AND CURRENCY STRATEGIES.........................................................................25
Introduction............................................................................................25
General Risks of Options, Futures and Currency Strategies...............................................26
Cover...................................................................................................26
Writing Call Options....................................................................................27
Writing Put Options.....................................................................................27
Purchasing Put Options..................................................................................27
Purchasing Call Options.................................................................................28
Over-The-Counter Options................................................................................28
Index Options...........................................................................................29
Limitations on Options..................................................................................29
Interest Rate, Currency and Stock Index Futures Contracts...............................................29
Options on Futures Contracts............................................................................30
Forward Contracts.......................................................................................30
Limitations on Use of Futures, Options on Futures and Certain Options on Currencies.....................31
RISK FACTORS.....................................................................................................32
Small Capitalization Companies..........................................................................32
Non-Investment Grade Debt Securities....................................................................32
Foreign Securities......................................................................................33
Non-diversified Portfolio (Global Utilities Fund Only)..................................................34
INVESTMENT RESTRICTIONS..........................................................................................34
Fundamental Restrictions................................................................................34
Non-fundamental Restrictions............................................................................35
MANAGEMENT.......................................................................................................36
Directors and Officers..................................................................................36
Remuneration of Directors......................................................................39
AIM Funds Retirement Plan for Eligible Directors/Trustees......................................41
Deferred Compensation Agreements...............................................................41
Investment Advisory, Sub-Advisory and Administrative Services Agreements................................42
The Distribution Agreement..............................................................................48
DETERMINATION OF NET ASSET VALUE.................................................................................48
PURCHASE AND REDEMPTION OF SHARES................................................................................51
DIVIDENDS, DISTRIBUTIONS AND TAX MATTERS.........................................................................51
MISCELLANEOUS INFORMATION........................................................................................54
Organization of the Company.............................................................................54
</TABLE>
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<TABLE>
<S> <C>
Audit Reports...........................................................................................54
Legal Matters...........................................................................................55
Custodian and Transfer Agent............................................................................55
Principal Holders of Securities.........................................................................55
Other Information.......................................................................................60
APPENDIX A......................................................................................................A-1
APPENDIX B......................................................................................................B-1
APPENDIX C......................................................................................................C-1
FINANCIAL STATEMENTS.............................................................................................FS
</TABLE>
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INTRODUCTION
AIM Variable Insurance Funds, Inc. (the "Company") is a mutual fund.
The rules and regulations of the United States Securities and Exchange
Commission (the "SEC") require all mutual funds to furnish prospective
investors certain information concerning the activities of the fund being
considered for investment. That information can be found in the most recent
prospectus for each of the series portfolios of the Company (each referred to
throughout as a "Fund"), which are:
Date of Most
Fund Name Recent Prospectus:
--------- ------------------
AIM V.I. Aggressive Growth Fund May 3, 1999
Supplemented October 1, 1999
AIM V.I. Balanced Fund May 3, 1999
Supplemented October 1, 1999
AIM V.I. Capital Appreciation Fund May 3, 1999
Supplemented July 1, 1999
and October 1, 1999
AIM V.I. Capital Development Fund May 3, 1999
Supplemented October 1, 1999
AIM V.I. Diversified Income Fund May 3, 1999
Supplemented July 1, 1999
and October 1, 1999
AIM V.I. Global Growth and Income Fund May 3, 1999
Supplemented July 1, 1999
and September 14, 1999
and October 1, 1999
AIM V.I. Global Utilities Fund May 3, 1999
Supplemented July 1, 1999
and October 1, 1999
AIM V.I. Government Securities Fund May 3, 1999
Supplemented October 1, 1999
AIM V.I. Growth and Income Fund May 3, 1999
Supplemented October 1, 1999
AIM V.I. Growth Fund May 3, 1999
Supplemented October 1, 1999
AIM V.I. High Yield Fund May 3, 1999
Supplemented October 1, 1999
AIM V.I. International Equity Fund May 3, 1999
Supplemented July 1, 1999
and October 1, 1999
AIM V.I. Money Market Fund May 3, 1999
Revised July 1, 1999
AIM V.I. Telecommunications Fund May 3, 1999
Supplemented July 1, 1999
and October 1, 1999
AIM V.I. Value Fund May 3, 1999
Supplemented October 1, 1999
The information regarding all the Funds (except AIM V.I. Global Growth
and Income Fund and AIM V.I. Telecommunications Fund) is included in a
Prospectus dated May 3, 1999, as supplemented July 1, 1999. One or more of the
Funds may not be available under a particular variable annuity contract or
variable life insurance policy. Accordingly, this Statement of Additional
Information may contain information that is not relevant to the investment
options under such a contract or policy. Copies of each Prospectus available
under a contract or policy and additional copies of this Statement of
Additional Information may be obtained without charge by contacting the
principal distributor of each Fund's shares, A I M Distributors, Inc. ("AIM
Distributors"), 11 Greenway Plaza, Suite 100, Houston, TX 77046-1173 or by
calling (800) 410-4246. Investors must receive a Prospectus before they invest.
To the extent that the Statement of Additional Information contains information
concerning a Fund that is not available under a contract or policy,
the Statement of Additional Information does not constitute the offer of the
shares of that Fund.
This Statement of Additional Information is intended to furnish
prospective investors with additional information concerning the Funds. Some of
the information required to be in this Statement of Additional Information is
also included in the Funds' current Prospectus and, in order to avoid
repetition, reference will be made to sections of the Prospectus. Additionally,
the Prospectus and this Statement of Additional Information omit certain
information contained in the Registration Statement filed with the SEC. Copies
of the Registration Statement, including items omitted from the Prospectus and
this Statement of Additional Information, may be obtained from the SEC by
paying the charges prescribed under its rules and regulations.
GENERAL INFORMATION ABOUT THE FUNDS
THE COMPANY AND ITS SHARES
The Company was organized on January 22, 1993, as a Maryland
corporation, and is registered with the SEC as an open-end, series, management
investment company. The Company currently consists of fifteen separate Funds as
follows: the AIM V.I. Aggressive Growth Fund ("Aggressive Growth Fund"), the
AIM V.I. Balanced Fund ("Balanced Fund"), the AIM V.I. Capital Appreciation
Fund ("Capital Appreciation Fund"), the AIM V.I. Capital Development Fund
("Capital Development Fund"), the AIM V.I. Diversified Income Fund
("Diversified Income Fund"), the AIM V.I. Global Growth and Income Fund
("Global Growth and Income Fund"), the AIM V.I. Global Utilities Fund ("Global
Utilities Fund") (formerly known as the AIM V.I. Utilities Fund), the AIM V.I.
Government Securities Fund ("Government Fund"), the AIM V.I. Growth Fund
("Growth Fund"), the AIM V.I. Growth and Income Fund ("Growth and Income
Fund"), the AIM V.I. High Yield Fund ("High Yield Fund), the AIM V.I.
International Equity Fund ("International Fund"), the AIM V.I.
Telecommunications Fund ("Telecommunications Fund"), the AIM V.I. Money Market
Fund ("Money Market Fund"), the AIM V.I. Value Fund ("Value Fund").
Each share of a Fund is entitled to one vote, to participate equally
in dividends and distributions declared by the Board of Directors with respect
to the Fund and, upon liquidation of the Fund, to participate in its
proportionate share of the net assets allocable to the Fund remaining after
satisfaction of outstanding liabilities of the Fund. Fund shares are fully
paid, non-assessable and fully transferable when issued and have no preemptive,
conversion or exchange rights. Fractional shares have proportionately the same
rights, including voting rights, as are provided for a full share.
Shareholders of the Funds do not have cumulative voting rights, and
therefore the holders of more than 50% of the outstanding shares of all Funds
voting together for election of directors may elect all of the
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members of the Board of Directors of the Company. In such event, the remaining
holders cannot elect any directors of the Company.
PERFORMANCE
TOTAL RETURN CALCULATIONS
Total returns quoted in advertising reflect all aspects of the
applicable Fund's return, including the effect of reinvesting dividends and
capital gain distributions, and any change in such Fund's net asset value per
share (NAV) over the period. Average annual returns are calculated by
determining the growth or decline in value of a hypothetical investment in a
particular Fund over a stated period, and then calculating the annually
compounded percentage rate that would have produced the same result if the rate
of growth or decline in value had been constant over the period. While average
annual returns are a convenient means of comparing investment alternatives,
investors should realize that a Fund's performance is not constant over time,
but changes from year to year, and that average annual returns do not represent
the actual year-to-year performance of such Fund.
In addition to average annual returns, each Fund may quote unaveraged
or cumulative total returns reflecting the simple change in value of an
investment over a stated period. Average annual and cumulative total returns
may be quoted as a percentage or as a dollar amount, and may be calculated for
a single investment, a series of investments, and/or a series of redemptions,
over any time period. Total returns may be broken down into their components of
income and capital (including capital gains and changes in share price) in
order to illustrate the relationship of these factors and their contributions
to total return. Total returns and other performance information may be quoted
numerically or in a table, graph, or similar illustration.
HISTORICAL PORTFOLIO RESULTS
The Funds' (except the AIM V.I. Global Growth and Income Fund and the
AIM V.I. Telecommunications Fund) average annual and cumulative total return
for the fiscal year ended December 31, 1998 and average annual and cumulative
total returns for the period May 5, 1993 (commencement of operations) through
December 31, 1998, were as follows:
<TABLE>
<CAPTION>
Since
Inception
-------------------------
Year Ended Average
December 31, Annual Cumulative
1998 Return Return
---- ------ ------
<S> <C> <C> <C>
AIM V.I. Aggressive Growth Fund** N/A N/A (0.94)%
AIM V.I. Balanced Fund** N/A N/A 13.02%
AIM V.I. Capital Appreciation Fund 19.30% 18.77% 164.60%
AIM V.I. Capital Development Fund** N/A N/A (7.51)%
AIM V.I. Diversified Income Fund 3.58% 7.38% 49.61%
AIM V.I. Global Utilities Fund* 16.49% 15.44% 95.37%
AIM V.I. Government Securities Fund 7.73% 5.76% 37.30%
AIM V.I. Growth Fund 34.12% 20.87% 192.24%
AIM V.I. Growth and Income Fund* 27.68% 22.49% 157.71%
AIM V.I. High Yield Fund** N/A N/A (7.61)%
AIM V.I. International Equity Fund 15.49% 13.36% 103.33%
AIM V.I. Money Market Fund 5.06% 4.59% 28.89%
AIM V.I. Value Fund 32.41% 21.90% 206.59%
</TABLE>
* The inception date of the AIM V.I. Global Utilities Fund and the AIM
V.I. Growth and Income Fund was May 2, 1994.
** The inception date of the AIM V.I. Aggressive Growth Fund, AIM V.I.
Balanced Fund, AIM V.I. Capital Development Fund and AIM V.I. High
Yield Fund was May 1, 1998.
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The total returns quoted above do not reflect charges levied at the
insurance company separate account level. For a complete description of the
applicable charges, see the fee table in the prospectus for the appropriate
insurance company separate account.
Each Fund's performance may be compared in advertising to the
performance of other mutual funds in general, or of particular types of mutual
funds, especially those with similar objectives. Such performance data may be
prepared by Lipper Analytical Services, Inc., Morningstar, Inc. and other
independent services which monitor the performance of mutual funds. The Funds
may also advertise mutual fund performance rankings which have been assigned to
each respective Fund by such monitoring services.
Each Fund's performance may also be compared in advertising to the
performance of comparative benchmarks such as the Consumer Price Index ("CPI"),
the Standard & Poor's ("S&P") 500 Stock Index, and fixed-price investments such
as bank certificates of deposit and/or savings accounts.
The International Fund's performance may also be compared in
advertising to performance of comparative benchmarks such as The Financial
Times--Actuaries World Indices (a wide range of comprehensive measures of stock
price performance for the major stock markets and regional areas), Morgan
Stanley Capital International Indices, including the EAFE Index, Pacific Basin
Index and Pacific Ex Japan Index (a widely recognized series of indices in
international market performance), and indices of stocks comparable to those in
which the Fund invests.
Each Fund's advertising may from time to time include historical
discussions of general economic conditions such as inflation rates and changes
in the stock market, foreign and domestic interest rates and foreign and
domestic political circumstances and events.
In addition, each Fund's long-term performance may be described in
advertising in relation to historical, political and/or economic events.
From time to time, A I M Advisors, Inc. ("AIM") or its affiliates may
waive all or a portion of their fees and/or assume certain expenses of any
Fund. Voluntary fee waivers or reductions or commitments to assume expenses may
be rescinded at any time without further notice to investors. During periods of
voluntary fee waivers or reductions or commitments to assume expenses, AIM will
retain its ability to be reimbursed for such fee prior to the end of each
fiscal year. Contractual fee waivers or reductions or reimbursement of expenses
set forth in the Fee Table in a Prospectus may not be terminated or amended to
the Funds' detriment during the period stated in the agreement between AIM and
the Fund. Fee waivers or reductions or commitments to reduce expenses will have
the effect of increasing that Fund's yield and total return.
The performance of each Fund will vary from time to time and past
results are not necessarily indicative of future results. A Fund's performance
is a function of its portfolio management in selecting the type and quality of
portfolio securities and is affected by operating expenses of the Fund and
market conditions. A shareholder's investment in a Fund is not insured or
guaranteed. These factors should be carefully considered by the investor before
making an investment in any Fund.
Some or all of the Funds (except Money Market Fund) may participate in
the initial public offering ("IPO") market, and a significant portion of those
Funds' returns may be attributable to their investment in IPOs, which have a
magnified impact due to the Funds' small asset base. There is no guarantee that
as the Funds' assets grow, they will continue to experience substantially
similar performance by investing in IPOs.
From time to time, the Funds' sales literature and/or advertisements
may discuss generic topics pertaining to the mutual fund industry. This
includes, but is not limited to, literature addressing general information
about mutual funds, variable annuities, variable life insurance, dollar-cost
averaging, stocks, bonds, money markets, certificates of deposit, retirement,
retirement plans, asset allocation, tax-free investing, college planning and
inflation.
YIELD INFORMATION
Quotations of yield on the Money Market Fund may appear from time to
time in the financial press and in advertisements.
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<PAGE> 8
The Money Market Fund's yield is its investment income, less expenses,
expressed as a percentage of assets on an annualized basis for an identified
period, usually seven days. The yield is expressed as a simple annualized yield
and as a compounded effective yield. The yield does not reflect the fees and
charges imposed on the assets of the insurance company separate account.
The standard formulas prescribed by the SEC for calculating yield and
effective yield for the Money Market Fund are described below:
The simple annualized yield is computed by determining the net change
(exclusive of realized gains and losses from the sale of securities, unrealized
appreciation and depreciation, and income other than investment income) in the
value of a hypothetical pre-existing account having a balance of one share at
the beginning of the period, dividing the net change in account value by the
value of the account at the beginning of the period, and annualizing the
resulting quotient (base period return) on a 365-day basis. The net change in
account value reflects the value of additional shares purchased with dividends
from the original shares in the account during the period, dividends declared
on such additional shares during the period, and expenses accrued during the
period.
The compounded effective yield is computed by determining the
unannualized base period return, adding one to the base period return, raising
the sum to a power equal to 365 divided by the number of days in the period,
and subtracting one from the result. Historical yields are not necessarily
indicative of future yields. Rates of return will vary as interest rates and
other conditions affecting money market instruments change. Yields also depend
on the quality, length of maturity and type of instruments in the Fund's
portfolio and the Fund's operating expenses. Quotations of yield will be
accompanied by information concerning the average weighted maturity of the
Fund. Comparison of the quoted yields of various investments is valid only if
yields are calculated in the same manner and for identical limited periods.
When comparing the yield for a Fund with yields quoted with respect to other
investments, shareholders should consider (a) possible differences in time
periods, (b) the effect of the methods used to calculate quoted yields, (c) the
quality and average-weighted maturity of portfolio investments, expenses,
convenience, liquidity and other important factors, and (d) the taxable or
tax-exempt character of all or part of dividends received.
The simple annualized yield and compounded effective yield for the
Money Market Fund for the 7 days ended December 31, 1998 were 4.61% and 4.66%,
respectively.
PORTFOLIO TRANSACTIONS AND BROKERAGE
GENERAL BROKERAGE POLICY
Subject to policies established by the Board of Directors of the
Company, A I M Advisors, Inc. ("AIM") is responsible for decisions to buy and
sell securities for each Fund, for the selection of broker-dealers, for the
execution of the Fund's investment portfolio transactions, for the allocation
of brokerage fees in connection with such transactions and, where applicable,
for the negotiation of commissions and spreads on transactions. AIM's primary
consideration in effecting a security transaction is to obtain the best net
price and the most favorable execution of the order. While AIM generally seeks
reasonably competitive commission rates, each Fund does not necessarily pay the
lowest commission or spread available.
Purchases and sales of portfolio securities for the Diversified Income
Fund, the Money Market Fund and the Government Fund are generally transacted
with the issuer or a primary market maker. In addition, a portion of the
securities in which the Funds invest may be traded in over-the-counter ("OTC")
markets. In such transactions, the Fund deals directly with the dealers who
make markets in the securities involved, except in those circumstances where
better prices and executions are available elsewhere. Portfolio transactions
placed through dealers serving as primary market makers are effected at net
prices, without commissions as such, but which include compensation to the
dealer in the form of mark up or mark down.
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Traditionally, commission rates have not been negotiated on stock
markets outside the United States. In recent years, however, an increasing
number of overseas stock markets have adopted a system of negotiated rates,
although a number of markets continue to be subject to an established schedule
of minimum commission rates.
Foreign equity securities may be held by the Fund in the form of
American Depositary Receipts ("ADRs") or European Depositary Receipts ("EDRs"),
or other securities representing underlying securities of foreign issuers, or
securities convertible into foreign equity securities. These securities may not
necessarily be denominated in the same currency as the securities into which
they may be converted. 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. Generally, ADRs, in registered form, are
designed for use in the United States securities markets, and EDRs, in bearer
form, are designed for use in European securities markets. ADRs and EDRs may be
listed on stock exchanges, or traded in OTC markets in the United States or
Europe, as the case may be. ADRs, like other securities traded in the United
States, will be subject to negotiated commission rates.
The Funds are not under any obligation to deal with any broker or
group of brokers in the execution of transactions in portfolio securities.
Brokers who provide supplemental investment research to AIM may receive orders
for transactions by a Fund. Information so received will be in addition to and
not in lieu of the services required to be performed by AIM under its
agreements with the Fund, and the expenses of AIM will not necessarily be
reduced as a result of the receipt of such supplemental information. Certain
research services furnished by broker-dealers may be useful to AIM in
connection with its services to other advisory clients, including the other
mutual funds advised by AIM (collectively with the Funds, the "AIM Funds").
Also, a Fund may pay a higher price for securities or higher commissions in
recognition of research services furnished by broker-dealers.
AIM may from time to time determine target levels of commission
business for AIM to transact with various brokers on behalf of its clients
(including the Funds) over a certain time period. The target levels will be
determined based upon the following factors, among others: (1) the execution
services provided by the broker; (2) the research services provided by the
broker; (3) certain products and/or services provided to the Funds, the cost of
which will be included in Fund expenses reported to shareholders; and (4) the
broker's attitude toward an interest in mutual funds in general and in the
Funds and the other AIM Funds in particular. No specific formula will be used
in connection with any of the foregoing considerations in determining the
target levels. However, if a broker has indicated a certain level of desired
commissions in return for certain research services provided by the broker,
this factor will be taken into consideration by AIM.
Subject to the overall objective of obtaining best price and execution
for the Funds, AIM may also consider sales of shares by broker-dealers of each
Fund and of the other AIM Funds as well as sales of variable annuity contracts
("Contracts") and variable life insurance policies ("Policies") funded through
the Funds ("selling dealers"), as a factor in the selection of broker-dealers
to execute portfolio transactions for a Fund. Such portfolio transactions may
be executed directly by selling dealers or by other broker-dealers with which
selling dealers have clearing arrangements.
AIM will seek, whenever possible, to recapture for the benefit of a
Fund any commissions, fees, brokerage or similar payments paid by the Fund on
portfolio transactions. Normally, the only fees which may be recaptured are the
soliciting dealer fees on the tender of a Fund's portfolio securities in a
tender or exchange offer.
AIM and its affiliates manage several other investment accounts, some
of which may have investment objectives similar to those of the Funds. It is
possible that, at times, identical securities will be appropriate for
investment by one or more of such investment accounts. The position of each
account, however, in the securities of the same issue may vary and the length
of time that each account may choose to hold its investment in the securities
of the same issue may likewise vary. The timing and amount of purchases by each
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<PAGE> 10
account will also be determined by its cash position. If the purchase or sale
of securities is consistent with the investment policies of a Fund(s) and one or
more of these accounts is considered at or about the same time, AIM will fairly
allocate transactions in such securities among the Fund(s) and these accounts.
AIM may combine such transactions, in accordance with applicable laws and
regulations, in order to obtain the best net price and most favorable execution.
Simultaneous transactions could, however, adversely affect the ability of a Fund
to obtain or dispose of the full amount of a security which it seeks to purchase
or sell.
These combined transactions, and related brokerage charges, will be
allocated among the Fund(s) and such accounts in a manner consistent with
guidelines and procedures approved by the Company's Board of Directors that are
designed to achieve an equitable manner of allocation. In some cases the
procedure for allocating portfolio transactions among the various investment
accounts advised by AIM could have an adverse effect on the price or amount of
securities available to a Fund. In making such allocations, the main factors
considered by AIM are the respective investment objectives and policies of its
advisory clients, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and the judgments of the persons
responsible for recommending the investment.
From time to time, an identical security may be sold by an AIM Fund or
another investment account advised by AIM or A I M Capital Management, Inc.
("AIM Capital") and simultaneously purchased by another investment account
advised by AIM or AIM Capital, when such transactions comply with applicable
rules and regulations and are deemed consistent with the investment
objective(s) and policies of the investment accounts advised by AIM or AIM
Capital. Procedures pursuant to Rule 17a-7 under the Investment Company Act of
1940, as amended (the "1940 Act") regarding transactions between investment
accounts advised by AIM or AIM Capital have been adopted by the Boards of
Directors/Trustees of the various AIM Funds, including the Company. Although
such transactions may result in custodian, tax or other related expenses, no
brokerage commissions or other direct transaction costs are generated by
transactions among the investment accounts advised by AIM or AIM Capital.
ALLOCATION OF IPO SECURITIES TRANSACTIONS
From time to time, certain of the AIM Funds may become interested in
participating in security distributions that are available in an IPO, and
occasions may arise when purchases of such securities by one AIM Fund may also
be considered for purchase by one or more other AIM Funds. In such cases, it
shall be AIM's practice to specifically combine or otherwise bunch indications
of interest for IPO securities for all AIM Funds participating in purchase
transactions for that security, and to allocate such transactions in
accordance with the following procedures:
AIM will determine the eligibility of each AIM Fund that seeks to
participate in a particular IPO by reviewing a number of factors, including
suitability of the investment with the AIM Fund's investment objective, policies
and strategies, the liquidity of the AIM Fund if such investment is purchased,
and whether the portfolio manager intends to hold the security as a long-term
investment. The allocation of limited supply securities issued in IPOs will be
made to eligible AIM Funds in a manner designed to be fair and equitable for
the eligible AIM Funds, and so that there is equal allocation of IPOs over the
longer term. Where multiple funds are eligible, rotational participation may
occur, based on the extent to which an AIM Fund has participated in previous
IPOs as well as the size of the AIM Fund. Each eligible AIM Fund with an asset
level of less than $500 million will be placed in one or three tiers, depending
upon its asset level. The AIM Funds in the tier containing funds with the
smallest asset levels will participate first, each receiving a 40 basis point
allocation (rounded to the nearest share round lot that approximates 40 basis
points) (the "Allocation"), based on that AIM Fund's net assets. This process
continues until all of the AIM Funds in the three tiers receive their
Allocations, or until the shares are all allocated. Should securities remain
after this process, eligible AIM Funds will receive their Allocations on a
straight pro rata basis. For the tier of AIM Funds not receiving a full
Allocation, the Allocation may be made only to certain AIM Funds so that each
may receive close to or exactly 40 basis points.
Any AIM Funds with substantially identical investment objectives and
policies will participate in syndicates in amounts that are substantially
proportionate to each other. In these cases, the net assets of the largest AIM
Fund will be used to determine in which tier, as described in the paragraph
above, such group of AIM Funds will be placed. The price per share of
securities purchased in such syndicate transactions will be the same for each
AIM Fund.
SECTION 28(e) STANDARDS
As permitted by Section 28(e) of the Securities Exchange Act of 1934,
AIM may cause a Fund to pay a broker that provides brokerage and research
services to AIM an amount of commission for effecting a securities transaction
for the Fund in excess of the commission another broker would have charged for
effecting that transaction. To obtain the benefit of Section 28(e), AIM must
make a good faith determination that the commissions paid are "reasonable in
relation to the value of the brokerage and research services provided . . .
viewed in terms of either that particular transaction or [its] overall
responsibilities with respect to the accounts as to which [it] exercises
investment discretion" and that the services provided by a broker provide AIM
with lawful and appropriate assistance in the performance of its investment
decision-making responsibilities. Accordingly, the price to a Fund in any
transaction may be less favorable than that available from another
broker-dealer if the difference is reasonably justified by other aspects of the
portfolio execution services offered.
Broker-dealers utilized by AIM may furnish statistical, research and
other information or services which are deemed by AIM to be beneficial to the
Funds' investment programs. Research services received from brokers supplement
AIM's own research (and the research of sub-advisors to other clients of AIM)
and may include the following types of information: statistical and background
information on industry groups and individual companies; forecasts and
interpretations with respect to U.S. and foreign economies, securities markets,
specific industry groups and individual companies; information on political
developments; portfolio management strategies; performance information on
securities and information concerning prices of securities; and information
supplied by specialized services to AIM and to the Company's directors with
respect to the performance, investment activities and fees and expenses of
other mutual funds. Such information may be communicated electronically,
orally, in written form or on computer software. Research services may also
include the providing of equipment used to communicate research information,
the arranging of meetings with management of companies and the providing of
access to consultants who supply research information.
6
<PAGE> 11
The outside research assistance is useful to AIM since the brokers
utilized by AIM as a group tend to follow a broader universe of securities and
other matters than AIM's staff can follow. In addition, this research provides
AIM with a diverse perspective on financial markets. Research services which
are provided to AIM by brokers are available for the benefit of all accounts
managed or advised by AIM (or by sub-advisors to accounts managed or advised by
AIM). In some cases, the research services are available only from the broker
providing such services. In other cases, the research services may be
obtainable from alternative sources in return for cash payments. AIM is of the
opinion that because the broker research supplements rather than replaces its
research, the receipt of such research does not tend to decrease its expenses,
but tends to improve the quality of its investment advice. However, to the
extent that AIM would have purchased any such research services had such
services not been provided by brokers, the expenses of such services to AIM
could be considered to have been reduced accordingly.
For the fiscal year ended December 31, 1998 certain Funds paid
brokerage commissions to certain brokers for research services. The amount of
such transactions and related commissions paid by each Fund were as follows:
<TABLE>
<CAPTION>
Commissions Transactions
----------- ------------
<S> <C> <C>
AIM V. I. Aggressive Growth Fund $ 476 $ 265,096
AIM V. I. Balanced Fund $ 107 $ 73,629
AIM V. I. Capital Appreciation Fund $ 111,070 $ 76,873,344
AIM V. I. Capital Development Fund $ 475 $ 255,434
AIM V. I. Global Utilities Fund $ 1,105 $ 556,721
AIM V. I. Growth Fund $ 58,834 $ 52,124,585
AIM V. I. Growth and Income Fund $ 154,841 $ 136,649,725
AIM V. I. International Equity Fund $ 401 $ 90,510
AIM V. I. Value Fund $ 126,500 $ 120,560,762
</TABLE>
As of December 31, 1998, the following Funds entered into
repurchase agreements with the following regular brokers, as that term is
defined in Rule 10b-1 under the 1940 Act, having the noted market values.
<TABLE>
<CAPTION>
GOLDMAN,
FUNDS SACHS & CO.
<S> <C>
AIM V.I. Capital Appreciation Fund $ 59,251,734
- ------------------------------------------------------------------
AIM V.I. Diversified Fund $ 2,305,989
- ------------------------------------------------------------------
AIM V.I. Global Utilities Fund $ 2,391,815
- ------------------------------------------------------------------
AIM V.I. Growth Fund $ 31,583,054
- ------------------------------------------------------------------
AIM V.I. Growth and Income Fund $ 35,491,011
- ------------------------------------------------------------------
AIM V.I. International Equity Fund $ 17,938,040
- ------------------------------------------------------------------
AIM V.I. Value Fund $ 77,768,447
- ------------------------------------------------------------------
</TABLE>
The following information regarding securities acquired by the Funds
of their regular brokers, as defined in Rule 10b-1 under the 1940 Act, is as of
December 31, 1998. The Balanced Fund, the Growth and Income Fund and the Value
Fund each held an amount of common stock issued by Merrill Lynch & Co. having
7
<PAGE> 12
a market value of $20,025, $9,345,000 and $2,670,000, respectively. The Growth
Fund held an amount of common stock issued by PaineWebber Group, Inc. having a
market value of $1,224,413.
PORTFOLIO TURNOVER
The portfolio turnover rate of each Fund is shown under "Financial
Highlights" in the Prospectus. In any particular year, however, market
conditions could result in portfolio activity at a rate greater or lesser than
anticipated. The estimated portfolio turnover rate for the Global Growth and
Income Fund and Telecommunications Fund is less than 100%. Higher portfolio
turnover increases transaction costs to the Fund.
BROKERAGE COMMISSIONS PAID
Brokerage commissions paid by each of the Funds (except the AIM V.I.
Global Growth and Income Fund and the AIM V.I. Telecommunications Fund) listed
below were as follows for the fiscal years ended December 31, 1998, December
31, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
AIM V.I. Aggressive Growth Fund* $ 2,983 N/A N/A
AIM V.I. Balanced Fund* $ 2,241 N/A N/A
AIM V.I. Capital Appreciation Fund $ 1,017,185 $ 644,279 $ 405,056
AIM V.I. Capital Development Fund* $ 3,748 N/A N/A
AIM V.I. Diversified Income Fund $ 282 $ 2,818 $ 1,670
AIM V.I. Global Utilities Fund $ 18,422 $ 12,208 $ 16,365
AIM V.I. Government Securities Fund $ -0- $ -0- $ -0-
AIM V.I. Growth Fund $ 876,546 $ 621,467 $ 578,444
AIM V.I. Growth and Income Fund $ 2,834,451 $ 1,190,597 $ 417,167
AIM V.I. High Yield Fund* $ -0- N/A N/A
AIM V.I. International Equity Fund $ 814,499 $ 605,318 $ 557,527
AIM V.I. Money Market Fund $ -0- $ -0- $ -0-
AIM V.I. Value Fund $ 1,920,264 $ 1,503,734 $ 1,126,384
</TABLE>
* Commissions paid are for the period May 1,1998 (date operations commenced)
through December 31, 1998.
INVESTMENT STRATEGIES AND RISKS
Information concerning each Fund's fundamental investment objective is
set forth in the Prospectus under the heading "Investment Objectives and
Strategies." There can be no assurance that any Fund will achieve its
objective. The principal features of each Fund's investment program and the
primary risks associated with that investment program are discussed in the
Prospectus under the following headings: "Investment Objectives and Strategies"
and "Principal Risks of Investing in the Funds". The following discussion of
investment policies supplements the discussion of the investment strategies and
risks set forth in the Prospectus.
Set forth in this section is a description of each Fund's investment
policies, strategies and practices. The investment objective(s) of each Fund,
except the High Yield Fund, are deemed to be fundamental policies and,
therefore, unless permitted by law, may not be changed without the approval of
a majority of that Fund's outstanding shares (within the meaning of the 1940
Act). The Board of Directors on behalf of the High Yield
8
<PAGE> 13
Fund is permitted to change the investment objective of that Fund without
shareholder approval. Each Fund's investment policies, strategies and practices
are not fundamental. The Board of Directors of the Company reserves the right
to change any of these non-fundamental investment policies, strategies or
practices without shareholder approval. However, shareholders will be notified
before any material change in the investment policies become effective. Each
Fund has adopted investment restrictions, some of which are fundamental and
cannot be changed without shareholder approval. See "Investment Restrictions"
in this Statement of Additional Information. Individuals considering the
purchase of shares of any Fund should recognize that there are risks in the
ownership of any security.
AGGRESSIVE GROWTH FUND. The Fund will invest primarily in common
stocks, convertible bonds, convertible preferred stocks and warrants of
companies which, in the opinion of the Fund's investment advisor, are expected
to achieve earnings growth over time at a rate in excess of 15% per year. Many
of these companies are in the small to medium-sized category (i.e., companies
with a market capitalization within the range of small cap stocks in the
Russell 2000 Index.) Management of the Fund will be particularly interested in
companies that are likely to benefit from new or innovative products, services
or processes that should enhance such companies' prospects for future growth in
earnings. As a result of this policy, the market prices of many of the
securities purchased and held by the Fund may fluctuate widely. Any income
received from securities held by the Fund will be incidental, and an investor
should not consider a purchase of shares of the Fund as equivalent to a
complete investment program. The Fund's portfolio is primarily comprised of
securities of two basic categories: (a) "core" companies, which Fund management
considers to have experienced above-average and consistent long-term growth in
earnings and to have excellent prospects for outstanding future growth, and (b)
"earnings acceleration" companies which Fund management believes are currently
enjoying dramatic increase in profits. The Fund's strategy does not preclude
investment in large, seasoned companies which in the judgement of AIM possess
superior potential returns similar to companies with formative growth profiles.
The Fund will also invest in established smaller companies (under $500 million
in market capitalization) which offer exceptional value based upon
substantially above average earnings growth potential relative to market value.
The Fund may invest in non-equity securities, such as corporate bonds or U.S.
Government obligations during periods when, in the opinion of AIM, prevailing
market, financial, or economic conditions warrant, as well as when such
holdings are advisable in light of a change in circumstances of a particular
company or within a particular industry.
BALANCED FUND. The Fund's objective is to achieve as high a total
return to investors as possible, consistent with preservation of capital. The
Fund seeks to achieve its objective by investing in a broadly diversified
portfolio of high-yielding securities, including common stocks, preferred
stocks, convertible securities and bonds. Although equity securities will be
purchased primarily for capital appreciation and fixed income securities will
be purchased primarily for income purposes, income and capital appreciation
potential will be considered in connection with all investments. The Fund
normally will have a minimum of 30% and a maximum of 70% of its total assets
invested in equity securities and a minimum of 30% and a maximum of 70% of its
total assets invested in (non-convertible) fixed income securities. Most of
such fixed income securities will be rated Baa or better by Moody's Investors
Service, Inc. ("Moody's") or BBB or better by Standard & Poor's Rating Services
("S&P") or, in unrated, deemed to be of comparable quality by AIM, although the
Fund may invest to a limited extent in lower-rated securities. (For a
description of the various rating categories, see Appendix A to this Statement
of Additional Information.) The fixed income securities in which the Fund
invests may include U.S. Government obligations, mortgage-backed securities,
asset-backed securities, bank obligations, corporate debt obligations and
unrated obligations, including those of foreign issuers. The Fund may, in
pursuit of its objective, invest up to 10% of its total assets in debt
securities rated lower than Baa by Moody's or BBB by S&P, which are commonly
known as "junk bonds." See "Risk Factors -- Non-Investment Grade Debt
Securities" for more information concerning the risk factors associated with
investing in such securities. The Fund may also invest up to 25% of its total
assets in convertible securities. Compliance with all of the above percentage
requirements may limit the ability of the Fund to maximize total return. The
actual percentage of the assets invested in equity and fixed income securities
will vary from time to time, depending on the judgment of AIM as to general
market and economic conditions and trends, yields and interest rates and
changes in fiscal and monetary policies.
9
<PAGE> 14
CAPITAL APPRECIATION FUND. The Fund's investment objective is to seek
capital appreciation through investments in common stocks, with emphasis on
medium-sized and smaller emerging growth companies. AIM will be particularly
interested in companies that are likely to benefit from new or innovative
products, services or processes that should enhance such companies' prospects
for future growth in earnings. As a result of this policy, the market prices of
many of the securities purchased and held by the Fund may fluctuate widely. Any
income received from securities held by the Fund will be incidental, and an
investor should not consider a purchase of shares of the Fund as equivalent to
a complete investment program. The Capital Appreciation Fund's portfolio is
primarily comprised of securities of two basic categories of companies: (1)
"core" companies, which AIM considers to have experienced above-average and
consistent long-term growth in earnings with excellent prospects for
outstanding future growth, and (2) "earnings acceleration" companies which AIM
believes are currently enjoying a dramatic increase in profits.
CAPITAL DEVELOPMENT FUND. The Fund's investment objective is long-term
capital appreciation. Production of income is incidental to this objective. The
Fund's principal investments are in common stocks, convertible securities and
bonds. There can, of course, be no assurance that the Fund will in fact achieve
its objective since all investments are inherently subject to market risks.
The Fund will invest primarily in securities of small and medium-sized
companies (i.e., companies which fall in the smallest 85% by market
capitalization of publicly traded companies in the United States). Among
factors that AIM may consider when selecting investments in a company for the
Fund are (i) the growth prospects for a company's products, (ii) the economic
outlook for its industry, (iii) a company's new product development, (iv) its
operating management capabilities, (v) the relationship between the price of
the security and its estimated fundamental value, (vi) relevant market,
economic and political environments and (vii) financial characteristics such as
balance sheet analysis and return on assets. The Fund may invest in issuers
making initial public offerings of their securities if AIM determines that the
issuer has good prospects for growth.
DIVERSIFIED INCOME FUND. The Fund's investment objective is to seek to
achieve a high level of current income. The Fund will seek to achieve its
investment objective by investing primarily in: (i) domestic and foreign
corporate debt securities, (ii) U.S. Government securities, including U.S.
Government Agency Mortgage-Backed Securities, (iii) foreign government
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, similar equity securities and convertible 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 Statement of Additional Information. For a
description of U.S. Government Agency Mortgage-Backed Securities, see Appendix
B to this Statement of Additional Information.) 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 Statement of Additional Information.
GLOBAL GROWTH AND INCOME FUND. The Fund's investment objectives are
long-term capital appreciation together with current income. In seeking those
objectives, the Fund normally invests at least 65% of its total assets in a
combination of blue-chip equity securities and high quality government bonds.
The Fund considers an equity security to be "blue chip" if: (i) during the
issuer's most recent fiscal year the security offered an above average dividend
yield relative to the latest reported dividend yield on the Morgan Stanley
Capital International World Index; and (ii) the total equity market
capitalization of the issuer is at least $1 billion. Government bonds are
deemed to be high quality if at the time of the Fund's investment they are
rated within one of the two highest ratings categories of Moody's Investors
Services, Inc. ("Moody's") or Standard & Poor's,
10
<PAGE> 15
a division of The McGraw-Hill Companies, Inc. ("S&P"), i.e., rated Aaa or Aa by
Moody's or AAA or AA by S&P (or a comparable rating of any other nationally
recognized statistical rating organizations "NRSROs") or, if unrated, are
determined by AIM and INVESCO Asset Management Limited ("INVESCO") to be of
comparable quality. (For a description of the various rating categories of
corporate debt securities in which the Fund may invest, see Appendix A to this
Statement of Additional Information.)
Up to 35% of the Fund's assets may be invested in other equity
securities, convertible securities and investment grade government and
corporate debt obligations which AIM/INVESCO believes will assist the Fund in
achieving its objectives.
Equity securities that the Fund may purchase include common stocks,
preferred stocks, and warrants to acquire such stocks and other equity
securities. Government bonds that the Fund may purchase include debt
obligations issued or guaranteed by the U.S. or foreign governments (including
foreign states, provinces or municipalities) or their agencies, authorities or
instrumentalities and debt obligations of supranational entities organized or
supported by several national governments, such as the World Bank and the Asian
Development Bank. The debt obligations held by the Fund may include debt
obligations convertible into equity securities or having attached warrants or
rights to purchase equity securities.
Under normal market conditions, the Fund invests in the securities of
issuers located in at least three different countries. Investments in
securities of issuers in any one country other than the United States, will
represent no more than 40% of the Fund's total assets. The Fund may purchase
securities of an issuer located in one country but denominated in the currency
of another country (or a multinational currency unit).
AIM/INVESCO allocates the Fund's assets among securities of issuers
located in countries where opportunities for meeting the Fund's investment
objectives are expected to be the most attractive. The relative proportions of
equity and debt securities held by the Fund at any one time will vary, and will
depend upon AIM/INVESCO's assessment of global political and economic
conditions and the relative strengths and weaknesses of the world equity and
debt markets. To enable the Fund to respond to general economic changes and
market conditions around the world, the Fund is authorized to invest up to 100%
of its assets in either equity securities or debt securities.
GLOBAL UTILITIES FUND. The Fund's investment objective is to achieve a
high level of current income, and as a secondary objective the Fund seeks to
achieve capital appreciation, by investing primarily in the common and
preferred stocks of public utility companies (either domestic or foreign).
Under normal circumstances, at least 65% of the Fund's total assets will be
invested in securities of public utility companies (either domestic or
foreign). Public utility companies include companies that provide electricity,
natural gas or water and other sanitary services to the public, and telephone
or telegraph companies and other companies providing public communications
services. The Fund may also invest in developing utility technology companies
and in holding companies which derive a substantial portion of their revenues
from utility-related activities. Generally, a holding company will be
considered to derive a substantial portion of its revenues from utility-related
activities if such activities account for at least 40% of its revenues. The
Fund may invest up to 25% of its total assets in convertible securities. When
AIM deems it appropriate, the Fund may also purchase the bonds of such
companies. Investments in non-convertible bonds, however, will not exceed 25%
of the Fund's total assets. The Fund may invest up to 10% of its total assets
in lower-rated or unrated high yield securities. (For a description of the
various rating categories of corporate debt securities in which the Fund may
invest, see Appendix A to this Statement of Additional Information.) During the
fiscal year ended December 31, 1998, the Fund invested less than 5% of its net
assets in below investment grade debt securities. The Fund may also invest up
to 80% of its total assets in securities of foreign companies, including
investments in American Depositary Receipts ("ADRs"), European Depositary
Receipts ("EDRs") and underlying securities of foreign issuers. For a
discussion of the investment risks associated with investments in
non-investment grade debt securities and foreign securities, see "Risk Factors"
in this Statement of Additional Information.
11
<PAGE> 16
A portfolio of utility company securities is subject to a different
degree of volatility than a more broadly diversified portfolio. Economic,
operational or regulatory changes that affect utility companies will have a
material impact upon the value of the securities that the Fund owns. Events,
such as changing weather patterns, emergencies involving nuclear power plants,
or rapidly changing fuel prices that have no direct connection with companies
whose securities are owned by the Fund may affect the prices of those
securities.
Moreover, a portfolio of utilities industry securities is subject to
the risks unique to that industry, such as inflationary or other increases in
fuel and operating expenses, possible increases in the interest costs of loans
needed for capital construction programs, compliance with environmental
regulations, possible adverse changes in the regulatory climate and
availability of fuel sources.
GOVERNMENT SECURITIES FUND. The Fund's investment objective is to
achieve a high level of current income consistent with reasonable concern for
safety of principal by investing in debt securities issued, guaranteed or
otherwise backed by the United States Government. The government securities
which may be purchased by the Fund include but are not limited to (1) U.S.
Treasury obligations such as Treasury Bills (maturities of one year or less),
Treasury Notes (maturities of one to ten years) and Treasury Bonds (generally
maturities of greater than ten years) and (2) obligations issued or guaranteed
by U.S. Government agencies and instrumentalities ("Agency Securities") which
are supported by any of the following: (a) the full faith and credit of the
U.S. Treasury, such as obligations of the Government National Mortgage
Association ("GNMA"), (b) the right of the issuers to borrow an amount limited
to a specific line of credit from the U.S. Treasury, such as obligations of the
Federal National Mortgage Association ("FNMA"), the Federal Home Loan Bank and
the U.S. Postal Service or (c) the credit of the agency or instrumentality,
such as obligations of the Federal Home Loan Mortgage Corporation ("FHLMC") and
Federal Farm Credit System. 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 required by law to support the agencies and
instrumentalities listed in (b) and (c), above. Accordingly, such securities
may involve risk of loss of principal and interest; however, historically there
have not been any defaults of such issues. For a listing of some of the types
of Agency Securities in which the Fund may invest, see Appendix B to this
Statement of Additional Information.
The Fund's investments include high coupon U.S. Government Agency
Mortgage-Backed Securities, which provide a higher coupon at the time of
purchase than the prevailing market rate yield. The prices of high coupon U.S.
Government Agency Mortgage-Backed Securities do not tend to rise as rapidly as
those of traditional fixed rate securities at times when interest rates are
decreasing, and tend to decline more slowly at times when interest rates are
increasing. The Fund may purchase such securities at a premium, which means
that a faster principal prepayment rate than expected will reduce the market
value of and income from such securities, while a slower prepayment rate will
tend to increase the market value of and income from such securities.
The composition and weighted average maturity of the Fund's portfolio
will vary from time to time, based upon the determination of AIM and how best
to further the Fund's investment objective. The Fund may invest in government
securities of all maturities, short-term, intermediate-term and long-term. The
Fund intends to maintain a dollar-weighted average portfolio maturity of
between three and ten years. This policy regarding portfolio maturity is a
non-fundamental policy of the Fund.
GROWTH FUND. The Fund's investment objective is to seek growth of
capital principally through investment in common stocks of seasoned and better
capitalized companies considered by AIM to have strong earnings momentum.
Current income will not be an important criterion of investment selection, and
any such income should be considered incidental. It is anticipated that common
stocks will be the principal form of investment by the Fund. The Fund's
portfolio is primarily comprised of securities of two basic categories of
companies: (1) "core" companies, which AIM considers to have experienced
above-average and consistent long-term growth in earnings and to have excellent
prospects for outstanding future growth, and (2) "earnings acceleration"
companies which Fund management believes are currently enjoying a dramatic
increase in profits.
12
<PAGE> 17
GROWTH AND INCOME FUND. The Fund's investment objective is to seek
growth of capital, with current income as a secondary objective. The Fund seeks
to meet these objectives by investing at least 65% of its net assets in
income-producing securities, including dividend-paying common stocks and
convertible securities. The Fund's portfolio managers purchase securities of
established companies that have long-term above-average growth in earnings and
dividends, and growth companies that they believe have the potential for
above-average growth in earnings and dividends. The Fund's portfolio managers
consider whether to sell a particular security when they believe the security
no longer has that potential or the capacity to generate income.
HIGH YIELD FUND. The Fund's objective is to achieve a high level of
current income. The Fund seeks to achieve its objective by investing primarily
in publicly traded non-investment grade debt securities. The Fund will also
consider the possibility of capital growth when it purchases and sells
securities. Debt securities of less than investment grade are considered "high
risk" securities (commonly referred to as junk bonds). The Fund seeks high
income principally by purchasing securities that are rated Baa, Ba or B by
Moody's or BBB, BB, or B by S&P, or securities of comparable quality in the
opinion of AIM that are either unrated or rated by other NRSROs1. (For a
description of the various rating categories, see Appendix A to this Statement
of Additional Information.) The Fund may also hold, from time to time,
securities rated Caa by Moody's or CCC by S&P, or if unrated or rated by other
NRSROs, securities of comparable quality as determined by AIM. It should be
noted, however, that achieving the Fund's investment objective may be more
dependent on the credit analysis of AIM, and less on that of credit rating
agencies, than may be the case for funds that invest in more highly rated
bonds. At least 80% of the value of the Fund's total assets will be invested in
debt securities, including convertible debt securities, and/or cash and cash
equivalents. At least 65% of the value of the Fund's assets will be invested in
high yield debt securities. The Fund may also invest in preferred stocks.
While the securities held by the Fund are expected to provide greater
income and, possibly, opportunity for greater gain than investments in more
highly rated securities, they may be subject to greater risk of loss of income
and principal and are more speculative in nature. The Fund's yield and the net
asset value of its shares may be expected to fluctuate over time. Therefore, an
investment in the Fund may not be appropriate for some investors and should not
constitute a complete investment program for others. See "Risk Factors --
Non-Investment Grade Debt Securities."
The Fund may invest in both illiquid securities and securities which
are subject to restrictions on resale because they have not been registered
under the Securities Act of 1933. See "Illiquid Securities" for further
information regarding such investments.
INTERNATIONAL EQUITY FUND. The Fund's investment objective is to seek
to provide long-term growth of capital by investing in a diversified portfolio
of international equity securities the issuers of which are considered by AIM
to have strong earnings momentum. Any income realized by the Fund will be
incidental and will not be an important criterion in the selection of portfolio
securities.
In managing the Fund, AIM seeks to apply to a diversified portfolio of
international equity securities substantially the same investment strategy
which it applies to the Growth Fund with respect to that Fund's
- ---------------------
1 "Requisite NRSRO" shall mean (a) any two nationally recognized
statistical rating organizations that have issued a rating with
respect to a security or class of debt obligations of an issuer, or
(b) if only one NRSRO has issued a rating with respect to such
security or issuer at the time of the Fund acquires the security; that
NRSRO. At present the NRSROs are: Standard & Poor's Corp., Moody's
Investors Service, Inc., Thomson Bankwatch, Duff and Phelps, Inc.,
Fitch IBCA, Inc. and, with respect to certain types of securities,
IBCA Ltd and its subsidiary, IBCA, Inc. Subcategories or gradations in
ratings (such as "+" or "-") do not count as rating categories.
13
<PAGE> 18
investment in United States equities markets. The Fund will utilize to the
extent practicable a fully managed investment policy providing for the
selection of securities which meet certain quantitative standards determined by
AIM. AIM will review carefully the earnings history and prospects for growth of
each company considered for investment by the Fund. It is expected that the
Fund's portfolio, when fully invested, will generally be comprised of two basic
categories of foreign companies: (1) "core" companies, which AIM considers to
have experienced consistent long-term growth in earnings and to have strong
prospects for outstanding future growth, and (2) companies that AIM believes
are currently experiencing a greater than anticipated increase in earnings. If
a particular foreign company meets the quantitative standards determined by
AIM, its securities may be acquired by the Fund regardless of the location of
the company or the percentage of the Fund's investments in the company's
country or region. However, AIM will also consider other factors in making
investment decisions for the Fund, including such factors as the prospects for
relative economic growth among countries or regions, economic and political
conditions, currency exchange fluctuations, tax considerations and the
liquidity of a particular security. For a discussion of the investment risks
associated with investments in foreign securities, see "Risk Factors" in this
Statement of Additional Information.
MONEY MARKET FUND. The Fund's investment objective is to seek to
provide as high a level of current income as is consistent with the
preservation of capital and liquidity. The Fund seeks to achieve its objective
by investing in a diversified portfolio of high quality U.S. dollar denominated
money market instruments and other similar instruments with maturities of 397
days or less from the date of purchase, and will maintain a dollar
weighted-average portfolio maturity of 90 days or less. Securities subject to
repurchase agreements may bear longer maturities.
The Fund invests in a broad range of U.S. Government and foreign
government obligations, and bank and commercial instruments that may be
available in the money markets. Such obligations include U.S. Treasury
obligations and repurchase agreements secured by such obligations. The Money
Market Fund intends to invest in bankers' acceptances, certificates of deposit,
repurchase agreements, time deposits, variable rate master demand notes,
taxable municipal securities and commercial paper, and U.S. Government direct
obligations and U.S. Government agencies' securities. Bankers acceptances,
certificates of deposit and time deposits may be purchased from U.S. or foreign
banks. All of these instruments, which are collectively referred to as "Money
Market Obligations," are briefly described in Appendix C to this Statement of
Additional Information.
The Fund will limit investments in Money Market Obligations to those
which are denominated in U.S. dollars and which at the date of purchase are
"First Tier" securities as defined in Rule 2a-7 under the 1940 Act, as such
Rule may be amended from time to time. Generally "First Tier" securities are
securities that are rated in the highest rating category by two NRSROs, or, if
only rated by one NRSRO, are rated in the highest rating category by that
NRSRO, or, if unrated, are determined by AIM (under the supervision of and
pursuant to guidelines established by the Board of Directors) to be comparable
quality to a rated security that meets the foregoing quality standards. For a
more complete definition of a "First Tier" security, see "Money Market
Obligations" in this Statement of Additional Information.
The Money Market Fund may invest up to 100% of its total assets in
obligations issued by banks. While the Fund will limit its investments in bank
instruments to U.S. dollar denominated obligations, it may invest in Eurodollar
obligations (i.e., U.S. dollar-denominated obligations issued by a foreign
branch of a domestic bank), Yankee dollar obligations (i.e., U.S.
dollar-denominated obligations issued by a domestic branch of a foreign bank)
and obligations of foreign branches of foreign banks. The Money Market Fund
will limit its aggregate investments in foreign bank obligations, including
Eurodollar obligations and Yankee dollar obligations, to 25% of its total
assets at the time of purchase, provided that there is no limitation upon the
Fund's investments in (a) Eurodollar obligations, if the domestic parent of the
foreign branch issuing the obligation is unconditionally liable in the event
that the foreign branch for any reason fails to pay on the Eurodollar
obligation; and (b) Yankee dollar obligations, if the U.S. branch of the
foreign bank is subject to the same regulation as U.S. banks. Eurodollar,
Yankee dollar and other foreign bank obligations include time deposits, which
are non-negotiable deposits maintained in a bank for a specified period of time
at a stated
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<PAGE> 19
interest rate. For a discussion of the risks pertaining to investments in
foreign securities, see "Risk Factors" in this Statement of Additional
Information.
TELECOMMUNICATIONS FUND. The Fund's investment objective is long-term
growth of capital. It seeks its objective by investing primarily in equity
securities of companies throughout the world engaged in the development,
manufacture or sale of telecommunications services or equipment.
At least 65% of the Fund's total assets normally will be invested in
common and preferred stocks and warrants to acquire such stocks issued by
telecommunications companies. A "telecommunications company" is an entity in
which (i) at least 50% of either its revenues or earnings was derived from
telecommunications activities, or (ii) at least 50% of its assets was devoted
to telecommunications activities, based on the issuer's most recent fiscal
year. The remainder of the assets of the Fund may be invested in debt
securities issued by telecommunications companies and/or equity and debt
securities of companies outside of the telecommunications industry which, in
the opinion of AIM, stand to benefit from developments in the
telecommunications industries. (For a description of the various rating
categories of corporate debt securities in which the Fund may invest, see
Appendix A to this Statement of Additional Information). The Fund may, in
pursuit of its objective, invest up to 5% of its total assets in below
investment grade debt securities. See "Risk Factors -- Non-Investment Grade
Debt Securities" for more information concerning the risk factors associated
with investing in such securities.
The Fund may invest substantially in securities denominated in one or
more currencies. Under normal conditions, the Fund invests in the equity
securities of issuers located in at least three different countries, including
the United States. No more than 40% of the Fund's total assets will be invested
in securities of issuers in any one country other than the United States.
Telecommunications companies cover a variety of sectors, ranging from
companies concentrating on established technologies to those primarily engaged
in emerging or developing technologies. The characteristics of companies
focusing on the same technology will vary among countries depending upon the
extent to which the technology is established in the particular country. AIM
will allocate the Fund's investments among these sectors depending upon its
assessment of their relative long-term growth potentials.
The Fund will invest primarily in issuers engaged in designing,
developing or providing the following products and services: communications
equipment and services (including equipment and services for both data and
voice transmission); electronic components and equipment; broadcasting
(including television and radio , satellite, microwave and cable television and
narrowcasting); computer equipment, mobile communications and cellular
radio/paging; electronic mail; local and wide area networking and linkage of
word and data processing systems; publishing and information systems; videotext
and teletext; and emerging technologies combining telephone, television and/or
computer systems.
Telecommunications is a global industry with significant, growing
markets outside of the United States. A sizeable proportion of the companies
that comprise the telecommunications industry are headquartered outside of the
United States. From time to time, however, a significant portion of the Fund's
assets may be invested in the securities of domestic issuers.
AIM uses its financial expertise in markets located throughout the
world in attempting to identify those countries and telecommunications
companies then providing the greatest potential for long-term capital
appreciation. In this fashion, AIM and the Fund seek to enable shareholders to
capitalize on the substantial investment opportunities and the potential for
long-term growth of capital presented by the global telecommunications
industry. AIM will allocate the Fund's assets among securities of countries and
in currency denominations and industry sectors where opportunities for meeting
the Fund's investment objective are expected to be the most attractive.
AIM believes that there are opportunities for continued growth in
demand for components, products, media and systems to collect, store, retrieve,
transmit, process, distribute, record, reproduce and use
15
<PAGE> 20
information. The pervasive societal impact of communications and information
technologies has been accelerated by the lower costs and higher efficiencies
that result from the blending of computers with telecommunications systems.
Accordingly, companies engage in the production of methods for using electronic
and, potentially, video technology to communicate information are expected to be
important in the Fund's portfolio. Older technologies, such as photography and
print, also may be represented, however.
VALUE FUND. The Fund's investment objective is to achieve long-term
growth of capital by investing primarily in equity securities judged by AIM to
be undervalued relative to the current or projected earnings of the companies
issuing the securities, or relative to current market values of assets owned by
the companies issuing the securities or relative to the equity market
generally. Income is a secondary objective and would be satisfied principally
from the income (interest and dividends) generated by the common stocks,
convertible bonds and convertible preferred stocks that make up the Fund's
portfolio. The Fund should not be purchased by those who seek income as their
primary investment objective.
In addition to the securities described above, the Fund may also
acquire preferred stocks and debt instruments having prospects for growth of
capital. Although these different types of securities can be expected to
generate amounts of income to satisfy the Fund's secondary objective, they will
be purchased for their potential for growth of capital.
The primary thrust of AIM's search for undervalued equity securities
is in four categories: (1) out-of-favor cyclical growth companies; (2)
established growth companies that are undervalued compared to historical
relative valuation parameters; (3) companies where there is early but tangible
evidence of improving prospects which are not yet reflected in the price of the
company's equity securities; and (4) companies whose equity securities are
selling at prices that do not reflect the current market value of its assets
and where there is reason to expect realization of this potential in the form
of increased equity values.
CERTAIN INVESTMENT STRATEGIES AND TECHNIQUES
Each of the Funds has the flexibility to invest, to the extent
described below, in a variety of instruments designed to enhance its investment
capabilities. Each of the Funds may invest in money market obligations, foreign
securities (including ADRs and EDRs), repurchase agreements, reverse repurchase
agreements, taxable municipal securities, illiquid securities and Rule 144A
securities; the Diversified Income Fund and the Government Fund may invest in
U.S. Government Agency Mortgage-Backed Securities; each of the Funds may
purchase or sell securities on a delayed delivery or when-issued basis and may
borrow money; each of the Funds, other than the Money Market Fund, may lend
portfolio securities and make short sales "against the box." A short sale is
"against the box" to the extent that the Fund contemporaneously owns or has the
right to obtain securities identical to those sold short without payment of any
further consideration.
Each of the Funds, other than the Money Market Fund, may write (i.e.,
sell) "covered" put and call options and buy put and call options on domestic
and foreign securities, securities indices and currencies. Each of the Funds,
other than the Money Market Fund, may use exchange-traded financial futures
contracts, options thereon, and forward contracts as a hedge to protect against
possible changes in market values. A brief description of these investment
instruments and their risks appears below. See "Hedging and Other Investment
Techniques" in this Statement of Additional Information for more detailed
information.
MONEY MARKET OBLIGATIONS
When deemed appropriate for temporary or defensive purposes, each of
the Funds may hold cash or cash equivalent Money Market Obligations. Of course,
the Money Market Fund invests exclusively in Money Market Obligations. While
none of the Funds other than the Money Market Fund is required by regulation or
fundamental policy to limit such investments to those which, at the date of
purchase, are "First Tier" securities as that term is defined in Rule 2a-7
under the 1940 Act, it is the current intention of AIM to limit such
investments to those securities which, at the time of purchase, are considered
"First Tier" securities or
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<PAGE> 21
securities which AIM has determined to be of comparable credit quality. To the
extent that a Fund invests to a significant degree in these instruments, its
ability to achieve its investment objectives may be adversely affected.
In addition to the Money Market Obligations described above, as a
temporary or defensive measure, and without regard to their respective
investment objectives, AIM, or AIM/INVESCO for the Global Growth and Income
Fund may invest all or substantially all of the assets of the Aggressive Growth
Fund, the Balanced Fund, the Diversified Income Fund, the Global Growth and
Income Fund, the Global Utilities Fund, the High Yield Fund, the International
Fund and the Telecommunications Fund in cash or Money Market Obligations,
including repurchase agreements, denominated in foreign currencies.
As set forth in the Prospectus, the Money Market Fund will limit its
purchases of Money Market Obligations to U.S. dollar denominated securities
which are "First Tier" securities, as such term is defined from time to time in
Rule 2a-7 under the 1940 Act. A First Tier Security is generally a security
that: (i) has received a short-term rating, or is subject to a guarantee that
has received a short-term rating, or, in either case, is issued by an issuer
with a short-term rating from the Requisite NRSROs in the highest short-term
rating category for debt obligations; (ii) is an unrated security that the
Fund's investment adviser has determined are of comparable quality to a rated
security described in (i); (iii) is a security issued by a registered
investment company that is a money market fund; or (iv) is a Government
Security.
Subsequent to its purchase by the Fund, an issue of Money Market
Obligations may cease to be a First Tier security. Subject to certain
exceptions set forth in Rule 2a-7, such an event will not require the
elimination of the security from the Fund, but AIM will consider such an event
to be relevant in its determination of whether the Fund should continue to hold
the security.
REPURCHASE AGREEMENTS
Each of the Funds may enter into repurchase agreements with
institutions believed by the Company's Board of Directors to present minimal
credit risk. A repurchase agreement is an instrument under which the Fund
acquires ownership of a debt security and the seller agrees, at the time of the
sale, to repurchase the obligation at a mutually agreed upon time and price,
thereby determining the yield during the Fund's holding period. With regard to
repurchase transactions, in the event of a bankruptcy or other default of a
seller of a repurchase agreement (such as the sellers' failure to repurchase
the obligation in accordance with the terms of the agreement), a Fund could
experience both delays in liquidating the underlying securities and losses,
including: (a) a possible decline in the value of the underlying security
during the period while the Fund seeks to enforce its rights thereto; (b)
possible subnormal levels of income and lack of access to income during this
period; and (c) expenses of enforcing its rights. Repurchase agreements are
considered to be loans by the Fund under the 1940 Act. Repurchase agreements
will be secured by U.S. Treasury securities, U.S. Government agency securities
(including, but not limited to, those which have been stripped of their
interest payments and mortgage-backed securities) and commercial paper.
Although the underlying collateral for repurchase agreements may have
maturities exceeding one year, the Funds will not enter into repurchase
agreements expiring in more than seven days. The Fund may, however, enter into
a "continuing contract" or "open" repurchase agreement under which the seller
is under a continuing obligation to repurchase the underlying obligation from
the Fund on demand and the effective interest rate is negotiated on a daily
basis. Repurchase agreements are considered to be loans by the Fund under the
1940 Act. Securities subject to repurchase agreements will be held in the
custodian's account with the Federal Book-Entry System on behalf of the Fund.
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
The Diversified Income Fund and the Government Fund may invest in U.S.
Government Agency Mortgage-Backed Securities. These securities are obligations
issued or guaranteed by the Untied States
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<PAGE> 22
Government or by one of its agencies or instrumentalities, including but not
limited to GNMA, 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 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 of 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.
CONVERTIBLE SECURITIES
To the extent consistent with their respective investment objectives,
each of the Funds (except the Money Market Fund) may invest in convertible
securities. Convertible securities usually consist of corporate debt securities
or preferred stock that may in certain circumstances be converted into a
predetermined number of shares of another form of that issuer's equity, usually
common stock. Convertible securities consequently often involve attributes of
both debt and equity instruments, and investment in such securities requires
analysis of both credit and stock market risks. Convertible securities rank
senior to common stock in a corporation's capital structure but are usually
subordinated to comparable nonconvertible securities. Convertible securities
may be subject to redemption at the option of the issuer at a price established
in the convertible security's governing instrument. Although the Funds will
only purchase convertible securities that AIM considers to have adequate
protection parameters, including an adequate capacity to pay interest and repay
principal in a timely manner, each applicable Fund invests in such securities
without regard to corporate bond ratings.
REAL ESTATE INVESTMENTS TRUSTS ("REITS")
To the extent consistent with their respective investment objectives
and policies, each of the Funds (except the Government Fund, International Fund
and Money Market Fund) may invest in equity and/or debt securities issued by
REITs. Such investments will not exceed (i) 25% of the total assets of
Aggressive Growth Fund, Balanced Fund, Capital Appreciation Fund, Capital
Development Fund, Global Utilities Fund, Growth Fund, Growth and Income Fund
and Value Fund; and (ii) 10% of the total assets of Diversified Income Fund and
High Yield Fund.
REITs are trusts which sell equity or debt securities to investors and
use the proceeds to invest in real estate or interest therein. A REIT may focus
on particular projects, such as apartment complexes, or geographic regions,
such as the Southeastern United States, or both.
To the extent that the Fund has the ability to invest in REITs, the
Fund could conceivably own real estate directly as a result of a default on the
securities it owns. The Fund, therefore, may be subject to certain risks
associated with the direct ownership of real estate including difficulties in
valuing and trading real estate, declines in the value of real estate, risks
related to general and local economic conditions, adverse changes in the
climate for real estate, increases in property taxes and operating expenses,
changes in zoning laws, casualty or condemnation losses, limitations on rents,
changes in neighborhood values, the appeal of properties to tenants, and
increases in interest rates.
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In addition to the risks described above, equity REITs may be affected
by any changes in the value of the underlying property owned by the trusts,
while mortgage REITs may be affected by the quality of any credit extended.
Equity and mortgage REITs are dependent upon management skill, are not
diversified, and are therefore subject to the risk of financing single or a
limited number of projects. Such trusts are also subject to heavy cash flow
dependency, defaults by borrowers, self-liquidation, and the possibility of
failing to maintain exemption from the 1940 Act. Changes in interest rates may
also affect the value of debt securities held by a Fund. By investing in REITs
indirectly through a Fund, a shareholder will bear not only his/her
proportionate share of the expenses of the Fund, but also, indirectly, similar
expenses of the REITs.
FOREIGN SECURITIES
To the extent consistent with their respective investment objectives,
each of the Funds may invest in foreign securities. It is not anticipated that
such foreign securities will constitute more than: (i) 20% of the value of the
total assets of the Balanced Fund, the Capital Appreciation Fund, the
Government Fund, the Growth Fund and the Growth and Income Fund; (ii) 25% of
the value of the total assets of the Aggressive Growth Fund, the Capital
Development Fund, the High Yield Fund and the Value Fund; (iii) 50% of the
value of the total assets of the Diversified Income Fund and the Money Market
Fund (however, the Money Market Fund may only invest in foreign securities
denominated in U.S. dollars); (iv) 75% of the value of the total assets of the
Telecommunications Fund; (v) 80% of the value of the total assets of the
Global Utilities Fund; and (vi) 90% of the value of the total assets of the
Global Growth and Income Fund. The International Fund will invest at least 70%
of its total assets in foreign securities.
The Diversified Income Fund may invest in debt obligations which may
be denominated in the U.S. dollar or in other currencies issued or guaranteed
by foreign corporations, certain supranational entities (such as the World
Bank, Asian Development Bank and European Economic Community), and foreign
governments (including political subdivisions having taxing authority) or their
agencies or instrumentalities. The Diversified Income Fund may also invest in
debt obligations issued by corporations denominated in non-U.S. dollar
currencies. No more than 25% of the Diversified Income Fund's total assets, at
the time of purchase, will be invested in government securities of any one
foreign country. At the present time, AIM does not intend to invest more than
10% of the Diversified Income Fund's total assets in securities issued by
foreign governments or foreign companies located in developing countries in
various regions of the world. A "developing country" is a country in the
initial stages of its industrial cycle. Investments in emerging markets or
developing countries involve exposure to economic structures that are generally
less diverse and mature and to political systems which can be expected to have
less stability than those of more developed countries. Such countries may have
relatively unstable governments, economies based on only a few industries, and
securities markets which trade only a small number of securities. Historical
experience indicates that emerging markets have been more volatile than the
markets of more mature economies; such markets have also from time to time
provided higher rates of return and greater risks to investors. AIM believes
that these characteristics of emerging markets can be expected to continue in
the future.
The Global Utilities Fund may invest up to 80% of its total assets in
securities of foreign companies, including investments in ADRs, EDRs and other
securities representing underlying securities of foreign issuers. Under normal
market conditions, the Global Utilities Fund will be invested in securities of
issuers located in at least four countries, one of which will be the United
States, although for defensive purposes, it may invest 100% of its total assets
in securities of U.S. issuers. In some foreign countries, utility companies are
partially owned by government agencies. In some cases, foreign government
agencies may have significant investments in businesses other than utility
companies. Also, investments in securities of foreign issuers may involve other
risks which are not ordinarily associated with investments in domestic issuers.
See "Risk Factors" in this Statement of Additional Information. In addition,
investors should also be aware that the Global Utilities Fund may invest in
companies located within emerging or developing countries.
Under normal market conditions the International Fund will invest at
least 70% of its total assets in marketable equity securities (including common
and preferred stock and depositary receipts for stock) and
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may invest up to 20% of its total assets in securities exchangeable for or
convertible into stock or foreign companies.
Under normal market conditions, the International Fund intends to
invest in the securities of foreign companies located in at least four
countries outside the United States. The International Fund will emphasize
investment in foreign companies in the developed countries of Western Europe
and the Pacific Basin, but the Fund may also invest to a lesser extent in the
securities of companies located in developing countries in various regions of
the world. At the present time, AIM does not intend to invest more than 20% of
the International Fund's total assets in securities issued by foreign
governments or foreign companies located in developing countries. For a
discussion of the risks pertaining to investments in foreign obligations, see
"Risk Factors" in this Statement of Additional Information.
FOREIGN EXCHANGE TRANSACTIONS
Purchases and sales of foreign securities are usually made with
foreign currencies, and consequently the Funds (except the Government Fund and
the Money Market Fund) may from time to time hold cash balances in the form of
foreign currencies and multinational currency units. Such foreign currencies
and multinational currency units will usually be acquired on a spot (i.e. cash)
basis at the spot rate prevailing in foreign exchange markets and will result
in currency conversion costs to the Fund. A Fund attempts to purchase and sell
foreign currencies on as favorable a basis as practicable; however, some price
spread on foreign exchange transactions (to cover service charges) may be
incurred, particularly when the Fund changes investments from one country to
another, or when U.S. Dollars are used to purchase foreign securities. Certain
countries could adopt policies which would prevent the Fund from transferring
cash out of such countries, and the Fund may be affected either favorably or
unfavorably by fluctuations in relative exchange rates while the Fund holds
foreign currencies.
ADRS AND EDRS
To the extent consistent with their respective investment objectives
each of the Funds (except the International Fund which is discussed separately
above) 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.
LENDING OF PORTFOLIO SECURITIES
Each Fund (except the Money Market Fund) may, from time to time, lend
securities from their respective portfolios, with a value not exceeding 33_% of
their respective total assets, to banks, brokers and other financial
institutions, and receive in return collateral in the form of liquid assets
which will be maintained at all times in an amount equal to at least 100% of
the current market value of the loaned securities. The collateral received will
consist of cash, U.S. Government securities, letters of credit or such other
collateral as may be permitted under each such Fund's investment program. While
the securities are being lent, a Fund will continue to receive the equivalent
of the interest or dividends paid by the issuer on the securities, as well as
interest on the investment of the collateral or a fee from the borrower. A Fund
has a right to call each loan and obtain the securities on five business days'
notice or, in connection with securities trading on foreign markets, within
such longer period of time which coincides with the normal settlement period
for purchases and sales of such securities in such foreign markets. A Fund will
not have the right to vote securities while they are being lent, but it will
call a loan in anticipation of any important vote. During the period of the
loan, the applicable Fund receives the income on both the loaned securities and
the collateral (or a fee) and thereby increases its yield. In the event that
the borrower defaults on its obligation to return loaned securities because
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<PAGE> 25
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.
Loans will only be made to persons deemed by AIM to be of good standing and
will not be made unless, in the judgment of AIM, the consideration to be earned
from such loans would justify the risk.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements involve the sale by the Fund of
portfolio securities, with an agreement that the Fund will repurchase the
securities at an agreed upon price, date and interest payment. Each Fund may
employ reverse repurchase agreements (i) for temporary emergency purposes, such
as to meet unanticipated net redemptions so as to avoid liquidating other
portfolio securities during unfavorable market conditions; (ii) to cover
short-term cash requirements resulting from the timing of trade settlements;
(iii) to take advantage of market situations where the interest income to be
earned from the investment of the proceeds of the transaction is greater than
the interest expense of the transaction. At the time it enters into a reverse
repurchase agreement, a Fund will segregate liquid assets having a dollar value
equal to the repurchase price. Each of the Funds may enter into reverse
repurchase agreements in amounts not exceeding 33_% of the value of their
respective total assets. Reverse repurchase agreements involve the risk that
the market value of securities retained by a Fund in lieu of liquidating may
decline below the repurchase price of the securities sold by the Fund which 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
Statement of Additional Information for percentage limitations on borrowings.
DELAYED DELIVERY AGREEMENTS AND WHEN-ISSUED SECURITIES
Each Fund may enter into delayed delivery agreements and may purchase
securities on a "when-issued" basis.
Delayed delivery agreements involve commitments by each such Fund to
dealers or issuers to acquire securities or instruments at a specified future
date 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, AIM 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. Until the settlement
date, the Fund will segregate cash or other liquid assets of a dollar value
sufficient at all times to make payment for the delayed delivery securities.
The delayed delivery securities, which will not begin to accrue interest until
the settlement date, will be recorded as an asset of the Fund and will be
subject to the risks of market fluctuation. The purchase price of the delayed
delivery securities is a liability of the Fund until settlement. If cash is not
available to the Fund at the time of settlement, the Fund may be required to
dispose of portfolio securities that it would otherwise hold to maturity in
order to meet its obligation to accept delivery under a delayed delivery
agreement. The Board of Directors has determined that entering into delayed
delivery agreements does not present a materially increased risk of loss to
shareholders, but the Board of Directors may restrict the use of delayed
delivery agreements if the risk of loss is determined to be material or if it
affects the constant net asset value of the Money Market Fund.
Many new issues of debt securities are offered on a "when-issued"
basis, that is, the date for delivery of and payment for the securities is not
fixed at the date of purchase, but is set after the securities are issued
(normally within forty-five days after the date of the transaction). The
payment obligation and the interest rate that will be received on the
securities are fixed at the time the buyer enters into the commitment. The
Funds will only make commitments to purchase such debt securities with the
intention of actually acquiring such securities, but the Funds may each sell
these securities before the settlement date if it is deemed advisable. The Fund
holds, and maintains until the settlement date segregated liquid assets of a
dollar value sufficient
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at all times to make payment for the when-issued securities. The securities
will be marked-to-market and additional assets will be segregated if necessary
to maintain adequate coverage of the when-issued commitments.
Securities purchased on a when-issued basis and the securities held in
the Funds' portfolios are subject to changes in market value based upon the
public's perception of the creditworthiness of the issuer and changes in the
level of interest rates (which will generally result in all of those securities
changing in value in the same way, i.e., all those securities experiencing
appreciation when interest rates rise). Therefore, if, in order to achieve
higher interest income, a Fund is to remain substantially fully invested at the
same time that it has purchased securities on a when-issued basis, there will
be a possibility that the market value of the Fund's assets will fluctuate to a
greater degree. Furthermore, when the time comes for the Fund to meet its
obligations under when-issued commitments, the Fund will do so by using
then-available cash flow, by sale of the segregated securities, by the sale of
other securities or, although it would not normally expect to do so, by
directing the sale of the when-issued securities themselves (which may have a
market value greater or less than the applicable Fund's payment obligation).
A sale of securities to meet such obligations carries with it a
greater potential for the realization of net short-term capital gains, which
are not exempt from federal income taxes. The value of when-issued securities
on the settlement date may be more or less than the purchase price.
If a Fund enters into a delayed delivery agreement or purchases a
when-issued security, the Fund will direct its custodian bank to segregate
liquid assets in an amount equal to its delayed delivery agreements or
when-issued commitments. If the market value of such securities declines,
additional cash or securities will be segregated on a daily basis so that the
market value of the account will equal the amount of such Fund's delayed
delivery agreements and when-issued commitments. To the extent that funds are
segregated, they will not be available for new investment or to meet
redemptions. Investment in securities on a when-issued basis and use of delayed
delivery agreements may increase the Fund's exposure to market fluctuation, or
may increase the possibility that the Fund will incur a short-term loss, if the
Fund must engage in portfolio transactions in order to honor a when-issued
commitment or accept delivery of a security under a delayed delivery agreement.
The Fund will employ techniques designed to minimize these risks. No additional
delayed delivery agreements or when-issued commitments will be made by a Fund
if, as a result, more than 25% of the Fund's net assets would become so
committed.
The Government Fund may engage in buy/sell back transactions (a form
of delayed delivery agreement). In a buy/sell back transaction, the Fund enters
a trade to sell securities at one price and simultaneously enters a trade to
buy the same securities at another price for settlement at a future date.
DOLLAR ROLL TRANSACTIONS
In order to enhance portfolio returns and manage prepayment risk, the
Diversified Income Fund and the Government Fund may engage in dollar roll
transactions with respect to mortgage securities issued by GNMA, FNMA and
FHLMC. In a dollar roll transaction, the Fund sells a mortgage security held in
the portfolio to a financial institution such as a bank or broker-dealer, and
simultaneously agrees to repurchase a substantially similar security (same
type, coupon and maturity) from the institution at a later date at an agreed
upon price. The mortgage securities that are repurchased will bear the same
interest rate as those sold, but generally will be collateralized by different
pools of mortgages with different prepayments 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
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agreement. In the event the buyer of securities under a dollar roll transaction
files for bankruptcy or becomes insolvent, the Fund's use of the proceeds from
the sale of the securities may be restricted pending a determination by the
other party, or its trustee or receiver, whether to enforce the Fund's
obligation to repurchase the securities. See "Borrowing," below for the
applicable limitation on dollar roll transactions.
BORROWING
Each of the Funds may borrow money to a limited extent from banks
(including the Funds' custodian bank) for temporary or emergency purposes
subject to the limitations under the 1940 Act. Each Fund will restrict
borrowings, reverse repurchase agreements and dollar roll transactions to an
aggregate of 33-1/3% of the Fund's total assets at the time of the transaction.
No Fund will purchase additional securities when any borrowings from banks
exceed 5% of the Fund's total assets.
ILLIQUID SECURITIES
None of the Funds will invest more than 15% of their respective net
assets in illiquid securities, including restricted securities which are
illiquid. The Money Market Fund will not invest more than 10% of its net assets
in illiquid securities.
SPECIAL SITUATIONS
Although the Capital Appreciation Fund does not currently intend to do
so, it may invest in "special situations." A special situation arises when, in
the opinion of the Fund's management, the securities of a particular company
will, within a reasonably estimable period of time, be accorded market
recognition at an appreciated value solely by reason of a development
applicable to that company, and regardless of general business conditions or
movements of the market as a whole. Developments creating special situations
might include, among others: liquidations, reorganizations, recapitalizations,
mergers, material litigation, technical breakthroughs and new management or
management policies. Although large and well known companies may be involved,
special situations more often involve comparatively small or unseasoned
companies. Investments in unseasoned companies and special situations often
involve much greater risk than is inherent in ordinary investment securities.
WARRANTS
The Aggressive Growth Fund, the Capital Development Fund, the Global
Growth and Income Fund, the Growth and Income Fund and the Telecommunications
Fund may, from time to time, invest in warrants. Warrants are, in effect,
longer-term call options. They give the holder the right to purchase a given
number of shares of a particular company at specified prices within certain
periods of time. The purchaser of a warrant expects that the market price of
the security will exceed the purchase price of the warrant plus the exercise
price of the warrant, thus giving him a profit. Of course, since the market
price may never exceed the exercise price before the expiration date of the
warrant, the purchaser of the warrant risks the loss of the entire purchase
price of the warrant. Warrants generally trade in the open market and may be
sold rather than exercised. Warrants are sometimes sold in unit form with other
securities of an issuer. Units of warrants and common stock may be employed in
financing young, unseasoned companies. The purchase price of a warrant varies
with the exercise price of a warrant, the current market value of the
underlying security, the life of the warrant and various other investment
factors.
SHORT SALES
Each of the Funds (except the Money Market Fund) may enter into short
sales transactions from time to time. None of these Funds will make short sales
of securities nor maintain a short position unless at all times when a short
position is open, the Fund owns an equal amount of such securities or
securities convertible into or exchangeable, without payment of any further
consideration, for securities of the same issue as, and equal
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in amount to, the securities sold short. This is a technique known as selling
short "against the box." Such short sales will be used by each of the Funds for
the purpose of deferring recognition of gain or loss for federal income tax
purposes. In no event may more than 10% of the value of any such Fund's total
assets be deposited or pledged as collateral for such sales at any time.
RULE 144A SECURITIES
Each of the Funds may invest in securities that are subject to
restrictions on resale because they have not been registered under the
Securities Act of 1933 (the "1933 Act"). These securities are sometimes
referred to as private placements. Although securities which may be resold only
to "qualified institutional buyers" in accordance with the provisions of Rule
144A under the 1933 Act are technically considered "restricted securities," the
Funds may each purchase Rule 144A securities without regard to the limitation
on investments in illiquid securities described above under "Illiquid
Securities," provided that a determination is made that such securities have a
readily available trading market. AIM will determine the liquidity of Rule 144A
securities under the supervision of the Company's Board of Directors.
Determination of whether a Rule 144A security is liquid or not is a question of
fact. In making this determination AIM will consider the trading markets for
the specific security taking into account the unregistered nature of a Rule
144A security. In addition, AIM could consider the (i) frequency of trades and
quotes, (ii) number of dealers and potential purchasers, (iii) dealer
undertakings to make a market, and (iv) nature of the security and of market
place trades (for example, the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). The liquidity of
Rule 144A securities will 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.
INVESTMENT IN OTHER INVESTMENT COMPANIES
Each of the Funds may invest in other investment companies to the
extent permitted by the 1940 Act, and rules and regulations thereunder, and if
applicable, exemptive orders granted by the SEC. The Funds have obtained an
exemptive order from the SEC allowing them to invest in money market funds that
have AIM or an affiliate of AIM as an investment adviser (the "Affiliated Money
Market Funds"), provided that investments in Affiliated Money Market Funds do
not exceed 25% of the total assets of such Fund. With respect to a Fund's
purchase of shares of the Affiliated Money Market Funds, the Fund will
indirectly pay the advisory fees and other operating expenses of the Affiliated
Money Market Funds.
TEMPORARY DEFENSIVE INVESTMENTS
In anticipation of or in response to adverse market conditions, for
cash management purposes, or for defensive purposes, each of the Funds may
temporarily hold all or a portion of its assets in cash, money market
instruments, bonds, or other debt securities. Each of the Funds may also invest
up to 25% of its total assets in Affiliated Money Market Funds for these
purposes. For a description of the various rating categories of corporate bonds
and commercial paper in which the Funds may invest, see the Appendix to this
Statement of Additional Information.
ASSET ALLOCATION AMONG COUNTRIES
The Global Growth and Income Fund currently contemplates that it will
invest principally in securities of issuers in the United States, Canada,
Japan, the Western European nations, New Zealand and Australia, and it may
invest in securities denominated in more than one currency.
UTILITIES INDUSTRY
The following is a general description of the particular types of
utilities industries in which the Global Utilities Fund may invest.
Electric Utility Industry. Electric utilities are heavily regulated.
Local rates are subject to the review of state commissions, and sales either
between companies or that cross state lines are subject to review by the
Federal Energy Regulatory Commission. The industry is also subject to
regulation by the SEC under the Public Utility Holding Company Act of 1935. In
addition, companies constructing or operating nuclear powered generating
stations are subject to extensive regulation by the Nuclear Regulatory
Commission.
Electric utility companies are also subject to extensive local
regulation in environmental and site location matters. Future legislation with
regard to the issues of acid rain and toxic and radioactive wastes could have a
significant impact on the manner in which utility companies conduct their
business, and the costs that they incur. Since the late 1970s, investor-owned
utilities have experienced a number of unfavorable regulatory trends, including
increased regulatory resistance to price increases and new legislation
encouraging competition.
Electric utilities have recently become subject to competition in
varying degrees. This competition can have the effect of decreasing revenues
and profit margins.
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Natural Gas Industry. The natural gas industry is comprised primarily
of many small distribution companies and a few large interstate pipeline
companies. The Public Utility Holding Company Act of 1935 has generally acted
as a bar to the consolidation of pipeline and distribution companies.
Regulation of these companies is similar to that of electric companies. The
performance of natural gas utilities may also be substantially affected by
fluctuations in energy prices. Competition in the natural gas industry has
resulted in the consolidation of the industry.
Communications Industry. Most of the communications industry capacity
is concentrated in the hands of a few very large publicly-held companies,
unlike the situation in the electric and gas industries. Significant risks for
the investor to overcome still exist, however, including risk relating to
pricing at marginal versus embedded cost. New entrants may have lower costs of
material due to newer technologies or lower standards of reliability than those
heretofore imposed by American Telephone & Telegraph ("AT&T") on the industry.
Accordingly, the marginal cost of incremental service is much lower than the
costs embedded in an existing network. Communications companies are not subject
to the Public Utility Holding Company Act of 1935.
Interstate communications service may be subject to Federal
Communications Commission regulation. Local service may be regulated by the
states. In addition, AT&T and its former subsidiaries are still subject to
judicial review pursuant to the settlement of the antitrust case brought
against them by the Department of Justice.
Water Utility Industry. The water utility industry is composed of
regulated public utilities that are involved in the distribution of drinking
water to densely populated areas. The industry is geographically diverse and
subject to the same rate base and rate of return regulations as are other
public utilities. Demand for water is most heavily influenced by the local
weather, population growth in the service area and new construction. Supplies
of clean, drinkable water are limited and are primarily a function of the
amount of past rainfall.
Other. In addition to the particular types of utilities industries
described above, the Fund may invest in developing utility technology companies
(such as cellular telephone, fiber optics and satellite communications firms)
and in holding companies which derive a substantial portion of their revenues
from utility-related activities.
OPTIONS, FUTURES AND CURRENCY STRATEGIES
INTRODUCTION
Each of the Funds (except the Money Market Fund) may each use forward
contracts, futures contracts, options on securities, options on indices, options
on currencies, and options on futures contracts to attempt to hedge against the
overall level of investment and currency risk normally associated with each
Fund's investments. These instruments are often referred to as "derivatives,"
which may be defined as financial instruments whose performance is derived, at
least in part, from the performance of another asset (such as a security,
currency or an index of securities).
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GENERAL RISKS OF OPTIONS, FUTURES AND CURRENCY STRATEGIES
The use by the Funds of options, futures contracts and forward
currency contracts involves special considerations and risks, as described
below. Risks pertaining to particular strategies are described in the sections
that follow.
(1) Successful use of hedging transactions depends upon AIM's ability
to correctly predict the direction of changes in the value of the applicable
markets and securities, contracts and/or currencies. While AIM is experienced
in the use of these instruments, there can be no assurance that any particular
hedging strategy will succeed.
(2) There might be imperfect correlation, or even no correlation,
between the price movements of an instrument (such as an option contract) and
the price movements of the investments being hedged. For example, if a
"protective put" is used to hedge a potential decline in a security and the
security does decline in price, the put option's increased value may not
completely offset the loss in the underlying security. Such a lack of
correlation might occur due to factors unrelated to the value of the
investments being hedged, such as changing interest rates, market liquidity,
and speculative or other pressures on the markets in which the hedging
instrument is traded.
(3) Hedging strategies, if successful, can reduce risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies can also
reduce opportunity for gain by offsetting the positive effect of favorable
price movements in the hedged investments.
(4) There is no assurance that a liquid secondary market will exist
for any particular option, futures contract, forward contract or option thereon
at any particular time.
(5) As described below, a Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in instruments involving obligations to third parties. If a Fund were
unable to close out its positions in such instruments, it might be required to
continue to maintain such assets or accounts or make such payments until the
position expired or matured. The requirements might impair the Fund's ability
to sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time.
(6) There is no assurance that a Fund will use hedging transactions.
For example, if a Fund determines that the cost of hedging will exceed the
potential benefit to the Fund, the Fund will not enter into such transaction.
COVER
Transactions using forward contracts, futures contracts and options
(other than options purchased by a Fund) expose a Fund to an obligation to
another party. A Fund will not enter into any such transactions unless it owns
either (1) an offsetting ("covered") position in securities, currencies, or
other options, forward contracts or futures contracts or (2) cash, liquid
assets and/or short-term debt securities with a value sufficient at all times
to cover its potential obligations not covered as provided in (1) above. Each
Fund will comply with SEC guidelines regarding cover for these instruments and,
if the guidelines so require, set aside cash or liquid securities. To the
extent that a futures contract, forward contract or option is deemed to be
illiquid, the assets used to "cover" the Fund's obligation will also be treated
as illiquid for purposes of determining the Fund's maximum allowable investment
in illiquid securities.
Even though options purchased by the Funds do not expose the Funds to
an obligation to another party, but rather provide the Funds with a right to
exercise, the Funds intend to "cover" the cost of any such exercise. To the
extent that a purchased option is deemed illiquid, the Fund will treat the
market value of the option (i.e., the amount at risk to the Fund) as illiquid,
but will not treat the assets used as cover on such transactions as illiquid.
Assets used as cover cannot be sold while the position in the
corresponding forward contract, futures contract or option is open, unless they
are replaced with other appropriate assets. If a large portion of a Fund's
assets is used for cover or otherwise set aside, it could affect portfolio
management or the Fund's ability to meet redemption requests or other current
obligations.
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WRITING CALL OPTIONS
Each of the Funds may write (sell) covered call options on securities,
futures contracts, forward contracts, indices and currencies. As the writer of
a call option, a Fund would have the obligation to deliver the underlying
security, cash or currency (depending on the type of derivative) to the holder
(buyer) at a specified price (the exercise price) at any time until (American
style) or on (European style) a certain date (the expiration date). So long as
the obligation of a Fund continues, it may be assigned an exercise notice,
requiring it to deliver the underlying security, cash or currency against
payment of the exercise price. This obligation terminates upon the expiration
of the call option, or such earlier time at which a Fund effects a closing
purchase transaction by purchasing an option identical to that previously sold.
When writing a call option a Fund, in return for the premium, gives up
the opportunity for profit from a price increase in the underlying security,
contract or currency above the exercise price, and retains the risk of loss
should the price of the security, contract or currency decline. Unlike one who
owns securities, contracts or currencies not subject to an option, a Fund has
no control over when it may be required to sell the underlying securities,
contracts or currencies, since most options may be exercised at any time prior
to the option's expiration. If a call option that a Fund has written expires,
it will realize a gain in the amount of the premium; however, such gain may be
offset by a decline in the market value of the underlying security, contract or
currency during the option period. If the call option is exercised, a Fund will
realize a gain or loss from the sale of the underlying security, contract or
currency, which will be increased or offset by the premium received.
Writing call options can serve as a limited hedge because declines in
the value of the hedged investment would be offset to the extent of the premium
received for writing the option.
Closing transactions may be effected in order to realize a profit on
an outstanding call option, to prevent an underlying security, contract or
currency from being called or to permit the sale of the underlying security,
contract or currency. Furthermore, effecting a closing transaction will permit
the Fund to write another call option on the underlying security, contract or
currency with either a different exercise price or expiration date, or both.
WRITING PUT OPTIONS
Each of the Funds may write (sell) covered put options on securities,
futures contracts, forward contracts, indices and currencies. As the writer of
a put option, a Fund would have the obligation to buy the underlying security,
contract or currency (depending on the type of derivative) at the exercise
price at any time until (American style) or on (European style) the expiration
date. This obligation terminates upon the expiration of the put option, or such
earlier time at which a Fund effects a closing purchase transaction by
purchasing an option identical to that previously sold.
A Fund would write a put option at an exercise price that, reduced by
the premium received on the option, reflects the lower price it is willing to
pay for the underlying security, contract or currency. The risk in such a
transaction would be that the market price of the underlying security, contract
or currency would decline below the exercise price less the premium received.
PURCHASING PUT OPTIONS
Each of the Funds may purchase covered put options on securities,
futures contracts, forward contracts, indices and currencies. As the holder of a
put option, a Fund would have the right to sell the underlying security,
contract or currency at the exercise price at any time until (American style) or
on (European style) the expiration date. A Fund may enter into closing sale
transactions with respect to such options, exercise such option or permit such
option to expire.
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A Fund may purchase a put option on an underlying security, contract
or currency ("protective put") owned by the Fund in order to protect against an
anticipated decline in the value of the security, contract or currency. Such
hedge protection is provided only during the life of the put option. The
premium paid for the put option and any transaction costs would reduce any
profit realized when the security, contract or currency is delivered upon
exercise of said option. Conversely, if the underlying security, contract or
currency does not decline in value, the option may expire worthless and the
premium paid for the protective put would be lost.
A Fund may also purchase put options on underlying securities,
contracts or currencies against which it has written other put options. For
example, where a Fund has written a put option on an underlying security,
rather than entering a closing transaction of the written option, it may
purchase a put option with a different exercise price and/or expiration date
that would eliminate some or all of the risk associated with the written put.
Used in combinations, these strategies are commonly referred to as "put
spreads." Likewise, a Fund may write call options on underlying securities,
contracts or currencies against which it has purchased protective put options.
This strategy is commonly referred to as a "collar."
PURCHASING CALL OPTIONS
Each of the Funds may purchase covered call options on securities,
futures contracts, forward contracts, indices and currencies. As the holder of
a call option, a Fund would have the right to purchase the underlying security,
contract or currency at the exercise price at any time until (American style)
or on (European style) the expiration date. A Fund may enter into closing sale
transactions with respect to such options, exercise such options or permit such
options to expire.
Call options may be purchased by a Fund for the purpose of acquiring
the underlying security, contract or currency for its portfolio. Utilized in
this fashion, the purchase of call options would enable a Fund to acquire the
security, contract or currency at the exercise price of the call option plus
the premium paid. So long as it holds such a call option, rather than the
underlying security or currency itself, the Fund is partially protected from
any unexpected decline in the market price of the underlying security, contract
or currency and, in such event, could allow the call option to expire,
incurring a loss only to the extent of the premium paid for the option.
Each of the Funds may also purchase call options on underlying
securities, contracts or currencies against which it has written other call
options. For example, where a Fund has written a call option on an underlying
security, rather than entering a closing transaction of the written option, it
may purchase a call option with a different exercise price and/or expiration
date that would eliminate some or all of the risk associated with the written
call. Used in combinations, these strategies are commonly referred to as "call
spreads."
OVER-THE-COUNTER OPTIONS
Options may be either listed on an exchange or traded in
over-the-counter ("OTC") markets. Listed options are third-party contracts
(i.e., performance of the obligations of the purchaser and seller is guaranteed
by the exchange or clearing corporation) and have standardized strike prices
and expiration dates. OTC options are two-party contracts with negotiated
strike prices and expiration dates. A Fund will not purchase an OTC option
unless it believes that daily valuations for such options are readily
obtainable. OTC options differ from exchange-traded options in that OTC options
are transacted with dealers directly and not through a clearing corporation
(which guarantees performance). Consequently, there is a risk of
non-performance by the dealer. Since no exchange is involved, OTC options are
valued on the basis of an average of the last bid prices obtained from dealers,
unless a quotation from only one dealer is available, in which case only that
dealer's price will be used. In the case of OTC options, there can be no
assurance that a liquid secondary market will exist for any particular option
at any specific time. Although a Fund will enter into OTC options only with
dealers that are expected to be capable of entering into closing transactions
with it, there is no assurance that the Fund will in fact be able to close out
an OTC option position at a favorable price prior to expiration. In the event
of insolvency of the dealer, a Fund might be unable to close out an OTC option
position at any time prior to its expiration.
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The staff of the SEC considers purchased OTC options (i.e., the market value of
the option) to be illiquid securities. A Fund may also sell OTC options and, in
connection therewith, segregate assets or cover its obligations with respect to
OTC options written by it. The assets used as cover for OTC options written by
the Fund will be considered illiquid unless the OTC options are sold to
qualified dealers who agree that the Fund may repurchase any OTC option it
writes at a maximum price to be calculated by a formula set forth in the option
agreement. The cover for an OTC option written subject to this procedure would
be considered illiquid only to the extent that the maximum repurchase price
under the formula exceeds the intrinsic value of the option.
INDEX OPTIONS
Puts and calls on indices are similar to puts and calls on securities
or futures contracts except that all settlements are in cash and gain or loss
depends on changes in the index in question (and thus on price movements in the
securities market or a particular market sector generally) rather than on price
movements in individual securities or futures contracts. The amount of cash is
equal to the difference between the closing price of the index and the exercise
price of the call or put times a specified multiple (the "multiplier"), which
determines the total dollar value for each point of such difference.
The risks of investment in index options may be greater than options
on securities. Because index options are settled in cash, when a Fund writes a
call on an index it cannot provide in advance for its potential settlement
obligations by acquiring and holding the underlying securities. A Fund can
offset some of the risk of writing a call index option position by holding a
diversified portfolio of securities similar to those on which the underlying
index is based. However, the Fund cannot, as a practical matter, acquire and
hold a portfolio containing exactly the same securities as underlie the index
and, as a result, bears a risk that the value of the securities held will not
be perfectly correlated with the value of the index.
LIMITATIONS ON OPTIONS
A Fund will not write options if, immediately after such sale, the
aggregate value of securities or obligations underlying the outstanding options
exceeds 20% of the Fund's total assets. A Fund will not purchase options if, at
the time of the investment, the aggregate premiums paid for the options will
exceed 5% of the Fund's total assets.
INTEREST RATE, CURRENCY AND STOCK INDEX FUTURES CONTRACTS
Each of the Funds may enter into interest rate, currency or stock
index futures contracts (collectively, "Futures" or "Futures Contracts") as a
hedge against changes in prevailing levels of interest rates, currency exchange
rates or stock price levels, respectively, in order to establish more
definitely the effective return on securities or currencies held or intended to
be acquired by it. A Fund's hedging may include sales of Futures as an offset
against the effect of expected increases in interest rates, and decreases in
currency exchange rates and stock prices, and purchases of Futures as an offset
against the effect of expected declines in interest rates, and increases in
currency exchange rates or stock prices.
A Futures Contract is a two party agreement to buy or sell a specified
amount of a specified security or currency (or delivery of a cash settlement
price, in the case of an index future) for a specified price at a designated
date, time and place. A stock index future provides for the delivery, at a
designated date, time and place, of an amount of cash equal to a specified
dollar amount times the difference between the stock index value at the close
of trading on the contract and the price agreed upon in the Futures Contract;
no physical delivery of stocks comprising the index is made. Brokerage fees are
incurred when a Futures Contract is bought or sold, and margin deposits must be
maintained at all times the Future is outstanding.
The Funds will only enter into Futures Contracts that are traded
(either domestically or internationally) on futures exchanges and are
standardized as to maturity date and underlying financial instrument. Futures
exchanges and trading thereon
29
<PAGE> 34
in the United States are regulated under the Commodity Exchange Act and by the
Commodity Futures Trading Commission ("CFTC"). Foreign futures exchanges and
trading thereon are not regulated by the CFTC and are not subject to the same
regulatory controls. For a further discussion of the risks associated with
investments in foreign securities, see "Foreign Securities" in this Statement
of Additional Information.
Closing out an open Future is effected by entering into an offsetting
Future for the same aggregate amount of the identical financial instrument or
currency and the same delivery date. There can be no assurance, however, that a
Fund will be able to enter into an offsetting transaction with respect to a
particular Future at a particular time. If a Fund is not able to enter into an
offsetting transaction, it will continue to be required to maintain the margin
deposits on the Future.
A Fund's Futures transactions will be entered into for hedging
purposes only; that is, Futures will be sold to protect against a decline in
the price of securities or currencies that the Fund owns, or Futures will be
purchased to protect the Fund against an increase in the price of securities or
currencies it has committed to purchase or expects to purchase.
"Margin" with respect to Futures is the amount of funds that must be
deposited by a Fund in order to initiate Futures trading and maintain its open
positions in Futures. A margin deposit made when the Futures Contract is
entered ("initial margin") is intended to ensure the Fund's performance under
the Futures Contract. The margin required for a particular Future is set by the
exchange on which the Future is traded and may be significantly modified from
time to time by the exchange during the term of the Futures Contract.
Subsequent payments, called "variation margin," to and from the
futures commission merchant through which a Fund entered into the Futures
Contract will be made on a daily basis as the price of the underlying security,
currency or index fluctuates making the Futures more or less valuable, a
process known as marking-to-market.
If a Fund were unable to liquidate a Future or an option on a Futures
position due to the absence of a liquid secondary market or the imposition of
price limits, it could incur substantial losses. The Fund would continue to be
subject to market risk with respect to the position. In addition, except in the
case of purchased options, the Fund would continue to be required to make daily
variation margin payments and might be required to maintain the position being
hedged by the Future or option or to maintain cash or securities in a
segregated account.
OPTIONS ON FUTURES CONTRACTS
Options on Futures Contracts are similar to options on securities or
currencies except that options on Futures Contracts give the purchaser the
right, in return for the premium paid, to assume a position in a Futures
Contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the period of
the option. Upon exercise of the option, the delivery of the Futures position
by the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's Futures margin account.
FORWARD CONTRACTS
A forward contract is an obligation, usually arranged with a
commercial bank or other currency dealer, to purchase or sell a currency
against another currency at a future date and price as agreed upon by the
parties. A Fund either may accept or make delivery of the currency at the
maturity of the forward contract. A Fund may also, if its contra party agrees
prior to maturity, enter into a closing transaction involving the purchase or
sale of an offsetting contract. Forward contracts are traded over-the-counter,
and not on organized commodities or securities exchanges. As a result, it may
be more difficult to value such contracts, and it may be difficult to enter
into closing transactions.
Each of the Funds may engage in forward currency transactions in
anticipation of, or to protect itself against, fluctuations in exchange rates.
A Fund may enter into forward contracts with respect to a specific
30
<PAGE> 35
purchase or sale of a security, or with respect to its portfolio positions
generally. When a Fund purchases a security denominated in a foreign currency
for settlement in the near future, it may immediately purchase in the forward
market the currency needed to pay for and settle the purchase. By entering into
a forward contract with respect to the specific purchase or sale of a security
denominated in a foreign currency, the Fund can secure an exchange rate between
the trade and settlement dates for that purchase or sale transaction. This
practice is sometimes referred to as "transaction hedging." Position hedging is
the purchase or sale of foreign currency with respect to portfolio security
positions denominated or quoted in a foreign currency.
The cost to a Fund of engaging in forward contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because forward contracts are usually
entered into on a principal basis, no fees or commissions are involved. The use
of forward contracts does not eliminate fluctuations in the prices of the
underlying securities a Fund owns or intends to acquire, but it does establish
a rate of exchange in advance. In addition, while forward contract sales limit
the risk of loss due to a decline in the value of the hedged currencies, they
also limit any potential gain that might result should the value of the
currencies increase.
LIMITATIONS ON USE OF FUTURES, OPTIONS ON FUTURES AND CERTAIN OPTIONS ON
CURRENCIES
To the extent that a Fund enters into Futures Contracts, options on
Futures Contracts and options on foreign currencies traded on a CFTC-regulated
exchange, in each case other than for bona fide hedging purposes (as defined by
the CFTC), the aggregate initial margin and premiums required to establish
those positions (excluding the amount by which options are "in-the-money") will
not exceed 5% of the total assets of the Fund, after taking into account
unrealized profits and unrealized losses on any contracts it has entered into.
This guideline may be modified by the Board, without a shareholder vote. This
limitation does not limit the percentage of the Fund's assets at risk to 5%.
31
<PAGE> 36
RISK FACTORS
Investors should consider carefully the following special factors before
investing in any of the Funds.
SMALL CAPITALIZATION COMPANIES
Investors should realize that equity securities of small to
medium-sized companies may involve greater risk than is associated with
investing in more established companies. Small to medium-sized companies often
have limited product and market diversification, fewer financial resources or
may be dependent on a few key managers. Any one of the foregoing may change
suddenly and have an immediate impact on the value of the company's securities.
Furthermore, whenever the securities markets are experiencing rapid price
changes due to national economic trends, secondary growth securities have
historically been subject to exaggerated price changes.
NON-INVESTMENT GRADE DEBT SECURITIES
The Balanced Fund, the Diversified Income Fund, the High Yield Fund,
and to a lesser extent the Global Utilities Fund and the Telecommunications
Fund, seek to meet their respective investment objectives by investing in
non-investment grade debt securities, commonly known as "junk bonds." While
generally providing greater income and opportunity for gain, non-investment
grade debt securities may be subject to greater risks than higher-rated
securities. Economic downturns tend to disrupt the market for junk bonds and
adversely affect their values. Such economic downturns may be expected to
result in increased price volatility for junk bonds and of the value of shares
of the above-named Funds, and increased issuer defaults on junk bonds.
32
<PAGE> 37
In addition, many issuers of junk bonds are substantially leveraged,
which may impair their ability to meet their obligations. In some cases, junk
bonds are subordinated to the prior payment of senior indebtedness, which
potentially limits a Fund's ability to fully recover principal or to receive
payments when senior securities are subject to a default.
The credit rating of a junk bond does not necessarily address its
market value risk, and ratings may from time to time change to reflect
developments regarding the issuer's financial condition. Junk bonds have
speculative characteristics which are likely to increase in number and
significance with each successive lower rating category.
When the secondary market for junk bonds becomes more illiquid, or in
the absence of readily available market quotations for such securities, the
relative lack of reliable objective data makes it more difficult for the
Company's directors to value a Fund's securities, and judgment plays a more
important role in determining such valuations. Increased illiquidity in the
junk bond market also may affect a Fund's ability to dispose of such securities
at desirable prices.
In the event a Fund experiences an unexpected level of net
redemptions, the Fund could be forced to sell its junk bonds without regard to
their investment merits, thereby decreasing the asset based 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 a Fund in foreign securities whether denominated in
U.S. dollars or foreign currencies, may entail the following risks set forth
below. Investments by a Fund in ADRs, EDRs or similar securities also may
entail some or all of the risks described below.
CURRENCY RISK. The value of the Fund's foreign investments may be
affected by changes in currency exchange rates. The U.S. dollar value of a
foreign security generally decreases when the value of the U.S. dollar rises
against the foreign currency in which the security is denominated, and tends to
increase when the value of the U.S. dollar falls against such currency.
On January 1, 1999, certain members of the European Economic and
Monetary Union ("EMU"), namely Austria, Belgium, Finland, France, Germany,
Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain established a
common European currency known as the "euro" and each members's local currency
became a denomination of the euro. It is anticipated that each participating
country will replace its local currency with the euro on July 1, 2002. Any
other European country that is a member of the European Union and satisfies the
criteria for participation in the EMU may elect to participate in the EMU and
may supplement its existing currency with the euro. The anticipated replacement
of existing currencies with the euro on July 1, 2002 could cause market
disruptions before or after July 1, 2002 and could adversely affect the value
of securities held by the Fund.
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
33
<PAGE> 38
applicable to domestic companies. Income from foreign securities owned by the
Fund may be reduced by a withholding tax at the source, which tax would reduce
dividend income payable to the Fund's shareholders.
MARKET RISK. The securities markets in many of the countries in which
the Fund invests will have substantially less trading volume than the major
United States markets. As a result, the securities of some foreign companies
and governments may be less liquid and experience more price volatility than
comparable domestic securities. Increased custodian costs as well as
administrative difficulties (such as the need to use foreign custodians) may be
associated with the maintenance of assets in foreign jurisdictions. There is
generally less government regulation and supervision of foreign stock
exchanges, brokers and issuers which may make it difficult to enforce
contractual obligations. In addition, transaction costs in foreign securities
markets are likely to be higher, since brokerage commission rates in foreign
countries are likely to be higher than in the United States.
In addition, there are risks associated with certain investment
strategies employed by the Funds as discussed in the previous section.
NON-DIVERSIFIED PORTFOLIO (GLOBAL UTILITIES FUND ONLY)
The Global Utilities Fund is a non-diversified portfolio, which means
that it may invest a greater proportion of its assets in the securities of a
smaller number of issuers and therefore may be subject to greater market and
credit risk than a more broadly diversified portfolio. (A diversified portfolio
may not invest more than 5% of its assets in obligations of one issuer, with
respect to 75% of its total assets.)
INVESTMENT RESTRICTIONS
FUNDAMENTAL RESTRICTIONS
The following restrictions apply to all of the Funds and are
fundamental. Unless permitted by law, they will not be changed for any Fund
without approval of that Fund's voting securities.
None of the Funds will:
(1) invest for the purpose of exercising control over or management
over a company except that each Fund may purchase securities of other
investment companies to the extent permitted by applicable law or exemptive
order;
(2) act as an underwriter, except to the extent that, in connection
with the disposition of portfolio securities, the fund may be deemed to be an
underwriter for purposes of the 1933 Act;
(3) purchase or sell real estate or any interest therein, except that
each Fund may, as appropriate and consistent with its investment policies and
other investment restrictions, invest in securities of corporate or
governmental entities secured by real estate or marketable interests therein or
securities of issuers that engage in real estate operations or interests
therein, and may hold and sell real estate acquired as a result of ownership in
such securities;
(4) purchase or sell commodity contracts, except that each Fund may,
as appropriate and consistent with its investment policies and other investment
restrictions, enter into futures contracts on securities, securities indices
and currency, options on such futures contracts, forward foreign currency
exchange contracts, forward commitments and repurchase agreements;
(5) make loans, except for collateralized loans of portfolio
securities in an amount not exceeding 33-1/3% of the applicable Fund's total
assets. This restriction does not prevent a Fund from purchasing
34
<PAGE> 39
government obligations, short-term commercial paper, or publicly traded debt,
including bonds, notes, debentures, certificates of deposit, bankers acceptances
and equipment trust certificates, nor does this restriction apply to loans made
under insurance policies, or through entry into repurchase agreements, to the
extent they may be viewed as loans;
(6) purchase the securities of issuers conducting their principal
business activity in the same industry if, immediately after such purchase, the
value of its investments in such industry would exceed 25% of its total assets
at market value at the time of each investment, except that the Money Market
Fund may invest up to 100% of its assets in obligations issued by banks. This
limitation does not apply to the Global Utilities Fund or to investments in
obligations of the U.S. Government or any of its agencies or instrumentalities
but will apply to foreign government obligations unless the Securities and
Exchange Commission permits their exclusion;
(7) issue senior securities, except to the extent permitted by the
1940 Act, including permitted borrowings; and
(8) purchase securities of an issuer (other than investments in
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities or except that each Fund may purchase securities of other
investment companies to the extent permitted by applicable law or exemptive
order), if as a result with respect to 75% of the value of the Fund's total
assets, taken at market value, (i) more than 5% of the Fund's total assets
taken at market value would be invested in the securities of such issuer,
except that up to 25% of the Fund's total assets may be invested in securities
issued or guaranteed by any foreign government or its agencies or
instrumentalities, or (ii) such purchase would at the time result in more than
10% of the outstanding voting securities of such issuer being held by the Fund.
As a matter of operating policy, the Money Market Fund will invest no more than
5% of the value of that Fund's total assets in securities, other than U.S.
Government securities of any one issuer, except that the Money Market Fund may
invest up to 25% of its total assets in First Tier Securities (as defined in
Rule 2a-7 under the 1940 Act) of a single issuer for a period of up to three
business days after the purchase of such security. This restriction does not
apply to the Global Utilities Fund.
Each Fund may, notwithstanding any other fundamental investment
policy or limitation, invest all of its assets in the securities of a single
open-end management investment company with substantially the same fundamental
investment objectives, policies and limitations as that Fund.
NON-FUNDAMENTAL RESTRICTIONS
The following investment restrictions apply to all of the Funds but
are not fundamental. They may be changed for any Fund without approval of that
Fund's voting securities.
(1) None of the Funds will invest more than 15% (10% for the Money
Market Fund) of its assets in securities restricted as to disposition under
federal securities laws, or securities otherwise considered illiquid or not
readily marketable, including repurchase agreements having a maturity of more
than seven days.
(2) None of the Funds will purchase or retain the securities of any
issuer if, to the knowledge of AIM, those officers and Directors of the
Company, its adviser or distributor owning individually more than 1/2 of 1% of
the securities of such issuer together own more than 5% of the securities of
such issuer.
(3) The Company does not currently intend to invest all of the assets
of any Fund in the securities of a single open-end management investment
company with the same fundamental investment objectives, policies and
limitations as that Fund.
(4) The Fund may not invest in securities issued by other investment
companies except as part of a merger, reorganization or other acquisition and
except to the extent permitted by (i) the 1940 Act, as amended
35
<PAGE> 40
from time to time, (ii) the rules and regulations promulgated by the SEC under
the 1940 Act, as amended from time to time, or (iii) an exemption or other
relief from the provisions of the 1940 Act.
MANAGEMENT
DIRECTORS AND OFFICERS
The directors and officers of the Company and their principal
occupations during at least the last five years are set forth below. Unless
otherwise indicated, the address of each director and executive officer is 11
Greenway Plaza, Suite 100, Houston, Texas 77046.
<TABLE>
<CAPTION>
POSITIONS HELD WITH
NAME, ADDRESS AND AGE REGISTRANT PRINCIPAL OCCUPATION DURING PAST 5 YEARS
--------------------- ---------- ----------------------------------------
<S> <C> <C>
*CHARLES T. BAUER (80) Director and Chairman of the Board of Directors,
Chairman A I M Management Group Inc., A I M Advisors,
Inc., and A I M Capital Management, Inc.
BRUCE L. CROCKETT (55) Director Director, ACE Limited (insurance company),
906 Frome Lane Formerly, Director, President and Chief Executive
McLean, VA 22102 Officer, COMSAT Corporation and Chairman, Board
of Governors of INTELSAT, (international
communications company).
OWEN DALY II (74) Director Director, Cortland Trust Inc. (investment
Six Blythewood Road company). Formerly, Director, CF & I Steel Corp.,
Baltimore, MD 21210 Monumental Life Insurance Company and Monumental
General Insurance Company; and Chairman of the
Board of Equitable Bancorporation.
EDWARD K. DUNN, JR. (63) Director Chairman of the Board of Directors, Mercantile
2 Hopkins Plaza, 20th Floor Mortgage Corp. Formerly, Vice Chairman of the
Baltimore, MD 21201 Board of Directors and President, Mercantile-Safe
Deposit & Trust Co.; and President, Mercantile
Bankshares.
JACK FIELDS (47) Director Chief Executive Officer, Texana Global, Inc.
8810 Will Clayton Parkway (foreign trading company) and Twenty First
Jetero Plaza, Suite E Century, Inc. (a governmental affairs company).
Humble, TX 77338 Formerly, Member of the U.S. House of
Representatives.
</TABLE>
- --------------------------
* A director who is an "Interested person of A I M Advisors, Inc. and the
Company as defined in the 1940 Act.
36
<PAGE> 41
<TABLE>
<CAPTION>
POSITIONS HELD WITH
NAME, ADDRESS AND AGE REGISTRANT PRINCIPAL OCCUPATION DURING PAST 5 YEARS
--------------------- ---------- ----------------------------------------
<S> <C> <C>
*CARL FRISCHLING (62) Director Partner, Kramer, Levin, Naftalis & Frankel (law
919 Third Avenue firm). Formerly, Partner, Reid & Priest (law
New York, NY 10022 firm).
**ROBERT H. GRAHAM (52) Director and Director, President and Chief Executive Officer,
President A I M Management Group Inc.; Director and
President, A I M Advisors, Inc.; Director and
Senior Vice President, A I M Capital
Management, Inc., A I M Distributors, Inc.,
A I M Fund Services, Inc., and Fund Management
Company; Director, AMVESCAP PLC.
PREMA MATHAI-DAVIS (49) Director Chief Executive Officer, YWCA of the U.S.A.;
350 Fifth Avenue, Suite 301 Commissioner, New York City Department for the
New York, NY 10118 Aging; and Member, Board of Directors,
Metropolitan Transportation Authority of New York
State.
LEWIS F. PENNOCK (57) Director Attorney in private practice in Houston, Texas.
6363 Woodway, Suite 825
Houston, TX 77057
LOUIS S. SKLAR (59) Director Executive Vice President, Development and
Transco Tower, 50th Floor Operations, Hines Interests Limited Partnership
2800 Post Oak Blvd. (real estate development).
Houston, TX 77056
GARY T. CRUM (51) Senior Vice President Director and President, A I M Capital Management,
Inc.; Director and Executive Vice President,
A I M Management Group Inc. and A I M Advisors,
Inc.; and Director, A I M Distributors, Inc. and
AMVESCAP PLC.
</TABLE>
- --------------------------
* A director who is an "Interested person of A I M Advisors, Inc. and the
Company as defined in the 1940 Act.
** A director who is an "Interested person" of the Company as defined in the
1940 Act.
37
<PAGE> 42
<TABLE>
<CAPTION>
POSITIONS HELD WITH
NAME, ADDRESS AND AGE REGISTRANT PRINCIPAL OCCUPATION DURING PAST 5 YEARS
--------------------- ---------- ----------------------------------------
<S> <C> <C>
CAROL F. RELIHAN (45) Senior Vice Director, Senior Vice President, General Counsel
President and and Secretary, A I M Advisors, Inc.; Senior Vice
Secretary President, General Counsel and Secretary, A I M
Management Group Inc.; Director, Vice President
and General Counsel, Fund Management Company;
General Counsel and Vice President, A I M Fund
Services, Inc.; and Vice President, A I M Capital
Management, Inc., and A I M Distributors, Inc.
DANA R. SUTTON (40) Vice President and Vice President and Fund Controller,
Treasurer A I M Advisors, Inc.; and Assistant Vice
President and Assistant Treasurer, Fund
Management Company.
ROBERT G. ALLEY (50) Vice President Senior Vice President, A I M Capital Management,
Inc.; and Vice President,
A I M Advisors, Inc.
STUART W. COCO (43) Vice President Senior Vice President, A I M Capital Management,
Inc. and Vice President, A I M Advisors, Inc.
MELVILLE B. COX (56) Vice President Vice President and Chief Compliance Officer,
A I M Advisors, Inc., A I M Capital Management,
Inc., A I M Distributors, Inc., A I M Fund
Services, Inc., and Fund Management Company.
KAREN DUNN KELLEY (38) Vice President Senior Vice President, A I M Capital Management,
Inc. and Vice President, A I M Advisors, Inc.
EDGAR M. LARSEN (58) Vice President Senior Vice President, A I M Capital Management,
Inc.; and Vice President, A I M Advisors, Inc.
</TABLE>
The standing committees of the Board of Directors are the Audit
Committee, the Investments Committee and the Nominating and Compensation
Committee.
The members of the Audit Committee are Messrs. Crockett, Daly, Dunn
(Chairman), Fields, Frischling, Pennock, Sklar and Ms. Mathai-Davis. The Audit
Committee is responsible for meeting with the Company's auditors to review
audit procedures and results and to consider any matters arising from an audit
to be brought to the attention of the directors as a whole with respect to the
Company's fund accounting or its internal accounting controls, or for
considering such matters as may from time to time be set forth in a Charter
adopted by the Board of Directors and such Committee.
38
<PAGE> 43
The members of the Investments Committee are Messrs. Bauer, Crockett,
Daly, Dunn, Fields, Frischling, Pennock, Sklar (Chairman) and Ms. Mathai-Davis.
The Investments Committee is responsible for reviewing portfolio compliance,
brokerage allocation, portfolio investment pricing issues, interim dividend and
distribution issues, or considering such matters as may from time to time be
set forth in a charter adopted by the Board of Directors and such Committee.
The members of the Nominating and Compensation Committee are Messrs.
Crockett (Chairman), Daly, Dunn, Fields, Pennock, Sklar and Ms. Mathai-Davis.
The Nominating and Compensation Committee is responsible for considering and
nominating individuals to stand for election as directors who are not
interested persons, reviewing from time to time the compensation payable to the
disinterested directors, or considering such matters as may from time to time
be set forth in a charter adopted by the Board of Directors of such Committee.
All of the Company's Directors also serve as directors or trustees of
some or all of the other investment companies managed or advised by AIM. All of
the Directors' executive officers hold similar offices with some or all of the
other investment companies managed or advised by AIM.
Remuneration of Directors
Each director is reimbursed for expenses incurred in connection with
each meeting of the Board of Directors or any Committee thereof. Each director
of the Company who is not also an officer of the Company is compensated for his
services according to a fee schedule which recognizes the fact that such
director also serves as a director or trustee of certain other investment
companies advised or managed by AIM. Each such director receives a fee,
allocated among the AIM Funds for which he serves as a director or trustee,
which consists of an annual retainer component and a meeting fee component.
39
<PAGE> 44
Set forth below is information regarding compensation paid or accrued
during the fiscal year ended December 31, 1998 for each director of the
Company:
<TABLE>
<CAPTION>
RETIREMENT
BENEFITS
AGGREGATE ACCRUED TOTAL
COMPENSATION BY ALL AIM COMPENSATION
DIRECTOR FROM COMPANY(1) FUNDS(2) FROM ALL AIM FUNDS(3)
- ------------------------------ ----------------- -------------- ---------------------
<S> <C> <C> <C>
Charles T. Bauer $ -0- $ -0- $ -0-
- ------------------------------ ----------------- -------------- --------------
Bruce L. Crockett $ 13,095 $ 37,485 $ 96,000
- ------------------------------ ----------------- -------------- --------------
Owen Daly II $ 13,095 $ 122,898 $ 96,000
- ------------------------------ ----------------- -------------- --------------
Edward K. Dunn, Jr. $ 11,098 $ -0- $ 78,889
- ------------------------------ ----------------- -------------- --------------
Jack Fields $ 13,024 $ 15,826 $ 95,500
- ------------------------------ ----------------- -------------- --------------
Carl Frischling(4) $ 13,024 $ 97,791 $ 95,500
- ------------------------------ ----------------- -------------- --------------
Robert H. Graham $ -0- $ -0- $ -0-
- ------------------------------ ----------------- -------------- --------------
John F. Kroeger(5) $ 8,980 $ 107,896 $ 91,654
- ------------------------------ ----------------- -------------- --------------
Prema Mathai-Davis $ 4,625 $ -0- $ 32,636
- ------------------------------ ----------------- -------------- --------------
Lewis F. Pennock $ 13,024 $ 45,766 $ 95,500
- ------------------------------ ----------------- -------------- --------------
Ian W. Robinson(6) $ 12,876 $ 94,442 $ 94,500
- ------------------------------ ----------------- -------------- --------------
Louis S. Sklar $ 12,952 $ 90,232 $ 95,500
- ------------------------------ ----------------- -------------- --------------
</TABLE>
- -------------------------
(1) The total amount of compensation deferred by all Directors of the
Company during the fiscal year ended December 31, 1998, including
interest earned thereon, was $60,584.
(2) During the fiscal year ended December 31, 1998, the total amount of
expenses allocated to the Company in respect of such retirement
benefits was $21,293. Data reflects compensation estimated for the
calendar year ended December 31, 1998.
(3) Each Director serves as a director or trustee of a total of 12
registered investment companies advised by AIM. Data reflects
compensation estimated for the calendar year ended December 31, 1998.
(4) The Company paid the law firm of Kramer, Levin, Naftalis & Frankel LLP
$35,121 in legal fees for services provided to the Funds during the
fiscal year ended December 31, 1998. Mr. Frischling, a Director of the
Company, is a partner in such firm.
(5) Mr. Kroeger was a director until June 11, 1998, when he resigned. On
that date he became a consultant to the Company. Of the amount listed
above $4,723 was for compensation for service as a director and the
remainder as a consultant. Mr. Kroeger passed away on November 26,
1998. Mr. Kroeger's widow will receive his pension as described below
under "AIM Funds Retirement Plan for Eligible Directors/Trustee."
(6) Mr. Robinson was a director until March 12, 1999, when he retired.
40
<PAGE> 45
AIM Funds Retirement Plan for Eligible Directors/Trustees
Under the terms of the AIM Funds Retirement Plan for Eligible
Directors/Trustees (the "Plan"), each director (who is not a employee of any of
the AIM Funds, A I M Management Group Inc. or any of their affiliates) may be
entitled to certain benefits upon retirement from the Board of Directors.
Pursuant to the Plan, the normal retirement date is the date on which the
eligible director has attained age 65 and has completed at least five years of
continuous service with one or more of the regulated investment companies
managed, administered or distributed by AIM or its affiliates (the "Applicable
AIM Funds"). Each eligible director is entitled to receive an annual benefit
from the Applicable AIM Funds commencing on the first day of the calendar
quarter coincident with or following his date of retirement equal to a maximum
of 75% of the annual retainer paid or accrued by the Applicable AIM Funds for
such director during the twelve-month period immediately preceding the
director's retirement (including amounts deferred under a separate agreement
between the Applicable AIM Funds and the director) and based on the number of
such director's years of service (not in excess of 10 years of service)
completed with respect to any of the Applicable AIM Funds. Such benefit is
payable to each eligible director in quarterly installments. If an eligible
director dies after attaining the normal retirement date but before receipt of
any benefits under the Plan commences, the director's surviving spouse (if any)
shall receive a quarterly survivor's benefit equal to 50% of the amount payable
to the deceased director, for no more than ten years beginning the first day of
the calendar quarter following the date of the director's death. Payments under
the Plan are not secured or funded by any AIM Fund.
Set forth below is a table that shows the estimated annual benefits
payable to an eligible director upon retirement assuming a specified level of
compensation and years of service classifications. The estimated credited years
of service for Messrs. Crockett, Daly, Dunn, Fields, Frischling, Kroeger,
Mathai-Davis, Pennock, Robinson and Sklar are 11, 12, 1, 2, 21, 21, 1, 17, 11
and 9 years, respectively.
ANNUAL BENEFITS UPON RETIREMENT
<TABLE>
<CAPTION>
Number of Annual Retirement
Years of Paid By All AIM Funds
Service With
the Applicable AIM
Funds
------------------ ---------------------
<S> <C>
10 $ 67,500
---------- ----------
9 $ 60,750
---------- ----------
8 $ 54,000
---------- ----------
7 $ 47,250
---------- ----------
6 $ 40,500
---------- ----------
5 $ 33,750
---------- ----------
</TABLE>
Deferred Compensation Agreements
Messrs. Daly, Frischling, Kroeger, Robinson and Sklar (for purposes of
this paragraph only, the "deferring directors") have each executed a Deferred
Compensation Agreement (collectively, the "Agreements"). Pursuant to the
Agreements, the deferring directors elected to defer receipt of 100% of their
41
<PAGE> 46
compensation payable by the Company, and such amounts are placed into a
deferral account. Currently, the deferring directors may select various AIM
Funds in which all or part of their deferral account shall be deemed to be
invested. Distributions from the deferring directors' deferral accounts will be
paid in cash, in generally equal quarterly installments over a period of five
(5) or ten (10) years (depending on the Agreement) beginning on the date the
deferring director's retirement benefits commence under the Plan. The Company's
Board of Directors, in its sole discretion, may accelerate or extend the
distribution of such deferral accounts after the deferring director's
termination of service as a director of the Company. If a deferring director
dies prior to the distribution of amounts in his deferral account, the balance
of the deferral account will be distributed to his designated beneficiary in a
single lump sum payment as soon as practicable after such deferring director's
death. The Agreements are not funded and, with respect to the payments of
amounts held in the deferral accounts, the deferring directors have the status
of unsecured creditors of the Company and of each other AIM Fund from which
they are deferring compensation.
INVESTMENT ADVISORY, SUB-ADVISORY AND ADMINISTRATIVE SERVICES AGREEMENTS
Each Fund has entered into a master investment advisory agreement (the
"Advisory Agreement") dated February 28, 1997, and a master administrative
services agreement (the "Administrative Services Agreement"), dated May 1,
1998, with AIM. A prior investment advisory agreement with substantially
identical terms to the Advisory Agreement was in effect prior to February 28,
1997. A prior master administrative services agreement ("Prior Administrative
Services Agreement") with substantially similar terms to the Administrative
Services Agreement, was in effect prior to May 1, 1998. In addition, AIM has
entered into a Sub-Advisory Agreement, dated December 14, 1998, (the
"Sub-Advisory Agreement") with INVESCO Asset Management Limited ("INVESCO"), an
indirect wholly owned subsidiary of AMVESCAP PLC, with respect to Global Growth
and Income Fund. The address of INVESCO is 11 Devonshire Square, London,
England EC2 M4YR. See "Fund Management" in the Prospectus.
AIM was organized in 1976, and along with its subsidiaries, manages or
advises over 110 investment portfolios encompassing a broad range of investment
objectives. AIM is a wholly owned subsidiary of A I M Management Group, Inc.
("AIM Management"), a holding company that has been engaged in the financial
services business since 1976. The address of AIM is 11 Greenway Plaza, Suite
100, Houston, Texas 77046-1173.
AIM and the Company have adopted a Code of Ethics (the "Code of
Ethics") which requires investment personnel and certain other employees (a) to
pre-clear all personal securities transactions subject to the Code of Ethics,
(b) to file reports or duplicate confirmations regarding such transactions, (c)
to refrain from personally engaging in (i) short-term trading of a security,
(ii) transactions involving a security within seven days of an AIM Fund
transaction involving the same security, and (iii) transactions involving
securities being considered for investment by an AIM Fund and (d) abide by
certain other provisions under the Code of Ethics. The Code of Ethics also
prohibits investment personnel and all other employees from purchasing
securities in an initial public offering. Personal trading reports are reviewed
periodically by AIM, and the Board of Directors reviews quarterly and annual
reports (including information on any substantial violations of the Code of
Ethics). Sanctions for violations of the Code of Ethics may include censure,
monetary penalties, suspension or termination of employment.
The Advisory Agreement for the Funds provides that each Fund will pay
all expenses of the Fund, including, without limitation: brokerage commissions,
taxes, legal, auditing, or governmental fees, the cost of preparing share
certificates, custodian, transfer and shareholder service agent costs, expenses
of issue, sale, redemption and repurchase of shares, expenses of registering
and qualifying shares for sale, expenses relating to directors and shareholder
meetings, the cost of preparing and distributing reports and notices to
shareholders, the fees and other expenses incurred by the Company on behalf of
the Funds in connection with membership in investment company organizations,
the cost of printing copies of prospectuses and statements of additional
information distributed to the Fund's shareholders; and all other charges and
costs of the Fund's operations unless otherwise explicitly provided.
42
<PAGE> 47
The Advisory Agreement for the Funds and the Sub-Advisory Agreement
for Global Growth and Income Fund provides that the agreement will remain in
effect for the initial term and continue in effect from year to year thereafter
only if such continuance is specifically approved at least annually (i) by the
Company's Board of Directors or by the vote of a majority of the outstanding
voting securities of the Funds (as defined in the 1940 Act); and (ii) by the
affirmative vote of a majority of the directors who are not parties to the
agreement or "interested persons" of any such party (the "Non-Interested
Directors") by votes cast in person at a meeting called for such purpose. The
Advisory Agreement was initially approved by the Company's Board of Directors
(including the affirmative vote of all of the Non-Interested Directors) on
December 11, 1996 and was approved by the Funds' shareholders on February 7,
1997. The Board of Directors of the Company approved the continuance of the
Agreement until June 30, 1998. The Advisory Agreement became effective on
February 28, 1997. The Sub-Advisory Agreement was initially approved by the
Company's Board of Directors (including the affirmative vote of all of the
Non-Interested Directors) on September 26, 1998. The Sub-Advisory Agreement
became effective December 14, 1998. The Advisory Agreement provides that the
Company, AIM (in the case of the Advisory Agreement) or INVESCO (in the case of
the Sub-Advisory Agreement) may terminate such agreement with respect to any
Fund(s) on sixty (60) days' written notice without penalty. Each agreement
terminates automatically in the event of its assignment. As compensation for
its services, AIM pays 0.40% of the advisory fees it receives pursuant to the
Advisory Agreement with respect to Global Growth and Income Fund to INVESCO.
AIM may from time to time waive or reduce its fee. Voluntary fee
waivers or reductions may be rescinded at any time without further notice to
investors. During periods of voluntary fee waivers or reductions, AIM will
retain its ability to be reimbursed for such fee prior to the end of each
fiscal year. Contractual fee waivers or reductions set forth in the Fee Table
in a Prospectus may not be terminated or amended to the Fund's detriment during
the period stated in the agreement between AIM and the Fund.
Pursuant to the Advisory Agreement, AIM receives a fee from each of
AIM V.I. Aggressive Growth Fund, AIM V.I. Balanced Fund, AIM V.I. Capital
Appreciation Fund, AIM V.I. Capital Development Fund, AIM V.I. Diversified
Income Fund AIM V.I. Global Growth and Income Fund, AIM V.I. Global Utilities
Fund, AIM V.I. Government Securities Fund, AIM V.I. Growth Fund, AIM V.I.
Growth and Income Fund, AIM V.I. High Yield Fund, AIM V.I. International Equity
Fund, AIM V.I. Money Market Fund, AIM V.I. Telecommunications Fund and AIM V.I.
Value Fund calculated at the following annual rate, based on the average daily
net assets of the Fund during the year:
AIM V.I. CAPITAL APPRECIATION FUND
AIM V.I. GLOBAL UTILITIES FUND
AIM V.I. GROWTH FUND
AIM V.I. GROWTH AND INCOME FUND
AIM V.I. VALUE FUND
<TABLE>
<CAPTION>
ANNUAL
NET ASSETS RATE
- ---------- --------
<S> <C>
First $250 million............................................. 0.65%
Over $250 million ............................................. 0.60%
</TABLE>
43
<PAGE> 48
<TABLE>
<CAPTION>
AIM V.I. AGGRESSIVE GROWTH FUND
ANNUAL
NET ASSETS RATE
- ---------- ------
<S> <C>
First $150 million............................................................................... 0.80%
Over $150 million ............................................................................... 0.625%
AIM V.I. BALANCED FUND
ANNUAL
NET ASSETS RATE
- ---------- ------
First $150 million............................................................................... 0.75%
Over $150 million ............................................................................... 0.50%
AIM V.I. CAPITAL DEVELOPMENT FUND
ANNUAL
NET ASSETS RATE
- ---------- ------
First $350 million............................................................................... 0.75%
Over $350 million ............................................................................... 0.625%
AIM V.I. DIVERSIFIED INCOME FUND
ANNUAL
NET ASSETS RATE
- ---------- ------
First $250 million............................................................................... 0.60%
Over $250 million ............................................................................... 0.55%
AIM V.I. GLOBAL GROWTH AND INCOME FUND
AIM V.I. TELECOMMUNICATIONS FUND
ANNUAL
NET ASSETS RATE
- ---------- ------
Average Daily Net Assets......................................................................... 1.00%
AIM V.I. GOVERNMENT SECURITIES FUND
ANNUAL
NET ASSETS RATE
- ---------- ------
First $250 million............................................................................... 0.50%
Over $250 million ............................................................................... 0.45%
</TABLE>
44
<PAGE> 49
<TABLE>
<CAPTION>
AIM V.I. HIGH YIELD FUND
ANNUAL
NET ASSETS RATE
- ---------- ------
<S> <C>
First $200 million ............................................................................... 0.625%
Next $300 million ................................................................................ 0.55%
Next $500 million ................................................................................ 0.50%
Amount over $1 billion............................................................................ 0.45%
AIM V.I. INTERNATIONAL EQUITY FUND
ANNUAL
NET ASSETS RATE
- ---------- ------
First $250 million................................................................................ 0.75%
Over $250 million ................................................................................ 0.70%
AIM V.I. MONEY MARKET FUND
ANNUAL
NET ASSETS RATE
- ---------- ------
First $250 million ............................................................................... 0.40%
Over $250 million ................................................................................ 0.35%
</TABLE>
Each of the following Funds (except the AIM V.I. Global Growth and
Income Fund and the AIM V.I. Telecommunications Fund) paid to AIM a management
fee (net of fee waivers) for the fiscal years ended December 31, 1998, December
31, 1997, and December 31, 1996, under the Advisory Agreement and a prior,
substantially identical advisory agreement, as follows:
45
<PAGE> 50
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
AIM V.I. Aggressive Growth Fund* $ 1,609 N/A N/A
AIM V.I. Balanced Fund* $ -0- N/A N/A
AIM V.I. Capital Appreciation Fund $ 3,521,837 $3,083,708 $1,884,838
AIM V.I. Capital Development Fund* $ -0- N/A N/A
AIM V.I. Diversified Income Fund $ 580,119 $ $ 306,235
AIM V.I. Global Utilities Fund $ 161,488 $ 106,309 $ 57,054
AIM V.I. Government Securities Fund $ 221,956 $ 138,550 $ 107,471
AIM V.I. Growth Fund $ 1,941,818 $1,453,488 $ 916,484
AIM V.I. Growth and Income Fund $ 5,556,833 $2,609,695 $ 678,242
AIM V.I. High Yield Fund* $ -0- N/A N/A
AIM V.I. International Equity Fund $ 1,744,127 $1,519,323 $ 924,578
AIM V.I. Money Market Fund $ 252,407 $ 254,546 $ 264,855
AIM V.I. Value Fund $ 5,570,566 $3,303,799 $1,955,091
</TABLE>
* Fees paid were for the period May 1, 1998 (date operations commenced) through
December 31, 1998.
For the fiscal years ended December 31, 1998, December 31, 1997 and
December 31, 1996, AIM waived management fees for each Fund (except the AIM
V.I. Global Growth and Income Fund and the AIM V.I. Telecommunications Fund) as
follows:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
AIM V.I. Aggressive Growth Fund* $ 11,445 N/A N/A
AIM V.I. Balanced Fund* $ 21,238 N/A N/A
AIM V.I. Capital Appreciation Fund $ -0- $ -0- $ -0-
AIM V.I. Capital Development Fund* $ 9,522 N/A N/A
AIM V.I. Diversified Income Fund $ -0- $ -0- $ -0-
AIM V.I. Global Utilities Fund $ -0- $ -0- $ 15,954
AIM V.I. Government Securities Fund $ -0- $ -0- $ -0-
AIM V.I. Growth Fund $ -0- $ -0- $ -0-
AIM V.I. Growth and Income Fund $ -0- $ -0- $ -0-
AIM V.I. High Yield Fund* $ 20,728 N/A N/A
AIM V.I. International Equity Fund $ -0- $ -0- $ -0-
AIM V.I. Money Market Fund $ -0- $ -0- $ -0-
AIM V.I. Value Fund $ -0- $ -0- $ -0-
</TABLE>
* Fees waived were for the period May 1, 1998 (date operations commenced)
through December 31, 1998.
46
<PAGE> 51
In addition to the management fees paid by each Fund (except the AIM
V.I. Global Growth and Income Fund and the AIM V.I. Telecommunications Fund)
for the fiscal years ended December 31, 1998, December 31, 1997 and December
31, 1996, AIM absorbed other expenses as follows:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
AIM V.I. Aggressive Growth Fund* $ 43,400 N/A N/A
AIM V.I. Balanced Fund* $ 25,501 N/A N/A
AIM V.I. Capital Appreciation Fund $ -0- $ -0- $ -0-
AIM V.I. Capital Development Fund* $ 48,808 N/A N/A
AIM V.I. Diversified Income Fund $ -0- $ -0- $ -0-
AIM V.I. Global Utilities Fund $ -0- $ -0- $ -0-
AIM V.I. Government Securities Fund $ -0- $ -0- $ -0-
AIM V.I. Growth Fund $ -0- $ -0- $ -0-
AIM V.I. Growth and Income Fund $ -0- $ -0- $ -0-
AIM V.I. High Yield Fund* $ 24,798 N/A N/A
AIM V.I. International Equity Fund $ -0- $ -0- $ -0-
AIM V.I. Money Market Fund $ -0- $ -0- $ -0-
AIM V.I. Value Fund $ -0- $ -0- $ -0-
</TABLE>
* Fee amounts are for the period May 1, 1998 (date operations commenced)
through December 31, 1998.
The Administrative Services Agreement for the Funds provides that AIM
may perform certain accounting and other administrative services to each Fund
which are not required to be performed by AIM under the Advisory Agreement. For
such services, AIM would be entitled to receive from each Fund reimbursement of
its expenses. In addition, AIM provides, or assures that Participating Insurance
Companies will provide, certain services implementing the Company's funding
arrangements with Participating Insurance Companies. These services include:
establishment of compliance procedures; negotiation of participation agreements;
preparation of prospectuses, financial reports and proxy statements for existing
Contractowners; maintenance of master accounts; facilitation of purchases and
redemptions requested by Contractowners; distribution to existing Contractowners
of copies of prospectuses, proxy materials, periodic Fund reports and other
materials; maintenance of records; and Contractowner services and communication.
Effective May 1, 1998, the Funds reimburse AIM for its costs in providing, or
assuring that Participating Insurance Companies provide, these services,
currently in an amount up to 0.25% of the average net asset value of each Fund
in excess of the net asset value of each Fund on April 30, 1998.
The Administrative Services Agreement for the Funds provides that the
agreement will remain in effect for the initial term and continue in effect
from year to year thereafter only if such continuance is specifically approved
at least annually (i) by the Company's Board of Directors or by the vote of a
majority of the outstanding voting securities of the Funds (as defined in the
1940 Act); and (ii) by the affirmative vote of a majority of the Non-Interested
Directors, by votes cast in person at a meeting called for such purpose. The
agreement terminates automatically in the event of its assignment or in the
event of termination of the Master Investment Advisory Agreement.
47
<PAGE> 52
For the fiscal years ended December 31, 1998, December 31, 1997 and
December 31, 1996, AIM received reimbursement of administrative services costs
from each of the Funds (except the AIM V.I. Global Growth and Income Fund and
the AIM V.I. Telecommunications Fund) pursuant to the Prior Administrative
Services Agreement as follows:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
AIM V.I. Aggressive Growth Fund* $ 26,658 N/A N/A
AIM V.I. Balanced Fund* $ 26,649 N/A N/A
AIM V.I. Capital Appreciation Fund $ 62,063 $43,588 $46,623
AIM V.I. Capital Development Fund* $ 26,658 N/A N/A
AIM V.I. Diversified Income Fund $ 47,528 $48,683 $49,500
AIM V.I. Global Utilities Fund $ 46,855 $47,128 $47,729
AIM V.I. Government Securities Fund $ 50,152 $37,872 $38,695
AIM V.I. Growth Fund $ 57,128 $44,692 $39,552
AIM V.I. Growth and Income Fund $ 296,138 $43,065 $38,784
AIM V.I. High Yield Fund* $ 28,103 N/A N/A
AIM V.I. International Equity Fund $ 76,026 $59,724 $58,644
AIM V.I. Money Market Fund $ 36,480 $38,289 $29,412
AIM V.I. Value Fund $ 420,725 $53,632 $47,116
</TABLE>
* Fees paid were for the period May 1, 1998 (date operations commenced)
through December 31, 1998.
THE DISTRIBUTION AGREEMENT
The Funds have entered into a master distribution agreement (the
"Distribution Agreement") with AIM Distributors, dated February 28, 1997.
Information concerning AIM Distributors and the continuous offering of the
Funds' shares is set forth in the Prospectus under the heading "Fund
Management." The Distribution Agreement provides that AIM Distributors will
bear the expenses of printing from the final proof and distributing
prospectuses and statements of additional information of the Funds relating to
the sale of Fund shares. The Distribution Agreement provides that the Funds
shall bear the expenses of qualification of shares of the Fund for sale in
connection with the public offering in any jurisdictions where qualification is
required by law. AIM Distributors has not undertaken to sell any specified
number of shares of the Funds.
The Distribution Agreement for the Funds provides that it will
continue in effect for its initial term and from year to year thereafter only
if such continuance is specifically approved at least annually (i) by the
Company's Board of Directors or by the vote of a majority of the outstanding
voting securities of the Funds (as defined in the 1940 Act); and (ii) by the
affirmative vote of a majority of Non-Interested Directors by votes cast in
person at a meeting called for such purpose. The Company or AIM Distributors
may terminate its Distribution Agreement on sixty (60) days' written notice
without penalty. The Distribution Agreement will terminate automatically in the
event of its assignment.
DETERMINATION OF NET ASSET VALUE
The net asset value per share (or share price) of each of the Funds
will be determined as of the close of regular trading of the New York Stock
Exchange ("NYSE") (generally 4:00 p.m. Eastern Time) on each "business day of
the Fund." In the event the NYSE closes early (i.e. before 4:00 p.m. Eastern
Time) on a particular day, the net asset value of a Fund share is determined as
of the close of the NYSE on such day.
48
<PAGE> 53
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
NYSE. A "business day of a Fund" is any day on which the NYSE is open for
business. It is expected that the NYSE will be closed during the next twelve
months on Saturdays and Sundays and on the observed holidays of New Year's Day,
Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset
value per share of a Fund is determined by subtracting the liabilities (e.g.,
the expenses) of the Fund from the assets of the Fund and dividing the result
by the total number of shares outstanding of such Fund. The determination of a
Fund's net asset value per share is made in accordance with generally accepted
accounting principles.
VALUATION OF INVESTMENTS OF ALL FUNDS EXCEPT THE MONEY MARKET FUND.
Among other items, a Fund's liabilities include accrued expenses and dividends
payable, and its total assets include portfolio securities valued at their
market value as well as income accrued but not received. Securities for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the supervision of the Company's officers
and in accordance with methods which are specifically authorized by the Board
of Directors of the Company. Short-term obligations with maturities of 60 days
or less are valued at amortized cost as reflecting fair value.
VALUATION OF THE MONEY MARKET FUND'S INVESTMENTS. The Money Market
Fund uses the amortized cost method of valuing the securities held by the Fund
and rounds the Fund's per share net asset value to the nearest whole cent;
therefore, it is anticipated that the net asset value of the shares of the Fund
will remain constant at $1.00 per share. However, the Company can give no
assurance that the Fund can maintain a $1.00 net asset value per share.
FUTURE 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.
For the Money Market Fund: The net asset value per share of the Fund
is determined daily as of the close of trading on the New York Stock Exchange
("NYSE") (generally 4:00 p.m. Eastern time) on each business day of the Fund.
In the event the NYSE closes early (i.e. before 4:00 p.m. Eastern Time) on a
particular day, the net asset value of a Fund share is determined as of the
close of the NYSE on such day. Net asset value per share is determined by
dividing the value of the Fund's securities, cash and other assets (including
interest accrued but not collected), less all its liabilities (including
accrued expenses and dividends payable), by the number of shares outstanding of
the Fund and rounding the resulting per share net asset value to the nearest
one cent. Determination of the Fund's net asset value per share is made in
accordance with generally accepted accounting principles.
The securities of the Fund are valued on the basis of amortized cost.
This method values a security at its cost on the date of purchase and
thereafter assumes a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the security. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Fund would receive if the security were
sold. During such periods, the daily yield on shares of the Fund computed as
described under "Yield Information" may differ somewhat from an identical
computation made by another investment company with identical investments
utilizing available indications as to the market value of its portfolio
securities.
49
<PAGE> 54
The valuation of the portfolio instruments based upon their amortized
cost and the concomitant maintenance of the net asset value per share of $1.00
for the Fund is permitted in accordance with applicable rules and regulations
of the SEC which require the Fund to adhere to certain conditions. The Fund
will invest only in "Eligible Securities," as defined in Rule 2a-7 of the 1940
Act, which the Fund's Board of Directors has determined present minimal credit
risk. Rule 2a-7 also requires, among other things, that the Fund maintain a
dollar-weighted average portfolio maturity of 90 days or less and purchase only
instruments having remaining maturities of 397 calendar days or less.
The Board of Directors is required to establish procedures designed to
stabilize, to the extent reasonably practicable, the Fund's price per share at
$1.00 for the Fund as computed for the purpose of sales and redemptions. Such
procedures include review of the Fund's holdings by the Board of Directors at
such intervals as they may deem appropriate, to determine whether the net asset
value calculated by using available market quotations or other reputable
sources for the Fund deviates from $1.00 per share and, if so, whether such
deviation may result in material dilution or is otherwise unfair to existing
holders of the Fund's shares. In the event the Board of Directors determines
that such a deviation exists for the Fund, it will take such corrective action
as the Board of Directors deems necessary and appropriate with respect to the
Fund, including the sale of portfolio instruments prior to maturity to realize
capital gains or losses or to shorten the average portfolio maturity; the
withholding of dividends; redemption of shares in kind; or the establishment of
a net asset value per share by using available market quotations.
The Fund intends to comply with any amendments made to Rule 2a-7 which
may require corresponding changes in the Fund's procedures which are designed
to stabilize the Fund's price per share at $1.00.
For All Other Funds: The net asset value per share of each Fund is
normally determined daily as of the close of trading on the NYSE (generally
4:00 p.m. Eastern time) on each business day of the Company. In the event the
NYSE closes early (i.e. before 4:00 p.m. Eastern Time) on a particular day, the
net asset value of a Fund share is determined as of the close of the NYSE on
such day. For purposes of determining net asset value per share, futures and
options contracts closing prices which are available 15 minutes after the close
of trading of the NYSE will generally be used. Net asset value per share is
determined by dividing the value of the Fund's securities, cash and other
assets (including interest accrued but not collected), less all its liabilities
(including accrued expenses and dividends payable), by the total number of
shares outstanding. Determination of the Fund's net asset value per share is
made in accordance with generally accepted accounting principles.
Each equity security held by the Fund is valued at its last sales
price on the exchange where the security is principally traded or, lacking any
sales on a particular day, the security is valued at the closing bid price on
that day. Each security traded in the over-the-counter market (but not
including securities reported on the NASDAQ National Market System) is valued
at the mean between the last bid and asked prices based upon quotes furnished
by market makers for such securities. Each security reported on the NASDAQ
National Market System is valued at the last sales price on the valuation date
or absent a last sales price, at the closing bid price on that day. Debt
securities are valued on the basis of prices provided by an independent pricing
service. Prices provided by the pricing service may be determined without
exclusive reliance on quoted prices, and may reflect appropriate factors such
as institution-size trading in similar groups of securities, developments
related to special securities, yield, quality, coupon rate, maturity, type of
issue, individual trading characteristics and other market data. 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
in a manner specifically authorized by the Board of Directors of the Company.
Short-term obligations having 60 days or less to maturity are valued on the
basis of amortized cost. 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 NYSE.
50
<PAGE> 55
Generally, trading in foreign securities is substantially completed
each day at various times prior to the close of the NYSE. The values of such
foreign securities used in computing the net asset value of each Fund's shares
are determined at such times as trading is completed. Foreign currency exchange
rates are also generally determined prior the close of the NYSE. Occasionally,
events affecting the values of such foreign securities and such foreign
securities exchange rates may occur after the time at which such values are
determined and prior to the close of the NYSE that will not be reflected in the
computation of a Fund's net asset value. If events materially affecting the
value of such securities occur during such period, then these securities will
be valued at their fair value as determined in good faith by or under the
supervision of the Board of Directors.
PURCHASE AND REDEMPTION OF SHARES
The Company offers the shares of the Funds, on a continuous basis, to
both registered and unregistered separate accounts of affiliated and
unaffiliated Participating Insurance Companies to fund variable annuity
contracts (the "Contracts") and variable life insurance policies ("Policies").
Each separate account contains divisions, each of which corresponds to a Fund
in the Company. Net purchase payments under the Contracts are placed in one or
more of the divisions of the relevant separate account and the assets of each
division are invested in the shares of the Fund which corresponds to that
division. Each separate account purchases and redeems shares of these Funds for
its divisions at net asset value without sales or redemption charges.
Currently several insurance company separate accounts invest in the Funds.
The Company, in the future, may offer the shares of its Funds to
certain pension and retirement plans ("Plans") qualified under the Internal
Revenue Code. The relationships of Plans and Plan participants to the Fund
would be subject, in part, to the provisions of the individual plans and
applicable law. Accordingly, such relationships could be different from those
described in this Prospectus for separate accounts and owners of Contracts and
Policies, in such areas, for example, as tax matters and voting privileges.
The Board of Directors monitors for possible conflicts among separate
accounts (and will do so for plans) buying shares of the Funds. Conflicts could
develop for a variety of reasons. For example, differences in treatment under
tax and other laws or the failure by a separate account to comply with such
laws could cause a conflict. To eliminate a conflict, the Board of Directors
may require a separate account or Plan to withdraw its participation in a Fund.
A Fund's net asset value could decrease if it had to sell investment securities
to pay redemption proceeds to a separate account (or plan) withdrawing because
of a conflict.
Each Fund ordinarily effects orders to purchase or redeem its shares
that are based on transactions under Policies or Contracts (e.g., purchase or
premium payments, surrender or withdrawal requests, etc.) at the Fund's net
asset value per share next computed on the day on which the separate account
processes such transactions. Each Fund effects orders to purchase or redeem its
shares that are not based on such transactions at the Fund's net asset value
per share next computed on the day on which the Fund receives the orders.
Please refer to the appropriate separate account prospectus related to
your Contract for more information regarding the Contract.
DIVIDENDS, DISTRIBUTIONS AND TAX MATTERS
DIVIDENDS AND DISTRIBUTIONS. The Funds declare and distribute
dividends representing substantially all net investment income as follows:
<TABLE>
<CAPTION>
DIVIDENDS DIVIDENDS
DECLARED PAID
-------- ----
<S> <C> <C>
AIM V.I. Aggressive Growth Fund ................................ annually annually
AIM V.I. Balanced Fund ......................................... annually annually
AIM V.I. Capital Appreciation Fund ............................. annually annually
AIM V.I. Capital Development Fund .............................. annually annually
AIM V.I. Diversified Income Fund ............................... annually annually
AIM V.I. Global Utilities Fund ................................. annually annually
AIM V.I. Global Growth and Income Fund ......................... annually annually
AIM V.I. Government Securities Fund ............................ annually annually
</TABLE>
51
<PAGE> 56
<TABLE>
<S> <C> <C>
AIM V.I. Growth Fund ........................................... annually annually
AIM V.I. Growth and Income Fund ................................ annually annually
AIM V.I. High Yield Fund ....................................... annually annually
AIM V.I. International Equity Fund ............................. annually annually
AIM V.I. Money Market Fund ..................................... daily daily
AIM V.I. Telecommunications Fund................................ annually annually
AIM V.I. Value Fund ............................................ annually annually
</TABLE>
Substantially all net realized capital gains, if any, are distributed
on an annual basis, except for the Money Market Fund, which may distribute net
realized short-term gains more frequently.
All such distributions will be automatically reinvested, at the
election of Participating Insurance Companies, in shares of the Fund issuing
the distribution at the net asset value determined on the reinvestment date.
TAX MATTERS. Each series of shares of the Company is treated as a
separate association taxable as a corporation. Each Fund intends to qualify
under the Internal Revenue Code of 1986, as amended (the "Code"), as a
regulated investment company ("RIC") for each taxable year. As a RIC, a Fund
will not be subject to federal income tax to the extent it distributes to its
shareholders its net investment income and net capital gains.
In order to qualify as a regulated investment company, each Fund must
satisfy certain requirements concerning the nature of its income,
diversification of its assets and distribution of its income to shareholders.
In order to ensure that individuals holding the Contracts whose assets are
invested in a Fund will not be subject to federal income tax on distributions
made by the Fund prior to the receipt of payments under the Contracts, each
Fund intends to comply with additional requirements of Section 817(h) of the
Code relating to both diversification of its assets and eligibility of an
investor to be its shareholder. Certain of these requirements in the aggregate
may limit the ability of a Fund to engage in transactions involving options,
futures contracts, forward contracts and foreign currency and related deposits.
Any Fund's transactions in non-equity options, forward contracts,
futures contracts and foreign currency will be subject to special tax rules,
the effect of which may be to accelerate income to the Fund, defer Fund losses,
cause adjustments in the holding periods of fund securities and convert
short-term capital losses into long-term capital losses. These losses could
therefore affect the amount, timing and character of distributions.
The holding of the foreign currencies and investments by a Fund in
certain "passive foreign investment companies" may be limited in order to avoid
imposition of a tax on such Fund.
Each Fund investing in foreign securities may be subject to foreign
withholding taxes on income from its investments. In any year in which more
than 50% in value of a Fund's total assets at the close of the taxable year
consists of securities of foreign corporations, the Fund may elect to treat any
foreign taxes paid by it as if they had been paid by its shareholders. The
insurance company segregated asset accounts holding Fund shares should consider
the impact of this election.
Holders of Contracts under which assets are invested in the Funds
should refer to the prospectus for the Contracts for information regarding the
tax aspects of ownership of such Contracts.
Each Fund is treated as a separate association taxable as a
corporation.
Each Fund intends to qualify under the Internal Revenue Code of 1986,
as amended (the "Code"), as a regulated investment company ("RIC") for each
taxable year. Accordingly, each Fund must, among other things, meet the
following requirements: A. Each Fund must generally derive at least 90% of its
gross income
52
<PAGE> 57
from dividends, interest, payments with respect to securities loans, gains from
the sale or other disposition of stock, securities, foreign currencies, or
other income derived with respect to its business of investing in such stock,
securities or currencies. B. Each Fund must diversify its holdings so that, at
the end of each fiscal quarter or within 30 days thereafter: (i) at least 50%
of the market value of the Fund's assets is represented by cash, cash items
(including receivables), U.S. Government securities, securities of other RICs,
and other securities, with such other securities limited, with respect to any
one issuer, to an amount not greater than 5% of the Fund's assets and not more
than 10% of the outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of its assets is invested in the securities of any one
issuer (other than U.S. Government securities or securities of other RICs).
The Code imposes a nondeductible 4% excise tax on a RIC that fails to
distribute during each calendar year at least 98% of its ordinary income for
the calendar year, at least 98% of its capital gain net income for the 12-month
period ending on October 31 of the calendar year and certain other amounts.
Each Fund intends to make sufficient distributions to avoid imposition of the
excise tax. Some Funds meet an exception which results in their not being
subject to excise tax.
As a RIC, each Fund will not be subject to federal income tax on its
income and gains distributed to shareholders if it distributes at least (i) 90%
of its investment company taxable income for the taxable year; and (ii) 90% of
the excess of its tax-exempt interest income under Code Section 103(a) over its
deductions disallowed under Code Sections 265 and 171(a)(2).
Each Fund intends to comply with the diversification requirements
imposed by Section 817(h) of the Code and the regulations thereunder. These
requirements, which are in addition to the diversification requirements imposed
on each Fund by the 1940 Act and Subchapter M of the Code, place certain
limitations on (i) the assets of the insurance company separate accounts that
may be invested in securities of a single issuer and (ii) eligible investors.
Because Section 817(h) and those regulations treat the assets of each Fund as
assets of the corresponding division of the insurance company separate
accounts, each Fund intends to comply with these diversification requirements.
Specifically, the regulations provide that, except as permitted by the "safe
harbor" described below, as of the end of each calendar quarter or within 30
days thereafter no more than 55% of a Fund's total assets may be represented by
any one investment, no more than 70% by any two investments, no more than 80%
by any three investments and no more than 90% by any four investments. For this
purpose, all securities of the same issuer are considered a single investment,
and while each U.S. Government agency and instrumentality is considered a
separate issuer, a particular foreign government and its agencies,
instrumentalities and political subdivisions all will be considered the same
issuer. The regulations also provide that a Fund's shareholders are limited,
generally, to life insurance company separate accounts, general accounts of the
same life insurance company, an investment adviser or affiliate in connection
with the creation or management of a Fund or the trustee of a qualified pension
plan. Section 817(h) provides, as a safe harbor, that a separate account will
be treated as being adequately diversified if the diversification requirements
under Subchapter M are satisfied and no more than 55% of the value of the
account's total assets are cash and cash items, government securities and
securities of other RICs. Failure of a Fund to satisfy the Section 817(h)
requirements would result in taxation of and treatment of the Contract holders
investing in a corresponding division other than as described in the applicable
prospectuses of the various insurance company separate accounts.
53
<PAGE> 58
MISCELLANEOUS 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
an open-end, series, management investment company. The Company currently
consists of thirteen separate portfolios (i.e., the Funds).
The authorized capital stock of the Company consists of 4,000,000,000
shares of common stock with a par value of $.001 per share, of which
250,000,000 shares are classified AIM V.I. AGGRESSIVE GROWTH FUND shares,
250,000,000 shares are classified AIM V.I. BALANCED FUND shares, 250,000,000
shares are classified AIM V.I. CAPITAL APPRECIATION FUND shares, 250,000,000
shares are classified AIM V.I. CAPITAL DEVELOPMENT 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 GROWTH AND 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. HIGH YIELD 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.
TELECOMMUNICATIONS 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 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 Fund will
have the exclusive right to vote on matters pertaining to distribution plans,
if any such plans are adopted, relating solely to such Fund. Shareholders of
the Funds do not have cumulative voting rights.
The Company understands that insurance company separate accounts
owning shares of the Funds will vote their shares in accordance with the
instructions received from Contract owners, annuitants and beneficiaries. Fund
shares held by a registered separate account as to which no instructions have
been received will be voted for or against any proposition, or in abstention,
in the same proportion as the shares of that separate account as to which
instructions have been received. Fund shares held by a registered separate
account that are not attributable to Contracts will also be voted for or
against any proposition in the same proportion as the shares for which voting
instructions are received by that separate account. If an insurance company
determines, however, that it is permitted to vote any such shares of the Funds
in its own right, it may elect to do so, subject to the then current
interpretation of the 1940 Act and the rules thereunder.
Under Maryland law and the Company's By-Laws, the Company need not
hold an annual meeting of shareholders unless a meeting is required under the
1940 Act to elect directors. Shareholders may remove directors from office, and
a meeting of shareholders may be called at the request of the holders of 10% or
more of the Company's outstanding shares.
There are not preemptive or conversion rights applicable to any of the
Company's shares. Each Fund's shares, when issued, are fully paid and
non-assessable.
AUDIT REPORTS
The Company furnishes semi-annual reports containing information about
the Funds and their operations, including a list of the investments held in
each Fund's portfolio and their respective financial statements. Financial
statements, audited by independent auditors, will be issued annually. The firm
of Tait, Weller & Baker, Two Penn Center Plaza, Philadelphia, PA 19102, serves
as the auditors of each Fund.
54
<PAGE> 59
LEGAL MATTERS
Freedman, Levy, Kroll & Simonds, Washington, D.C. has advised the
Company on certain federal securities law matters.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company ("State Street"), 225 Franklin
Street, Boston, MA 02110, is custodian of all securities and cash of the Funds.
The custodian attends to the collection of principal and income, pays and
collects all monies for securities bought and sold by the Portfolios, and
performs certain other ministerial duties. State Street also acts as transfer
and dividend disbursing agent for the Funds. These services do not include any
supervisory function over management or provide any protection against any
possible depreciation of assets. The Funds pay State Street such compensation
as may be agreed upon from time to time.
PRINCIPAL HOLDERS OF SECURITIES
To the best of the knowledge of each Fund, the names of the record
holders of 5% or more of the outstanding shares of the Fund as of April 1,
1999, and the percentage of the outstanding shares of such Fund owned by such
shareholders as of such date are set out below. The address of A I M Advisors,
Inc. is 11 Greenway Plaza, Suite 100, Houston, TX 77046. The address of
Connecticut General Life Insurance Company is 900 Cottage Grove Road, Hartford,
CT 06152-2321. The address of Glenbrook Life and Annuity Company is 3100
Sanders Road, N4C, Northbrook, IL 60062. The address of IDS Life Insurance
Company is IDS Tower 10, T27/52, Minneapolis, MN 55440. The address of Merrill
Lynch Life Insurance Company is 800 Scudders Mill Road, Plainsboro, NJ 08536.
The address of Pruco Life Insurance Company and Pruco Life Insurance Company of
New Jersey is Gateway Center Three, 13th Floor, Newark, NJ 07102. The address
of First Citicorp Life Insurance Company is One Court Square, Long Island City,
NY 11120. The address of Union Central Life Insurance Company is 1876 Waycross
Road, Cincinnati, OH 45240. The address for Hartford Life Insurance Company is
200 Hopmeadow Street, Simsburg, CT 06089. The address of Security Life of
Denver Insurance Company is 1290 Broadway, Denver, CO 80203.
AIM V.I. AGGRESSIVE GROWTH FUND
<TABLE>
<CAPTION>
PERCENT OWNED PERCENT OWNED
NAME OF OF RECORD BENEFICIALLY PERCENT OWNED
RECORD OWNER AND BENEFICIALLY ONLY OF RECORD ONLY
------------ ---------------- ---- --------------
<S> <C> <C> <C>
Glenbrook Life & Annuity Company -0- -0- 83.18%*
A I M Advisors, Inc. -0- -0- 16.82%
</TABLE>
- -------------------------
* A shareholder who beneficially owns more than 25% of the voting securities
of a Fund may be presumed to "control" the Fund. The Funds understand that
insurance company separate accounts owning shares of the Funds will vote their
shares in accordance with instructions received from Contract owners,
annuitants and beneficiaries. If an insurance company determines, however, that
it is permitted to vote any such shares of the Funds in its own right, it may
elect to do so, subject to the then current interpretation of the 1940 Act and
the rules thereunder.
55
<PAGE> 60
AIM V.I. BALANCED FUND
<TABLE>
<CAPTION>
PERCENT OWNED PERCENT OWNED
NAME OF OF RECORD BENEFICIALLY PERCENT OWNED
RECORD OWNER AND BENEFICIALLY ONLY OF RECORD ONLY
------------ ---------------- ---- --------------
<S> <C> <C> <C>
Glenbrook Life & Annuity Company -0- -0- 70.87%*
Union Central Life Insurance Company -0- -0- 23.13%
A I M Advisors, Inc. -0- -0- 6.01%
</TABLE>
AIM V.I. CAPITAL APPRECIATION FUND
<TABLE>
<CAPTION>
PERCENT OWNED PERCENT OWNED
NAME OF OF RECORD BENEFICIALLY PERCENT OWNED
RECORD OWNER AND BENEFICIALLY ONLY OF RECORD ONLY
------------ ---------------- ---- --------------
<S> <C> <C> <C>
Connecticut General Life Insurance Company -0- -0- 44.73%*
Glenbrook Life & Annuity Company -0- -0- 19.20%
Merrill Lynch Life Insurance Company -0- -0- 14.57%
</TABLE>
AIM V.I. CAPITAL DEVELOPMENT FUND
<TABLE>
<CAPTION>
PERCENT OWNED PERCENT OWNED
NAME OF OF RECORD BENEFICIALLY PERCENT OWNED
RECORD OWNER AND BENEFICIALLY ONLY OF RECORD ONLY
------------ ---------------- ---- --------------
<S> <C> <C> <C>
Glenbrook Life & Annuity Company -0- -0- 75.19%*
A I M Advisors, Inc. -0- -0- 24.81%
</TABLE>
- -------------------------
* A shareholder who beneficially owns more than 25% of the voting securities
of a Fund may be presumed to "control" the Fund. The Funds understand that
insurance company separate accounts owning shares of the Funds will vote their
shares in accordance with instructions received from Contract owners,
annuitants and beneficiaries. If an insurance company determines, however, that
it is permitted to vote any such shares of the Funds in its own right, it may
elect to do so, subject to the then current interpretation of the 1940 Act and
the rules thereunder.
56
<PAGE> 61
AIM V.I. DIVERSIFIED INCOME FUND
<TABLE>
<CAPTION>
PERCENT OWNED PERCENT OWNED
NAME OF OF RECORD BENEFICIALLY PERCENT OWNED
RECORD OWNER AND BENEFICIALLY ONLY OF RECORD ONLY
------------ ---------------- ---- --------------
<S> <C> <C> <C>
Connecticut General Life Insurance Company -0- -0- 63.37%*
Glenbrook Life & Annuity Company -0- -0- 31.41%*
</TABLE>
AIM V.I. GLOBAL UTILITIES FUND
<TABLE>
<CAPTION>
PERCENT OWNED PERCENT OWNED
NAME OF OF RECORD BENEFICIALLY PERCENT OWNED
RECORD OWNER AND BENEFICIALLY ONLY OF RECORD ONLY
------------ ---------------- ---- --------------
<S> <C> <C> <C>
Connecticut General Life Insurance Company -0- -0- 59.47%*
Glenbrook Life & Annuity Company -0- -0- 38.70%*
</TABLE>
AIM V.I. GOVERNMENT SECURITIES FUND
<TABLE>
<CAPTION>
PERCENT OWNED PERCENT OWNED
NAME OF OF RECORD BENEFICIALLY PERCENT OWNED
RECORD OWNER AND BENEFICIALLY ONLY OF RECORD ONLY
------------ ---------------- ---- --------------
<S> <C> <C> <C>
Connecticut General Life Insurance Company -0- -0- 43.56%*
Glenbrook Life & Annuity Company -0- -0- 21.45%
First Citicorp Life Insurance Company -0- -0- 20.33%
Security Life of Denver Insurance Company -0- -0- 6.00%
</TABLE>
- -------------------------
* A shareholder who beneficially owns more than 25% of the voting securities
of a Fund may be presumed to "control" the Fund. The Funds understand that
insurance company separate accounts owning shares of the Funds will vote their
shares in accordance with instructions received from Contract owners,
annuitants and beneficiaries. If an insurance company determines, however, that
it is permitted to vote any such shares of the Funds in its own right, it may
elect to do so, subject to the then current interpretation of the 1940 Act and
the rules thereunder.
57
<PAGE> 62
AIM V.I. GROWTH FUND
<TABLE>
<CAPTION>
PERCENT OWNED PERCENT OWNED
NAME OF OF RECORD BENEFICIALLY PERCENT OWNED
RECORD OWNER AND BENEFICIALLY ONLY OF RECORD ONLY
------------ ---------------- ---- --------------
<S> <C> <C> <C>
Connecticut General Life Insurance Company -0- -0- 61.10%*
Glenbrook Life & Annuity Company -0- -0- 27.31%*
</TABLE>
AIM V.I. GROWTH AND INCOME FUND
<TABLE>
<CAPTION>
PERCENT OWNED PERCENT OWNED
NAME OF OF RECORD BENEFICIALLY PERCENT OWNED
RECORD OWNER AND BENEFICIALLY ONLY OF RECORD ONLY
------------ ---------------- ---- --------------
<S> <C> <C> <C>
IDS Life Insurance Company -0- -0- 62.15%*
Connecticut General Life Insurance Company -0- -0- 11.77%
Glenbrook Life & Annuity Company -0- -0- 10.29%
Pruco Life Insurance Company -0- -0- 7.75%
</TABLE>
AIM V.I. HIGH YIELD FUND
<TABLE>
<CAPTION>
PERCENT OWNED PERCENT OWNED
NAME OF OF RECORD BENEFICIALLY PERCENT OWNED
RECORD OWNER AND BENEFICIALLY ONLY OF RECORD ONLY
------------ ---------------- ---- --------------
<S> <C> <C> <C>
Glenbrook Life & Annuity Company -0- -0- 50.74%*
Hartford Life Insurance Company -0- -0- 24.98%
A I M Advisors, Inc. -0- -0- 24.29%
</TABLE>
- -------------------------
* A shareholder who beneficially owns more than 25% of the voting securities
of a Fund may be presumed to "control" the Fund. The Funds understand that
insurance company separate accounts owning shares of the Funds will vote their
shares in accordance with instructions received from Contract owners,
annuitants and beneficiaries. If an insurance company determines, however, that
it is permitted to vote any such shares of the Funds in its own right, it may
elect to do so, subject to the then current interpretation of the 1940 Act and
the rules thereunder.
58
<PAGE> 63
AIM V.I. INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
PERCENT OWNED PERCENT OWNED
NAME OF OF RECORD BENEFICIALLY PERCENT OWNED
RECORD OWNER AND BENEFICIALLY ONLY OF RECORD ONLY
------------ ---------------- ---- --------------
<S> <C> <C> <C>
Connecticut General Life Insurance Company -0- -0- 60.77%*
Glenbrook Life & Annuity Company -0- -0- 23.38%
First Citicorp Life Insurance Company -0- -0- 6.25%
</TABLE>
AIM V.I. MONEY MARKET FUND
<TABLE>
<CAPTION>
PERCENT OWNED PERCENT OWNED
NAME OF OF RECORD BENEFICIALLY PERCENT OWNED
RECORD OWNER AND BENEFICIALLY ONLY OF RECORD ONLY
------------ ---------------- ---- --------------
<S> <C> <C> <C>
Connecticut General Life Insurance Company -0- -0- 68.76%*
Glenbrook Life & Annuity Company -0- -0- 29.91%*
</TABLE>
AIM V.I. VALUE FUND
<TABLE>
<CAPTION>
PERCENT OWNED PERCENT OWNED
NAME OF OF RECORD BENEFICIALLY PERCENT OWNED
RECORD OWNER AND BENEFICIALLY ONLY OF RECORD ONLY
------------ ---------------- ---- --------------
<S> <C> <C> <C>
Connecticut General Life Insurance Company -0- -0- 35.42%*
Merrill Lynch Life Insurance Company -0- -0- 27.63%*
Glenbrook Life & Annuity Company -0- -0- 13.55%
Pruco Life Insurance Company of New Jersey -0- -0- 11.52%
</TABLE>
- -------------------------
* A shareholder who beneficially owns more than 25% of the voting securities
of a Fund may be presumed to "control" the Fund. The Funds understand that
insurance company separate accounts owning shares of the Funds will vote their
shares in accordance with instructions received from Contract owners,
annuitants and beneficiaries. If an insurance company determines, however, that
it is permitted to vote any such shares of the Funds in its own right, it may
elect to do so, subject to the then current interpretation of the 1940 Act and
the rules thereunder.
59
<PAGE> 64
A I M Advisors, Inc. provided the initial capitalization of the AIM
V.I. Global Growth and Income Fund and AIM V.I. Telecommunications Fund and,
accordingly, as of the date of this Statement of Additional Information, owned
all the outstanding shares of common stock of the Funds. Although the Funds
expect that the sale of its shares to the public pursuant to the Prospectus
will promptly reduce the percentage of such shares owned by A I M Advisors,
Inc. to less than 1% of the total shares outstanding, as long as A I M
Advisors, Inc. owns over 25% of the shares of the Fund that are outstanding, it
may be presumed to be in "control" of the Fund, as defined in the 1940 Act.
As of April 1, 1999, the directors and officers of the Company as a
group owned beneficially less than 1% of the outstanding shares of the Company.
OTHER INFORMATION
The Prospectus and this Statement of Additional Information omit
certain information contained in the Registration Statement which the Funds
have filed with the SEC under the Securities Act of 1933 and reference is
hereby made to the Registration Statement for further information with respect
to the Funds and the securities offered hereby. The Registration Statement is
available for inspection by the public at the SEC in Washington, D.C.
60
<PAGE> 65
APPENDIX A
- -------------------------------------------------------------------------------
DESCRIPTION OF CORPORATE BOND RATINGS
Investment grade debt securities are those rating categories indicated
by an asterisk (*).
Moody's Investors Service, Inc.'s corporate bond ratings are as
follows:
*Aaa -- Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
*Aa -- Bonds which are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long term risks appear somewhat larger than in
Aaa securities.
*A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
*Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba -- Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during other good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier indicates that the security ranks in the higher end of its
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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 Ratings Services 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 strong capacity to pay interest and
repay principal and differs from the highest rated issues only in small degree.
*A -- Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
*BBB -- Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher categories.
BB, B, CCC, CC, C -- Debt rated "BB", "B", "CCC", "CC" and "C" is
regarded, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the
obligation. "BB" indicates the lowest degree of speculation and "C" the highest
degree of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
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's 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.
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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" maybe 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 IBCA Inc.'s bond ratings are as follows:
*AAA -- Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
*AA -- Bonds considered to be Investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA". Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated "F-1+".
*A -- 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
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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.
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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.
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.
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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.
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
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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.
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.
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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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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 Funds reserve the right to invest in Money
Market Obligations other than those listed below:
1. GOVERNMENT OBLIGATIONS.
U.S. GOVERNMENT DIRECT OBLIGATIONS -- Bills, notes, and bonds issued
by the U.S. Treasury.
U.S. GOVERNMENT AGENCIES SECURITIES -- Certain federal agencies such
as the Government National Mortgage Association have been established as
instrumentalities of the U.S. Government to supervise and finance certain types
of activities. Issues of these agencies, while not direct obligations of the
U.S. Government, are either backed by the full faith and credit of the United
States or are guaranteed by the Treasury or supported by the issuing agencies'
right to borrow from the Treasury.
FOREIGN GOVERNMENT OBLIGATIONS -- These are U.S. dollar denominated
obligations issued or guaranteed by one or more foreign governments or any of
their political subdivisions, agencies or instrumentalities that are determined
by the Fund's investment advisor to be of comparable quality to the other
obligations in which the Fund may invest. Such securities also include debt
obligations of supranational entities. Supranational entities include
international organizations designated or supported by governmental entities to
promote economic reconstruction or development and international banking
institutions and related government agencies. Examples include the
International Bank for Reconstruction and Development (the World Bank), the
European Coal and Steel Community, the Asian Development Bank and the
InterAmerican Development Bank. The percentage of the Fund's assets invested in
securities Issued by foreign governments will vary depending on the relative
yields of such securities, the economic and financial markets of the countries
in which the investments are made and the interest rate climate of such
countries.
2. BANK INSTRUMENTS.
BANKERS' ACCEPTANCES -- A bill of exchange or time draft drawn on and
accepted by a commercial bank. It is used by corporations to finance the
shipment and storage of goods and to furnish dollar exchange. Maturities are
generally six months or less.
CERTIFICATES OF DEPOSIT -- A negotiable interest-bearing instrument
with a specific maturity. Certificates of deposit are issued by banks and
savings and loan institutions in exchange for the deposit of funds and normally
can be traded in the secondary market, prior to maturity.
TIME DEPOSITS -- A non-negotiable receipt issued by a bank in exchange
for the deposit of funds. Like a certificate of deposit, it earns a specified
rate of interest over a definite period of time; however, it cannot be traded
in the secondary market.
EURODOLLAR OBLIGATIONS -- A Eurodollar obligation is a U.S.
dollar-denominated obligation issued by a foreign branch of a domestic bank.
YANKEE DOLLAR OBLIGATIONS -- A Yankee dollar obligation is a U.S.
dollar-denominated obligation issued by a domestic branch of a foreign bank.
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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.
5. TAXABLE MUNICIPAL SECURITIES.
Taxable municipal securities are debt securities issued by or on
behalf of states and their political subdivisions, the District of Columbia,
and possessions of the United States, the interest on which is not exempt from
federal income tax.
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FINANCIAL STATEMENTS
FS
