<PAGE>
TAX-FREE
INVESTMENTS CO.
PROSPECTUS
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- -----------------------------------------------------------------------------------------------------------------------
<C> <S>
INSTITUTIONAL
CASH RESERVE Tax-Free Investments Co. (the "Company") is a mutual fund designed for insti-
SHARES tutions and individuals seeking current income which is exempt from federal in-
come taxes. Pursuant to this Prospectus, the Company offers shares representing
JULY 29, 1996 interests in Institutional Cash Reserve Shares (the "Institutional Class") of
its Cash Reserve Portfolio.
The Cash Reserve Portfolio is a "money market fund," the investment objective
of which is the generation of as high a level of tax-exempt income as is con-
sistent with preservation of capital and maintenance of liquidity by investing
in high quality, short-term municipal obligations. The Cash Reserve Portfolio
attempts to maintain a constant net asset value of $1.00 per share. No assur-
ance can be given that such a net asset value can be maintained.
This Prospectus relates solely to the Institutional Class. The Institutional
Class is offered primarily to banks and other institutions acting for them-
selves or in a fiduciary, advisory, agency, custodial or similar capacity, and
is designed as a convenient and economical vehicle in which such institutions
can invest short-term cash reserves. Another class of shares of the Cash Re-
serve Portfolio, the Private Investment Class, is offered to individuals and to
financial institutions pursuant to a separate prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THIS PROSPECTUS SETS FORTH BASIC INFORMATION THAT A PROSPECTIVE INVESTOR
SHOULD KNOW ABOUT THE COMPANY AND THE SHARES PRIOR TO INVESTING AND SHOULD BE
READ AND RETAINED FOR FUTURE REFERENCE. A STATEMENT OF ADDITIONAL INFORMATION
DATED JULY 29, 1996 HAS BEEN FILED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION AND IS HEREBY INCORPORATED BY REFERENCE. A COPY OF THE
STATEMENT OF ADDITIONAL INFORMATION IS INCLUDED AS AN APPENDIX TO THIS
PROSPECTUS.
SHARES OF THE CASH RESERVE PORTFOLIO ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK, AND THE CASH RESERVE PORTFOLIO'S SHARES
ARE NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
THERE CAN BE NO ASSURANCE THAT THE CASH RESERVE PORTFOLIO WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. SHARES OF THE CASH
[LOGO APPEARS HERE] RESERVE PORTFOLIO INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
Fund Management Company
11 Greenway Plaza
Suite 1919
Houston, TX 77046-1173
(800) 659-1005
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ORGANIZATION OF THE COMPANY
The Company is a Maryland corporation organized as an open-end, diversified,
series investment company, which currently has one portfolio, the Cash Reserve
Portfolio, which is referred to herein as the "Portfolio."
The Portfolio currently offers two classes of shares, the Institutional Cash
Reserve Shares and the Private Investment Class. The Institutional Cash Reserve
Shares, offered pursuant to this Prospectus, are referred to herein as the "In-
stitutional Class." The Institutional Class is offered primarily to banks and
other institutions investing for themselves or in a fiduciary, advisory, agen-
cy, custodial or other similar capacity.
THIS PROSPECTUS RELATES SOLELY TO THE INSTITUTIONAL CASH RESERVE SHARES.
TABLE OF FEES AND EXPENSES
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<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load imposed on purchases
(as a percentage of offering price)..................................... None
Maximum sales load on reinvested dividends
(as a percentage of offering price)..................................... None
Deferred sales load (as a percentage of original
purchase price or redemption proceeds, as applicable)................... None
Redemption fees (as a percentage of amount
redeemed, if applicable)................................................ None
Exchange fee............................................................. None
ANNUAL OPERATING EXPENSES OF THE SHARES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)(AFTER FEE WAIVERS)
Management fees (after fee waivers)...................................... .16%*
Other expenses........................................................... .04%
----
Total operating expenses of the shares (after fee waivers)............... .20%
====
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* After fee waivers.
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Institutional Class will
bear directly or indirectly. Had there been no fee waivers during the fiscal
year, management fees would have been 0.22% and total fund operating expenses
would have been 0.26%. A beneficial holder of shares of the Institutional Class
should also consider the effect of any account fees charged by the financial
institution managing his or her account.
EXAMPLE
An investor would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
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<S> <C>
1 year.................................................................. $ 2
3 years................................................................. $ 6
5 years................................................................. $11
10 years................................................................. $26
</TABLE>
THE EXAMPLES SHOWN IN THE ABOVE TABLE SHOULD NOT BE CONSIDERED TO BE AN
ACCURATE REPRESENTATION OF PAST OR FUTURE PERFORMANCE AND ACTUAL EXPENSES MAY
BE GREATER OR LESSER THAN THOSE SHOWN.
The AIM Family of Funds, The AIM Family of Funds and Design (i.e., the AIM
logo), AIM and Design, AIM, AIM LINK and AIM Institutional Funds are registered
service marks and La Familia AIM de Fondos and La Familia AIM de Fondos and De-
sign are service marks of AIM Management Group Inc.
2
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FINANCIAL HIGHLIGHTS
Shown below are the per share income and capital changes for a share out-
standing during the fiscal years ended March 31, 1996, 1995, 1994, 1993, 1992,
1991 and 1990, the eleven months ended March 31, 1989 and the fiscal years
ended April 30, 1988 and 1987. The following information has been audited by
KPMG Peat Marwick LLP, independent auditors, whose report on the financial
statements and the related notes appears in the Statement of Additional Infor-
mation.
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<CAPTION>
FOR THE YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990
---------- ---------- ---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from
investment
operations:
Net investment
income......... 0.04 0.03 0.02 0.03 0.04 0.06 0.06
---------- ---------- ---------- -------- ---------- ---------- ----------
Less
distributions:
Dividends from
net investment
income......... (0.04) (0.03) (0.02) (0.03) (0.04) (0.06) (0.06)
---------- ---------- ---------- -------- ---------- ---------- ----------
Net asset value,
end of period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========== ========== ========== ======== ========== ========== ==========
Total return..... 3.67% 3.06% 2.33% 2.66% 4.09% 5.68% 6.22%
========== ========== ========== ======== ========== ========== ==========
Ratios/Supplemental
Data
Net assets, end
of period (000s
omitted)....... $1,009,039 $1,009,891 $1,040,595 $994,828 $1,191,209 $1,156,557 $1,114,813
========== ========== ========== ======== ========== ========== ==========
Ratio of
expenses to
average net
assets......... 0.20%(b)(c) 0.20%(b) 0.20%(b) 0.20%(b) 0.20%(b) 0.20%(b) 0.20%(b)
========== ========== ========== ======== ========== ========== ==========
Ratio of net
investment
income to
average net
assets......... 3.59%(b)(c) 3.01%(b) 2.30%(b) 2.66%(b) 4.00%(b) 5.52%(b) 6.03%(b)
========== ========== ========== ======== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
FOR THE
PERIOD FOR THE YEAR ENDED
ENDED APRIL 30,
MARCH 31, ---------------------------
1989 1988 1987
---------- -------------- ------------
<S> <C> <C> <C>
Net asset value,
beginning of
period.......... $ 1.00 $ 1.00 $ 1.00
Income from
investment
operations:
Net investment
income......... 0.05 0.04 0.04
---------- -------------- ------------
Less
distributions:
Dividends from
net investment
income......... (0.05) (0.04) (0.04)
---------- -------------- ------------
Net asset value,
end of period... $ 1.00 $ 1.00 $ 1.00
========== ============== ============
Total return..... 5.67%(a) 4.56% 4.24%
========== ============== ============
Ratios/Supplemental
Data
Net assets, end
of period (000s
omitted)....... $1,062,479 $1,192,604 $993,392
========== ============== ============
Ratio of
expenses to
average net
assets......... 0.20%(a)(b) 0.21%(b) 0.21%(d)
========== ============== ============
Ratio of net
investment
income to
average net
assets......... 5.52%(a)(b) 4.47%(b) 4.14%(d)
========== ============== ============
</TABLE>
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(a) Annualized.
(b) After waiver of advisory fees.
(c) Ratios are based on average net assets of $1,097,089,368. Ratios of
expenses and net investment income to average net assets prior to waiver of
advisory fees are 0.26% and 3.53%, respectively.
(d) After waiver of advisory fees and distribution fees.
3
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SUITABILITY FOR INVESTORS
The Institutional Class is intended for use by banks and other institutions,
investing for themselves or in a fiduciary, advisory, agency, custodial or
other similar capacity. The Institutional Class is designed to be a convenient
and economical vehicle in which such shareholders can invest in high quality
municipal obligations with remaining maturities of 397 days or less while main-
taining liquidity. The municipal obligations purchased for investment by the
Portfolio are hereinafter referred to as "Municipal Securities."
Shares of the Institutional Class may not be purchased directly by individu-
als, although institutions may purchase the Institutional Class for accounts
maintained for individuals. Prospective investors should determine if an in-
vestment in the Institutional Class is consistent with the investment objec-
tives of their clients and with applicable state and federal laws and regula-
tions. Certain financial institutions may impose changes in connection with
opening or maintaining their customers' accounts or for providing recordkeeping
or sub-accounting services with respect to the Institutional Class. Beneficial
owners of the Institutional Class held of record by an institutional investor
should read this Prospectus in light of the terms governing their institutional
accounts, and should obtain from such institution information concerning any
recordkeeping, account maintenance or other fees charged to their accounts. The
minimum amount required for an initial investment in the Institutional Class is
$1 million.
An investment in the Institutional Class may relieve the institution of many
of the investment and administrative burdens encountered when investing in Mu-
nicipal Securities directly, including: selection of portfolio investments;
surveying the market for the best price at which to buy and sell; valuation of
portfolio securities; selection and scheduling of maturities; receipt, delivery
and safekeeping of securities; and portfolio recordkeeping. At the same time,
the expenses of the Company attributable to the Institutional Class are ex-
pected to be relatively small due primarily to the fact that there will be only
a small number of shareholders in the Institutional Class. These shareholders
of the Institutional Class do not need many of the services provided by other
tax-exempt investment companies, thereby resulting in lower transfer agent fees
and costs for printing reports and any necessary proxy statements. In addition,
sales of the Institutional Class to institutions acting for themselves or in a
fiduciary capacity are exempt from the registration requirements of most state
securities laws, thereby resulting in reduced state registration fees.
It is anticipated that most shareholders of the Institutional Class will per-
form their own sub-accounting.
INVESTMENT PROGRAM
INVESTMENT OBJECTIVES
The investment objective of the Portfolio is to generate as high a level of
tax-exempt income as is consistent with preservation of capital and maintenance
of liquidity by investing in high quality, short-term Municipal Securities.
There can be no assurance that the Portfolio will achieve its investment ob-
jective.
MUNICIPAL SECURITIES
Municipal Securities include debt obligations issued to obtain funds for vari-
ous public purposes, including the construction of a wide range of public fa-
cilities, the refunding of outstanding obligations, the obtaining of funds for
general operating expenses and the lending of such funds to other public insti-
tutions and facilities. In addition, certain types of industrial development
bonds are issued by or on behalf of public authorities to obtain funds to pro-
vide for the construction, equipment, repair or improvement of privately oper-
ated facilities. As used in this Prospectus and the Statement of Additional In-
formation, interest which is "tax-exempt" or "exempt from federal income taxes"
means interest on Municipal Securities which is excluded from gross income for
federal income tax purposes, and which does not give rise to a federal alterna-
tive minimum tax liability. See "Tax Matters" herein and in the Statement of
Additional Information.
INVESTMENT POLICIES
Except where noted, the investment policies stated below are not fundamental
and may be changed by the Board of Directors of the Company without shareholder
approval. Shareholders will be notified before any material change in the fol-
lowing investment policies becomes effective. Policies which are noted as fun-
damental may be changed only with the approval of the shareholders of the Port-
folio.
4
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QUALITY STANDARDS
The policies set forth below with respect to quality standards are fundamental
and may be changed only with shareholder approval. The quality standards apply
at the time of purchase of a security. Since the Portfolio invests in securi-
ties backed by banks and other financial institutions, changes in the credit
quality of these institutions could cause losses to the Portfolio and affect
its share price. Information concerning the ratings criteria of Moody's Invest-
ors Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P") and cer-
tain other nationally recognized statistical rating organizations ("NRSROs")
appears in the Statement of Additional Information.
The Fund will limit its purchases of Municipal Securities to those which are
"First Tier" securities as defined in Rule 2a-7 under the Investment Company
Act of 1940 (the "1940 Act"). Generally, "First Tier" securities are securities
that are rated in the highest rating category for short-term obligations by two
NRSROs, or, if only rated by one NRSRO, are rated in the highest rating cate-
gory by that NRSRO, or, if unrated, are determined by the Portfolio's invest-
ment advisor (under the supervision of and pursuant to guidelines established
by the Board of Directors) to be of comparable quality to a rated security that
meets the foregoing quality standards.
MATURITIES
The policies set forth below with respect to maturities are non-fundamental
and may be changed without shareholder approval.
Consistent with its objective of stability of principal, the Portfolio at-
tempts to maintain a constant net asset value per share of $1.00 and, to this
end, values its assets by the amortized cost method and rounds the per share
net asset value of its shares in compliance with Rule 2a-7, as amended from
time to time. Accordingly, the Portfolio invests only in Municipal Securities
having remaining maturities of 397 days or less and maintains a dollar weighted
average portfolio maturity of 90 days or less.
The maturity of a security held by the Portfolio is determined in compliance
with applicable rules and regulations. Certain securities bearing interest at
rates that are adjusted prior to the stated maturity of the instrument or are
subject to demand features or that are subject to repurchase agreements are
deemed to have maturities shorter than their stated maturities.
VARIABLE OR FLOATING RATE INSTRUMENTS
The Portfolio may invest in Municipal Securities which have variable or float-
ing interest rates which are readjusted periodically. Such readjustment may be
based either upon a predetermined standard, such as a bank prime rate or the
U.S. Treasury bill rate, or upon prevailing market conditions. Variable or
floating interest rates generally reduce changes in the market price of Munici-
pal Securities from their original purchase price. Accordingly, as interest
rates decrease or increase, the potential for capital appreciation or deprecia-
tion is less for variable or floating rate Municipal Securities than for fixed
rate obligations.
Many Municipal Securities with variable or floating interest rates purchased
by the Portfolio are subject to payment of principal and accrued interest (usu-
ally within seven days) on the Portfolio's demand. The terms of such demand in-
struments require payment of principal and accrued interest from the issuer, a
guarantor and/or a liquidity provider. Frequently such obligations include let-
ters of credit or other credit support arrangements provided by financial in-
stitutions. All variable or floating rate instruments will meet the quality
standards of the Portfolio. A I M Advisors, Inc. ("AIM") will monitor the pric-
ing, quality and liquidity of the variable or floating rate Municipal Securi-
ties held by the Portfolio.
SYNTHETIC MUNICIPAL INSTRUMENTS
AIM believes that certain synthetic municipal instruments provide opportuni-
ties for mutual funds to invest in high credit quality securities providing at-
tractive returns, even in market conditions where the supply of short-term tax-
exempt instruments may be limited. Synthetic municipal instruments (sometimes
referred to as "derivative municipal instruments") are securities the value of
and return on which are derived from underlying securities. Synthetic municipal
instruments comprise a large percentage of tax- exempt securities eligible for
purchase by tax-exempt money market funds. The types of synthetic municipal in-
struments in which the Portfolio may invest involve the deposit into a trust or
custodial account of one or more long-term tax-exempt bonds or notes ("Under-
lying Bonds"), and the sale of certificates evidencing interests in the trust
or custodial account to investors such as the Portfolio. The trustee or custo-
dian receives the long-term fixed rate interest payments on the Underlying
Bonds, and pays certificate holders short-term floating or variable interest
rates which are reset periodically. Synthetic municipal instruments typically
are created by a bank, broker-dealer or other financial institution ("Spon-
sor"). Typically, a portion of the interest paid on the Underlying Bonds which
exceeds the interest paid to the certificate holders is paid to the Sponsor or
other investors. For further information regarding specific types of synthetic
municipal instruments in which the Portfolio may invest see the caption "In-
vestment Program and Restrictions--Synthetic Municipal Instruments" in the
Statement of Additional Information.
5
<PAGE>
All such instruments must meet the minimum quality standards required for the
Portfolio's investments and must present minimal credit risks. In selecting
synthetic municipal instruments for the Portfolio, AIM considers the creditwor-
thiness of the issuer of the Underlying Bond, the Sponsor and the party provid-
ing certificate holders with a conditional right to sell (put) their certifi-
cates at stated times and prices. Typically, a certificate holder cannot exer-
cise its put upon the occurrence of certain conditions, such as where the is-
suer of the Underlying Bond defaults on interest payments. Moreover, because
synthetic municipal instruments involve a trust or custodial account and a
third party conditional put feature, they involve complexities and potential
risks that may not be present where a municipal security is owned directly.
The tax-exempt character of the interest paid to certificate holders is based
on the assumption that the holders have an ownership interest in the Underlying
Bonds; however, the Internal Revenue Service has not issued a ruling addressing
this issue. In the event the Internal Revenue Service issues an adverse ruling
or successfully litigates this issue, it is possible that the interest paid to
the Portfolio on certain synthetic municipal instruments would be deemed to be
taxable. The Portfolio relies on opinions of special tax counsel on this owner-
ship question and opinions of bond counsel regarding the tax-exempt character
of interest paid on the Underlying Bonds.
INVESTMENT RESTRICTIONS
The Portfolio's investment program is subject to a number of investment re-
strictions which reflect self-imposed standards as well as federal and state
regulatory limitations. These restrictions provide that the Portfolio will not:
(1) with respect to 75% of its total assets, purchase securities of any
issuer (except obligations of the U.S. Government, its agencies or
instrumentalities, including any Municipal Securities guaranteed by the U.S.
Government) if as a result of such purchase more than 5% of the Portfolio's
total net assets would be invested in securities of such issuer except as
permitted by Rule 2a-7 of the 1940 Act as amended from time to time;
(2) purchase any securities which would cause more than 25% of the value
of the Portfolio's total net assets at the time of such purchase to be
invested in: (i) securities of one or more issuers conducting their
principal activities in the same state, (ii) securities, the interest on
which is paid from revenues of projects with similar characteristics, or
(iii) industrial development bonds issued by issuers in the same industry;
provided that there is no limit with respect to investments in U.S. Treasury
Bills, other obligations issued or guaranteed by the U.S. Government and its
agencies or instrumentalities, certificates of deposit and guarantees of
Municipal Securities by banks; or
(3) invest more than 10% of the value of its net assets in illiquid
securities, including repurchase agreements with remaining maturities in
excess of seven days.
The foregoing restrictions are matters of fundamental policy and may not be
changed without shareholder approval.
In addition to the restrictions described above, the Company must also comply
with the requirements of Rule 2a-7 under the 1940 Act, as amended, which gov-
erns the operations of money market funds and may be more restrictive. A de-
scription of further investment restrictions applicable to the Portfolio is
contained in the Statement of Additional Information.
OTHER CONSIDERATIONS
The ability of the Portfolio to achieve its investment objectives depends upon
the continuing ability of the issuers or guarantors of Municipal Securities
held by such Portfolio to meet their obligations for the payment of interest
and principal when due. The securities in which the Portfolio invests may not
yield as high a level of current income as longer term or lower grade securi-
ties, which generally have less liquidity and greater fluctuation in value. The
net asset value per share of the Institutional Class will normally remain con-
stant at $1.00, although there can be no assurance that such net asset value
will not change.
PURCHASE OF SHARES
Shares of the Institutional Class are sold on a continuing basis at their net
asset value next determined after an order has been received by the Company. As
discussed below, the Fund reserves the right to reject any purchase order. Al-
though no sales charge is imposed in connection with the purchase of shares of
the Institutional Class, banks or other institutions may charge record keeping,
account maintenance or other fees to their customers. Beneficial holders in the
Class of the Portfolio should consult with such institutions to obtain a sched-
ule of such fees. In order to be accepted for execution, purchase orders for
shares of the Institutional Class must be submitted to and received by the Com-
pany prior to the determination of net asset value (12:00 noon Eastern Time) on
a "business day" of the Portfolio, which means any day on which commercial
banks in the New York Federal district are open for business. It is expected
that commercial banks will be closed during the next twelve months on Saturdays
and Sundays and on New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day,
Thanksgiving Day and Christmas Day. Subject to the Company's right to reject
any purchase order, purchase orders received prior to the net asset value de-
termination on any business day will be effective on such day and payment for
such shares must be made in the form of federal funds wired to A I M Institu-
tional Fund Services, Inc. (the "Transfer Agent" or "AIFS") on the day of pur-
chase.
6
<PAGE>
The minimum initial investment for the purchase of shares of the Institutional
Class is $1 million. An institution's Master Account(s) and sub-accounts may be
aggregated for the purpose of the minimum investment requirement. No minimum
amount is required for subsequent investments.
Prior to the initial purchase of shares of the Institutional Class, an Account
Application must be completed and sent to A I M Institutional Fund Services,
Inc., at P.O. Box 4497, Houston, Texas 77210-4497. Account Applications may be
obtained from AIFS. Any funds received in respect of an order to purchase
shares which is not accepted by the Company and any funds received for which an
order has not been received will be promptly returned to the investor.
The Company reserves the right in its sole discretion to withdraw all or any
part of the offering made by this Prospectus or to reject any purchase order.
REDEMPTION OF SHARES
Shareholders may redeem any or all of their shares of the Institutional Class
at the net asset value next determined after receipt of a redemption request in
proper form by the Company. There is no charge for redemption. The value of
shares of the Institutional Class on redemption may be more or less than the
shareholder's initial cost, depending upon the value of the Portfolio's invest-
ments at the time of redemption. It is expected that the net asset value of the
Portfolio will remain constant at $1.00 per share. See "Share Purchases and Re-
demptions--Net Asset Value Determination" in the Statement of Additional Infor-
mation.
Redemption requests with respect to the Institutional Class are normally made
by calling AIFS at (800) 659-1005. Redemption requests with respect to the In-
stitutional Class may also be made via AIM LINK(R), a personal computer appli-
cation software product. Payment for redeemed shares of the Institutional Class
is normally made by Federal Reserve wire to the commercial bank account desig-
nated in the shareholder's Account Application on the day specified below, but
may be remitted by check upon request by a shareholder.
If a redemption request is received by AIFS prior to 12:00 noon Eastern Time
on a business day of the Portfolio, the redemption will be effected at the net
asset value of the Portfolio determined as of 12:00 noon Eastern Time and the
redemption proceeds will normally be wired on the same day. A redemption re-
quest received by AIFS after 12:00 noon Eastern Time or on other than a busi-
ness day of the Portfolio will be effected at the net asset value of the Port-
folio determined as of 12:00 noon Eastern Time on the next business day of such
Portfolio, and the proceeds of such redemption will normally be wired on that
day.
A shareholder may change the bank account designated to receive redemption
proceeds by written notice to the Company. The authorized signature on the no-
tice must be guaranteed by a commercial bank or trust company (which may in-
clude the shareholder). Additional documentation may be required when deemed
appropriate by the Portfolio or AIFS or its Transfer Agent.
Shareholders may request a redemption by telephone. The Transfer Agent and FMC
will not be liable for any loss, expense or cost arising out of any telephone
redemption request effected in accordance with the authorization set forth in
the account application if they reasonably believe such request to be genuine,
but may in certain cases be liable for losses due to unauthorized or fraudulent
transactions if they do not follow reasonable procedures for verification of
telephone transactions. Such reasonable procedures for verification of tele-
phone transactions may include recordings of telephone transactions (maintained
for six months), and mailings of confirmation promptly after the transaction.
Payment for shares of the Institutional Class redeemed by mail and payment for
telephone redemptions in amounts of less than $10,000 will be made by check
mailed within seven days after receipt of the redemption request in proper
form. The Company may make payment for telephone redemptions in excess of
$10,000 by check when it is considered to be in the Company's best interest to
do so.
Dividends payable up to the date of redemption on redeemed shares of the In-
stitutional Class will normally be paid on the next dividend payment date. How-
ever, if all of the shares of the Institutional Class in a shareholder's ac-
count are redeemed, dividends payable up to the date of redemption will nor-
mally be paid within five days of the date of redemption.
DETERMINATION OF NET ASSET VALUE
The net asset value per share (or share price) of the Portfolio is determined
as of 12:00 noon Eastern Time on each "business day" of the Portfolio, as pre-
viously defined. It is calculated by subtracting the Portfolio's liabilities
from its total assets and by dividing the result by the total number of shares
outstanding in the Portfolio, and rounding such per share net asset value to
the nearest whole cent. The determination of the Portfolio's net asset value
per share is made in accordance with generally accepted accounting
7
<PAGE>
principles. Among other items, the Portfolio's liabilities include accrued ex-
penses and dividends payable, and its total assets include portfolio securities
valued at their market value as well as income accrued but not yet received.
Portfolio securities in the Portfolio are valued on the basis of amortized
cost.
DIVIDENDS
Net investment income (not including any net short-term gains) earned by the
Portfolio is declared as a dividend to the shareholders of record on each busi-
ness day of the Company. The dividend declared on any day preceding a non-busi-
ness day of the Portfolio will include the income accrued on such non-business
day. Dividends will be paid monthly. Net realized capital gains (including net
short-term gains) are normally distributed annually. The Portfolio does not ex-
pect to realize any long-term capital gains and losses. Dividends and distribu-
tions are paid in cash unless the shareholder has elected to have such divi-
dends and distributions reinvested in the form of additional full and frac-
tional shares at the net asset value thereof.
The dividend accrued and paid for each class of shares of the Company will
consist of: (a) interest accrued and original issue discount earned less amor-
tization of premiums, if any, for the portfolio to which such class relates,
allocated based upon such class' pro rata share of the total shares outstanding
which relate to such portfolio, less (b) Company expenses accrued for the ap-
plicable dividend period attributable to such portfolio, such as custodian fees
and accounting expenses, allocated based upon each such class's pro rata share
of the net assets of such portfolio, less (c) expenses directly attributable to
each class which are accrued for the applicable dividend period, such as dis-
tribution expenses, if any.
Dividends are declared to shareholders of record immediately after 3:00 p.m.
Eastern Time on the day of declaration. Accordingly, dividends accrue on the
first day that a purchase order for shares of the Institutional Class is effec-
tive, but not on the day that a redemption order is effective. Thus, if a pur-
chase order is accepted prior to 12:00 noon Eastern Time, the shareholder will
receive its pro rata share of dividends declared on that day. Information con-
cerning the amount of the dividends declared on any particular day will nor-
mally be available by 4:00 p.m. Eastern Time on that day.
PERFORMANCE INFORMATION
Performance information for the Institutional Class can be obtained by calling
the Company at (800) 659-1005. Performance will vary from time to time and past
results are not necessarily indicative of future results. Investors should un-
derstand that performance is a function of the type and quality of the Portfo-
lio's investments as well as its operating expenses. Performance information
for the shares of the Institutional Class may not provide a basis for compari-
son with investments which pay fixed rates of interest for a stated period of
time, with other investments or with investment companies which use a different
method of calculating performance.
Comparative performance information using data from industry publications may
be used from time to time in advertising or marketing the Institutional Class.
The yield of the Institutional Class, calculated as described below, will
fluctuate from day to day. Calculations of yield will take into account the to-
tal income received by the Portfolio, including taxable income, if any; howev-
er, the Portfolio intends to invest its assets so that one hundred percent
(100%) of its annual interest income will be tax-exempt. To the extent that
different classes of shares bear different expenses, the yields of such classes
can be expected to vary. To the extent that institutions charge fees in connec-
tion with services provided in conjunction with the Fund, the yield will be
lower for those beneficial owners paying such fees.
From time to time and in its discretion, AIM or its affiliates may waive all
or a portion of advisory or distribution fees and/or assume certain expenses of
the Portfolio. Such a practice will have the effect of increasing the Portfo-
lio's yield and total return.
The current yield and effective yield (which assumes the reinvestment of divi-
dends for a 365 day year and a return for the entire year equal to the average
annualized current yield for the period) for the Institutional Class are calcu-
lated according to a formula prescribed by the SEC. See "Performance Informa-
tion" in the Statement of Additional Information. For the seven-day period
ended March 31, 1996 the current yield and effective yield for the Institu-
tional Class were 3.20% and 3.25%, respectively.
TAX MATTERS
The Portfolio has qualified and intends to qualify for treatment as a regu-
lated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). As long as the Portfolio qualifies for this tax
treatment, it is not subject to federal income taxes on amounts distributed to
shareholders.
8
<PAGE>
Shareholders will not be required to include the "exempt-interest" portion of
dividends paid by the Portfolio in their gross income for federal income tax
purposes. However, shareholders will be required to report the receipt of ex-
empt-interest dividends and other tax-exempt interest on their federal income
tax returns. Moreover, exempt-interest dividends from the Portfolio may be sub-
ject to state income taxes, may give rise to a federal alternative minimum tax
liability, may affect the amount of social security benefits subject to federal
income tax, may affect the deductibility of interest on certain indebtedness of
a shareholder and may have other collateral federal income tax consequences.
The Portfolio intends to avoid investment in Municipal Securities the interest
on which will constitute an item of tax preference and therefore could give
rise to a federal alternative minimum tax liability. For additional information
concerning the alternative minimum tax and certain collateral tax consequences
of the receipt of exempt-interest dividends, see the Statement of Additional
Information.
The Portfolio may pay dividends to shareholders which are taxable, but will
endeavor to avoid investments which would result in taxable dividends. Unless
otherwise required by Treasury regulations, the percentage of dividends which
constitutes exempt-interest dividends, and the percentage thereof (if any)
which constitutes an item of tax preference will be determined annually and
will be applied uniformly to all dividends declared during that year. These
percentages may differ from the actual percentages for any particular day.
To the extent that dividends are derived from taxable investments or net real-
ized short-term capital gains, they will constitute ordinary income for federal
income tax purposes, whether received in cash or additional shares. Distribu-
tions of net long-term capital gains (capital gain dividends), if any, will be
taxable as long-term capital gains, whether received in cash or additional
shares.
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the federal tax exemption on Munici-
pal Securities. If such a proposal were enacted, the ability of the Portfolio
to pay exempt-interest dividends might be adversely affected.
Shareholders will be advised annually as to the federal income tax status of
distributions made during the year. Shareholders are advised to consult with
their tax advisors concerning the impact of the Code on their investments in
the Portfolio, and concerning the application of state, local and foreign taxes
to investments in the Fund, which may differ significantly from the federal in-
come tax consequences described above.
MANAGEMENT OF THE COMPANY
BOARD OF DIRECTORS
The overall management of the business and affairs of the Company is vested in
its Board of Directors. The Board of Directors approves all significant agree-
ments between the Company and persons or companies furnishing services to the
Company, including the Company's agreements with the Portfolio's investment ad-
visor, distributor, custodian and transfer agent. The day-to-day operations of
the Company are delegated to the Company's officers and to AIM, subject always
to the objective and policies of the Portfolio and to the general supervision
of the Board of Directors. AIM also furnishes or procures on behalf of the Com-
pany all services necessary to the proper conduct of the Company's business.
Certain directors and officers of the Company are affiliated with AIM and A I M
Management Group Inc. ("AIM Management"), the parent of AIM. AIM Management is
a holding company engaged in the financial services business. Information con-
cerning the Board of Directors may be found in the Statement of Additional In-
formation.
DISTRIBUTOR
The Company has entered into a distribution agreement dated as of October 18,
1993 (the "Distribution Agreement") with FMC, a wholly-owned subsidiary of AIM,
with respect to the Institutional Class. FMC does not receive any fees from the
Company. Two directors and several officers of the Company are affiliated with
FMC.
FMC may, from time to time, at its expense, pay a bonus or other consideration
or incentive to banks or dealers who sell a minimum dollar amount of the shares
of the Portfolio during a specific period of time. In some instances, these in-
centives may be offered only to certain banks or dealers who have sold or may
sell significant amounts of shares. The total amount of such additional bonus
payments or other consideration shall not exceed 0.05% of the net asset value
of the shares sold. Any such bonus or incentive programs will not change the
price paid by investors for the purchase of the Portfolio's shares or the
amount that the Portfolio will receive as proceeds from such sales. Banks or
dealers may not use sales of the Portfolio's shares to qualify for any incen-
tives to the extent that such incentives may be prohibited by the laws of any
jurisdiction.
9
<PAGE>
INVESTMENT ADVISOR
A I M Advisors, Inc., 11 Greenway Plaza, Suite 1919, Houston, Texas 77046-
1173, acts as the Company's investment advisor with respect to the Fund pursu-
ant to an Investment Advisory Agreement dated as of October 18, 1993 (the "Ad-
visory Agreement"). AIM, which was organized in 1976, together with its affili-
ates advises or manages 43 investment company portfolios. As of July 15, 1996,
the total assets of the investment company portfolios advised or managed by AIM
or its affiliates were approximately $50.8 billion.
Pursuant to the terms of the Advisory Agreement, AIM manages the investments
of the Fund. AIM obtains and evaluates economic, statistical and financial in-
formation to formulate and implement investment programs for the Portfolio. AIM
shall not be liable to the Company or to its shareholders except in the case of
willful misfeasance, bad faith, gross negligence or reckless disregard of duty;
provided, however, that AIM may be liable for certain breaches of duty under
the 1940 Act.
FEES AND EXPENSES
Pursuant to the Advisory Agreement, the Company pays AIM a fee with respect to
the Portfolio calculated at the annual rate of 0.25% of the first $500 million
of the Portfolio's average daily net assets plus 0.20% of the Portfolio's aver-
age daily net assets in excess of $500 million.
For the fiscal year ended March 31, 1996, AIM was paid fees from the Company
with respect to the Portfolio which represented 0.16% of the Portfolio's aver-
age net assets. During such fiscal year, those expenses of the Company which
were borne by the Institutional Class, including fees paid to AIM, amounted to
0.20% of the Institutional Class' average net assets. For the fiscal year ended
March 31, 1996, AIM waived a portion of its fees with respect to the Portfolio.
Had AIM not waived its fee, AIM would have received an amount from the Company
pursuant to the Advisory Agreement which represented 0.22% of the Portfolio's
average daily net assets.
The Company pays or causes to be paid all expenses of the Company which are
not borne by its distributor or AIM. See the Statement of Additional Informa-
tion for a detailed description of these other charges.
FEE WAIVERS
In order to increase the yield to investors, AIM or its affiliates may from
time to time voluntarily waive or reduce its advisory or distribution fees
while retaining the right to be reimbursed for such fees prior to the end of
each fiscal year. Fee waivers or reductions, other than those set forth in the
Advisory Agreement, may be rescinded, however, at any time without further no-
tice to investors, provided, however, that the fee waiver described below will
be continued in effect until sixty days following notice to the Board of Direc-
tors that such fee waiver will be terminated.
AIM has agreed to reduce its fee from the Portfolio to the extent necessary to
cause the expense ratio of the Company attributable to the operations of the
Institutional Class not to exceed 0.20% (exclusive of interest, taxes, broker-
age commissions, directors' fees, and registration fees payable to the SEC).
GENERAL INFORMATION
ORGANIZATION AND DESCRIPTION OF SHARES
The Company was originally incorporated in Maryland on January 24, 1977, but
had no operations prior to March 21, 1983. On August 30, 1985, the Company was
reorganized as a Massachusetts business trust. On May 1, 1992, the Company was
reorganized as a Maryland corporation. The Company currently has one portfolio,
the Cash Reserve Portfolio. The Portfolio currently offers two classes of
shares, the Institutional Cash Reserve Shares and the Private Investment Class.
The Private Investment Class is offered pursuant to a separate prospectus.
All shares of the Company have equal rights with respect to voting, except
that the holders of shares of a particular class will have the exclusive right
to vote on matters pertaining to distribution plans or shareholder service
plans, if any such plans are adopted, relating solely to such class. The hold-
ers of each class have distinctive rights with respect to dividends which are
more fully described in the Statement of Additional Information. There will not
normally be annual shareholders' meetings. Shareholders may remove directors
from office by votes cast at a meeting of shareholders or by written consent,
and a meeting of shareholders may be called at the request of the holders of
10% or more of the Company's outstanding shares.
There are no preemptive or conversion rights applicable to any of the
Company's shares. The Company's shares, when issued, will be fully paid and
non-assessable. The Board of Directors may create additional classes or series
of the Company's shares without shareholder approval.
10
<PAGE>
TRANSFER AGENT AND CUSTODIAN
A I M Institutional Fund Services, Inc., 11 Greenway Plaza, Suite 1919, Hous-
ton, Texas 77046-1173, acts as transfer agent for the Institutional Class of-
fered pursuant to this Prospectus. The Bank of New York, 90 Washington Street,
11th floor, New York, New York 10286 acts as custodian for the Company's port-
folio securities and cash for the Institutional Class offered pursuant to this
Prospectus.
SHAREHOLDER INQUIRIES
Inquiries by holders of the Class concerning the status of an account should
be directed to the Portfolio or an AIFS investment representative by calling
(800) 659-1005.
11
<PAGE>
APPENDIX
STATEMENT OF
ADDITIONAL INFORMATION
TAX-FREE INVESTMENTS CO.
11 GREENWAY PLAZA, SUITE 1919
HOUSTON, TEXAS 77046
(800) 659-1005
------------
INSTITUTIONAL CASH RESERVE SHARES
------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS.
IT SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS THAT PRECEDES
THIS APPENDIX, ADDITIONAL COPIES OF WHICH MAY BE OBTAINED BY WRITING
FUND MANAGEMENT COMPANY
P.O. BOX 4333
HOUSTON, TEXAS 77210-4333
OR CALLING (800) 659-1005
------------
STATEMENT OF ADDITIONAL INFORMATION DATED: JULY 29, 1996
RELATING TO THE PROSPECTUS DATED: JULY 29, 1996
A-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Introduction................................................ A-3
General Information about the Company....................... A-3
The Company and Its Shares................................ A-3
Directors and Officers.................................... A-4
Remuneration of Directors................................. A-6
AIM Funds Retirement Plan for Eligible Directors/Trustees. A-7
Deferred Compensation Agreements.......................... A-8
The Distributor........................................... A-8
The Investment Advisor.................................... A-8
Expenses.................................................. A-9
Transfer Agent and Custodian ............................. A-10
Legal Counsel............................................. A-10
Sub-Accounting............................................ A-11
Principal Holders of Securities........................... A-11
Reports................................................... A-12
Share Purchases and Redemptions............................. A-13
Purchases and Redemptions................................. A-13
Net Asset Value Determination............................. A-13
Dividends, Distributions and Tax Matters.................... A-14
Dividends and Distributions............................... A-14
Tax Matters............................................... A-14
Qualification as a Regulated Investment Company........... A-14
Excise Tax on Regulated Investment Companies.............. A-15
Distributions............................................. A-15
Foreign Shareholders...................................... A-16
Effect of Future Legislation; Local Tax Considerations.... A-17
Performance Information..................................... A-17
Investment Program and Restrictions......................... A-17
Investment Program........................................ A-17
Municipal Securities...................................... A-18
Investment Ratings........................................ A-19
When-Issued Securities and Delayed Delivery Transactions.. A-22
Variable or Floating Rate Instruments..................... A-22
Synthetic Municipal Instruments........................... A-23
Investment Restrictions................................... A-23
Fund Transactions........................................... A-24
Financial Statements........................................ A-26
</TABLE>
A-2
<PAGE>
INTRODUCTION
Tax-Free Investments Co. (the "Company") is a mutual fund organized with one
portfolio, the Cash Reserve Portfolio, which is referred to herein as the
"Portfolio." The Portfolio may have one or more classes of shares. The rules
and regulations of the United States Securities and Exchange Commission (the
"SEC") require all mutual funds to furnish prospective investors with certain
information concerning the activities of the fund being considered for invest-
ment. This information is included in the Prospectus dated July 29, 1996 (the
"Prospectus") for Institutional Cash Reserve Shares (the "Institutional
Class"), a class of the Portfolio of the Company. This Statement of Additional
Information is intended to furnish investors with additional information con-
cerning the Institutional Class. Some of the information set forth in this
Statement of Additional Information is also included in the Prospectus and, in
order to avoid repetition, reference will be made to sections of the Prospec-
tus. Additional information is contained in the Company's registration state-
ment filed with the SEC. Copies of the registration statement may be obtained
from the SEC by paying the charges prescribed under its rules and regulations.
GENERAL INFORMATION ABOUT THE COMPANY
THE COMPANY AND ITS SHARES
The Company is an open-end diversified series management investment company
initially organized as a corporation under the laws of the State of Maryland on
January 24, 1977. The Company was reorganized as a business trust under the
laws of the Commonwealth of Massachusetts on August 30, 1985, and was formerly
known as "Tax-Free Investments Trust." The Company was reorganized as a Mary-
land corporation under the name "Tax-Free Investments Co." on May 1, 1992.
Shares of the Company are redeemable at the net asset value thereof at the op-
tion of the holders thereof or at the option of the Company in certain circum-
stances. Information concerning the methods of redemption and the rights of
share ownership are set forth in the Prospectus under "General Information" and
"Redemption of Shares."
As used in the Prospectus, the term "majority of the outstanding shares" of
the Company, the Portfolio or a particular class of shares of the Company
means, respectively, the vote of the lesser of (i) 67% or more of the shares of
the Company or Portfolio or class present at a meeting, if the holders of more
than 50% of the outstanding shares of the Company or Portfolio or class are
present or represented by proxy, or (ii) more than 50% of the outstanding
shares of the Company or Portfolio or class.
Shareholders of the Company do not have cumulative voting rights, and there-
fore the holders of a majority of a quorum of the outstanding shares of all
classes voting together for election of directors may elect all of the members
of the Board of Directors of the Company. In such event, the remaining holders
cannot elect any members of the Board of Directors of the Company.
The Board of Directors may classify or reclassify any unissued shares of any
class or classes in addition to those already authorized by setting or changing
in any one or more respects, from time to time and prior to the issuance of
such shares, the preferences, conversion or other rights, voting powers, re-
strictions, limitations as to dividends, qualifications, or terms or conditions
of redemption, of such shares. Any such classification or reclassification will
comply with the provisions of the Investment Company Act of 1940, as amended
(the "1940 Act").
The Articles of Incorporation permit the directors to issue 6,000,000,000
shares of common stock, of $.001 par value. A share of the Company's common
stock represents an equal proportionate interest in the Portfolio and is enti-
tled to a proportionate interest in the dividends and distributions with re-
spect to its class of the Portfolio. Additional information concerning the
rights of share ownership is set forth in the Prospectus.
The assets received by the Company for the issuance of shares of each class
relating to the Portfolio and all income, earnings, profits, losses and pro-
ceeds therefrom, subject only to the rights of creditors, are allocated to the
Portfolio and constitute the underlying assets of the Portfolio. The underlying
assets of the Portfolio are charged with the expenses attributable to the Port-
folio. See "Expenses."
The Articles of Incorporation provide that the directors will not be liable
for errors of judgment or mistakes of fact or law. However, nothing in the Ar-
ticles of Incorporation protects a director against any liability to which such
director would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of his office. The Articles of Incorporation provide for indemnifica-
tion by the Company of the directors and the officers of the Company except
with respect to any matter as to which any such person did not act in good
faith in the reasonable belief that his action was in, or not opposed to, the
best interests of the Company. Such person may not be indemnified against any
liability to the Company or the Company's shareholders to which he would other-
wise be subject by reason of his willful misfeasance, bad faith, gross negli-
gence or reckless disregard of the duties involved in the conduct of his of-
fice. The Articles of Incorporation also authorize the purchase of liability
insurance on behalf of the Company's directors and officers.
A-3
<PAGE>
As described in the Prospectus, the Company will not normally hold annual
shareholders' meetings. A special meeting shall be held upon written request of
the holders of not less than 10% of the outstanding shares of the Company. At
such time as less than a majority of the directors have been elected by the
shareholders, the directors then in office will call a shareholders' meeting
for the election of directors. In addition, directors may be removed from of-
fice by a written consent signed by the holders of two-thirds of the Company's
outstanding shares and filed with the Company's transfer agent or by a vote of
the holders of two-thirds of the Company's outstanding shares at a meeting duly
called for the purpose. Upon written request by ten or more shareholders, who
have been such for at least six months and who hold shares constituting at
least 1% of the Company's outstanding shares, stating that such shareholders
wish to communicate with the other shareholders for the purpose of obtaining
the signatures necessary to demand a meeting to consider removal of a director,
the Company has undertaken to provide a list of shareholders or to disseminate
appropriate materials (at the expense of the requesting shareholders).
Except as otherwise disclosed in the Prospectus and in this Statement of Addi-
tional Information, the directors shall continue to hold office and may appoint
their successors.
DIRECTORS AND OFFICERS
The directors and officers of the Company and their principal occupations dur-
ing the last five years are set forth below. Unless otherwise noted, the ad-
dress of each such director and officer is 11 Greenway Plaza, Suite 1919, Hous-
ton, Texas 77046-1173.
*CHARLES T. BAUER, Director and Chairman (77)
Director, Chairman and Chief Executive Officer, A I M Management Group
Inc.; and Chairman of the Board of Directors, A I M Advisors, Inc., A I M
Capital Management, Inc., A I M Distributors, Inc., A I M Fund Services,
Inc., A I M Institutional Fund Services, Inc. and Fund Management Company.
BRUCE L. CROCKETT, Director (52)
906 Frome Lane
McLean, VA 22102
Formerly, Director, President and Chief Executive Officer, COMSAT
Corporation (Includes COMSAT World Systems, COMSAT Mobile Communications,
COMSAT Video Enterprises, COMSAT RSI and COMSAT International Ventures).
Previously, President and Chief Operating Officer, COMSAT Corporation;
President, World Systems Division, COMSAT Corporation; and Chairman, Board of
Governors of INTELSAT; (each of the COMSAT companies listed above is an
international communication, information and entertainment-distribution
services company).
OWEN DALY II, Director (71)
6 Blythewood Road
Baltimore, MD 21210
Director, Cortland Trust Inc. (investment company). Formerly, Director, CF
& I Steel Corp., Monumental Life Insurance Company and Monumental General
Insurance Company; and Chairman of the Board of Equitable Bancorporation.
**CARL FRISCHLING, Director (59)
919 Third Avenue
New York, NY 10022
Partner, Kramer, Levin, Naftalis & Frankel (law firm). Formerly, Partner
Reid & Priest (law firm); and prior thereto, Partner, Spengler Carlson Gubar
Brodsky & Frischling (law firm).
*ROBERT H. GRAHAM, Director and President (49)
Director, President and Chief Operating Officer, A I M Management Group
Inc.; Director and President, A I M Advisors, Inc.; and Director and Senior
Vice President, A I M Capital Management, Inc., A I M Distributors, Inc.,
A I M Fund Services, Inc., A I M Institutional Fund Services, Inc. and Fund
Management Company.
- ------
*A director who is an "interested person" of the Company and A I M Advisors,
Inc. as defined in the 1940 Act.
**A director who is an "interested person" of the Company as defined in the
1940 Act.
A-4
<PAGE>
JOHN F. KROEGER, Director (71)
37 Pippins Way
Morristown, NJ 07960
Director, Flag Investors International Fund, Inc., Flag Investors Emerging
Growth Fund, Inc., Flag Investors Telephone Income Fund, Inc., Flag Investors
Equity Partners Fund, Inc., Total Return U.S. Treasury Fund, Inc., Flag In-
vestors Intermediate Term Income Fund, Inc., Managed Municipal Fund, Inc.,
Flag Investors Value Builder Fund, Inc., Flag Investors Maryland Intermediate
Tax-Free Income Fund, Inc., Flag Investors Real Estate Securities Fund, Inc.,
Alex. Brown Cash Reserve Fund, Inc. and North American Government Bond Fund,
Inc. (investment companies). Formerly, Consultant, Wendell & Stockel Associ-
ates, Inc. (consulting firm).
LEWIS F. PENNOCK, Director (53)
6363 Woodway, Suite 825
Houston, TX 77057
Attorney in private practice in Houston, Texas.
IAN W. ROBINSON, Director (73)
183 River Drive
Tequesta, FL 33469
Formerly, Executive Vice President and Chief Financial Officer, Bell Atlan-
tic Management Services, Inc. (provider of centralized management services to
telephone companies); Executive Vice President, Bell Atlantic Corporation
(parent of seven telephone companies); and Vice President and Chief Financial
Officer, Bell Telephone Company of Pennsylvania and Diamond State Telephone
Company.
LOUIS S. SKLAR, Director (56)
Transco Tower, 50th Floor
2800 Post Oak Blvd.
Houston, TX 77056
Executive Vice President, Development and Operations, Hines Interests Lim-
ited Partnership (real estate development).
***JOHN J. ARTHUR, Senior Vice President and Treasurer (51)
Senior Vice President and Treasurer, A I M Advisors, Inc.; and Vice Presi-
dent and Treasurer, A I M Management Group Inc., A I M Capital Management,
Inc., A I M Distributors, Inc., A I M Fund Services, Inc., A I M Institu-
tional Fund Services, Inc. and Fund Management Company.
GARY T. CRUM, Senior Vice President (48)
Director and President, A I M Capital Management, Inc.; Director and Senior
Vice President, A I M Management Group Inc., A I M Advisors, Inc., and Direc-
tor, A I M Distributors, Inc.
***CAROL F. RELIHAN, Senior Vice President and Secretary (41)
Senior Vice President, General Counsel and Secretary, A I M Advisors, Inc.;
Vice President, General Counsel and Secretary, A I M Management Group Inc.;
Vice President and General Counsel, Fund Management Company; and Vice Presi-
dent, A I M Capital Management, Inc., A I M Distributors, Inc., A I M Fund
Services, Inc. and A I M Institutional Fund Services, Inc.
- ------
***Mr. Arthur and Ms. Relihan are married to each other.
A-5
<PAGE>
STUART W. COCO, Vice President (41)
Senior Vice President, A I M Capital Management, Inc.; and Vice President,
A I M Advisors, Inc.
MELVILLE B. COX, Vice President (52)
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 A I M Institutional Fund Services, Inc.; and Fund Management Company.
Formerly, Vice President, Charles Schwab & Co., Inc.; Assistant Secretary,
Charles Schwab Family of Funds and Schwab Investments; Chief Compliance Offi-
cer, Charles Schwab Investment Management, Inc.; and Vice President, Inte-
grated Resources Life Insurance Co. and Capitol Life Insurance Co.
KAREN DUNN KELLEY, Vice President (36)
Senior Vice President, A I M Capital Management, Inc.; and Vice President,
A I M Advisors, Inc.
J. ABBOTT SPRAGUE, Vice President (41)
Director and President, A I M Institutional Fund Services, Inc. and Fund
Management Company; Director and Senior Vice President, A I M Advisors, Inc.;
and Senior Vice President, A I M Management Group Inc.
DANA R. SUTTON, Vice President and Assistant Treasurer (37)
Vice President and Fund Controller, A I M Advisors, Inc.; and Assistant
Vice President and Assistant Treasurer, Fund Management Company.
The Company's Board of Directors has an Audit Committee, consisting of Messrs.
Kroeger (Chairman), Daly, Pennock and Robinson, which is responsible for meet-
ing with the Portfolio'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 Portfolio's fund accounting, its
internal accounting controls, or to consider such matters as may from time to
time be set forth in a charter adopted by the Board of Directors and such com-
mittee.
The Board of Directors also has an Investments Committee, consisting of
Messrs. Daly (Chairman), Bauer, Crockett, Kroeger and Pennock, which is respon-
sible for considering matters relating to investment management, or for consid-
ering such matters as may from time to time be set forth in a charter adopted
by the Board of Directors.
The Company also has a Nominating and Compensation Committee, consisting of
Messrs. Pennock (Chairman), Crockett, Daly, Kroeger and Sklar, which is respon-
sible for considering and nominating individuals to stand for election as di-
rectors who are not "interested persons" (as defined by the 1940 Act) as long
as the Company maintains a Distribution Plan on behalf of the Portfolio pursu-
ant to Rule 12b-1 under the 1940 Act, or considering such matters as may from
time to time be set forth in a charter adopted by the Board and 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 A I M Advisors,
Inc. ("AIM") or distributed and administered by Fund Management Company. All of
the Company's executive officers hold similar offices with some or all of such
investment companies.
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 who
is not also an officer of the Company is compensated for his or her services
according to a fee schedule which recognizes the fact that such director also
serves as a director or trustee of other regulated investment companies man-
aged, administered or distributed by AIM or its affiliates (the "AIM Funds").
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.
A-6
<PAGE>
Set forth below is information regarding compensation paid or accrued for each
director of the Company:
<TABLE>
<CAPTION>
RETIREMENT TOTAL
AGGREGATE BENEFITS COMPENSATION
COMPENSATION ACCRUED FROM ALL
FROM BY ALL AIM
DIRECTOR COMPANY(1) AIM FUNDS(2) FUNDS(3)
-------- ------------ -------------- ------------
<S> <C> <C> <C>
Charles T. Bauer.......... -0- -0- -0-
Bruce L. Crockett......... $1,829 $ 3,655 $57,750
Owen Daly II.............. $2,118 $18,662 $58,125
Carl Frischling........... $2,078 $11,323 $57,250(4)
Robert H. Graham.......... -0- -0- -0-
John F. Kroeger........... $2,025 $22,313 $58,125
Lewis F. Pennock.......... $1,810 $ 5,067 $58,125
Ian W. Robinson........... $1,817 $15,381 $56,750
Louis S. Sklar............ $2,095 $ 6,632 $57,250
</TABLE>
- ------
(1) The total amount of compensation deferred by all Directors of the Company
during the fiscal year ended March 31, 1996, including interest earned
thereon, was $7,703.
(2) During the fiscal year ended March 31, 1996, the total amount of expenses
allocated to the Company in respect of such retirement benefits was $4,603.
Data reflect compensation for the calendar year ended December 31, 1995.
(3) Messrs. Bauer, Daly, Graham, Kroeger and Pennock each serves as a Director
or Trustee of a total of 11 AIM Funds. Messrs. Crockett, Frischling, Robin-
son and Sklar each serves as a Director or Trustee of a total of 10 AIM
Funds. Data reflects total compensation for the calendar year ended Decem-
ber 31, 1995.
(4) See also page A-8 regarding fees earned by Mr. Frischling's law firm.
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 an 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 eli-
gible director has attained age 65 and has completed at least five years of
continuous service with one or more of the regulated investment companies man-
aged, 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 75% of the re-
tainer paid or accrued by the 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) for the number of such Director's years of service (not in excess of
10 years of service) completed with respect to any of the AIM Funds. Such bene-
fit is payable to each eligible director in quarterly installments. If an eli-
gible director dies after attaining the normal retirement date but before re-
ceipt 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 various compensation and years of
service classifications. The estimated credited years for Messrs. Crockett,
Daly, Frischling, Kroeger, Pennock, Robinson and Sklar are 9, 9, 18, 19, 14, 9,
and 6 years, respectively.
ESTIMATED BENEFITS UPON RETIREMENT
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
PAID BY ALL AIM FUNDS
-----------------------
NUMBER OF YEARS OF SERVICE WITH THE AIM FUNDS $55,000 $60,000 $65,000
--------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
10.............................................. $41,250 $45,000 $48,750
9.............................................. $37,125 $40,500 $43,875
8.............................................. $33,000 $36,000 $39,000
7.............................................. $28,875 $31,500 $34,125
6.............................................. $24,750 $27,000 $29,250
5.............................................. $20,625 $22,500 $24,375
</TABLE>
A-7
<PAGE>
DEFERRED COMPENSATION AGREEMENTS
Messrs. Daly, Frischling, Kroeger, Robinson and Sklar (for purposes of this
paragraph only, the "deferring directors") have each executed a Deferred Com-
pensation Agreement (collectively, the "Agreements"). Pursuant to the Agree-
ments, the deferring directors elected to defer receipt of 100% of their com-
pensation 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 accounts 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 ten years be-
ginning on the date the deferring director's retirement benefits commence under
the Plan. The Company's Board of Directors, in its sole discretion, may accel-
erate 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 benefi-
ciary 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 pay-
ments 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.
As of December 31, 1995, the Fund paid legal fees of $6,329 for services ren-
dered by Kramer, Levin, Naftalis & Frankel, formerly Kramer, Levin, Naftalis,
Nessen, Kamin & Frankel, as counsel to the Board of Directors. Carl Frischling,
a member of that firm is a director of the Company.
THE DISTRIBUTOR
Fund Management Company ("FMC") serves as the distributor of the Institutional
Class pursuant to a Distribution Agreement dated as of October 18, 1993 (the
"Distribution Agreement"). FMC is a registered broker-dealer and a wholly-owned
subsidiary of AIM. The address of FMC is 11 Greenway Plaza, Suite 1919, Hous-
ton, Texas 77046. Mail addressed to FMC should be sent to P.O. Box 4333, Hous-
ton, Texas 77210-4333.
The Distribution Agreement provides that FMC has the exclusive right to dis-
tribute shares of the Institutional Class either directly or through other bro-
ker-dealers. Pursuant to the Distribution Agreement, AIM Distributors (a) so-
licits and receives orders for the purchase of shares of the Institutional
Class, accepts or rejects such orders on behalf of the Company in accordance
with the Company's currently effective Prospectus, and transmits such orders as
are accepted to the Company's transfer agent as promptly as possible; (b) re-
ceives requests for redemptions and transmits such redemption requests to the
Company's transfer agent as promptly as possible; (c) responds to inquiries
from shareholders concerning the status of their accounts and the operations of
the Company; and (d) provides information concerning yields and dividend rates
to shareholders. FMC does not receive any fees from the Company for its servic-
es.
FMC has not undertaken to sell any specific number of shares of the Institu-
tional Class. The Distribution Agreement further provides that, in connection
with the distribution of shares of the Institutional Class, FMC will pay all of
the promotional expenses, including the incremental costs of printing prospec-
tuses, statements of additional information, annual reports and other periodic
reports for distribution to prospective investors and the costs of preparing
and distributing any other supplemental sales material to prospective invest-
ors. The services of FMC to the Company are not exclusive so it is free to ren-
der similar services to others. FMC shall not be liable to the Company or the
shareholders of the Institutional Class for any act or omission by FMC or for
any loss sustained by the Company or the shareholders of the Institutional
Class except in the case of willful misfeasance, bad faith, gross negligence or
reckless disregard of duty.
FMC may, from time to time, at its expense, pay a bonus or other consideration
or incentive to dealers or banks who sell a minimum dollar amount of the Insti-
tutional Class during a specific period of time. In some instances, these in-
centives may be offered only to certain dealers or institutions who have sold
or may sell significant amounts of shares. The total amount of such additional
bonus or payments or other consideration shall not exceed 0.05% of the net as-
set value per share of the Institutional Class sold. Any such bonus or incen-
tive programs will not change the price paid by investors for the purchase of
shares of the Institutional Class or the amount received as proceeds from such
sales. Dealers or institutions may not use sales of the shares of the Institu-
tional Class to qualify for any incentives to the extent that such incentives
may be prohibited by the laws of any jurisdiction.
THE INVESTMENT ADVISOR
A I M Advisors, Inc., 11 Greenway Plaza, Suite 1919, Houston, Texas 77046,
serves as investment advisor to the Portfolio pursuant to an Investment Advi-
sory Agreement dated as of October 18, 1993 (the "Advisory Agreement"). AIM,
which was organized in 1976, is the investment advisor or manager of 43 invest-
ment company portfolios. As of July 15, 1996, the total assets advised or man-
aged by AIM or its affiliates were approximately $50.8 billion.
A-8
<PAGE>
AIM and the Company have adopted a Code of Ethics which requires investment
personnel and certain other employees (a) to pre-clear personal securities
transactions subject to the Code of Ethics, (b) to file reports or duplicate
confirmations regarding such transactions, (c) to refrain from personally en-
gaging in (i) short-term trading of a security, (ii) transactions involving a
security within seven days of an AIM Fund transaction involving the same secu-
rity, and (iii) transactions involving securities being considered for invest-
ment by an AIM Fund, and (d) to abide by certain other provisions under the
Code of Ethics. The Code of Ethics also prohibits investment personnel and all
other AIM employees from purchasing securities in an initial public offering.
Personal trading reports are reviewed periodically by AIM, and the Board of Di-
rectors reviews quarterly and annual reports (including information on any sub-
stantial violations of the Code of Ethics). Sanctions for violations of the
Code of Ethics may include censure, monetary penalties, suspension or termina-
tion of employment.
On May 14, 1996, the Board of Directors (including the affirmative vote of all
the directors who were not parties to such agreement or "interested persons" of
any such party) last approved the Advisory Agreement, which will be in effect
until June 30, 1997. The Advisory Agreement will continue in effect from year
to year thereafter if it is specifically approved at least annually by the af-
firmative vote of a majority of the directors who are not parties to the Advi-
sory Agreement or "interested persons" of any such party by votes cast in per-
son at a meeting called for such purpose. The Company or AIM may terminate the
Advisory Agreement on 60 days' written notice without penalty. The Advisory
Agreement terminates automatically in the event of its "assignment," as defined
in the 1940 Act.
Pursuant to the terms of the Advisory Agreement, AIM: (a) supervises and man-
ages all aspects of the Company's operations; (b) provides the Company with
certain executive, administrative and clerical services as deemed advisable by
the Board of Directors; (c) provides the Company with, or obtains for the Com-
pany, adequate office space and all necessary equipment and services, including
telephone services, utilities, stationery supplies and similar items for the
Company's principal office; (d) arranges, but does not pay for, the periodic
updating of prospectuses and statements of additional information (and supple-
ments thereto), proxy materials, tax returns, reports to the Portfolio's share-
holders and reports to and filings with the SEC and state Blue Sky authorities;
(e) provides the Company's Board of Directors on a regular basis with financial
reports and analyses of the Portfolio's operations and the operation of compa-
rable funds; (f) obtains and evaluates pertinent information about significant
developments and economic, statistical and financial data, domestic, foreign or
otherwise, whether affecting the economy generally or the Portfolio and whether
concerning the individual issuers whose securities are included in the Portfo-
lio; (g) determines which issuers and securities shall be represented in the
Portfolio and regularly reports thereon to the Board of Directors; (h) formu-
lates and implements continuing programs for purchases and sales of securities
for the Portfolio; and (i) takes, on behalf of the Company, all actions which
appear to be necessary to carry into effect such purchase and sale programs,
including the placing of orders for the purchase and sale of portfolio securi-
ties. Any investment program undertaken by AIM will at all times be subject to
the policies and control of the Board of Directors. AIM shall not be liable to
the Portfolio or its shareholders for any act or omission by AIM or for any
loss sustained by the Portfolio or its shareholders, except in the case of
AIM's willful misfeasance, bad faith, gross negligence or reckless disregard of
duty; provided, however, that AIM may be liable for certain breaches of duty
under the 1940 Act.
As compensation for its services, AIM receives a fee from the Company with re-
spect to the Portfolio, calculated daily and paid monthly, at the annual rate
of 0.25% of the first $500 million of the Portfolio's aggregate average daily
net assets, plus 0.20% of the Portfolio's aggregate daily net assets in excess
of $500 million. For the fiscal years ended March 31, 1996, 1995 and 1994, the
fees paid by the Company to AIM with respect to the Portfolio were $1,819,232,
$1,824,453 and $1,525,419, respectively (after giving effect to fee waivers for
the fiscal years ended March 31, 1996, 1995 and 1994 of $690,397, $659,533 and
$802,331, respectively).
In addition, in order to increase the yield to investors, AIM may, from time
to time, waive or reduce its fee while retaining the right to be reimbursed
prior to year end. Fee waivers or reductions, other than those set forth in the
Advisory Agreement, may be rescinded, however, at any time without further no-
tice to investors. The fee waivers currently in effect are shown in the Pro-
spectus.
EXPENSES
AIM and FMC furnish, without cost to the Company, the services of the Presi-
dent, Secretary and one or more Vice Presidents of the Company and such other
personnel as are required for the proper conduct of the Company's affairs and
to carry out their obligations under the Advisory Agreement and the Distribu-
tion Agreement. AIM maintains, at its expense and without cost to the Company,
a trading function in order to carry out its obligations to place orders for
the purchase and sale of portfolio securities for the Portfolio. FMC bears the
expenses of printing and distributing prospectuses and statements of additional
information (other than those prospectuses and statements of additional infor-
mation distributed to existing holders of shares) and any other promotional or
sales literature used by FMC or furnished by FMC to purchasers or dealers in
connection with the public offering of shares of the Institutional Class.
A-9
<PAGE>
The Company pays, or causes to be paid, all other expenses of the Company; in-
cluding, without limitation: the fees paid to AIM; the charges and expenses of
any registrar, any custodian or depository appointed by the Company for the
safekeeping of cash, portfolio securities and other property, and any transfer,
dividend or accounting agent or agents; brokers' commissions in connection with
portfolio securities transactions of the Portfolio; all taxes, including secu-
rities issuance and transfer taxes, and fees payable to federal, state or other
governmental agencies; the costs and expenses of engraving or printing share
certificates; all costs and expenses in connection with registration and main-
tenance of registration with the SEC and various states and other jurisdictions
(including filing fees, legal fees and disbursements of counsel); the costs and
expenses of printing, including typesetting, and distributing proxy statements,
reports to shareholders, prospectuses and statements of additional information
of the Company and supplements thereto (except reports to shareholders and pro-
spectuses distributed to potential shareholders of the Company which are paid
for by FMC); expenses of shareholders' and directors' meetings; fees and travel
expenses of directors or director members of any advisory board or committee;
expenses incident to the payment of any dividend, distribution, withdrawal or
redemption, whether in shares or in cash; charges and expenses of any outside
pricing service; fees and expenses of legal counsel and of independent accoun-
tants; membership dues of industry associations; interest payable on
borrowings; postage; insurance premiums on property or personnel (including of-
ficers and directors) of the Company; extraordinary expenses (including, but
not limited to, legal claims and liabilities and litigation costs and any in-
demnification related thereto); and all other charges and costs of the
Company's operations unless otherwise explicitly assumed by AIM or FMC.
The Company may also reimburse AIM for the costs of a principal financial of-
ficer and related personnel who may perform internal accounting functions for
the Company. Such accounting functions consist primarily of regulatory, tax,
shareholder and internal management reporting and calculation of the Portfo-
lio's net asset value and the daily dividend for its several classes. The
method of calculating such reimbursements must be approved annually, and the
amounts paid will be reviewed periodically by the Board of Directors. For the
fiscal years ended March 31, 1996, 1995 and 1994, AIM was reimbursed $75,960,
$78,184 and $65,124, respectively, by the Portfolio for such expenses.
Expenses of the Company which are not directly attributable to the operations
of any class are pro-rated among all classes of the Company based upon the rel-
ative net assets of each class. Expenses of the Company which are directly at-
tributable to a class are charged against the income available for distribution
as dividends to such class.
AIM has agreed to reduce its fee for any fiscal year, or reimburse the Portfo-
lio, to the extent required, so that the amount of the ordinary expenses of the
Company (excluding brokerage commissions, interest, directors' fees, taxes and
extraordinary expenses such as litigation costs) paid or incurred by the Com-
pany does not exceed the expense limitations applicable to the Portfolio im-
posed by the securities laws or regulations of those states or jurisdictions in
which the Shares are registered or qualified for sale. Currently, the most re-
strictive of such state expense limitations would require AIM to reduce its
fees to the extent required so that ordinary expenses of the Company (excluding
interest, taxes, brokerage commissions and extraordinary expenses) for any fis-
cal year do not exceed 2 1/2% of the first $30 million of the Company's average
daily net assets, plus 2% of the next $70 million of the Company's average
daily net assets, plus 1 1/2% of the Company's average daily net assets in ex-
cess of $100 million.
Expenses of the Portfolio which are not directly attributable to the opera-
tions of any class are pro-rated among the classes of the Portfolio based upon
the relative net assets of each class. Expenses of the Portfolio which are di-
rectly attributable to a class are charged against the income available for
distribution as dividends to such class.
TRANSFER AGENT AND CUSTODIAN
A I M Institutional Fund Services, Inc., ("AIFS") 11 Greenway Plaza, Suite
1919, Houston, Texas 77046-1173, serves as transfer agent and dividend disburs-
ing agent for the shares of the Institutional Class and receives an annual fee
from the Company for its services in such capacity in the amount of .009% of
average daily net assets of the Company, payable monthly. Such compensation may
be changed from time to time as is agreed to by AIFS and the Company. The Bank
of New York ("BONY") acts as custodian for the Company's portfolio securities
and cash. BONY receives such compensation from the Company for its services in
such capacity as is agreed to from time to time by BONY and the Company. The
address of BONY is 90 Washington Street, 11th floor, New York, New York 10286.
LEGAL COUNSEL
The law firm of Ballard Spahr Andrews & Ingersoll, Philadelphia, Pennsylvania,
serves as counsel to the Company.
A-10
<PAGE>
SUB-ACCOUNTING
The Company and FMC have arranged for AIFS or the Portfolio to offer sub-ac-
counting services to shareholders of the Institutional Class and to maintain
information with respect to the underlying beneficial ownership of the shares.
Investors who purchase shares of the Institutional Class for the account of
others can make arrangements through the Company or FMC for these sub-account-
ing services. In addition, shareholders utilizing certain versions of AIM
LINK(R), a personal computer application software product, may receive sub-ac-
counting services via such software.
PRINCIPAL HOLDERS OF SECURITIES
To the best knowledge of the Company, the names and addresses of the holders
of 5% or more of the outstanding shares of the Institutional Cash Reserve
Shares as of July 15, 1996, and the amount of the outstanding shares held of
record by such shareholders are set forth below:
<TABLE>
<CAPTION>
PERCENT
NAME AND ADDRESS OF OWNED OF
RECORD OWNER RECORD*
------------------- --------
<S> <C>
NationsBank of Texas, N.A. 27.95%**
1401 Elm Street, 11th floor
P.O. Box 831000
Dallas, TX 75283-1000
Liberty Bank and Trust Company of Tulsa 15.13%
P.O. Box 25848
Oklahoma City, OK 73125
First Interstate Bank of California 10.76%
26610 West Agoura Rd.
Calabasas, CA 91302
Trust Company Bank 8.70%
Center 3131
P.O. Box 105504
Atlanta, GA 30348
U.S. Bank of Oregon 8.17%
555 Southwest Oak
Portland, OR 97204-1752
Frost National Bank of Texas 5.06%
P.O. Box 1600
San Antonio, Tx 78296
</TABLE>
To the best knowledge of the Company, the names and addresses of the holders
of 5% or more of the outstanding shares of the Private Investment Class of the
Portfolio as of July 15, 1996, and the amount of the outstanding shares held of
record by such shareholders, are set forth below:
<TABLE>
<CAPTION>
PERCENT
NAME AND ADDRESS OF OWNED OF
RECORD OWNER RECORD*
------------------- --------
<S> <C>
The Bank of New York 37.73%**
4 Fisher Lane
White Plains, NY 10603
Cullen/Frost Discount Brokers 25.23%**
P.O. Box 2358
San Antonio, TX 78299
Huntington Capital Corporation 24.41%
41 South High Street, 9th floor
Columbus, OH 43287
</TABLE>
- ------
* The Company has no knowledge as to whether all or any portfolio of the shares
owned of record only are also owned beneficially.
** A shareholder who holds more than 25% of the outstanding shares of a class
may be presumed to be in "control" of such class of shares, as defined in
the 1940 Act.
A-11
<PAGE>
<TABLE>
<CAPTION>
PERCENT
NAME AND ADDRESS OF OWNED OF
RECORD OWNER RECORD*
------------------- --------
<S> <C>
Charter National Bank of Houston Trust 5.49%
P.O. Box 1494
Houston, TX 77251-1494
First National Bank of Chicago 5.21%
Mail Suite 0126
Chicago, Il 60610-0126
</TABLE>
- ------
* The Company has no knowledge as to whether all or any portfolio of the shares
owned of record only are also owned beneficially.
As of July 15 1996, the directors and officers of the Company owned less than
1% of the Institutional Cash Reserve Shares and the Private Investment Class
Shares.
REPORTS
The Company furnishes shareholders of the Institutional Class with semi-annual
reports containing information about the Company and its operations, including
a schedule of investments held in the Portfolio, and its financial statements.
The annual financial statements are audited by the Company's independent audi-
tors. The Board of Directors has selected KPMG Peat Marwick LLP, 700 Louisiana,
NationsBank Building, Houston, Texas 77002, as the Company's independent audi-
tors to audit the Company's financial statements and review the Company's tax
returns.
A-12
<PAGE>
SHARE PURCHASES AND REDEMPTIONS
PURCHASES AND REDEMPTIONS
A complete description of the manner by which shares of the Institutional
Class may be purchased, redeemed or exchanged appears in the Prospectus under
the heading "Purchase of Shares."
The right of redemption may be suspended or the date of payment postponed when
(a) trading on the New York Stock Exchange ("NYSE") is restricted, as deter-
mined by applicable rules and regulations of the SEC, (b) the NYSE is closed
for other than customary weekend and holiday closings, (c) the SEC has by order
permitted such suspension, or (d) an emergency as determined by the SEC exists
making disposition of portfolio securities or the valuation of the net assets
of the Company not reasonably practicable.
NET ASSET VALUE DETERMINATION
The net asset value of a share of the Portfolio is determined once daily as of
the time shown in the Prospectus on each business day of the Company, as de-
fined in the Prospectus. For the purpose of determining the price at which all
shares of the Portfolio are issued and redeemed, the net asset value per share
is calculated by: (a) valuing all securities and instruments of the Portfolio
as set forth below; (b) adding other assets of the Portfolio, if any; (c) de-
ducting the liabilities of the Portfolio; (d) dividing the resulting amount by
the number of shares outstanding of the Portfolio; and (e) rounding such per
share net asset value to the nearest whole cent.
The debt instruments held in the Portfolio are valued on the basis of amor-
tized cost. This method involves valuing an instrument at its cost and thereaf-
ter assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in valuation, it may re-
sult in periods during which value, as determined by amortized cost, is higher
or lower than the price the Company would receive if it sold the entire portfo-
lio.
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 Portfolio is permitted in accordance with applicable rules and regulations
of the SEC, which require the Company to adhere to certain conditions. The
Portfolio is required pursuant to such rules to maintain a dollar-weighted av-
erage portfolio maturity of 90 days or less, to purchase only instruments hav-
ing remaining maturities of 397 days or less, and to invest only in securities
determined by AIM, pursuant to guidelines established by the Board of Direc-
tors, to be "Eligible Securities" (as defined in Rule 2a-7 under the 1940 Act)
and to present minimal credit risk to the Portfolio. The Portfolio adheres to a
policy of purchasing only "First Tier" securities (as defined in Rule 2a-7 un-
der the 1940 Act), which is a higher quality standard and more restrictive than
required by such rules.
Eligible Securities generally include (1) U.S. Government securities; (2) se-
curities that (a) are rated (at the time of purchase) by two or more nationally
recognized statistical rating organizations ("NRSROs") in the two highest rat-
ing categories for such securities (e.g., commercial paper rated "A-1" or "A-2"
by Standard & Poor's Corporation ("S&P"), or rated "Prime-1" or "Prime-2" by
Moody's Investors Service, Inc. ("Moody's"), or (b) are rated (at the time of
purchase) by only one NRSRO in one of its two highest rating categories for
such securities; (3) short-term obligations and long-term obligations that have
remaining maturities of 397 calendar days or less, provided in each instance
that such obligations have no short-term rating and are comparable in priority
and security to a class of short-term obligations of the issuer that has been
rated in accordance with (2)(a) or (b) above ("comparable obligations"); (4)
securities that are not rated and are issued by an issuer that does not have
comparable obligations rated by an NRSRO ("Unrated Securities"), provided that
such securities are determined to be of comparable quality to a security satis-
fying (2) or (3) above; and (5) long-term obligations that have remaining matu-
rities in excess of 397 calendar days that are subject to a demand feature or
put (such as a guarantee, a letter of credit or similar credit enhancement)
("demand instrument") (a) that are unconditional (readily exercisable in the
event of default), provided that the demand feature satisfies (2), (3) or (4)
above, and the demand instrument or long-term obligations of the issuer satisfy
(2) or (4) above for long-term debt obligations. The Board of Directors will
approve or ratify any purchases by the Portfolio of securities that are rated
by only one NRSRO or that are unrated securities.
The Board of Directors is required to establish procedures designed to stabi-
lize, to the extent reasonably possible, the Portfolio's price per share at
$1.00 as computed for the purpose of sales and redemptions. Such procedures in-
clude review of the portfolio holdings by the Board of Directors, at such in-
tervals as they may deem appropriate, to determine whether the net asset value
calculated by using available market quotations or other reputable sources for
the Portfolio deviates from $1.00 per share and, if so, whether such deviation
may result in material dilution or is otherwise unfair to purchasers or exist-
ing holders of any class of shares of the Portfolio. In the event the Board of
Directors determines that such a deviation exists for any class of shares of
the Portfolio, it
A-13
<PAGE>
will take such corrective action as the Board of Directors deems necessary and
appropriate, 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; the redemption of shares in kind; or the estab-
lishment of a net asset value per share by using available market quotations.
DIVIDENDS, DISTRIBUTIONS AND TAX MATTERS
DIVIDENDS AND DISTRIBUTIONS
Net investment income for the Portfolio is declared as a dividend to the
shareholders of record of the Institutional Class on each business day of the
Portfolio. The dividend declared on any day preceding a non-business day will
include the income accrued on such non-business day. Dividends will be paid
monthly. Net realized capital gains, if any, are normally distributed annually.
The Company may distribute realized capital gains of the Portfolio more often
if deemed necessary in order to maintain the net asset value of the Portfolio
at $1.00 per share. However, the Company does not expect the Portfolio to real-
ize net long-term capital gains. Dividends and distributions are paid in cash
unless the shareholder has elected to reinvest such dividends and distributions
in additional full and fractional shares of the Institutional Class at the net
asset value thereof.
The dividend accrued and paid for each class will consist of: (a) income for
the Portfolio to which such class relates, the allocation of which is based
upon each such class' pro rata share of the total shares outstanding which re-
late to the Portfolio, less (b) Company expenses accrued for the applicable
dividend period attributable to the Portfolio, such as custodian fees and ac-
counting expenses, allocated based upon each such class' pro rata share of the
net assets of the Portfolio, less (c) expenses directly attributable to each
class which are accrued for the applicable dividend period, such as distribu-
tion expenses, if any.
Dividends with respect to the Institutional Class are declared to shareholders
of record immediately after 3:00 p.m. Eastern Time on the date of declaration.
Accordingly, dividends accrue on the first day that a purchase order for shares
of the Institutional Class is effective, but not on the day that a redemption
order is effective. Thus, if a purchase order is accepted prior to 12:00 noon
Eastern Time, the shareholder will receive its pro rata share of dividends be-
ginning with those declared on that day.
Should the Company incur or anticipate any unusual expense, loss or deprecia-
tion, which would adversely affect the net asset value per share of the Portfo-
lio or the net income per share of a class of the Portfolio for a particular
period, the Board of Directors would at that time consider whether to adhere to
the present dividend policy described above or to revise it in light of then
prevailing circumstances. For example, if the net asset value per share of the
Portfolio were reduced, or were anticipated to be reduced, below $1.00, the
Board of Directors might suspend further dividend payments on shares of the
Portfolio until the net asset value returns to $1.00. Thus, such expense or
loss or depreciation might result in a shareholder receiving no dividends for
the period during which it held shares of the Portfolio and/or in its receiving
upon redemption a price per share lower than that which it paid.
TAX MATTERS
The following is only a summary of certain additional tax considerations gen-
erally affecting the Portfolio and its shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Portfolio or its shareholders, and the discussion here and in
the Prospectus is not intended as a substitute for careful tax planning.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The Portfolio has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). As
a regulated investment company, the Portfolio is not subject to federal income
tax on the portion of its net investment income (i.e., taxable interest, divi-
dends and other taxable ordinary income, net of expenses) and capital gain net
income (i.e., the excess of capital gains over capital losses) that it distrib-
utes to shareholders, provided that it distributes an amount at least equal to
the sum of (a) 90% of its investment company taxable income (i.e., net invest-
ment income and the excess of net short-term capital gain over net long-term
capital loss) and (b) 90% of its tax-exempt income (net of allocable expenses
and amortized bond premium allocable thereto) for the taxable year (the "Dis-
tribution Requirement"), and satisfies certain other requirements of the Code
that are described below. Distributions by the Portfolio made during the tax-
able year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and gains
of the taxable year and can therefore satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated investment
company must (1) derive at least 90% of its gross income from dividends, inter-
est, certain payments with respect to securities loans, gains from the sale or
other disposition of stock or securities or foreign currencies (to the extent
such currency gains are directly related to the regulated investment
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company's principal business of investing in stock or securities) and other in-
come (including but not limited to gains from options, futures or forward con-
tracts) derived with respect to its business of investing in such stock, secu-
rities or currencies (the "Income Requirement"); and (2) derive less than 30%
of its gross income from the sale or other disposition of stock, securities or
certain foreign currencies (or options, futures or forward contracts thereon)
held for less than three months (the "Short-Short Gain Test"). Because of the
Short-Short Gain Test, the Portfolio may have to limit the sale of appreciated
securities that it has held for less than three months. However, the Short-
Short Gain Test will not prevent the Portfolio from disposing of investments of
a loss, since the recognition of a loss before the expiration of the three-
month holding period is disregarded. Interest (including original issue dis-
count) received by the Portfolio at maturity or upon the disposition of a secu-
rity held for less than three months will not be treated as gross income de-
rived from the sale or other disposition of such security within the meaning of
the Short-Short Gain Test. However, income that is attributable to realized
market appreciation will be treated as gross income from the sale or other dis-
position of securities for this purpose.
In addition to satisfying the requirements described above, the Portfolio must
satisfy an asset diversification test in order to qualify as a regulated in-
vestment company. Under this test, at the close of each quarter of the Portfo-
lio's taxable year, at least 50% of the value of the Portfolio's assets must
consist of cash and cash items, U.S. Government securities, securities of other
regulated investment companies, and securities of other issuers (as to which
the Portfolio has not invested more than 5% of the value of the Portfolio's to-
tal assets in securities of such issuer and as to which the Portfolio does not
hold more than 10% of the outstanding voting securities of such issuer), and no
more than 25% of the value of its total assets may be invested in the securi-
ties of any one issuer (other than U.S. Government securities and securities of
other regulated investment companies), or in two or more issuers which the
Portfolio controls and which are engaged in the same or similar trades or busi-
nesses.
If for any taxable year the Portfolio does not qualify as a regulated invest-
ment company, all of its taxable income (including its net capital gain) will
be subject to tax at regular corporate rates without any deduction for distri-
butions to shareholders, and such distributions will be taxable as ordinary
dividends to the extent of the Portfolio's current and accumulated earnings and
profits.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in each calendar year an amount equal to 98% of ordi-
nary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year. The balance
of such income must be distributed during the next calendar year. Undistributed
tax-exempt interest on Municipal Securities is not subject to the excise tax.
For the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable
year ending in such calendar year.
The Portfolio intends to make sufficient distributions or deemed distributions
of its ordinary taxable income and capital gain net income prior to the end of
each calendar year to avoid liability for the excise tax. However, investors
should note that the Portfolio may in certain circumstances be required to liq-
uidate portfolio investments to make sufficient distributions to avoid excise
tax liability.
DISTRIBUTIONS
The Portfolio intends to qualify to pay exempt-interest dividends by satisfy-
ing the requirement that at the close of each quarter of the Portfolio's tax-
able year at least 50% of the Portfolio's total assets consists of Municipal
Securities. Distributions from the Portfolio will constitute exempt-interest
dividends to the extent of the Portfolio's tax-exempt interest income (net of
allocable expenses and amortized bond premium). Exempt-interest dividends dis-
tributed to shareholders of the Portfolio are excluded from gross income for
federal income tax purposes. However, shareholders required to file a federal
income tax return will be required to report the receipt of exempt-interest
dividends on their returns. Moreover, while exempt-interest dividends are ex-
cluded from gross income for federal income tax purposes, they may be subject
to alternative minimum tax ("AMT") in certain circumstances and may have other
collateral tax consequences as discussed below. Distributions by the Portfolio
of any investment company taxable income or of any net capital gain will be
taxable to shareholders as discussed below.
AMT is imposed in addition to, but only to the extent it exceeds, the regular
tax and is computed at a maximum rate of 28% for noncorporate taxpayers and 20%
for corporate taxpayers on the excess of the taxpayer's alternative minimum
taxable income ("AMTI") over an exemption amount. In addition, under the
Superfund Amendments and Reauthorization Act of 1986, a tax is imposed for tax-
able years beginning after 1986 and before 1996 at the rate of 0.12% on the ex-
cess of a corporate taxpayer's AMTI (determined without regard to the deduction
for this tax and the AMT net operating loss deduction) over $2 million. Exempt-
interest dividends derived from certain "private activity" Municipal Securities
issued after August 7, 1986 will generally constitute an item of tax preference
includable in AMTI for both corporate and noncorporate taxpayers. In addition,
exempt-interest dividends derived from all Municipal Securities, regardless of
the date of issue, must be included in adjusted current earnings, which are
used in computing an additional corporate preference item (i.e., 75% of the ex-
cess of a corporate taxpayer's adjusted current earnings over its AMTI (deter-
mined without regard to this item and the AMT net operating loss deduction))
includable in AMTI.
Exempt-interest dividends must be taken into account in computing the portion,
if any, of social security or railroad retirement benefits that must be in-
cluded in an individual shareholder's gross income subject to federal income
tax. Further, a
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shareholder of the Portfolio is denied a deduction for interest on indebtedness
incurred or continued to purchase or carry shares of the Portfolio. Moreover, a
shareholder who is (or is related to) a "substantial user" of a facility fi-
nanced by industrial development bonds held by the Portfolio will likely be
subject to tax on dividends paid by the Portfolio which are derived from inter-
est on such bonds. Receipt of exempt-interest dividends may result in other
collateral federal income tax consequences to certain taxpayers, including fi-
nancial institutions, property and casualty insurance companies and foreign
corporations engaged in a trade or business in the United States. Prospective
investors should consult their own tax advisers as to such consequences.
The Portfolio anticipates distributing substantially all of its investment
company taxable income, if any, for each taxable year. Such distributions will
be taxable to shareholders as ordinary income and treated as dividends for fed-
eral income tax purposes, but they will not qualify for the dividends-received
deduction for corporations.
The Portfolio may either retain or distribute to shareholders its net capital
gain, if any, for each taxable year. The Portfolio currently intends to dis-
tribute any such amounts. If net capital gain is distributed and designated as
a capital gain dividend, it will be taxable to shareholders as long-term capi-
tal gain, regardless of the length of time the shareholder has held his shares
or whether such gain was recognized by the Portfolio prior to the date on which
the shareholder acquired his shares. Realized market discount on Municipal Se-
curities purchased after April 30, 1993, will be treated as ordinary income and
not as capital gain.
Distributions by the Portfolio that do not constitute ordinary income divi-
dends, exempt-interest dividends or capital gain dividends will be treated as a
return of capital to the extent of (and in reduction of) the shareholder's tax
basis in his shares; any excess will be treated as gain from the sale of his
shares.
Distributions by the Portfolio will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in ad-
ditional shares of the Portfolio (or of another portfolio). Shareholders elect-
ing to reinvest a distribution in additional shares will be treated as receiv-
ing a distribution in an amount equal to the net asset value of the shares re-
ceived, determined as of the reinvestment date.
Ordinarily, shareholders are required to take distributions by the Portfolio
into account in the year in which the distributions are made. However, divi-
dends declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Portfolio) on December
31 of such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
The Portfolio will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of ordinary income dividends and capital gain dividends, if
any, and the proceeds of redemption of shares, paid to any shareholder (1) who
has provided either an incorrect tax identification number or no number at all,
(2) who is subject to backup withholding by the Internal Revenue Service for
failure to report the receipt of interest or dividend income properly, or (3)
who has failed to certify to the Portfolio that it is not subject to backup
withholding or that it is a corporation or other "exempt recipient."
FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a nonresident alien
individual, foreign trust or estate, foreign corporation, or foreign partner-
ship ("foreign shareholder"), depends on whether the income from the Portfolio
is "effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from the Portfolio is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income divi-
dends (including short-term capital gains) and return of capital distributions
will be subject to U.S. withholding tax at the rate of 30% (or lower treaty
rate) upon the gross amount of the dividend. Such a foreign shareholder would
generally be exempt from U.S. federal income tax on gains realized on the sale
of shares of the Portfolio, capital gain dividends (if any) and exempt-interest
dividends.
If the income from the Portfolio is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends (if any) and any gains realized upon the sale of shares
of the Portfolio will be subject to U.S. federal income tax at the rates appli-
cable to U.S. citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the Portfolio may be re-
quired to withhold U.S. federal income tax at a rate of 31% on distributions
(other than exempt-interest dividends) that are otherwise exempt from withhold-
ing tax (or taxable at a reduced treaty rate) unless such shareholders furnish
the Portfolio with proper notification of their foreign status.
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The tax consequences to a foreign shareholder entitled to claim the benefits
of an applicable tax treaty may be different from those described herein. Re-
cently proposed regulations may change the information provided here. Foreign
shareholders are urged to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Portfolio, includ-
ing the applicability of foreign taxes.
EFFECT OF FUTURE LEGISLATION; LOCAL TAX CONSIDERATIONS
The foregoing general discussion of U.S. federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the
date of this Statement of Additional Information. Future legislative or admin-
istrative changes or court decisions may significantly change the conclusions
expressed herein, and any such changes or decisions may have a retroactive ef-
fect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends, exempt-inter-
est dividends and capital gain dividends from regulated investment companies
often differ from the rules for U.S. federal income taxation described above.
Shareholders are urged to consult their tax advisers as to the consequences of
these and other state and local tax rules affecting investment in the Portfo-
lios.
PERFORMANCE INFORMATION
Calculations of yield will take into account the total income received by the
Portfolio, including taxable income, if any; however, the Portfolio intends to
invest its assets so that 100% of its annual interest income will be tax-ex-
empt. To the extent that institutions charge fees in connection with services
provided in conjunction with the Institutional Class, the yield will be lower
for those beneficial owners paying such fees.
The current yields quoted for the Institutional Class will be the net average
annualized yield for an identified period, usually seven consecutive calendar
days. Yields for the Institutional Class will be computed by assuming that an
account was established with a single share (the "Single Share Account") on the
first day of the period. To arrive at the quoted yield, the net change in the
value of that Single Share Account for the period (which would include divi-
dends accrued with respect to the share, and dividends declared on shares pur-
chased with dividends accrued and paid, if any, but would not include any real-
ized gains and losses or unrealized appreciation or depreciation) will be mul-
tiplied by 365 and then divided by the number of days in the period, with the
resulting figure carried to the nearest hundredth of one percent. The Company
may also furnish a quotation of effective yields for the Institutional Class
that assumes the reinvestment of dividends for a 365 day year and a return for
the entire year equal to the average annualized yields for the period, which
will be computed by compounding the unannualized current yields for the period
by adding 1 to the unannualized current yields, raising the sum to a power
equal to 365 divided by the number of days in the period, and then subtracting
1 from the result.
For the seven-day period ended March 31, 1996, the current yield and effective
yield for the Institutional Class were 3.20% and 3.25%, respectively. Assuming
a corporate tax rate of 35%, those yields for the Institutional Class on a tax-
equivalent basis were 4.92% and 5.00%, respectively.
INVESTMENT PROGRAM AND RESTRICTIONS
INVESTMENT PROGRAM
Information concerning the Portfolio's investment objectives and fundamental
and operating policies is set forth in the Prospectus. The principal features
of the Portfolio's investment program and the primary risks associated with
that investment program are also discussed in the Prospectus. There can be no
assurance that the Portfolio will achieve its objective. The values of the se-
curities in which the Portfolio invests fluctuate based upon interest rates,
the financial stability of the issuer and market factors. The following is a
more detailed description of the instruments eligible for purchase by the Port-
folio, which augments the summary of the Portfolio's investment program which
appears under the heading "Investment Program" in the Prospectus.
As set forth in the Prospectus, the Portfolio will limit its purchases of se-
curities to
(i) "First Tier" securities, as such term is defined from time to time in
Rule 2a-7 under the 1940 Act, or
(ii) securities guaranteed as to payment of principal and interest by the
U.S. Government.
Subsequent to its purchase by the Portfolio, an issue of Municipal Securities
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 Portfolio, but AIM will consider such an event to be relevant in its
determination of whether the Portfolio should continue to hold the security. To
the
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extent that the ratings applied by an NRSRO to Municipal Securities may change
as a result of changes in these rating systems, the Company will attempt to use
comparable ratings as standards for its investments in Municipal Securities in
accordance with the investment policies described herein.
The Portfolio may, from time to time, invest in taxable short-term investments
("Temporary Investments") consisting of obligations of the U.S. Government, its
agencies or instrumentalities and repurchase agreements (instruments under
which the seller agrees to repurchase the security at a specified time and
price) relating thereto; commercial paper rated within the highest rating cate-
gory by a recognized rating agency; and certificates of deposit of domestic
banks with assets of $1.5 billion or more as of the date of their most recently
published financial statements. The Portfolio may invest in Temporary Invest-
ments, for example, due to market conditions or pending the investment of pro-
ceeds from the sale of shares of the Portfolio or proceeds from the sale of
Portfolio securities or in anticipation of redemptions. Although interest
earned from such Temporary Investments will be taxable as ordinary income, the
Portfolio intends to minimize taxable income through investment, when possible,
in short-term tax-exempt securities, which may include shares of other invest-
ment companies whose dividends are tax-exempt. See "Investment Restrictions" in
the Prospectus for limitations on the Portfolio's ability to invest in repur-
chase agreements and in shares of other investment companies. It is a fundamen-
tal policy of the Company that the Portfolio's assets will be invested so that
at least 80% of the Portfolio's income will be exempt from federal income tax-
es, and it is the Company's present intention (but it is not a fundamental pol-
icy) to invest the Portfolio's assets so that 100% of the Portfolio's annual
interest income will be tax-exempt. Accordingly, the Portfolio may hold cash
reserves pending the investment of such reserves in Municipal Securities.
The Portfolio may, from time to time in order to qualify shares of the Portfo-
lio for sale in a particular state, agree to certain investment restrictions in
addition to or more stringent than those set forth above. Such restrictions are
not fundamental and may be changed without the approval of shareholders.
Pursuant to an undertaking made to the Ohio Department of Commerce, Division
of Securities, the Portfolio will not purchase the securities of any issuer if,
as to 75% of the total assets of the Portfolio, more than 10% of the voting se-
curities of such issuer would be held by the Portfolio at the time of purchase.
MUNICIPAL SECURITIES
Municipal Securities include debt obligations issued to obtain funds for vari-
ous public purposes, including the construction of a wide range of public fa-
cilities such as airports, bridges, highways, housing, hospitals, mass trans-
portation, schools, streets and water and sewer works. Other public purposes
for which Municipal Securities may be issued include the refunding of outstand-
ing obligations, obtaining funds for general operating expenses and lending
such funds to other public institutions and facilities. In addition, certain
types of industrial development bonds are issued by or on behalf of public au-
thorities to obtain funds to provide for the construction, equipment, repair or
improvement of privately operated housing facilities and certain local facili-
ties for water supply, gas, electricity or sewage or solid waste disposal. The
interest paid on such bonds may be exempt from federal income tax, although
current federal tax laws place substantial limitations on the size and purpose
of such issues. Such obligations are considered to be Municipal Securities pro-
vided that the interest paid thereon, in the opinion of bond counsel, qualifies
as exempt from federal income tax. However, interest on Municipal Securities
may give rise to a federal alternate minimum tax liability and may have other
collateral federal income tax consequences. See "Dividends, Distributions and
Tax Matters -- Tax Matters" in this Statement of Additional Information.
The two major classifications of Municipal Securities are bonds and notes.
Bonds may be further categorized as "general obligation" or "revenue" issues.
General obligation bonds are secured by the issuer's pledge of its full faith,
credit, and taxing power for the payment of principal and interest. Revenue
bonds are payable from the revenues derived from a particular facility or class
of facilities, or, in some cases, from the proceeds of a special excise or
other specific revenue source, but not from the general taxing power. Tax-ex-
empt industrial development bonds are in most cases revenue bonds and do not
generally carry the pledge of the credit of the issuing municipality. Notes are
short-term instruments. Most notes are general obligations of the issuing mu-
nicipalities or agencies and are sold in anticipation of a bond sale, collec-
tion of taxes or receipt of other revenues. There are, of course, variations in
the risks associated with Municipal Securities, both within a particular clas-
sification and between classifications. The Portfolio's assets may consist of
any combination of general obligation bonds, revenue bonds, industrial revenue
bonds and notes. The percentage of such Municipal Securities in the Portfolio
will vary from time to time.
For purpose of the diversification requirements applicable to the Portfolio,
the identification of the issuer of the Municipal Securities depends on the
terms and conditions of the security. When the assets and revenues of an agen-
cy, authority, instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the security is backed
only by the assets and revenues of the subdivision, such subdivision will be
deemed to be the sole issuer. Similarly, in the case of an industrial revenue
bond, if that bond is backed only by the assets and revenues of the non-govern-
mental user, then such non-governmental user will be deemed to be the sole is-
suer. If, however, in either case, the creating government or some other entity
guarantees a security, such a guarantee would be considered a separate security
and will be treated as an issue of such government or other agency unless the
value of all securities issued or guaranteed by such government or other entity
and owned by the Portfolio does not exceed 10% of the total assets of the Port-
folio. Certain Municipal Securities may be secured by the guaranty or irrevoca-
ble letter of credit of a major banking institution, or the payment of princi-
pal and interest when due may be insured by an insurance company.
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The yields on Municipal Securities depend on a variety of factors, including
general economic and monetary conditions, money market factors, conditions of
the Municipal Securities market, size of a particular offering, maturity of the
obligation, and rating of the issue. The yield realized by holders of a class
of the Portfolio will be the yield realized by the Portfolio on its investments
reduced by the general expenses of the Company and those expenses attributable
to such class. The market values of the Municipal Securities held by the Port-
folio will be affected by changes in the yields available on similar securi-
ties. If yields increase following the purchase of a Municipal Security the
market value of such Municipal Security will generally decrease. Conversely, if
yields on such Municipal Security decrease, the market value of such security
will generally increase.
INVESTMENT RATINGS
The following is a description of the factors underlying the tax-exempt debt
ratings of Moody's, S&P and Fitch Investors Service ("Fitch"):
MOODY'S MUNICIPAL BOND RATINGS
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
edged." Interest payments are protected by a large or by an exceptionally sta-
ble 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 pro-
tection 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 risk appear somewhat larger than in Aaa securities.
Note: Bonds in the Aa group which Moody's believes possess the strongest in-
vestment attributes are designated by the symbol Aa1.
Note: Also, Moody's applies numerical modifiers 1, 2, and 3 in the Aa group
when assigning ratings to: industrial development bonds; and bonds secured by
either a letter of credit or bond insurance. The modifier 1 indicates that the
security ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the issue
ranks in the lower end of its generic rating category.
MOODY'S DUAL RATINGS
In the case of securities with a demand feature, two ratings are assigned; one
representing an evaluation of the degree of risk associated with scheduled
principal and interest payments, and the other representing an evaluation of
the degree of risk associated with the demand feature.
MOODY'S SHORT-TERM LOAN RATINGS
Moody's ratings for state and municipal short-term obligations will be desig-
nated Moody's Investment Grade (or MIG). Such ratings recognize the differences
between short-term credit risk and long-term risk. Factors affecting the li-
quidity of the borrower and short-term cyclical elements are critical in short-
term ratings, while other factors of major importance in bond risk, long-term
secular trends for example, may be less important over the short run.
A short-term rating may also be assigned on an issue having a demand feature
(i.e., a variable rate demand obligation or VRDO). Short-term ratings on issues
with demand features are differentiated by the use of the VMIG symbol to re-
flect such characteristics as payment upon periodic demand rather than fixed
maturity dates and payment relying on external liquidity. Additionally, the
source of payment may be limited to the external liquidity with no or limited
legal recourse to the issuer in the event the demand is not met.
A VMIG rating may be assigned to commercial paper programs. Such programs are
characterized as having variable short-term maturities but having neither a
variable rate nor demand feature.
Gradations of investment quality are indicated by rating symbols, with each
symbol representing a group in which the quality characteristics are broadly
the same.
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MIG 1/VMIG 1
This designation denotes best quality. There is present strong protection by
established cash flows, superior liquidity support or demonstrated broad based
access to the market for refinancing.
MOODY'S COMMERCIAL PAPER RATINGS
Moody's commercial paper ratings are opinions of the ability of issuers to re-
pay punctually promissory obligations not having an original maturity in excess
of nine months.
Moody's employs the following two designations, each judged to be investment
grade, to indicate the relative repayment capacity of rated issuers.
Prime-1
Issuers (or related supporting institutions) rated Prime-1 (P-1) have a supe-
rior capacity for repayment of short-term promissory obligations. P-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well- established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed finan-
cial charges and high internal cash generation; and well-established access to
a range of financial markets and assured sources of alternate liquidity.
Note: A Moody's commercial paper rating may also be assigned as an evaluation
of the demand feature of a short-term or long-term security with a put option.
S&P MUNICIPAL BOND RATINGS
A S&P municipal bond rating is a current assessment of the creditworthiness of
an obligor with respect to a specific obligation. This assessment may take into
consideration obligors such as guarantors, insurers, or lessees.
The ratings are based, in varying degrees, on the following considerations:
likelihood of default -- capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with the
terms of the obligation; nature of and provisions of the obligation; and pro-
tection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
AAA
Debt rated AAA has the highest rating assigned by S&P. Capacity to pay inter-
est 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 a small degree.
Note: Ratings within the AA and A major rating categories may be modified by
the addition of a plus (+) sign or minus (-) sign to show relative standing.
S&P DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option or demand
feature as part of their structure.
The first rating addresses the likelihood of repayment of principal and inter-
est as due, and the second rating addresses only the demand feature. The long-
term debt rating symbols are used for bonds to denote the long-term maturity
and the commercial paper rating symbols for the put option (e.g., AAA/A-1+).
With short-term demand debt, the note rating symbols are used with the commer-
cial paper rating symbols (e.g., SP-1+/A-1+).
S&P MUNICIPAL NOTE RATINGS
A S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment: am-
ortization schedule (the larger the final maturity relative to other maturities
the more likely it will be treated as a note); and source of payment (the more
dependent the issue is on the market for its refinancing, the more likely it
will be treated as a note).
A-20
<PAGE>
The highest note rating symbol is as follows:
SP-1
Category denotes very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
S&P COMMERCIAL PAPER RATINGS
S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
The highest rating category is as follows:
A-1
This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
FITCH BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in determin-
ing the credit risk associated with a particular security. The ratings repre-
sent Fitch's assessment of the issuer's ability to meet the obligations of a
specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its rela-
tionship to other obligations of the issuer, the current and prospective finan-
cial condition and operating performance of the issuer and any guarantor, as
well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same ratings are of similar but not necessarily identical
credit quality since the rating categories do not fully reflect small differ-
ences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security. Rat-
ings do not comment on the adequacy of market price, the suitability of any se-
curity for a particular investor, or the tax-exempt nature or taxability of
payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other obligors,
underwriters, their experts, and other sources Fitch believes to be reliable.
Fitch does not audit or verify the truth or accuracy of such information. Rat-
ings may be changed, suspended, or withdrawn as a result of changes in, or the
unavailability of, information or for other reasons.
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 princi-
pal, 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 develop-
ments, short-term debt of these issuers is generally rated "F-l."
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" category.
NR -- Indicates that Fitch does not rate the specific issue.
A-21
<PAGE>
FITCH SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on de-
mand or have original maturities of generally up to three years, including com-
mercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
The highest Fitch short-term rating is as follows:
F-1
Exceptionally Strong Credit Quality. Issues assigned this rating are regarded
as having the strongest degree of assurance for timely payment.
WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS
The Portfolio may purchase Municipal Securities 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 Portfolio may purchase
or sell Municipal Securities on a delayed delivery basis. The payment obliga-
tion and the interest rate that will be received on the when-issued securities
are fixed at the time the buyer enters into the commitment. The Portfolio will
only make commitments to purchase when-issued or delayed delivery Municipal Se-
curities with the intention of actually acquiring such securities, but the
Portfolio may sell these securities before the settlement date if it is deemed
advisable. No additional when-issued or delayed delivery commitments will be
made if more than 25% of the Portfolio's net assets would thereby become so
committed.
If the Portfolio purchases a when-issued or delayed delivery security, the
Portfolio will direct its custodian bank to segregate cash or other high grade
securities (including Temporary Investments and Municipal Securities) of the
Portfolio in an amount equal to the when-issued or delayed delivery commitment.
The segregated securities will be valued at market for the purpose of determin-
ing the adequacy of the segregated securities. If the market value of such se-
curities declines, additional cash or securities will be segregated on a daily
basis so that the market value of the segregated assets will equal the amount
of the Portfolio's when-issued or delayed delivery commitments. To the extent
funds are segregated, they will not be available for new investment or to meet
redemptions.
Securities purchased on a when-issued or delayed delivery basis and the secu-
rities held in the Portfolio 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 secu-
rities changing in value in the same way, i.e., experiencing appreciation when
interest rates fall). Therefore, if in order to achieve higher interest income
the Portfolio remains substantially fully invested at the same time that it has
purchased securities on a when-issued or delayed delivery basis, there is a
possibility that the Portfolio will experience greater fluctuation in the mar-
ket value of its assets.
Furthermore, when the time comes for the Portfolio to meet its obligations un-
der when-issued or delayed delivery commitments, the Portfolio will do so by
use of its then available cash, by the 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 or delayed delivery securities
themselves (which may have a market value greater or less than the Portfolio's
payment obligation thereunder). The sale of securities to meet such obligations
carries with it a greater potential for the realization of net short-term capi-
tal gains, which are not exempt from federal income taxes. The value of when-
issued or delayed delivery securities on the settlement date may be more or
less than the purchase price.
In a delayed delivery transaction, the Portfolio relies on the other party to
complete the transaction. If the transaction is not completed, the Portfolio
may miss a price or yield considered to be advantageous.
VARIABLE OR FLOATING RATE INSTRUMENTS
The Portfolio may invest in Municipal Securities which have variable or float-
ing interest rates which are readjusted periodically. Such readjustment may be
based either upon a predetermined standard, such as a bank prime rate or the
U.S. Treasury bill rate, or upon prevailing market conditions. Variable or
floating interest rates generally reduce changes in the market price of Munici-
pal Securities from their original purchase price. Accordingly, as interest
rates decrease or increase, the potential for capital appreciation or deprecia-
tion is less for variable or floating rate Municipal Securities than for fixed
rate obligations.
A-22
<PAGE>
Many Municipal Securities with variable or floating interest rates purchased
by the Portfolio are subject to payment of principal and accrued interest (usu-
ally within seven days) on the Portfolio's demand. The terms of such demand in-
struments require payment of principal and accrued interest from the issuer, a
guarantor and/or a liquidity provider. All variable or floating rate instru-
ments will meet the quality standards of the Portfolio. AIM will monitor the
pricing, quality and liquidity of the variable or floating rate Municipal Secu-
rities held by the Portfolio.
SYNTHETIC MUNICIPAL INSTRUMENTS
The Portfolio may invest in synthetic municipal instruments the value of and
return on which are derived from underlying securities. The types of synthetic
municipal instruments in which the Portfolio may invest include tender option
bonds and variable rate trust certificates. Both types of instruments involve
the deposit into a trust or custodial account of one or more long-term tax-ex-
empt bonds or notes ("Underlying Bonds"), and the sale of certificates evidenc-
ing interests in the trust or custodial account to investors such as the Port-
folio. The trustee or custodian receives the long-term fixed rate interest pay-
ments on the Underlying Bonds, and pays certificate holders short-term floating
or variable interest rates which are reset periodically. A "tender option bond"
provides a certificate holder with the conditional right to sell (put) its cer-
tificate to the Sponsor or some designated third party at specified intervals
and receive the par value of the certificate plus accrued interest. A "variable
rate trust certificate" evidences an interest in a trust entitling the certifi-
cate holder to receive variable rate interest based on prevailing short-term
interest rates and also typically providing the certificate holder with the
conditional right to put its certificate at par value plus accrued interest.
Because synthetic municipal instruments involve a trust or custodial account
and a third party conditional put feature, they involve complexities and poten-
tial risks that may not be present where a municipal security is owned direct-
ly. For further information regarding certain risks associated with investing
in synthetic municipal instruments see the Prospectus under the caption "In-
vestment Program -- Synthetic Municipal Instruments."
INVESTMENT RESTRICTIONS
The most significant investment restrictions applicable to the Portfolio's
investment program are set forth in the Prospectus. Additionally, as a matter
of fundamental policy which may not be changed without a vote of all classes of
shareholders of the Portfolio, the Portfolio will not:
(1) purchase any industrial development bond, if, as a result of such
purchase, more than 5% of the Portfolio's total assets would be invested in
securities of issuers, which, together with their predecessors, have been in
business for less than three years;
(2) borrow money or pledge, mortgage or hypothecate the assets of the
Portfolio except for temporary or emergency purposes and then only in an
amount not exceeding 10% of the value of the Portfolio's total assets,
except that the Portfolio may purchase when-issued securities consistent
with the Portfolio's investment objective and policies; provided that the
Portfolio will repay all borrowings (other than when-issued purchases)
before making additional investments;
(3) lend money or securities except to the extent that the Portfolio's
investments may be considered loans;
(4) purchase or sell puts, calls, straddles, spreads or combinations
thereof, except that the Portfolio may purchase Stand-by Commitments;
(5) invest in shares of any other investment company, other than in
connection with the merger, consolidation, reorganization or acquisition of
assets, except that the Portfolio may invest up to 10% of its assets in
securities of other investment companies and then only for temporary
purposes in those investment companies whose dividends are tax-exempt;
provided that the Portfolio will not invest more than 5% of its assets in
securities of any investment company nor purchase more than 3% of the
outstanding voting stock of any investment company;
(6) invest in companies for the purpose of exercising control;
(7) underwrite any issue of securities, except to the extent that the
purchase of securities, either directly from the issuer or from an
underwriter for an issuer, and the later disposition of such securities in
accordance with the Portfolio's investment program, may be deemed an
underwriting;
(8) purchase or sell real estate, but this shall not prevent investments
in securities secured by real estate or interests therein;
(9) sell, securities short or purchase any securities on margin, except
for such short-term credits as are necessary for the clearance of
transactions;
A-23
<PAGE>
(10) purchase or retain securities of an issuer if, to the knowledge of
the Company, the directors and officers of the Company, and the directors
and officers of AIM, each of whom owns more than 1/2 of 1% of such
securities, together own more than 5% of the securities of such issuer; or
(11) purchase or sell commodities or commodity futures contracts or
interests in oil, gas or other mineral exploration or development programs.
The Company may, from time to time in order to qualify shares of the Portfo-
lio for sale in a particular state, agree to certain investment restrictions in
addition to or more stringent than those set forth above. Such restrictions are
not fundamental and may be changed without the approval of shareholders.
Pursuant to an undertaking made to the Ohio Department of Commerce, Division
of Securities, the Portfolio will not purchase the securities of any issuer if,
as to 75% of the total assets of the Portfolio, more than 10% of the voting se-
curities of such issuer would be held by the Portfolio at the time of purchase.
FUND TRANSACTIONS
AIM is responsible for decisions to buy and sell securities for the Portfolio,
for selection of broker-dealers and for negotiation of commission rates. Since
purchases and sales of portfolio securities by the Portfolio are usually prin-
cipal transactions, the Portfolio incurs little or no brokerage commissions.
Portfolio securities are normally purchased directly from the issuer or from a
market maker for the securities. The purchase price paid to dealers serving as
market makers may include a spread between the bid and asked prices. The Port-
folio may also purchase securities from underwriters at prices which include a
commission paid by the issuer to the underwriter.
AIM's primary consideration in effecting a security transaction is to obtain
the best net price and the most favorable execution of the order. To the extent
that the executions and prices offered by more than one dealer are comparable,
AIM may, in its discretion, effect transactions with dealers that furnish sta-
tistical research or other information or services which are deemed beneficial
by AIM. Such research services supplement AIM's own research. Research services
may include the following: statistical and background information on U.S. and
foreign economies, industry groups and individual companies; forecasts and in-
terpretations with respect to U.S. and foreign economies, money market fixed
income markets, equity markets, specific industry groups and individual compa-
nies; information on federal, state, local and foreign political developments;
portfolio management strategies; performance information on securities, indices
and investment accounts; information concerning prices of securities; the pro-
viding of equipment used to communicate research information; the arranging of
meetings with management of companies; and the providing of access to consul-
tants who supply research information. Certain research services furnished by
dealers may be useful to AIM with clients other than the Portfolio. Similarly,
any research services received by AIM through placement of portfolio transac-
tions of other clients may be of value to AIM in fulfilling its obligations to
the Portfolio. AIM is of the opinion that the material received is beneficial
in supplementing AIM's research and analysis; and therefore, such material may
benefit the Portfolio by improving the quality of AIM's investment advice. The
advisory fee paid by the Portfolio is not reduced because AIM receives such
services; however, because AIM must evaluate information received as a result
of such services, receipt of such services does not reduce AIM's workload.
Under the 1940 Act, persons affiliated with the Company are prohibited from
dealing with the Company as principal in any purchase or sale of securities un-
less an exemptive order allowing such transactions is obtained from the SEC.
Furthermore, the 1940 Act prohibits the Company from purchasing a security be-
ing publicly underwritten by a syndicate of which persons affiliated with the
Company are a member except in accordance with certain conditions. These condi-
tions may restrict the ability of the Portfolio to purchase Municipal Securi-
ties being publicly underwritten by such a syndicate, and the Portfolio may be
required to wait until the syndicate has been terminated before buying such se-
curities. At such time, the market price of the securities may be higher or
lower than the original offering price. A person affiliated with the Company
may, from time to time, serve as placement agent or financial advisor to an is-
suer of Municipal Securities and be paid a fee by such issuer. The Portfolio
may purchase such Municipal Securities directly from the issuer, provided that
the purchase is reviewed by the Company's Board of Directors and a determina-
tion is made that the placement fee or other remuneration paid by the issuer to
the person affiliated with the Company is fair and reasonable in relation to
the fees charged by others performing similar services. During the fiscal years
ended March 31, 1996, 1995 and 1994 no securities or instruments were purchased
by the Portfolio from issuers who paid placement fees or other compensation to
a broker affiliated with the Portfolio.
From time to time, the Company may sell a security, or purchase a security
from an AIM Fund or another investment account advised by AIM or A I M Capital
Management, Inc. ("AIM Capital"), when such transactions comply with applicable
rules and regulations and are deemed consistent with the investment objec-
tive(s) and policies of the investment accounts advised by AIM or AIM Capital.
Procedures pursuant to Rule 17a-7 under the 1940 Act regarding transactions be-
tween investment accounts advised by
A-24
<PAGE>
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 ac-
counts advised by AIM or AIM Capital.
Provisions of the 1940 Act and rules and regulations thereunder have also been
construed to prohibit the Portfolio from purchasing securities or instruments
from, or selling securities or instruments to, any holder of 5% or more of the
voting securities of any investment company managed or advised by AIM. The Com-
pany has obtained an order of exemption from the SEC which permits the Portfo-
lio to engage in certain transactions with such 5% holder, if the Portfolio
complies with conditions and procedures designed to ensure that such transac-
tions are executed at fair market value and present no conflicts of interest.
Purchases from these 5% holders will be subject to quarterly review by the
Board of Directors, including those directors who are not "interested persons"
of the Company.
Some of the AIM Funds may have objectives similar to that of the Portfolio. It
is possible that at times, identical securities will be acceptable for one or
more of such investment companies. However, the position of each account 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 like-
wise vary. The timing and amount of purchase by each account will also be de-
termined by its cash position. If the purchase or sale of securities consistent
with the investment policies of the Portfolio and one or more of these accounts
is considered at or about the same time, transactions in such securities will
be allocated in good faith among the Portfolio and such accounts in a manner
deemed equitable by AIM. 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 adversely affect the abil-
ity of the Portfolio to obtain or dispose of the full amount of a security
which it seeks to purchase or sell.
Under the 1940 Act, persons affiliated with the Company are prohibited from
dealing with the Company as principal in any purchase or sale of securities un-
less an exemptive order allowing such transactions is obtained from the SEC.
Furthermore, the 1940 Act prohibits the Company from purchasing a security be-
ing publicly underwritten by a syndicate of which persons affiliated with the
Company are a member except in accordance with certain conditions. These condi-
tions may restrict the ability of the Portfolio to purchase Municipal Market
obligations being publicly underwritten by such a syndicate, and the Portfolio
may be required to wait until the syndicate has been terminated before buying
such securities. At such time, the market price of the securities may be higher
or lower than the original offering price. A person affiliated with the Company
may, from time to time, serve as placement agent or financial advisor to an is-
suer of Municipal Market obligations and be paid a fee by such issuer. The
Portfolio may purchase such Municipal Market obligations directly from the is-
suer, provided that the purchase made in accordance with procedures adopted by
the Company's Board of Directors and any such purchases are reviewed at least
quarterly by the Company's Board of Directors and a determination is made that
all such purchases were effected in compliance with such procedures, including
a determination that the placement fee or other remuneration paid by the issuer
to the person affiliated with the Company was fair and reasonable in relation
to the fees charged by others performing similar services. During the fiscal
years ended March 31, 1996, 1995 and 1994 no securities or instruments were
purchased by the Portfolio from issuers who paid placement fees or other com-
pensation to a broker affiliated with the Portfolio.
A-25
<PAGE>
TAX-FREE INVESTMENTS CO.
INSTITUTIONAL CASH RESERVE SHARES
FINANCIAL STATEMENTS
FOR THE FISCAL YEAR ENDED
MARCH 31, 1996
A-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Tax-Free Investments Co.
We have audited the accompanying statement of assets and liabilities of the
Cash Reserve Portfolio (a Portfolio of Tax-Free Investments Co.), including the
schedule of investments, as of March 31, 1996, and the related statement of op-
erations for the year then ended, the statement of changes in net assets for
each of the years in the two-year period then ended, and the financial high-
lights for each of the years in the seven-year period then ended, the eleven-
month period ended March 31, 1989, and each of the years in the two-year period
ended April 30, 1988. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial high-
lights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
March 31, 1996, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Cash Reserve Portfolio as of March 31, 1996, the results of its operations for
the year then ended, the changes in its net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the seven-year period then ended, the eleven-month period ended March 31,
1989, and each of the years in the two-year period ended April 30, 1988, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
May 3, 1996
A-27
<PAGE>
SCHEDULE OF INVESTMENTS
March 31, 1996
<TABLE>
RATING(a) PAR
S&P MOODY'S (000) VALUE
<S> <C> <C> <C> <C>
ALABAMA - 4.02%
Birmingham (City of); General
Obligation
Series 1994-A Warrants
3.60% 06/01/18(b)(c) A-1+ VMIG-1 $ 3,000 $ 3,000,000
- ------------------------------------------------------------------------------
Birmingham (City of); Series 1995
General Obligation
Refunding Bonds
3.45% 06/01/23(b)(c) A-1+ VMIG-1 5,000 5,000,000
- ------------------------------------------------------------------------------
BMC Special Care Facilities Financing
Authority; Variable Rate Hospital
Series 1985 RB
3.30% Series B 12/01/30(b)(d) A-1 Aaa 3,200 3,200,000
- ------------------------------------------------------------------------------
3.30% Series C 12/01/30(b)(d) A-1 Aaa 3,075 3,075,000
- ------------------------------------------------------------------------------
3.30% Series D 12/01/30(b)(d) A-1 Aaa 4,000 4,000,000
- ------------------------------------------------------------------------------
3.30% Series E 12/01/30(b)(d) A-1 Aaa 4,400 4,400,000
- ------------------------------------------------------------------------------
3.30% Series H 12/01/30(b)(d) A-1 Aaa 1,500 1,500,000
- ------------------------------------------------------------------------------
Jefferson (County of); Sewer Series
1995-A Revenue Warrants
3.45% 09/01/25(b)(c) A-1+ VMIG-1 15,000 15,000,000
- ------------------------------------------------------------------------------
Marshall (County of); Special
Obligation School Refunding Series
1994 Warrants
3.50% 02/01/12(b)(c) A-1+ -- 2,850 2,850,000
- ------------------------------------------------------------------------------
42,025,000
- ------------------------------------------------------------------------------
ALASKA - 0.19%
North Slope (Borough of); Series 1994
B GO
5.20% 06/30/96(d) AAA Aaa 2,000 2,008,098
- ------------------------------------------------------------------------------
ARIZONA - 2.21%
Arizona (State of) Agricultural
Improvement and Power District (Salt
River Project); Promissory Notes
3.65% 04/04/96 A-1+ P-1 8,573 8,573,000
- ------------------------------------------------------------------------------
Arizona State University; RB
7.50% 07/01/96(e)(f) -- AAA 1,500 1,545,397
- ------------------------------------------------------------------------------
Chandler (City of) Industrial
Development Authority (Southpark
Apartment Project); Multifamily
Housing Series 1989 RB
3.40% 12/01/02(b)(c) A-1+ -- 1,500 1,500,000
- ------------------------------------------------------------------------------
Maricopa County High School District
No. 210;
Series A BAN
3.75% 07/01/96 AA Aa 1,500 1,499,520
- ------------------------------------------------------------------------------
Phoenix (City of); Refunding Series
1992 B GO
5.05% 07/01/96 AA+ Aa1 1,035 1,038,371
- ------------------------------------------------------------------------------
</TABLE>
A-28
<PAGE>
<TABLE>
RATING(a) PAR
S&P MOODY'S (000) VALUE
<S> <C> <C> <C> <C>
Arizona - (continued)
Phoenix (City of); Series 1995 A-2 RB
3.80% 06/01/20(b) A-1+ Aa1 $ 1,000 $ 1,000,000
- -------------------------------------------------------------------------------
Phoenix (City of) Industrial
Development Authority (Southwest
Villages Project); Variable Rate
Demand Multifamily Housing Series
1985 A RB
3.40% 12/01/06(b)(c) A-1+ -- 4,300 4,300,000
- -------------------------------------------------------------------------------
Scottsdale (City of) Municipal
Property Corp.;
Series 1986 COP
7.875% 11/01/96(d)(e) AAA Aaa 1,400 1,460,041
- -------------------------------------------------------------------------------
Tempe (City of) Industrial
Development Authority (Elliot's
Crossing Apartment Project);
Variable Rate Demand Multifamily
Housing Series 1985 RB
3.40% 10/01/08(b)(c) A-1+ -- 2,150 2,150,000
- -------------------------------------------------------------------------------
23,066,329
- -------------------------------------------------------------------------------
ARKANSAS - 0.11%
Arkansas (State of); College Savings
GO
3.65% 06/01/96 AA Aa 1,100 1,099,345
- -------------------------------------------------------------------------------
COLORADO - 2.66%
Adams (County of) Industrial
Development (Clear Creek Business);
RB
3.40% 11/01/08(b)(c) -- VMIG-1 6,500 6,500,000
- -------------------------------------------------------------------------------
Colorado (State of) General Fund;
Series A TRAN
4.50% 06/27/96 SP-1+ -- 1,000 1,002,423
- -------------------------------------------------------------------------------
Colorado Health Facilities Authority
(Boulder Community Hospital
Project); Variable Rate Demand
Hospital Series 1989 RB
3.35% 10/01/14(b)(d) A-1+ VMIG-1 3,310 3,310,000
- -------------------------------------------------------------------------------
Colorado Housing Finance Authority
(Winridge Project); Adjustable
Reference Multifamily Housing Series
1993 RB
3.40% 02/01/23(b)(c) A-1+ -- 5,715 5,715,000
- -------------------------------------------------------------------------------
Douglas (County of) (Autumn Chase
Project); Variable Rate Demand
Multifamily Housing
Series 1985 RB
3.40% 07/01/06(b)(c) -- VMIG-1 3,700 3,700,000
- -------------------------------------------------------------------------------
Pitkin (County of) (Centennial-Aspen
Project); Multifamily Housing Series
1984 RB
3.40% 04/01/07(b)(c) -- VMIG-1 7,700 7,700,000
- -------------------------------------------------------------------------------
27,927,423
- -------------------------------------------------------------------------------
DELAWARE - 0.10%
Delaware (State of); Series 1986 A GO
7.50% 07/01/96(e)(f) AAA Aaa 1,000 1,030,102
- -------------------------------------------------------------------------------
</TABLE>
A-29
<PAGE>
<TABLE>
RATING(a) PAR
S&P MOODY'S (000) VALUE
<S> <C> <C> <C> <C>
DISTRICT OF COLUMBIA - 2.46%
District of Columbia (American
Association for the Advancement of
Science); Series 1995 RB
3.75% 10/01/22(b)(c) A-1 VMIG-1 $21,850 $ 21,850,000
- -------------------------------------------------------------------------------
District of Columbia (The American
University Issue); Variable Rate
Weekly Demand
Series 1985 RB
3.40% 10/01/15(b)(c) -- VMIG-1 3,800 3,800,000
- -------------------------------------------------------------------------------
25,650,000
- -------------------------------------------------------------------------------
FLORIDA - 6.27%
Dade (County of) Health Facilities
Authority (Miami Children's Hospital
Project);
Series 1990 Hospital RB
3.85% 09/01/20(b)(c) -- VMIG-1 2,600 2,600,000
- -------------------------------------------------------------------------------
Eagle Tax-Exempt Trust; Series 950901
A COP
3.52% 06/01/21(b)(d)(g) A-1+c -- 12,700 12,700,000
- -------------------------------------------------------------------------------
Florida (State of); Pollution Control
GO
7.125% Series 1986 T 07/01/96(e)(f) -- AAA 900 925,348
- -------------------------------------------------------------------------------
7.20% Series 1986 T 07/01/96(e)(f) -- Aaa 2,495 2,567,116
- -------------------------------------------------------------------------------
Florida State General Services
Department (Florida Facilities
Pool); Facilities Management
Series 1986 RB
7.75% 09/01/96(e)(f) AAA Aaa 1,500 1,556,916
- -------------------------------------------------------------------------------
Hillsborough County Industrial
Development Authority (Tampa
Electric Co. Project); Refunding
Series 1990 PCR
3.85% 09/01/25(b)(d) AA VMIG-1 2,800 2,800,000
- -------------------------------------------------------------------------------
Pinellas (County of) Health
Facilities Authority (Pooled
Hospital Loan Program); Series 1985
RB
3.85% 12/01/15(b)(c) A-1 VMIG-1 3,200 3,200,000
- -------------------------------------------------------------------------------
Putnam County Development Authority
(Seminole Electric Cooperative, Inc.
Project); National Rural Utilities
Cooperative Finance Corp. Guaranteed
Semiannual Adjustable Series 1984 H-
4 PCR
3.25% 09/15/96(c)(e) A-1+ MIG-1 3,500 3,500,000
- -------------------------------------------------------------------------------
Putnam County Development Authority
(Seminole Electric Cooperative, Inc.
Project); National Rural Utilities
Cooperative Finance Corp. Guaranteed
Floating/Fixed Rate PCR
3.40% Pooled Series 1984H-1
03/15/14(b)(c) A-1+ P-1 4,015 4,015,000
- -------------------------------------------------------------------------------
3.40% Pooled Series 1984H-2
03/15/14(b)(c) A-1+ P-1 1,650 1,650,000
- -------------------------------------------------------------------------------
</TABLE>
A-30
<PAGE>
<TABLE>
RATING(a) PAR
S&P MOODY'S (000) VALUE
<S> <C> <C> <C> <C>
Florida - (continued)
Sunshine State Governmental Financing
Commission; Commercial Paper Notes
3.25% 05/20/96(d) A-1+ -- $15,000 $ 15,000,000
- -------------------------------------------------------------------------------
3.20% 08/09/96(d) A-1+ -- 15,000 15,000,000
- -------------------------------------------------------------------------------
65,514,380
- -------------------------------------------------------------------------------
GEORGIA - 1.88%
Cobb (County of); Water and Sewer
Series 1985 RB
9.50% 07/01/96(e)(f) AAA Aaa 1,500 1,552,005
- -------------------------------------------------------------------------------
Decatur County Bainbridge Industrial
Development Authority (Kaiser
Agriculture Chemical Inc. Project);
Series 1985 IDR
3.45% 12/01/02(b)(c) A-1+ -- 3,500 3,500,000
- -------------------------------------------------------------------------------
Development Authority of DeKalb County
(Radiation Sterilizers, Inc.
Project); Variable Rate Demand Series
1985 IDR
3.50% 03/01/05(b)(c) A-1 -- 4,600 4,600,000
- -------------------------------------------------------------------------------
Housing Authority of Cobb County
(Terrell Mill II Associates, Ltd.
Project); Multifamily Housing
Refunding Series 1993 RB
3.45% 12/01/05(b)(c) A-1 -- 10,000 10,000,000
- -------------------------------------------------------------------------------
19,652,005
- -------------------------------------------------------------------------------
ILLINOIS - 11.90%
Burbank (City of) (Service Merchandise
Co. Inc. Project); Floating Rate
Monthly Demand Industrial Building
Series 1984 RB
3.45% 09/15/24(b)(c) A-1+ -- 3,600 3,600,000
- -------------------------------------------------------------------------------
Chicago (City of) Tender Notes Series
1996 GO
3.10% 02/04/97(c)(e) SP-1 MIG-1 28,300 28,262,618
- -------------------------------------------------------------------------------
Chicago (City of) (O'Hare
International Airport); General
Airport Second Lien Series 1994 C RB
3.35% 01/01/18(b)(c) A-1+ VMIG-1 3,400 3,400,000
- -------------------------------------------------------------------------------
Chicago School Reform Board of
Trustees (Chicago School Reform Board
of Trustees Equipment Acquisition
Project); Series 1995 COP
3.70% 12/01/96(c) AA- -- 4,000 4,000,000
- -------------------------------------------------------------------------------
Cook (County of) (Catholic Charities
Housing Development Corp. Project);
Adjustable Demand Series 1988 A-1 RB
3.45% 01/01/28(b)(c) -- VMIG-1 1,700 1,700,000
- -------------------------------------------------------------------------------
</TABLE>
A-31
<PAGE>
<TABLE>
RATING(a) PAR
S&P MOODY'S (000) VALUE
<S> <C> <C> <C> <C>
Illinois - (continued)
Cook (County of) Township High School
District No. 211 (Palatine and
Schaumburg, Illinois); Limited School
Tax Series 1995 GO
4.25% 12/01/96 AA Aa1 $ 6,140 $ 6,177,754
- -------------------------------------------------------------------------------
East Peoria (City of) (Radnor/East Peoria
Partnership Project); Multifamily
Housing Series 1983 RB
3.55% 06/01/08(b)(c) -- Aa3 6,345 6,345,000
- -------------------------------------------------------------------------------
Illinois (State of); Series 1981 GO
11.00% 11/01/96(e)(f) AAA Aaa 2,000 2,108,026
- -------------------------------------------------------------------------------
Illinois (State of); Series August 1995
RAN
4.50% 05/10/96 SP-1+ MIG-1 5,000 5,003,629
- -------------------------------------------------------------------------------
Illinois (State of); Series August 1995-
June 1996 RAN
4.50% 06/10/96 SP-1+ MIG-1 2,060 2,063,058
- -------------------------------------------------------------------------------
Illinois (State of) Metropolitan Fair and
Exposition Authority; Series 1996 RB
8.00% 06/01/96(e)(f) AAA -- 1,000 1,027,035
- -------------------------------------------------------------------------------
Illinois Development Finance Authority
(Institutional Gas Technology Project);
Variable Rate
Series 1993 RB
3.40% 09/01/18(b)(c) A-1+ -- 2,700 2,700,000
- -------------------------------------------------------------------------------
Illinois Development Finance Authority
(Jewish Charities Revenue Anticipation
Notes Program); Variable Rate Demand
Series 1995-1996 B RAN
3.50% 06/28/96(b)(c) A-1+ -- $5,030 5,030,000
- -------------------------------------------------------------------------------
Illinois Educational Facilities Authority
(DePaul University Project); Series 1992
CP-1 RB
3.40% 04/01/26(b)(c) A-1+ VMIG-1 8,700 8,700,000
- -------------------------------------------------------------------------------
Illinois Health Facilities Authority
(Highland Park Hospital); Adjustable
Rate Series 1991 B RB
4.00% 06/01/96(d)(e) A-1+ VMIG-1 8,000 8,000,000
- -------------------------------------------------------------------------------
Illinois Health Facilities Authority
(Northwestern Memorial Hospital);
Variable Rate Demand
Series 1995 RB
3.70% 08/15/25(b)(d) A-1+ VMIG-1 2,600 2,600,000
- -------------------------------------------------------------------------------
Illinois Health Facilities Authority
(South Suburban Hospital Project);
Variable Rate Demand
Series 1994 RB
3.45% 02/15/14(b)(c) A-1+ -- 12,500 12,500,000
- -------------------------------------------------------------------------------
</TABLE>
A-32
<PAGE>
<TABLE>
RATING(a) PAR
S&P MOODY'S (000) VALUE
<S> <C> <C> <C> <C>
Illinois - (continued)
Marseilles (City of) (Kaiser Agricultural
Chemicals Inc. Project); Variable Rate
Demand Series 1985 IDR
3.45% 01/01/98(b)(c) A-1+ -- $ 4,650 $ 4,650,000
- -------------------------------------------------------------------------------
Oak Forest (City of) (Homewood Pool);
Series 1989 RB
3.45% 07/01/24(b)(c) -- VMIG-1 3,000 3,000,000
- -------------------------------------------------------------------------------
University of Illinois (University of
Illinois Natural Gas Purchase Project);
Series 1995 COP
4.30% 04/01/96(d) AAA Aaa 1,085 1,085,000
- -------------------------------------------------------------------------------
Village of Lisle (Four Lakes Project);
Multi-Family Housing Series 1985 A RB
3.45% 04/01/19(b)(c) A-1 -- 1,400 1,400,000
- -------------------------------------------------------------------------------
Village of Northbrook (Euromarket
Designs, Inc. Project); Variable Rate
Demand Refunding
Series 1993 IDR
3.40% 07/01/02(b)(c) A-1+ -- 3,400 3,400,000
- -------------------------------------------------------------------------------
Winnebage and Boone (Counties of) School
District No. 206; Tax Anticipation
Warrants Series 1996 GO
4.35% 10/30/96(d) SP-1 MIG-1 7,500 7,551,234
- -------------------------------------------------------------------------------
124,303,354
- -------------------------------------------------------------------------------
INDIANA - 2.00%
Auburn (City of) (Sealed Power Corp.
Project); Variable Rate Demand Economic
Development Series 1985 RB
3.50% 07/01/10(b)(c) -- VMIG-1 1,200 1,200,000
- -------------------------------------------------------------------------------
Indiana (State of) (Advance Funding
Project);
Series 1996 A-2 RAN
4.25% 01/09/97 SP-1+ MIG-1 14,000 14,078,663
- -------------------------------------------------------------------------------
Indiana Housing Finance Authority; Single
Family Mortgage Series 1994 D RB
3.90% 07/01/96(d)(e) -- VMIG-1 3,000 3,000,000
- -------------------------------------------------------------------------------
Indianapolis (City of); Public
Improvement Bond
Series F RAN
4.50% 07/11/96(d) A-1+ P-1 1,300 1,302,813
- -------------------------------------------------------------------------------
Jasper (County of) (Northern Indiana
Public Service Co. Project); Variable
Rate Demand Refunding
Series 1994 A PCR
3.85% 08/01/10(b)(c) A-1+ VMIG-1 1,300 1,300,000
- -------------------------------------------------------------------------------
20,881,476
- -------------------------------------------------------------------------------
</TABLE>
A-33
<PAGE>
<TABLE>
RATING(a) PAR
S&P MOODY'S (000) VALUE
<S> <C> <C> <C> <C>
IOWA - 0.74%
Iowa (State of) School Corporations
(Corporations of Iowa School Cash
Anticipation Program); Warrant
Certificates Series 1995-1996 B TRAN
4.25% 01/30/97(d) SP-1+ MIG-1 $ 1,000 $ 1,006,840
- -------------------------------------------------------------------------------
Waterloo (City of) Civic Center Hotel
Company;
Series 1983 IDR
3.45% 11/01/08(b)(d) A-1 -- 6,700 6,700,000
- -------------------------------------------------------------------------------
7,706,840
- -------------------------------------------------------------------------------
KANSAS - 0.94%
Kansas State Development Finance
Authority (Water Pollution Control-SRF);
Series 1993 I RB
4.30% 11/01/96 -- Aa1 1,250 1,254,232
- -------------------------------------------------------------------------------
Mission (City of) (Woodland Village
Project); Multifamily Housing Series
1985 RB
3.40% 12/01/97(b)(c) A-1 -- 8,600 8,600,000
- -------------------------------------------------------------------------------
9,854,232
- -------------------------------------------------------------------------------
KENTUCKY - 1.24%
Kentucky State Turnpike Authority;
Economic Development Road Series A RB
7.875% 07/01/96(e)(f) AAA Aaa 3,550 3,660,865
- -------------------------------------------------------------------------------
Mason County (East Kentucky Power
Cooperative, Inc. Project); National
Rural Utilities Cooperative Finance
Corp. Guaranteed Floating/Fixed Rate
Pooled
Series 1984 B-1 PCR
3.40% 10/15/14(b)(c) A-1+ Aa3 9,300 9,300,000
- -------------------------------------------------------------------------------
12,960,865
- -------------------------------------------------------------------------------
LOUISIANA - 2.98%
DeSoto (Parish of) (Central Louisiana
Electric Company); Refunding Series 1991
A PCR
3.30% 07/01/18(b)(c) A-1+ VMIG-1 8,410 8,410,000
- -------------------------------------------------------------------------------
Louisiana (State of); Series 1993 B GO
4.20% 08/01/96(d) AAA Aaa 1,000 1,001,450
- -------------------------------------------------------------------------------
Louisiana Offshore Terminal Authority
(LOOP Inc. Project); Deepwater Port
Refunding Series 1992 A RB
3.85% 09/01/08(b)(c) A-1+ VMIG-1 2,100 2,100,000
- -------------------------------------------------------------------------------
Louisiana Public Facilities Authority
(Greenbriar Hospital Inc. Project);
Variable Rate Demand
Series 1984 RB
3.45% 11/01/14(b)(c) -- Aa2 2,000 2,000,000
- -------------------------------------------------------------------------------
</TABLE>
A-34
<PAGE>
<TABLE>
RATING(a) PAR
S&P MOODY'S (000) VALUE
<S> <C> <C> <C> <C>
Louisiana - (continued)
Louisiana Public Facilities Authority
(Will-Knighton Medical Center
Project); Hospital Series 1995 RB
3.50% 09/01/25(b)(d) A-1 VMIG-1 $11,000 $ 11,000,000
- -----------------------------------------------------------------------------
Plaquemine Port Harbor & Terminal
Authority (TECO Energy, Inc.); Marine
Terminal Facility Refunding Series
1985 D RB
3.45% 04/01/96(d)(e) -- P-1 5,600 5,600,000
- -----------------------------------------------------------------------------
South Louisiana Port Commission Marine
Terminal Facilities (Occidental
Petroleum Corp. Project); Refunding
Series 1991 RB
3.35% 07/01/21(b)(c) A-1+ VMIG-1 1,000 1,000,000
- -----------------------------------------------------------------------------
31,111,450
- -----------------------------------------------------------------------------
MARYLAND - 0.34%
Prince George (County of) Housing
Authority (Laurel-Oxford Associates
Apartment Project); Mortgage Series
1985 RB
3.425% 10/01/07(b)(c) -- VMIG-1 3,500 3,500,000
- -----------------------------------------------------------------------------
MASSACHUSETTS - 0.29%
Massachusetts Muni Wholesale Electric;
Co-power Supply Systems Series A RB
3.60% 07/01/96(d) AAA Aaa 3,000 3,002,480
- -----------------------------------------------------------------------------
MICHIGAN - 4.25%
Charter County of Wayne; Downriver
Sewage Disposal System Adjustable Rate
Series 1994 B Limited Tax GO
3.30% 06/17/96(c)(e) A-1 VMIG-1 8,170 8,170,000
- -----------------------------------------------------------------------------
Jackson County Economic Development
Corp. (Sealed Power Corp.); Economic
Development Variable Refunding RB
3.50% 10/01/19(b)(c) -- VMIG-1 1,000 1,000,000
- -----------------------------------------------------------------------------
Michigan Municipal Bond Authority;
Series 1995 B RB
4.50% 07/03/96 SP-1+ -- 4,000 4,006,851
- -----------------------------------------------------------------------------
Michigan State Hospital Finance
Authority
(Hospital Equipment Loan Program);
Hospital RB
3.55% Pooled Series 1994 A
12/01/23(b)(c) -- VMIG-1 4,200 4,200,000
- -----------------------------------------------------------------------------
3.55% Pooled Series 1995 A
12/01/23(b)(c) -- VMIG-1 3,400 3,400,000
- -----------------------------------------------------------------------------
3.55% Series 1996 A 12/01/23(b)(c) -- VMIG-1 5,000 5,000,000
- -----------------------------------------------------------------------------
Michigan Strategic Fund (260 Brown St.
Associates Project); Convertible
Variable Rate Demand Limited
Obligation Series 1985 RB
3.35% 10/01/15(b)(c) -- VMIG-1 3,750 3,750,000
- -----------------------------------------------------------------------------
</TABLE>
A-35
<PAGE>
<TABLE>
RATING(a) PAR
S&P MOODY'S (000) VALUE
<S> <C> <C> <C> <C>
Michigan - (continued)
Michigan Strategic Fund (The Norcor Corp.
Project); IDR
3.40% 12/01/00(b)(c) -- P-1 $ 4,400 $ 4,400,000
- -------------------------------------------------------------------------------
University of Michigan (University of
Michigan Hospital); Variable Rate Demand
Hospital Refunding Series 1995 A RB
3.85% 12/01/27(b)(d) -- VMIG-1 2,900 2,900,000
- -------------------------------------------------------------------------------
Wayne County School District; State
School Aid
Series 1995 Limited Tax GO
4.50% 05/01/96(e) SP-1+ -- 7,500 7,503,884
- -------------------------------------------------------------------------------
44,330,735
- -------------------------------------------------------------------------------
MINNESOTA - 1.29%
Mankato (City of) (Northern States Power
Co. Project); Floating Collateralized
Series 1985 PCR
3.40% 03/01/11(b)(d) AA- A1 2,900 2,900,000
- -------------------------------------------------------------------------------
Minneapolis (City of) Community
Development Agency (Walker Methodist
Health Systems); Adjustable Refunding
Series 1995 RB
3.45% 04/01/10(b)(c) A-1 -- 6,000 6,000,000
- -------------------------------------------------------------------------------
Red Wing (City of) Industrial Development
Authority (Northern States Power Co.);
Floating Rate Collateralized Series 1985
PCR
3.40% 03/01/11(b)(d) AA- A1 4,600 4,600,000
- -------------------------------------------------------------------------------
13,500,000
- -------------------------------------------------------------------------------
MISSISSIPPI - 0.55%
Jackson (County of) (Chevron
Corporations); Water Systems RB
3.30% 08/01/96(d)(e) -- VMIG-1 2,000 2,000,000
- -------------------------------------------------------------------------------
Mississippi (State of); Capital
Improvement Series A GO
5.50% 05/01/96 AA- Aa 2,705 2,708,946
- -------------------------------------------------------------------------------
State Environment Improvement & Energy
Resources Authority (Union Electric Co.
Project); Adjustable-Fixed Rate Series
1984 A PCR
4.00% 06/01/96(c) A-1+ P-1 1,000 1,000,000
- -------------------------------------------------------------------------------
5,708,946
- -------------------------------------------------------------------------------
MISSOURI - 4.80%
Independence (City of) Industrial
Development Authority (The Independence
Ridge Apartment Project); Multi-Family
Housing Series 1985 RB
3.40% 12/01/15(b)(c) A-1+ -- 9,500 9,500,000
- -------------------------------------------------------------------------------
</TABLE>
A-36
<PAGE>
<TABLE>
RATING(a) PAR
S&P MOODY'S (000) VALUE
<S> <C> <C> <C> <C>
Missouri - (continued)
Kansas City (City of) Industrial
Development Authority (The Lorcarno
Multifamily Housing Project); Variable
Rate Demand Multifamily Housing Series
1985 RB
3.40% 12/01/15(b)(c) A-1+ -- $ 6,600 $ 6,600,000
- -------------------------------------------------------------------------------
Missouri Health & Educational Facilities
Authority; School District Advance
Refunding Program
Series 1995 Notes
4.50% 08/19/96 SP-1+ -- 3,840 3,847,739
- -------------------------------------------------------------------------------
Missouri Health & Educational Facilities
Authority (SSM Health Care Project);
Health Facililies Tax-Exempt Insured
Variable Rate Demand Series 1995 B RB
3.30% 06/01/22(b)(d) A-1+ Aaa 10,700 10,700,000
- -------------------------------------------------------------------------------
Missouri State Environmental Improvement
& Energy Resource Authority (Associated
Electric Cooperative, Inc. Project);
Pooled Series 1993-M RB
3.40% 12/15/03(b)(c) AA- VMIG-1 2,770 2,770,000
- -------------------------------------------------------------------------------
Saint Louis (City of) Industrial
Development Authority (Sugar Pines
Apartment Project); Multifamily Housing
Series 1991 A RB
3.40% 07/15/06(b)(c) A-1+ -- 9,785 9,785,000
- -------------------------------------------------------------------------------
Saint Louis County Industrial Development
Authority (Bonhomme Village Apartments
Association Project); Variable Rate
Demand Housing Series 1985 RB
3.60% 10/01/07(b)(d) -- VMIG-1 6,900 6,900,000
- -------------------------------------------------------------------------------
50,102,739
- -------------------------------------------------------------------------------
MONTANA - 0.68%
Forsyth (City of) (Portland General
Electric Company Colstrip Project);
Flexible Demand Series 1983 A PCR
3.30% 06/01/13(b)(c) A-1+ P-1 7,100 7,100,000
- -------------------------------------------------------------------------------
NEBRASKA - 0.50%
Nebraska Public Power District; Series B
Commercial Paper Notes
3.65% 04/02/96 A-1 P-1 4,165 4,165,000
- -------------------------------------------------------------------------------
Omaha Public Power District; Nebraska
Electric
Series 1993 D RB
3.90% 02/01/97 AA Aa 1,000 1,005,712
- -------------------------------------------------------------------------------
5,170,712
- -------------------------------------------------------------------------------
</TABLE>
A-37
<PAGE>
<TABLE>
RATING(a) PAR
S&P MOODY'S (000) VALUE
<S> <C> <C> <C> <C>
NEVADA - 0.58%
Clark (County of) (Nevada Power Company
Project); Series 1995 D-1 PCR
3.35% 10/01/11(b)(c) A-1+ -- $ 2,600 $ 2,600,000
- -------------------------------------------------------------------------------
Director of Nevada State Department of
Commerce (FMC Corp. Project); Series 1985
IDR
4.00% 09/15/96(c)(e) -- VMIG-1 3,500 3,500,000
- -------------------------------------------------------------------------------
6,100,000
- -------------------------------------------------------------------------------
NEW HAMPSHIRE - 0.67%
Business Finance Authority for the State
of New Hampshire (Connecticut Power &
Light);
Series 1993 A PCR
3.35% 12/01/22(b)(c) -- VMIG-1 1,600 1,600,000
- -------------------------------------------------------------------------------
New Hampshire Higher Educational and
Health Facilities Authority (VHA of New
England Capital Asset Financial Program);
Variable Rate Hospital RB
3.30% Series 1985 B 12/01/25(b)(d) A-1 -- 4,000 4,000,000
- -------------------------------------------------------------------------------
3.30% Series 1985 G 12/01/25(b)(d) A-1 -- 1,000 1,000,000
- -------------------------------------------------------------------------------
New Hampshire Industrial Development
Authority (Bangor Hydro-Electric Co.
Project); Variable Rate Demand Series
1983 PCR
3.50% 01/01/09(b)(c) A-1+ -- 400 400,000
- -------------------------------------------------------------------------------
7,000,000
- -------------------------------------------------------------------------------
NEW JERSEY - 0.34%
New Jersey Economic Development Authority
(Trailer Marine Transport Corp. Project);
Adjustable Rate Port Facility Series 1983
RB
3.35% 02/01/02(b)(c) A-1 -- 3,500 3,500,000
- -------------------------------------------------------------------------------
NEW MEXICO - 1.08%
Farmington (City of); Refunding Bonds
Series 1994 B PCR
3.75% 09/01/24(b)(c) A-1+ P-1 3,400 3,400,000
- -------------------------------------------------------------------------------
Hurley (Town of) (Kennecott Santa Fe Corp.
Project); Unit Priced Demand Adjustable
Series 1985 PCR
3.75% 12/01/15(b)(d) A-1+ P-1 3,800 3,800,000
- -------------------------------------------------------------------------------
New Mexico (State of); State Severance Tax
Series 1994 B RB
7.60% 07/01/96(b)(d) AA Aa 4,000 4,040,022
- -------------------------------------------------------------------------------
11,240,022
- -------------------------------------------------------------------------------
</TABLE>
A-38
<PAGE>
<TABLE>
RATING(a) PAR
S&P MOODY'S (000) VALUE
<S> <C> <C> <C> <C>
NEW YORK - 12.26%
Buffalo (City of); Series 1995-1996A RAN
4.20% 07/16/96(c) SP-1+ MIG-1 $ 2,800 $ 2,806,362
- -------------------------------------------------------------------------------
Eagle Tax Exempt Trust; Class A COP(g)
3.52% Series 1993 E 08/01/06(b) A-1+c -- 15,000 15,000,000
- -------------------------------------------------------------------------------
3.52% Series 943802 05/01/07(b)(d) A-1+c -- 17,800 17,800,000
- -------------------------------------------------------------------------------
3.52% Series 943901 06/15/07(b)(c) A-1+c -- 14,500 14,500,000
- -------------------------------------------------------------------------------
3.52% Series 94C2102 06/01/14(b)(d) A-1+c -- 11,600 11,600,000
- -------------------------------------------------------------------------------
3.47% Series 1994 C-1 06/15/18(b) A-1+c -- 18,000 18,000,000
- -------------------------------------------------------------------------------
3.47% Series 943207 07/01/29(b)(d) A-1+c -- 14,200 14,200,000
- -------------------------------------------------------------------------------
Merrill Lynch Group Float Program; Power
Supply System Series 1993 A RB
3.40% 01/01/16(b)(d) -- VMIG-1 5,000 5,000,000
- -------------------------------------------------------------------------------
New York (City of); General Obligation
Fiscal
Series 1996 D RAN
8.50% 08/01/96(f) -- Aaa 3,385 3,507,326
- -------------------------------------------------------------------------------
New York (City of); General Obligation
Fiscal 1994 Series B RAN
3.25% 08/15/23(b)(c) A-1+ VMIG-1 6,300 6,300,000
- -------------------------------------------------------------------------------
New York (City of); Variable Rate Demand
Series 1995 Subseries B-5 GO
3.80% 08/15/22(b)(d) A-1+ VMIG-1 10,000 10,000,000
- -------------------------------------------------------------------------------
New York State Energy Research and
Development Authority (New York Electric
& Gas); Series B PCR
3.40% 02/01/29(b)(c) A-1+ VMIG-1 6,500 6,500,000
- -------------------------------------------------------------------------------
New York State Thruway Authority; Series
A RB
4.20% 04/01/96(d) AAA Aaa 1,000 1,000,000
- -------------------------------------------------------------------------------
Trust for the Cultural Resource Authority
(Soloman R Guggenheim Foundation);
Series 1990B RB
3.60% 12/01/15(b)(c) A-1 VMIG-1 1,800 1,800,000
- -------------------------------------------------------------------------------
128,013,688
- -------------------------------------------------------------------------------
NORTH CAROLINA - 0.92%
Alamance Industrial Facilities &
Pollution Control Financing Authority
(Science Manufacturing Inc. Project);
Series 1985 IDR
3.90% 04/01/15(b)(c) -- P-1 4,400 4,400,000
- -------------------------------------------------------------------------------
North Carolina Eastern Muni Power
Systems; Series A RB
7.50% 01/01/97(e)(f) -- AAA 5,000 5,254,433
- -------------------------------------------------------------------------------
9,654,433
- -------------------------------------------------------------------------------
</TABLE>
A-39
<PAGE>
<TABLE>
RATING(a) PAR
S&P MOODY'S (000) VALUE
<S> <C> <C> <C> <C>
OHIO - 1.65%
Cleveland (City of) Ohio School District;
Series 1995 RAN
4.50% 06/01/96(d) AAA Aaa 5,000 5,007,903
- -------------------------------------------------------------------------------
Cleveland (City of) Ohio School District;
Series 1991 GO
7.70% 12/01/96(f) -- AAA 1,500 1,539,106
- -------------------------------------------------------------------------------
Cuyahoga (County of) (S&R Playhouse
Realty Co.); Adjustable Rate Demand
Series 1984 IDR
3.45% 12/01/09(b)(c) -- MIG-1 655 655,000
- -------------------------------------------------------------------------------
Franklin (County of) (Bricker & Eckler
Building Co. Project); Variable Rate
Demand Series 1984 IDR
3.55% 11/01/14(b)(c) -- P-1 9,000 9,000,000
- -------------------------------------------------------------------------------
Ohio Housing Finance Agency (Kenwood
Congregate Retirement Community
Project); Variable Rate Demand
Multifamily Housing Series 1985 RB
3.40% 12/01/15(b)(c) -- VMIG-1 980 980,000
- -------------------------------------------------------------------------------
17,182,009
- -------------------------------------------------------------------------------
OKLAHOMA - 0.39%
Oklahoma State SSM Healthcare System (St.
Anthony's Hospital); Adjustable Rate
Hospital Series 1988 C RB
3.30% 08/29/96(c)(e) -- VMIG-1 4,100 4,100,000
- -------------------------------------------------------------------------------
OREGON - 0.95%
Multnomah County School District No. 1J;
Series 1995 TRAN
4.75% 05/30/96 SP-1+ MIG-1 5,000 5,008,197
- -------------------------------------------------------------------------------
Portland (City of) (South Park Block
Project); Multifamily Housing Refunding
Series 1988 A RB
3.45% 12/01/11(b)(c) A-1+ -- 4,900 4,900,000
- -------------------------------------------------------------------------------
9,908,197
- -------------------------------------------------------------------------------
PENNSYLVANIA - 1.71%
Armstrong (County of) Pennsylvania
Hospital (St. Francis Medical Center
Project); Series A RB
5.10% 06/01/96(d) AAA Aaa 1,395 1,398,846
- -------------------------------------------------------------------------------
</TABLE>
A-40-
<PAGE>
<TABLE>
RATING(a) PAR
S&P MOODY'S (000) VALUE
<S> <C> <C> <C> <C>
Pennsylvania - (continued)
Delaware County Industrial Development
Authority (Henderson-Radnor Joint
Venture Project); Limited Obligation
Series 1985 RB
3.55% 04/01/15(b)(c) -- Aa3 $ 900 $ 900,000
- -----------------------------------------------------------------------------
Montour (County of) Geisinger
Authority; Health System
Series B 1992 RB
3.60% 07/01/22(b)(d) A-1+ -- 3,200 3,200,000
- -----------------------------------------------------------------------------
Northeastern Pennsylvania Hospital
Authority (Hospital Central Services
Capital Asset Program); Variable Rate
Demand Series B RB
3.20% 05/29/96(d)(e) A-1+ Aaa 3,000 3,000,000
- -----------------------------------------------------------------------------
Pennsylvania State Higher Education
Facilities Authority (Carnegie Mellon
University); Series 1995 B RB
3.85% 11/01/27(b)(d) A-1+ -- 3,000 3,000,000
- -----------------------------------------------------------------------------
Quakertown Hospital Authority (HPF
Group); Variable Rate
Series 1985 A RB
3.30% 07/01/05(b)(c) -- VMIG-1 1,800 1,800,000
- -----------------------------------------------------------------------------
Schuykill County Industrial Development
Authority (Gilberton Power Project);
Variable Rate Resource Recovery Series
1985 RB
3.45% 12/01/02(b)(c) A-1 -- 2,300 2,300,000
- -----------------------------------------------------------------------------
Wilkes-Barre (City of) Industrial
Development Authority (Toys "R"
Us/Penn Inc. Project); Economic
Development Series 1984 RB
3.425% 07/01/14(b)(c) -- A1 2,300 2,300,000
- -----------------------------------------------------------------------------
17,898,846
- -----------------------------------------------------------------------------
RHODE ISLAND - 0.48%
Rhode Island State; TAN
4.50% 06/28/96(c) SP-1+ MIG-1 4,000 4,010,607
- -----------------------------------------------------------------------------
Rhode Island State Health & Education
Building (Roger Williams General
Hospital); RB
11.375% 07/01/96(f) AAA -- 1,000 1,019,917
- -----------------------------------------------------------------------------
5,030,524
- -----------------------------------------------------------------------------
SOUTH CAROLINA - 3.68%
Florence (County of) (Stone Container
Corp.); Variable Rate
Series 1984 IDR
3.30% 02/01/07(b)(c) A-1+ -- 14,100 14,100,000
- -----------------------------------------------------------------------------
Goldman Sachs Series 1995 F Tender
Option Certificates
3.45% 06/16/14(b)(c)(g) A-1+c -- 12,500 12,500,000
- -----------------------------------------------------------------------------
</TABLE>
A-41
<PAGE>
<TABLE>
RATING(a) PAR
S&P MOODY'S (000) VALUE
<S> <C> <C> <C> <C>
South Carolina - (continued)
Horry (County of) (Carolina Treatment
Center); Variable Rate Demand Series
1984 RB
3.45% 12/01/14(b)(c) -- Aa2 $ 2,500 $ 2,500,000
- -------------------------------------------------------------------------------
Rock Hill (City of); Utilities System RB
3.30% 01/01/22(b)(d) A-1+ VMIG-1 6,100 6,100,000
- -------------------------------------------------------------------------------
York (County of) (North Carolina Electric
Membership Corp.); Pooled Series 1984 N-
2 PCR
3.40% 09/15/14(b)(c) A-1+ P-1 1,750 1,750,000
- -------------------------------------------------------------------------------
York (County of) (North Carolina Electric
Project National Rural Utilities);
Series 1984 N-6 RB
3.25% 09/15/96(c)(e) A-1+ VMIG-1 1,500 1,500,000
- -------------------------------------------------------------------------------
38,450,000
- -------------------------------------------------------------------------------
SOUTH DAKOTA - 0.90%
Rapid City, (Civic Center Associates
Project); Economic
Development RB
3.40% 12/01/16(b)(c) -- P-1 5,385 5,385,000
- -------------------------------------------------------------------------------
South Dakota School District (Cash Flow
Financing Program); COP
4.75% 07/30/96 SP-1+ -- 4,000 4,015,768
- -------------------------------------------------------------------------------
9,400,768
- -------------------------------------------------------------------------------
TENNESSEE - 4.44%
Health, Educational and Housing Facility
Board of Shelby County (Rhodes College);
Variable Rate Demand Educational
Facilities Series 1985 RB
3.55% 08/01/10(b)(c) A-1+ -- 2,195 2,195,000
- -------------------------------------------------------------------------------
Industrial Development Board of the City
of Franklin (The Landings Project);
Variable Rate Demand Multifamily Housing
Series 1985 Class A RB
3.40% 12/01/06(b)(c) A-1+ -- 2,000 2,000,000
- -------------------------------------------------------------------------------
Industrial Development Board of the City
of Knoxville (Toys "R" Us Inc.,
Project); Series 1984 IDR
3.55% 05/01/14(b)(c) -- A1 1,150 1,150,000
- -------------------------------------------------------------------------------
Knox (County of) Industrial Development
Authority (Centre Square II, Ltd.
Project); Floating Rate Monthly Demand
Series 1984 IDR
3.40% 12/01/14(b)(c) A-1+ -- 5,400 5,400,000
- -------------------------------------------------------------------------------
Knox (County of) Industrial Development
Authority (Old Kingston Properties);
Floating Rate Industrial Series 1984 RB
3.40% 12/01/14(b)(c) A-1+ -- 3,500 3,500,000
- -------------------------------------------------------------------------------
</TABLE>
A-42
<PAGE>
<TABLE>
RATING(a) PAR
S&P MOODY'S (000) VALUE
<S> <C> <C> <C> <C>
Tennessee - (continued)
Knox (County of) Industrial Development
Authority (Professional Plaza, Ltd.
Project); Floating Rate Monthly Demand
Series 1984 IDR
3.40% 12/01/14(b)(c) A-1+ -- $ 2,900 $ 2,900,000
- -------------------------------------------------------------------------------
Knox County Industrial Development Board
(Weisgarber Partners); Floating Rate
Series 1984 IDR
3.40% 12/01/4(b)(c) A-1+ -- 700 700,000
- -------------------------------------------------------------------------------
Nashville and Davidson (County of)
Industrial Development Board of Metro
Government (Amberwood, Ltd. Project);
Multifamily
Housing RB
3.67% Series 1993 A 07/01/13(b)(c) -- VMIG-1 2,450 2,450,000
- -------------------------------------------------------------------------------
3.67% Series 1993 B 07/01/13(b)(c) -- VMIG-1 2,065 2,065,000
- -------------------------------------------------------------------------------
Tennessee Higher Educational Facilities;
Variable Rate
Series 1993 B BAN
3.35% 03/01/98(b) A-1+ VMIG-1 1,400 1,400,000
- -------------------------------------------------------------------------------
Tennessee State School Bond Authority;
Higher Education Facilities BAN
3.35% Series 1993 A 03/01/98(b) A-1+ VMIG-1 4,525 4,525,000
- -------------------------------------------------------------------------------
3.35% Series 1995 B 03/01/98(b) A-1+ VMIG-1 7,750 7,750,000
- -------------------------------------------------------------------------------
3.35% Series 1994 C 03/01/98(b) A-1+ VMIG-0 6,335 6,335,000
- -------------------------------------------------------------------------------
3.35% Series 1995 C 03/01/98(b) A-1+ VMIG-1 4,000 4,000,000
- -------------------------------------------------------------------------------
46,370,000
- -------------------------------------------------------------------------------
TEXAS - 10.10%
Angelina & Neches River Authority
Industrial Development Corp. (Temple
Inland Marine); Solid Waste Disposal RB
3.80% Series 1984 B 05/01/14(b)(c) -- P-1 2,400 2,400,000
- -------------------------------------------------------------------------------
3.80% Series 1984 E 05/01/14(b)(c) -- P-1 5,000 5,000,000
- -------------------------------------------------------------------------------
Austin (City of) Texas Utility System;
Refunding Combination Series 1992 A RB
5.00% 11/15/96(d) AAA Aaa 1,975 1,992,947
- -------------------------------------------------------------------------------
Beaumont (City of) Texas Health Facilities
Development Authority; Health Facilities
Development Series 1985 RB
3.35% 12/01/10(b)(c) -- VMIG-1 3,265 3,265,000
- -------------------------------------------------------------------------------
Brazos River Harbor Navigation District of
Brazoria County (Hoffman-La Roche Inc.
Project); Series 1985 RB
3.55% 04/01/02(b)(c) -- A1 2,750 2,750,000
- -------------------------------------------------------------------------------
Texas (University of); Prerefunded Series
1986 RB
8.00% 08/15/96(d)(e) AAA Aaa 1,475 1,528,513
- -------------------------------------------------------------------------------
</TABLE>
A-43
<PAGE>
<TABLE>
RATING(a) PAR
S&P MOODY'S (000) VALUE
<S> <C> <C> <C> <C>
Texas - (continued)
Corpus Christi (Port of) Authority of
Nueces County Marine Terminal (Reynolds
Metals Company Project); Floating Rate
Demand Series 1984 RB
3.40% 09/01/14(b)(c) A-1+ -- $ 3,000 $ 3,000,000
- -------------------------------------------------------------------------------
Dallas (County of); Series 1986 A GO
6.50% 07/10/96(f) AAA Aaa 1,500 1,511,127
- -------------------------------------------------------------------------------
Fort Worth (City of) Water and Sewer
System; Tax Exempt Series A Commercial
Paper
3.30% 05/15/96 A-1+ P-1 5,300 5,300,000
- -------------------------------------------------------------------------------
Gulf Coast Waste Disposal Authority (Exxon
Project); Series 1989 PCR
3.35% 05/17/96(e) A-1+ P-1 5,000 5,000,000
- -------------------------------------------------------------------------------
Harris County Health Facilities
Development Corp. (The Methodist
Hospital); Hospital Series 1994 RB
3.85% 12/01/25(b) A-1+ -- 10,000 10,000,000
- -------------------------------------------------------------------------------
Harris County Health Facilities
Development Corp. (Greater Houston Pooled
Health); Series 1985 A RB
3.40% 11/01/25(b)(c) A-1 -- 3,100 3,100,000
- -------------------------------------------------------------------------------
Harris County Health Facilities
Development Corp. (Gulf Coast Regional
Blood Center Project); Series 1992 RB
3.35% 04/01/17(b)(c) A-1 -- 3,550 3,550,000
- -------------------------------------------------------------------------------
Harris County Health Facilities
Development Corp. (St. Luke's Episcopal
Hospital Project); Hospital Series 1985 B
RB
3.85% 02/15/16(b) A-1+ -- 3,500 3,500,000
- -------------------------------------------------------------------------------
Harris County Health Facilities
Development Corp. (Texas Medical Center
Project); Series 1992 RB
3.85% 02/15/22(b)(d) A-1 VMIG-1 4,300 4,300,000
- -------------------------------------------------------------------------------
Houston (City of); Senior Lien Hotel
Occupancy Tax Refunding Series 1995 RB
5.00% 07/01/96(d) AAA Aaa 650 651,726
- -------------------------------------------------------------------------------
Houston (City of) Texas Water and Sewer
System Revenue Exchange Prior Lien;
Series A RB
7.00% 12/01/96(e) AAA Aaa 1,265 1,320,328
- -------------------------------------------------------------------------------
Nueces County Health Facilities
Development Corp. (Driscoll Childrens
Hospital); Floating Rate Demand Hospital
Series 1985 RB
3.40% 07/01/15(b)(c) -- VMIG-1 2,570 2,570,000
- -------------------------------------------------------------------------------
San Antonio Independent School District;
RB
8.25% 06/15/96(e)(f) -- Aaa 3,250 3,283,386
- -------------------------------------------------------------------------------
Tarrant (County of) Texas Housing Finance
Corp. (Amherst Associates Project);
Multifamily Housing Series 1995 RB
3.40% 12/01/07(b)(c) -- VMIG-1 3,220 3,220,000
- -------------------------------------------------------------------------------
Texas Department of Housing and Urban
Affairs (Remington Hill Development);
Multi-Family Housing Refunding Series
1993 B RB
3.40% 02/01/23(b)(c) A-1+ -- 5,380 5,380,000
- -------------------------------------------------------------------------------
</TABLE>
A-44
<PAGE>
<TABLE>
RATING(a) PAR
S&P MOODY'S (000) VALUE
<S> <C> <C> <C> <C>
Texas - (continued)
Texas (State of); TRAN
4.75% Series 1995 A 08/30/96 SP-1+ MIG-1 $16,200 $ 16,278,278
- ------------------------------------------------------------------------------
3.65% Series 1995 B 08/20/96 A-1+ P-1 4,000 4,000,000
- ------------------------------------------------------------------------------
Texas (University of) Board of Regents
Permanent University Fund; Variable
Rate Series A Notes
3.20% 05/29/96(e) A-1+ VMIG-1 1,800 1,800,000
- ------------------------------------------------------------------------------
Texas (University of) Board of Regents
Revenue Financing System; Series A
Commercial Paper
3.25% 05/31/96 A-1+ P-1 7,516 7,516,000
- ------------------------------------------------------------------------------
Trinity River Authority (Texas Regional
Wastewater System); RB
5.00% 08/01/96(d) AAA Aaa 1,040 1,045,093
- ------------------------------------------------------------------------------
Trinity River Industrial Development
Authority (Radiation Sterilizers, Inc.
Project); Variable Rate Demand IDR
3.50% Series 1985 A 11/01/05(b)(c) A-1 -- 500 500,000
- ------------------------------------------------------------------------------
3.50% Series 1985 B 11/01/05(b)(c) A-1 -- 1,650 1,650,000
- ------------------------------------------------------------------------------
105,412,398
- ------------------------------------------------------------------------------
UTAH - 2.53%
Bountiful (City of) (Bountiful Gateway
Park Project); Adjustable Rate
Refunding Series 1987 IDR
3.60% 12/01/97(b)(c) A-1+ -- 3,835 3,835,000
- ------------------------------------------------------------------------------
Intermountain Power Agency Power Supply
Variable Rate RB
3.20% Series 1985 F 05/29/96(c)(e) A-1+ VMIG-1 1,700 1,700,000
- ------------------------------------------------------------------------------
3.90% Series 1993 A 07/01/96 AA- Aa 1,000 1,000,428
- ------------------------------------------------------------------------------
6.90% Series B 07/01/96 AA- Aa 2,000 2,015,491
- ------------------------------------------------------------------------------
7.00% Series 1986-C 07/01/96 AA- Aa 1,000 1,007,459
- ------------------------------------------------------------------------------
4.80% Series 1992 B 07/01/96 AA- Aa 1,130 1,132,795
- ------------------------------------------------------------------------------
State Board of Regents of the State of
Utah (University Inn Project); Variable
Rate Demand Series 1985 IDR
3.85% 12/01/15(b)(c) -- P-1 8,800 8,800,000
- ------------------------------------------------------------------------------
Utah State Housing Finance Agency;
Single Family Mortgage Variable Rate
Issue 1993 D RB
3.40% 07/01/16(b) -- VMIG-1 3,400 3,400,000
- ------------------------------------------------------------------------------
West Valley (City of) (Johnson Matthey
Inc. Project); Multi-Modal
Interchangeable Rate Series 1987 IDR
3.95% 11/01/11(b)(c)(h) -- -- 3,550 3,550,000
- ------------------------------------------------------------------------------
26,441,173
- ------------------------------------------------------------------------------
</TABLE>
A-45
<PAGE>
<TABLE>
RATING(a) PAR
S&P MOODY'S (000) VALUE
<S> <C> <C> <C> <C>
VERMONT - 1.26%
Vermont (State of); General Obligation
Commercial Paper Series F RAN
3.35% 05/23/96 A-1+ P-1 $10,000 $ 10,000,000
- -------------------------------------------------------------------------------
Vermont (State of); Series 1993 B GO
6.60% 10/15/96 AA- Aa 2,100 2,132,672
- -------------------------------------------------------------------------------
Vermont Educational & Health Building
Finance Authority (VHA New England);
Variable Hospital Series 1985 B RB
3.30% 12/01/25(b)(d) A-1 Aaa 1,000 1,000,000
- -------------------------------------------------------------------------------
13,132,672
- -------------------------------------------------------------------------------
VIRGINIA - 1.88%
Fairfax County Redevelopment and Housing
Authority (Chase Commons Project);
Variable Rate Demand Series 1984 A RB
3.425% 12/01/06(b)(c) -- VMIG-1 3,330 3,330,000
- -------------------------------------------------------------------------------
Henrico (County of) Virginia Industrial
Development Authority (Hermitage
Project); Variable Rate Health Facilities
Series 1994 Bonds
3.85% 05/01/24(b)(c) -- VMIG-1 4,000 4,000,000
- -------------------------------------------------------------------------------
Industrial Development Authority City of
Lynchburg (VHA Mid-Atlantic States, Inc.
Capital Asset Financing Program);
Variable Rate Hospital Series 1985 G RB
3.30% 12/01/25(b)(d) A-1 Aaa 2,300 2,300,000
- -------------------------------------------------------------------------------
Industrial Development Authority of the
City of Norfolk (Sentara Hospitals-
Norfolk Project); Hospital Series 1990 A
RB
3.25% 05/22/96(e) A-1+ VMIG-1 5,000 5,000,000
- -------------------------------------------------------------------------------
Richmond Redevelopment & Housing Authority
(1995 Old Manchester Project); Variable
Rate Demand Series 1995 A RB
3.55% 12/01/25(b)(c) A-1+ -- 5,000 5,000,000
- -------------------------------------------------------------------------------
19,630,000
- -------------------------------------------------------------------------------
WASHINGTON - 3.58%
Washington State Public Power Supply
Systems (Nuclear Project No. 3);
Refunding Series B RB
6.70% 07/01/96 AA Aa 1,000 1,007,259
- -------------------------------------------------------------------------------
Washington State Public Power Supply
Systems (Nuclear Project No. 1 & 3);
Refunding Electric Series 1993 RB
3.35% 07/01/17(b)(c) A-1+ VMIG-1 5,000 5,000,000
- -------------------------------------------------------------------------------
</TABLE>
A-46
<PAGE>
<TABLE>
RATING(a) PAR
S&P MOODY'S (000) VALUE
<S> <C> <C> <C> <C>
Washington - (continued)
Washington State Public Power Supply
Systems (Nuclear Project No. 1);
Adjustable Refunding Series 1993 1A-3
RB
3.30% 07/01/17(b)(c) A-1+ VMIG-1 $14,300 $ 14,300,000
- -------------------------------------------------------------------------------
Washington State; Refunding Bonds
Series 1986 D GO
8.00% 09/01/96(e)(f) AAA Aaa 14,740 15,034,985
- -------------------------------------------------------------------------------
Washington Suburban Sanitation
District; General Construction RB
7.375% 01/01/97(e)(f) AAA AAA 1,000 1,050,198
- -------------------------------------------------------------------------------
Washington Suburban Sanitation
District; Water Supply Refunding
Series 1986 GO
5.90% 11/01/96 AA Aa1 1,000 1,012,477
- -------------------------------------------------------------------------------
37,404,919
- -------------------------------------------------------------------------------
WISCONSIN - 0.63%
City of Milwaukee Housing Authority
(Yankee Hill Apartments Project);
Multi-Family Housing 1986 Issue
Variable Bonds
3.40% 12/01/09(b)(c) A-1+ -- 5,500 5,500,000
- -------------------------------------------------------------------------------
Wisconsin (State of) Transportation
Authority; Transportation Series 1988
A RB
7.50% 07/01/96(e)(f) AAA -- 1,000 1,029,085
- -------------------------------------------------------------------------------
6,529,085
- -------------------------------------------------------------------------------
WYOMING - 1.01%
Sweetwater (City of) (Pacificorp
Project); PCR
3.70% Series 1984 12/01/14(b)(c) A-1+ P-1 4,500 4,500,000
- -------------------------------------------------------------------------------
3.40% Series 1990A 07/01/15(b)(c) -- VMIG-1 6,000 6,000,000
- -------------------------------------------------------------------------------
10,500,000
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS - 103.44% 1,080,105,245(i)
- -------------------------------------------------------------------------------
OTHER ASSETS LESS LIABILITIES - (3.44%) (35,926,817)
- -------------------------------------------------------------------------------
NET ASSETS - 100.00% $1,044,178,428
- -------------------------------------------------------------------------------
</TABLE>
INVESTMENT ABBREVIATIONS:
<TABLE>
<S> <C> <S> <S>
BAN Bond Anticipation Notes RAN Revenue Anticipation Notes
COP Certificates of Participation RB Revenue Bonds
GO General Obligation Bonds TAN Tax Anticipation Notes
IDR Industrial Development Revenue Bonds TRAN Tax and Revenue Anticipation Notes
PCR Pollution Control Revenue Bonds
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS:
(a) Ratings assigned by Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Corporation ("S&P"). Ratings are not covered by
Independent Auditors' Report.
(b) Demand security: payable upon demand by the Fund at specified intervals no
greater than thirteen months. Interest rates are redetermined periodically.
Rates shown are the rates in effect on March 31, 1996.
(c) Security is secured by a letter of credit.
A-47
<PAGE>
(d) Security is secured by bond insurance.
(e) Security has an outstanding call or mandatory put by the issuer. Par value
and maturity date reflect such call or put.
(f) Security is secured by an escrow fund.
(g) The Fund may invest in synthetic municipal instruments the value of and
return on which are derived from underlying securities. The types of
synthetic municipal instruments in which the Fund may invest include
variable rate instruments. These instruments involve the deposit into a
trust of one or more long-term tax-exempt bonds or notes ("Underlying
Bonds"), and the sale of certificates evidencing interests in the trust to
investors such as the Fund. The trustee receives the long-term fixed rate
interest payments on the Underlying Bonds, and pays certificate holders
short-term floating or variable interest rates which are reset
periodically. A "variable rate trust certificate" evidences an interest in
a trust entitling the certificate holder to receive variable rate interest
based on prevailing short-term interest rates and also typically providing
the certificate holder with the conditional right to put its certificate at
par value plus accrued interest. Because synthetic municipal instruments
involve a trust and a third party conditional put feature, they involve
complexities and potential risks that may not be present where a municipal
security is owned directly.
(h) Unrated security; determined by the directors to be of comparable quality
to the rated determination of quality adopted by the Board of Directors and
followed by the investment advisor.
(i) Cost for federal income tax purposes is $1,080,099,469.
See Notes to Financial Statements.
A-48
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1996
<TABLE>
<S> <C>
ASSETS:
Investments, at value (amortized cost) $1,080,105,245
- ------------------------------------------------------------------------
Cash 45,530
- ------------------------------------------------------------------------
Receivables for:
Investments sold 700,785
- ------------------------------------------------------------------------
Interest 7,342,974
- ------------------------------------------------------------------------
Investment for deferred compensation plan 17,593
- ------------------------------------------------------------------------
Other assets 154,876
- ------------------------------------------------------------------------
Total assets 1,088,367,003
- ------------------------------------------------------------------------
LIABILITIES:
Payables for:
Investments purchased 40,934,545
- ------------------------------------------------------------------------
Dividends 2,946,396
- ------------------------------------------------------------------------
Deferred compensation 17,593
- ------------------------------------------------------------------------
Accrued advisory fees 166,238
- ------------------------------------------------------------------------
Accrued directors' fees 3,296
- ------------------------------------------------------------------------
Accrued accounting service fees 5,920
- ------------------------------------------------------------------------
Accrued transfer agent fees 17,568
- ------------------------------------------------------------------------
Accrued distribution fees 7,674
- ------------------------------------------------------------------------
Accrued operating expenses 89,345
- ------------------------------------------------------------------------
Total liabilities 44,188,575
- ------------------------------------------------------------------------
NET ASSETS $1,044,178,428
========================================================================
NET ASSETS:
Institutional Shares $1,009,039,194
========================================================================
Private Investment Class $ 35,139,234
========================================================================
CAPITAL STOCK, $0.001 PAR VALUE PER SHARE:
Institutional Shares:
Authorized 3,000,000,000
- ------------------------------------------------------------------------
Outstanding 1,009,122,349
========================================================================
Private Investment Class:
Authorized 1,000,000,000
- ------------------------------------------------------------------------
Outstanding 35,142,129
========================================================================
NET ASSET VALUE PER SHARE:
Net asset value, offering and redemption price per share $1.00
========================================================================
</TABLE>
See Notes to Financial Statements.
A-49
<PAGE>
STATEMENT OF OPERATIONS
For the year ended March 31, 1996
<TABLE>
<CAPTION>
PRIVATE
INSTITUTIONAL INVESTMENT
SHARES CLASS FUND
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest income $41,603,217 $1,250,203 $42,853,420
- ------------------------------------------------------------------------
EXPENSES:
Advisory fees 2,436,634 72,995 2,509,629
- ------------------------------------------------------------------------
Custodian fees 126,323 1,514 127,837
- ------------------------------------------------------------------------
Transfer agent fees 69,176 2,073 71,249
- ------------------------------------------------------------------------
Registration and filing fees 21,006 22,045 43,051
- ------------------------------------------------------------------------
Accounting service fees 73,569 2,391 75,960
- ------------------------------------------------------------------------
Directors' fees 14,734 382 15,116
- ------------------------------------------------------------------------
Distribution fees (Note 2) -- 82,160 82,160
- ------------------------------------------------------------------------
Other expenses 129,902 5,235 135,137
- ------------------------------------------------------------------------
Total expenses 2,871,344 188,795 3,060,139
- ------------------------------------------------------------------------
Less expenses assumed by advisor (670,269) (40,128) (710,397)
- ------------------------------------------------------------------------
Net expenses 2,201,075 148,667 2,349,742
- ------------------------------------------------------------------------
Net investment income $39,402,142 $1,101,536 40,503,678
- ------------------------------------------------------------------------
Net realized gain on sales of investments 292,222
- ------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of investments (30,577)
- ------------------------------------------------------------------------
Net increase in net assets resulting from operations $40,765,323
========================================================================
</TABLE>
See Notes to Financial Statements.
A-50
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
For the years ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
OPERATIONS:
Net investment income $ 40,503,678 $ 33,546,101
- -----------------------------------------------------------------------------
Net realized gain (loss) on sales of
investments 292,222 (430,985)
- -----------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments (30,577) 33,165
- -----------------------------------------------------------------------------
Net increase in net assets resulting from
operations 40,765,323 33,148,281
- -----------------------------------------------------------------------------
Distributions to shareholders from net
investment income:
Institutional Shares (39,402,142) (32,833,365)
- -----------------------------------------------------------------------------
Private Investment Class (1,101,536) (712,736)
- -----------------------------------------------------------------------------
Capital stock transactions - net:
Institutional Shares (1,106,286) (30,316,694)
- -----------------------------------------------------------------------------
Private Investment Class 5,845,831 12,695,756
- -----------------------------------------------------------------------------
Net increase (decrease) in net assets 5,001,190 (18,018,758)
- -----------------------------------------------------------------------------
NET ASSETS:
Beginning of period 1,039,177,238 1,057,195,996
- -----------------------------------------------------------------------------
End of period $1,044,178,428 $1,039,177,238
=============================================================================
NET ASSETS CONSIST OF:
Capital (par value and additional paid-in):
Institutional Shares $1,009,122,349 $1,010,228,635
- -----------------------------------------------------------------------------
Private Investment Class 35,142,129 29,296,298
- -----------------------------------------------------------------------------
Undistributed net realized gain (loss) on
sales of investments (91,827) (384,049)
- -----------------------------------------------------------------------------
Unrealized appreciation of investments 5,777 36,354
- -----------------------------------------------------------------------------
$1,044,178,428 $1,039,177,238
=============================================================================
</TABLE>
See Notes to Financial Statements.
A-51
<PAGE>
NOTES TO FINANCIAL STATEMENTS
March 31, 1996
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Tax-Free Investments Co. (the "Company") is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as a diversified, open-end
management investment company. The Company is organized as a Maryland
corporation consisting of one portfolio, the Cash Reserve Portfolio (the
"Fund"). The Fund consists of two different classes of shares, the
Institutional Cash Reserve Shares ("Institutional Shares") and the Private
Investment Class. Matters affecting each class are voted on exclusively by the
shareholders of each class. The investment objective of the Fund is to generate
as high a level of tax-exempt income as is consistent with preservation of
capital and maintenance of liquidity.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
A. Securities Valuations - The Fund uses the amortized cost method of valuing
investment portfolio securities which has been determined by the Board of
Directors of the Company to represent the fair value of the Fund's
investments.
B. Securities Transactions and Investment Income - Securities transactions are
recorded on a trade date basis. Realized gains and losses from securities
transactions are computed on the basis of specific identification of the
securities sold. Interest income, adjusted for amortization of premiums and,
when appropriate, discounts on investments, is earned from settlement date
and is recorded on the accrual basis. Interest income is allocated to each
class daily, based upon each class' pro rata share of the total shares of
the Fund outstanding. Discounts, other than original issue, on short-term
obligations are amortized to unrealized appreciation for financial reporting
purposes.
C. Dividends and Distributions to Shareholders - It is the policy of the Fund
to declare daily dividends from net investment income. Such dividends are
paid monthly. Distributions from net realized capital gains, if any, are
declared and paid annually. Net capital gains cannot be distributed to the
extent they can be offset by any capital loss carryovers of the Fund.
D. Federal Income Taxes - The Fund intends to comply with the requirements of
the Internal Revenue Code necessary to qualify as a regulated investment
company and, as such, will not be subject to federal income taxes on
otherwise taxable income (including net realized capital gains) which is
distributed to shareholders. Therefore, no provision for federal income
taxes is recorded in the financial statements. The Fund has a capital loss
carryforward of $175,320 (which may be carried forward to offset future
taxable gains, if any) which expires, if not previously utilized, through
the year 2004. The Fund cannot distribute capital gains to shareholders
until the tax loss carryforwards have been utilized. In addition, the Fund
intends to invest in sufficient municipal securities to allow it to qualify
to pay "exempt interest dividends," as defined in the Internal Revenue Code,
to shareholders.
E. Expenses - Operating expenses directly attributable to a class are charged
to that class' operations. Expenses which are applicable to both classes,
e.g., advisory fees, are allocated between them.
NOTE 2 - ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Company has entered into a master investment advisory agreement with A I M
Advisors, Inc. ("AIM"). Under the terms of the master investment advisory
agreement, the Fund pays an advisory fee to AIM at the annual rate of 0.25% of
the first $500 million of the Fund's average daily net assets plus 0.20% of the
Fund's average daily net assets in excess of $500 million. AIM will, if
necessary, reduce its fees for any fiscal year to the extent required so that
the amount of ordinary expenses of each class (excluding interest, taxes,
brokerage commissions and extraordinary expenses) paid or incurred by each
class for such fiscal year does not exceed the applicable expense limitations
imposed by securities regulations in any state or jurisdiction in which the
Company's shares are qualified for sale. AIM has voluntarily agreed to reduce
its fee from the Fund to the extent necessary so that the amount of ordinary
expenses of the Institutional Shares (excluding interest, taxes, brokerage
commissions, directors' fees, extraordinary expenses and federal registration
fees)
A-52
<PAGE>
paid or incurred by the Institutional Shares does not exceed 0.20% of the
Institutional Shares' average daily net assets. As a result, AIM's advisory fee
on the Private Investment Class is reduced in the same proportion as the
Institutional Shares. For the year ended March 31, 1996, AIM reduced its fees
from the Fund by $690,397. AIM also assumed expenses of $20,000 on the Private
Investment Class during the same period.
Under the terms of a master distribution agreement between Fund Management
Company ("FMC") and the Company, FMC acts as the exclusive distributor of
capital stock of the Institutional Shares and the Private Investment Class. The
Company has adopted a master distribution plan (the "Plan") pursuant to Rule
12b-1 under the 1940 Act with respect to the Private Investment Class. The Plan
provides that the Private Investment Class may pay up to a 0.50% maximum annual
rate of the Private Investment Class' average daily net assets. Of this amount,
the Fund may pay an asset-based sales charge to FMC and the Fund may pay a
service fee of 0.25% of the average daily net assets of the Private Investment
Class to selected broker-dealers and other financial institutions who offer
continuing personal shareholder services to their customers who purchase and
own shares of the Private Investment Class. Any amounts not paid as a service
fee under such Plan would constitute an asset-based sales charge. The Plan also
imposes a cap on the total amount of sales charges, including asset-based sales
charges, that may be paid by the Fund with respect to the Private Investment
Class. During the year ended March 31, 1996, the Private Investment Class paid
$82,160 as compensation under the Plan.
The Fund, pursuant to the Company's master investment advisory agreement with
AIM, has agreed to reimburse AIM for certain costs incurred in providing
accounting services to the Fund. During the year ended March 31, 1996, the Fund
reimbursed AIM $75,960 for such services.
Effective July 1, 1995, A I M Institutional Fund Services, Inc. ("AIFS")
became the exclusive transfer agent of the Fund. The Fund, pursuant to a
transfer agent and service agreement, has agreed to pay AIFS a fee for
providing transfer agent and shareholder services to the Fund. During the year
ended March 31, 1996, the Fund paid AIFS $64,592 for such services. Certain
officers and directors of the Company are directors or officers of AIM, AIFS
and FMC.
During the year ended March 31, 1996, the Fund paid legal fees of $6,329 for
services rendered by Kramer, Levin, Naftalis, Nessen, Kamin & Frankel as
counsel to the Board of Directors. A member of that firm is a director of the
Company.
NOTE 3 - DIRECTORS' FEES
Directors' fees represent remuneration paid or accrued to each director who is
not an "interested person" of AIM. The Company may invest directors' fees, if
so elected by a director, in mutual fund shares in accordance with a deferred
compensation plan.
NOTE 4 - CAPITAL STOCK
Changes in capital stock outstanding during the years ended March 31, 1996 and
1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Sold:
Institutional Shares 5,051,588,995 $ 5,051,588,995 5,223,878,446 $ 5,223,878,446
- -----------------------------------------------------------------------------------------
Private Investment
Class 218,503,050 218,503,050 147,139,503 147,139,503
- -----------------------------------------------------------------------------------------
Issued as reinvestment
of dividends:
Institutional Shares 99,312 99,312 74,376 74,376
- -----------------------------------------------------------------------------------------
Private Investment
Class 1,064,127 1,064,127 600,786 600,786
- -----------------------------------------------------------------------------------------
Redeemed:
Institutional Shares (5,052,794,593) (5,052,794,593) (5,254,269,516) (5,254,269,516)
- -----------------------------------------------------------------------------------------
Private Investment
Class (213,721,346) (213,721,346) (135,044,533) (135,044,533)
- -----------------------------------------------------------------------------------------
Net increase (de-
crease) 4,739,545 $ 4,739,545 (17,620,938) $ (17,620,938)
=========================================================================================
</TABLE>
A-53
<PAGE>
NOTE 5 - FINANCIAL HIGHLIGHTS
Shown below are the condensed financial highlights for a share of the Institu-
tional Shares capital stock outstanding during each of the years in the seven-
year period ended March 31, 1996, the eleven months ended March 31, 1989 and
each of the years in the two-year period ended April 30, 1988.
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990
---------- ---------- ---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
- ---------------- ---------- ---------- ---------- -------- ---------- ---------- ----------
Income from
investment
operations:
Net investment
income 0.04 0.03 0.02 0.03 0.04 0.06 0.06
- ---------------- ---------- ---------- ---------- -------- ---------- ---------- ----------
Less
distributions:
Dividends from
net investment
income (0.04) (0.03) (0.02) (0.03) (0.04) (0.06) (0.06)
- ---------------- ---------- ---------- ---------- -------- ---------- ---------- ----------
Net asset value,
end of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
================ ========== ========== ========== ======== ========== ========== ==========
Total return 3.67% 3.06% 2.33% 2.66% 4.09% 5.68% 6.22%
================ ========== ========== ========== ======== ========== ========== ==========
Ratios/supplemental
data:
Net assets, end
of period (000s
omitted) $1,009,039 $1,009,891 $1,040,595 $994,828 $1,191,209 $1,156,557 $1,114,813
================ ========== ========== ========== ======== ========== ========== ==========
Ratio of
expenses to
average net
assets 0.20%(b)(c) 0.20%(b) 0.20%(b) 0.20%(b) 0.20%(b) 0.20%(b) 0.20%(b)
================ ========== ========== ========== ======== ========== ========== ==========
Ratio of net
investment
income to
average net
assets 3.59%(b)(c) 3.01%(b) 2.30%(b) 2.66%(b) 4.00%(b) 5.52%(b) 6.03%(b)
================ ========== ========== ========== ======== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, APRIL 30,
-----------------------------------------
1989 1988 1987
---------- ---------- --------
<S> <C> <C> <C>
Net asset value,
beginning of
period $1.00 $1.00 $1.00
- ---------------- ---------- ---------- --------
Income from
investment
operations:
Net investment
income 0.05 0.04 0.04
- ---------------- ---------- ---------- --------
Less
distributions:
Dividends from
net investment
income (0.05) (0.04) (0.04)
- ---------------- ---------- ---------- --------
Net asset value,
end of period $1.00 $1.00 $1.00
================ ========== ========== ========
Total return 5.67%(a) 4.56% 4.24%
================ ========== ========== ========
Ratios/supplemental
data:
Net assets, end
of period (000s
omitted) $1,062,479 $1,192,604 $993,392
================ ========== ========== ========
Ratio of
expenses to
average net
assets 0.20%(a)(b) 0.21%(b) 0.21%(d)
================ ========== ========== ========
Ratio of net
investment
income to
average net
assets 5.52%(a)(b) 4.47%(b) 4.14%(d)
================ ========== ========== ========
</TABLE>
(a) Annualized.
(b) After waiver of advisory fees.
(c) Ratios are based on average net assets of $1,097,089,368. Ratios of
expenses and net investment income to average net assets prior to waiver of
advisory fees are 0.26% and 3.53%, respectively.
(d) After waiver of advisory fees and distribution fees.
A-54
<PAGE>
<TABLE>
<S> <C>
- ------------------------------------------ ------------------------------------------------
- ------------------------------------------ ------------------------------------------------
INVESTMENT ADVISOR PROSPECTUS
A I M ADVISORS, INC.
11 Greenway Plaza, Suite 1919
Houston, Texas 77046-1173
(713) 626-1919
DISTRIBUTOR JULY 29, 1996
FUND MANAGEMENT COMPANY
11 Greenway Plaza, Suite 1919
Houston, Texas 77046
(800) 659-1005
AUDITORS TAX-FREE
KPMG PEAT MARWICK LLP INVESTMENTS CO.
700 Louisiana, NationsBank Building
Houston, Texas 77002
CUSTODIAN INSTITUTIONAL CASH
THE BANK OF NEW YORK RESERVE SHARES
90 Washington Street, 11th Floor
New York, New York 10286
TRANSFER AGENT 11 GREENWAY PLAZA, SUITE 1919
A I M INSTITUTIONAL FUND SERVICES, INC. HOUSTON, TEXAS 77046-1173
P.O. Box 4497
Houston, Texas 77210-4497
NO PERSON HAS BEEN AUTHORIZED TO GIVE Organization of the Company.......... 2
ANY INFORMATION OR TO MAKE ANY REPRE- Table of Fees and Expenses........... 2
SENTATIONS NOT CONTAINED IN THIS Financial Highlights................. 3
PROSPECTUS IN CONNECTION WITH THE Suitability for Investors............ 4
OFFERING MADE BY THIS PROSPECTUS, Investment Program................... 4
AND IF GIVEN OR MADE, SUCH Purchase of Shares................... 6
INFORMATION OR REPRESENTATIONS Redemption of Shares................. 7
MUST NOT BE RELIED UPON AS Determination of Net Asset Value..... 7
HAVING BEEN AUTHORIZED BY THE Dividends............................ 8
FUND OR THE DISTRIBUTOR. THIS Performance Information.............. 8
PROSPECTUS DOES NOT CONSTITUTE Tax Matters.......................... 8
AN OFFER IN ANY JURISDICTION Management of the Company............ 9
TO ANY PERSON TO WHOM SUCH General Information.................. 10
OFFERING MAY NOT LAWFULLY Appendix............................. A-1
BE MADE.
- ------------------------------------------ ------------------------------------------------
- ------------------------------------------ ------------------------------------------------
</TABLE>
