<PAGE>
PROSPECTUS
PRIVATE INVESTMENT CLASS
OF THE
CASH RESERVE PORTFOLIO
OF
TAX-FREE INVESTMENTS CO.
11 GREENWAY PLAZA, SUITE 100
HOUSTON, TEXAS 77046-1173
(800) 877-7748
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The Private Investment Class of the Cash Reserve Portfolio of Tax-Free
Investments Co. (the "Company") is designed to be a convenient vehicle in
which customers of banks, certain broker-dealers and other institutions can
invest in a diversified, open-end money market fund which is exempt from
federal income taxes.
Pursuant to this Prospectus, the Company offers one class of shares which
represents interests in the Cash Reserve Portfolio. Shares of the
Institutional Class of the Cash Reserve Portfolio are offered pursuant to a
separate prospectus. 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 consistent 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 assurance can be given that such a net asset value can be
maintained.
This Prospectus relates solely to the Private Investment Class of the Cash
Reserve Portfolio.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
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 24, 1998 HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
(THE "SEC") AND IS HEREBY INCORPORATED BY REFERENCE. FOR A COPY OF THE
STATEMENT OF ADDITIONAL INFORMATION, WRITE TO FUND MANAGEMENT COMPANY AT P.O.
BOX 4333, HOUSTON, TEXAS 77210-4333 OR CALL (800) 877-7748. THE SEC MAINTAINS
A WEB SITE AT HTTP://WWW.SEC.GOV THAT CONTAINS THE STATEMENT OF ADDITIONAL
INFORMATION, MATERIAL INCORPORATED BY REFERENCE, AND OTHER INFORMATION
REGARDING THE COMPANY.
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
RESERVE PORTFOLIO INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
PROSPECTUS DATED: JULY 24, 1998
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TABLE OF CONTENTS
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PAGE
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<S> <C>
SUMMARY..................... 2
TABLE OF FEES AND EXPENSES.. 4
FINANCIAL HIGHLIGHTS........ 5
SUITABILITY FOR INVESTORS... 5
INVESTMENT PROGRAM.......... 5
PURCHASE OF SHARES.......... 9
REDEMPTION OF SHARES........ 11
</TABLE>
<TABLE>
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PAGE
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<S> <C>
DIVIDENDS.................. 12
TAXES...................... 12
NET ASSET VALUE............ 13
YIELD INFORMATION.......... 14
REPORTS TO SHAREHOLDERS.... 15
MANAGEMENT OF THE COMPANY.. 15
GENERAL INFORMATION........ 18
</TABLE>
SUMMARY
THE COMPANY AND ITS INVESTMENT OBJECTIVE
The Company is an open-end, diversified, series management investment
company with one portfolio, the Cash Reserve Portfolio (the "Portfolio").
Pursuant to this Prospectus, the Company offers one class of shares of the
Portfolio, known as the Private Investment Class (the "Class"). Shares of such
Class represent an interest in the Portfolio. The investment objective of the
Portfolio is the generation of 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 obligations. The Portfolio
attempts to maintain a constant net asset value of $1.00 per share. No
assurance can be given that such a net asset value can be maintained.
The Portfolio currently offers two classes of shares, the Institutional Cash
Reserve Shares and the Class. Shares of the Institutional Cash Reserve Shares
are offered pursuant to a separate prospectus.
Because the Company declares dividends on a daily basis, shares of each
class of the Portfolio are expected to have the same net asset value
(proportionate interest in the net assets of the Portfolio) and bear equally
the expenses, such as the advisory fee, of the Portfolio as a whole. Both
classes of the Portfolio share a common investment objective and portfolio of
investments. However, the classes have different shareholder qualifications,
and are separately allocated certain class expenses, such as those associated
with the distribution of their shares. Therefore, each class will have a
different dividend payment and a different yield.
INVESTORS IN THE COMPANY
The Class is designed to be a convenient vehicle in which customers of
banks, certain broker-dealers and other institutions can invest in a
diversified, open-end money market fund, the income from which is exempt from
federal income taxes.
PURCHASE OF SHARES
Shares of the Portfolio are sold at net asset value. The minimum initial
investment in the shares of the Class is $10,000. There is no minimum amount
for subsequent investments. Payment for shares purchased must be in funds
immediately available to the Company. See "Purchase of Shares."
REDEMPTION OF SHARES
Redemptions may be made without charge at net asset value. Payment for
redeemed shares for which redemption orders are received prior to 12:30 p.m.
Eastern Time will normally be made on the same day. See "Redemption of
Shares."
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DIVIDENDS
The net income of the Portfolio is declared as a dividend daily to
shareholders of record as of 3:00 p.m. Eastern Time. Dividends are paid
monthly by check or wire transfer unless the shareholder has previously
elected to have such dividends automatically reinvested in additional shares
of the Class. Information concerning the amount of the dividends declared on
any particular day will normally be available by 4:00 p.m. Eastern Time on
that day. See "Dividends."
CONSTANT NET ASSET VALUE
The Company uses the amortized cost method of valuing the securities held by
the Portfolio and rounds the per share net asset value to the nearest whole
cent. Accordingly, the net asset value per share of the Portfolio will
normally remain constant at $1.00; however, no assurance can be given that
such a net asset value can be maintained. See "Net Asset Value."
INVESTMENT ADVISOR
A I M Advisors, Inc. ("AIM") serves as the Company's investment advisor and
receives a fee based on the Portfolio's average daily net assets. During the
fiscal year ended March 31, 1998, the Company paid AIM advisory fees which
represented 0.16% of the average net assets of the Portfolio. During such
fiscal year, those expenses of the Company (relating exclusively to the
Portfolio) which were borne by the Class, including fees paid to AIM, amounted
to 0.45% of the Class' average net assets. For the fiscal year ended March 31,
1998, AIM waived a portion of its fees from the Company with respect to the
Portfolio. Had AIM not waived its fee, AIM would have received an amount from
the Company pursuant to the Investment Advisory Agreement with respect to the
Portfolio which represented 0.22% of the Portfolio's average daily net assets.
AIM is primarily engaged in the business of acting as manager or advisor to
investment companies. See "Management of the Company--Investment Advisor."
DISTRIBUTOR AND DISTRIBUTION PLAN
Fund Management Company ("FMC") acts as the exclusive distributor of the
shares of the Class. Pursuant to a Distribution Plan (the "Plan") adopted by
the Company pursuant to Rule 12b-1 under the Investment Company Act of 1940,
as amended (the "1940 Act") with respect to the Class, the Company may pay up
to 0.50% of the Portfolio's average net asset value attributable to the shares
of the Class to FMC and/or to certain broker-dealers or other financial
institutions. Of this amount, up to 0.25% may be for continuing personal
services to shareholders provided by broker-dealers or institutions and the
balance would be deemed an asset-based sales charge. See "Purchase of Shares"
and "Distribution Plan."
SPECIAL CONSIDERATIONS
The Portfolio may invest in repurchase agreements on a temporary basis or
for defensive purposes. Accordingly, an investment in the shares of the Class
may entail somewhat different risks from an investment in an investment
company that does not engage in such investment practices. There can be no
assurance that the Portfolio will be able to maintain a stable net asset value
of $1.00 per share. See "Investment Program."
The AIM Family of Funds, The AIM Family of Funds and Design (i.e., the AIM
logo), AIM and Design, AIM, AIM LINK, AIM Institutional Funds, aimfunds.com,
La Familia AIM de Fondos and La Familia AIM de Fondos and Design are
registered service marks and Invest With Discipline and AIM Bank Connection
are service marks of A I M Management Group Inc.
3
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TABLE OF FEES AND EXPENSES
<TABLE>
<CAPTION>
PRIVATE
INVESTMENT
CLASS OF THE CASH
RESERVE PORTFOLIO
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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 fees............................................... None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management fees*............................................ 0.16%
12b-1 Fees*................................................. 0.25%
Other expenses.............................................. 0.04%
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Total fund operating expenses*.............................. 0.45%
====
</TABLE>
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* After fee waivers. Had there been no fee waivers and no expense
reimbursements during the fiscal year, Management fees, 12b-1 fees and
Total fund operating expenses would have been 0.23%, 0.50% and 0.77%. A
beneficial holder of shares of the Class should also consider the effect of
any account fees charged by the financial institution managing his or her
account.
The purpose of the foregoing table is designed to help an investor
understand the various costs and expenses that an investor in the shares of
the Class will bear directly or indirectly.
EXAMPLE
An investor in the Class 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:
<TABLE>
<CAPTION>
PRIVATE
INVESTMENT
CLASS OF THE CASH
RESERVE PORTFOLIO
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<S> <C>
1 year..................................................... $ 5
3 years.................................................... $14
5 years.................................................... $25
10 years.................................................... $57
</TABLE>
THE EXAMPLE 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 LESS THAN THOSE SHOWN.
4
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FINANCIAL HIGHLIGHTS
Shown below are the per share income and capital changes for a share of the
Class outstanding during the fiscal years ended March 31, 1998, 1997, 1996,
1995, 1994 and 1993. The following information has been derived from financial
statements audited by KPMG Peat Marwick LLP, independent auditors, whose
report on the financial statements and the related notes appears in the
Statement of Additional Information.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from investment
operations:
Net investment income.. 0.03 0.03 0.03 0.03 0.02 0.02
Less distributions:
Dividends from net
investment income..... (0.03) (0.03) (0.03) (0.03) (0.02) (0.02)
------- ------- ------- ------- ------- ------
Net asset value, end of
period................. $ 1.00 $ 1.00 $1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= ======= ======= ======
Total return............ 3.29% 3.07% 3.41% 2.80% 2.07% 2.43%
======= ======= ======= ======= ======= ======
Ratios/supplemental da-
ta:
Net assets, end of
period (000s omitted). $80,462 $37,544 $35,139 $29,286 $16,601 $9,593
======= ======= ======= ======= ======= ======
Ratio of expenses to
average net assets(a). 0.45%(b) 0.45% 0.45% 0.45% 0.45% 0.45%
======= ======= ======= ======= ======= ======
Ratio of net investment
income to average net
assets(c)............. 3.24%(b) 3.02% 3.35% 2.89% 2.05% 2.22%
======= ======= ======= ======= ======= ======
</TABLE>
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(a) After fee waivers and/or expense reimbursements. Ratios of expenses to
average net assets prior to fee waivers and/or expense reimbursements were
0.77%, 0.83%, 0.76%, 1.17%, 1.15% and 1.40% (annualized), respectively,
for the periods 1998-1993.
(b) Ratios are based on average net assets of $54,089,253.
(c) After fee waivers and/or expense reimbursements. Ratios of net investment
income to average net assets prior to fee waivers and/or expense
reimbursements were 2.92%, 2.65%, 3.04%, 2.17%, 1.35% and 1.28%
(annualized), respectively, for the periods 1998-1993.
SUITABILITY FOR INVESTORS
The Class is intended for use primarily by customers of banks, certain
broker-dealers and other institutions who seek a convenient and economical
vehicle in which to invest in an open-end, diversified money market fund, the
income from which is exempt from federal income taxes. The minimum initial
investment is $10,000.
INVESTMENT PROGRAM
INVESTMENT OBJECTIVE
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
obligations. This objective will not be changed without the approval of a
majority of the Portfolio's outstanding shares (within the meaning of the 1940
Act).
There can be no assurance that the Portfolio will achieve its investment
objective.
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MUNICIPAL SECURITIES
"Municipal Securities" include debt obligations issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities, the refunding of outstanding obligations, the obtaining of funds
for general operating expenses and the lending of such funds to other public
institutions and facilities. In addition, certain types of industrial
development bonds are issued by or on behalf of public authorities to obtain
funds to provide for the construction, equipment, repair or improvement of
privately operated facilities. As used in this Prospectus and its related
Statement of Additional Information, 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 alternative 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 following investment policies becomes effective. Policies which are
noted as fundamental may be changed only with the approval of a majority of
the Portfolio's outstanding shares.
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 securities backed by banks and other financial institutions,
changes in the credit quality of these institutions could cause losses to the
Portfolio and effect its share price. Information concerning the ratings
criteria of Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's
Corporation ("S&P") and certain other nationally recognized statistical
ratings organizations ("NRSROs") appears in the Statement of Additional
Information.
The Portfolio will limit its purchases of Municipal Securities to those
which are "First Tier" securities as defined in Rule 2a-7 under the 1940 Act.
Briefly, "First Tier" securities are securities that are rated in the highest
rating category for short-term debt obligations by two NRSROs, or, if only
rated by one NRSRO, are rated in the highest rating category by that NRSRO,
or, if unrated, are determined by the Portfolio's investment 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, as well as securities issued by a registered
investment company that is a money market fund and U.S. government securities.
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
attempts 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.
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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
floating interest rates which are readjusted on set dates (such as the last
day of the month or calendar quarter) in the case of variable rates or
whenever a specified interest rate change occurs in the case of a floating
rate instrument. 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 Municipal Securities from their original
purchase price because, upon readjustment, such rates approximate market
rates. Accordingly, as interest rates decrease or increase, the potential for
capital appreciation or depreciation 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
(usually within seven days) on the Portfolio's demand. The terms of such
demand instruments require payment of principal and accrued interest from the
issuer, a guarantor and/or a liquidity provider. Frequently such obligations
include letters of credit or other credit support arrangements provided by
financial institutions. All variable or floating rate instruments will meet
the quality standards of the Portfolio. The Company's investment advisor will
monitor the pricing, quality and liquidity of the variable or floating rate
Municipal Securities held by the Portfolio.
SYNTHETIC MUNICIPAL INSTRUMENTS
AIM believes that certain synthetic municipal instruments provide
opportunities for mutual funds to invest in high credit quality securities
providing attractive 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 instruments 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 ("Underlying Bonds"), and the sale of certificates
evidencing interests in the trust or custodial account to investors such as
the Portfolio. The trustee or custodian 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 ("Sponsor"). 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 Statement of Additional Information.
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
creditworthiness of the issuer of the Underlying Bonds, the Sponsor and the
party providing certificate holders with a conditional right to sell their
certificates at stated times and prices (a demand feature). Typically,
7
<PAGE>
a certificate holder cannot exercise the demand feature upon the occurrence of
certain conditions, such as where the issuer of the Underlying Bond defaults
on interest payments. Moreover, because synthetic municipal instruments
involve a trust or custodial account and a third party conditional demand
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 ownership 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
restrictions which reflect self-imposed standards as well as federal and state
regulatory limitations. The most significant of these restrictions provide
that the Portfolio will not:
(1) purchase the securities of any issuer if, as a result, the Portfolio
would fail to be a diversified company within the meaning of the 1940 Act,
the rules and regulations promulgated thereunder, as such statute, rules
and regulations are amended from time to time; provided, however, that the
Portfolio may purchase securities of other investment companies to the
extent permitted by the 1940 Act and the rules and regulations promulgated
thereunder (as such statute, rules and regulations are amended from time to
time) or to the extent permitted by exemptive order or other similar
relief; or
(2) concentrate 25% or more of its total assets in the securities of
issuers in a particular industry; provided, however, that securities issued
or guaranteed by banks or subject to financial guaranty insurance are not
subject to this limitation; and provided further, that securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities and
tax-exempt securities issued by state and local governments and their
political subdivisions, are not included within this restriction.
The foregoing restrictions are matters of fundamental policy and may not be
changed without shareholder approval. A description of further investment
restrictions applicable to the Portfolio that may not be changed without
shareholder approval is contained in the Statement of Additional Information.
In pursuit of its objectives, the Portfolio will also adhere to the
following non-fundamental investment policies, which may be altered by the
Portfolio's Board of Directors without approval of holders of the Portfolio's
voting securities:
(1) the Portfolio will not 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;
(2) the Portfolio does not intend to purchase securities of an issuer if,
after giving effect to such purchase, 25% or more of the value of the
Portfolio's total assets would be invested in securities of one or more
issuers conducting their principal activities in the same state. The
Portfolio may invest 25% or more of its total assets in industrial
development bonds; and
(3) the Portfolio does not intend to purchase securities of an issuer if,
after giving effect to such purchase, 25% or more of the value of the
Portfolio's total assets would be invested in securities the interest on
which is paid from revenues of projects with similar characteristics. This
policy applies to industrial
8
<PAGE>
development bonds as well as other tax-exempt securities. This policy shall
not apply, however, in the event such securities are subject to a
guarantee. With respect to securities that are subject to a guarantee, the
Portfolio does not intend to purchase any such security if, after giving
effect to such purchase, 25% or more of its total assets would be invested
in securities issued or guaranteed by entities in a particular industry.
Securities issued or guaranteed by a bank or subject to financial guaranty
insurance are not subject to this policy.
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 the 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
securities, which generally have less liquidity and greater fluctuation in
value. The net asset value of the shares of the Class will normally remain
constant at $1.00 per share (although there can be no assurance that such net
asset value will not change).
PURCHASE OF SHARES
The Company sells shares of the Class on a continuous basis at the net asset
value of the shares next determined after the Company receives an order. The
Company determines the net asset value of the Portfolio twice each Business
Day at 12:30 and 3:00 p.m. Eastern time. A "Business Day" is any day on which
member banks of the New York Federal Reserve are open for business. It is
expected that these banks will be closed during the next twelve months on
Saturdays and Sundays and on New Year's Day, Martin Luther King, Jr. Day,
President's Day, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans' Day, Thanksgiving Day and Christmas Day. The Company may change the
time it determines the net asset value of the Portfolio and therefore the time
for which purchase orders for shares of the Class must be submitted to and
received by AFS for execution on the same day, on any Business Day when the
U.S. primary broker-dealer community is closed for business or trading is
restricted due to national holidays.
Shareholders should submit purchase orders to the Company's transfer agent,
A I M Fund Services, Inc. ("AFS"). A purchase order is considered received (i)
at the time the Bank of New York, the Portfolio's custodian bank, receives
federal funds for the order, provided the Transfer Agent has received notice
of the order, or (ii) at the time the Transfer Agent receives the order,
provided the Company is assured of prompt payment. Prior to the initial
purchase of shares of the Class, a shareholder must complete and send an
Account Application to AFS at P.O. Box 4333, Houston, Texas 77210-4333. An
investor must open a Company account through an Institution in accordance with
procedures established by such Institution. An investor may make changes to
the information provided in the Account Application by submitting such changes
in writing to AFS or by completing and submitting to AFS a new Account
Application.
The minimum initial investment for the purchase of shares of the Class is
$10,000. There is no minimum for any subsequent investments. A shareholder may
make subsequent investments via AIM LINK(R) Remote, a personal computer
application software product.
The Company sells shares of the Class without any sales charge. Banks or
other institutions, however, may charge record keeping, account maintenance or
other fees to their customers. Beneficial owners of the Class should consult
with such institutions to obtain a schedule of such fees.
9
<PAGE>
Shares of the Class are sold primarily to customers of banks, certain
broker-dealers and other institutions (individually, "Institution," or
collectively, "Institutions"). Individuals, corporations, partnerships and
other businesses that maintain qualified accounts at an Institution may invest
in shares of the Class. Each institution will render administrative support
services to its customers who are the beneficial owners of the shares of the
Class. Such services include, among other things, establishment and
maintenance of shareholder accounts and records; assistance in processing
purchase and redemption transactions in shares of the Class; providing
periodic statements showing a client's account balance in shares of the Class;
distribution of Company proxy statements, annual reports and other
communications to shareholders whose accounts are serviced by the Institution;
and such other services as the Company may reasonably request. Institutions
will be required to certify to the Company that they comply with applicable
state law regarding registration as broker-dealers, or that they are exempt
from such registration.
An Institution may have a "sweep" program under which a portion of a
customer's account with such Institution may be automatically invested in the
Class. An investor who proposes to open a Company account with an Institution
should consult with a representative of such Institution to obtain a
description of the rules governing such an account. A statement with regard to
the customer's investment in the Class is supplied to the customer
periodically, and confirmations of all transactions for the account of the
customer are provided by the Institution to the client promptly upon request.
In addition, each customer is sent proxies, periodic reports and other
information from the Institution with regard to the customer's shares of the
Class. The customer's shares of the Class are fully assignable and subject to
encumbrance by the customer.
An investor may terminate his relationship with an Institution at any time,
in which case an account in the investor's name will be established directly
with the Company and the investor will become a shareholder of record. In such
case, however, the investor will not be able to purchase additional shares of
the Class directly, except through reinvestment of dividends and
distributions.
All agreements which relate to a customer's account with an Institution are
with the Institution.
An order for the purchase of shares of the Class is placed by the investor
with the Institution. The Institution is responsible for the prompt
transmission of the order to the Company. The Portfolio is normally required
to make immediate settlement in federal funds (member bank deposits with a
Federal Reserve Bank) for portfolio securities purchased. Accordingly, payment
for shares of the Class purchased by Institutions on behalf of their clients
must be in federal funds. If an investor's order to purchase shares of the
Class is paid for other than in federal funds, the Institution, acting on
behalf of the investor, completes the conversion into federal funds (which may
take two business days), or itself advances federal funds prior to conversion,
and promptly transmits the order and payment in the form of federal funds to
AFS.
The Company reserves the right to reject any purchase order and to withdraw
all or any part of the offering made by this Prospectus. The Company will
promptly return to an investor any funds it receives with respect to an order
that the Company has not accepted or has not received.
Any request for correction to a transaction of Portfolio shares must be
submitted in writing to the Transfer Agent. The Transfer Agent reserves the
right to reject any such request. When a correction results in a dividend
adjustment, the Institution must agree in writing to reimburse the Portfolio
for any loss resulting from the correction. Failure to deliver purchase
proceeds on the requested settlement date may result in a claim against the
institution for an amount equal to the overdraft charge incurred by the
Portfolio.
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REDEMPTION OF SHARES
A shareholder may redeem any or all of his or her shares of the Class at the
net asset value next determined after receipt of the redemption request in
proper form by the Company. Redemption requests with respect to the Class may
also be made via AIM LINK(R) Remote. Normally, the net asset value per share
of the Portfolio will remain constant at $1.00 per share. See "Net Asset
Value" below. Redemption requests with respect to shares of the Class are
normally made through a customer's Institution.
Payment for redeemed shares is normally made by Federal Reserve wire to the
commercial bank account designated in the Institution's Account Application,
but may be remitted by check upon request by a shareholder. If AFS receives a
redemption request on a Business Day prior to the 12:30 p.m. Eastern time net
asset value determination, the redemption will be effected at the net asset
value of the Portfolio determined as of 12:30 p.m. Eastern time and the
Company will normally wire redemption proceeds on that day. A redemption
request received by AFS between 12:30 p.m. Eastern time and 3:00 p.m. Eastern
time will be effected at the net asset value of the Portfolio determined as of
3:00 p.m. Eastern time and proceeds will normally be wired on the next
Business Day. If proceeds are not wired on the same day, shareholders will
accrue dividends until the day the proceeds are wired. If AFS receives a
redemption request on a Business Day after 3:00 p.m. Eastern time, the
redemption will be effected at the net asset value of the Portfolio determined
as of 12:30 p.m. Eastern time on the next Business Day of such Portfolio, and
the Company will normally wire redemption proceeds on such next Business Day.
The Company may change the time it determines net asset value of the Class
under the circumstances described above in "Purchase of Shares." Any such
change may affect the processing of redemption requests.
A shareholder may change the bank account designated to receive redemption
proceeds by written notice to the Company. The authorized signature on the
notice must be guaranteed by a commercial bank or a trust company. Additional
documentation may be required when deemed appropriate by the Portfolio or AFS.
Shareholders may request a redemption by telephone. Neither the Transfer
Agent nor FMC will 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 telephone transactions may include recordings of telephone
transactions (maintained for six months), and mailings of confirmation
promptly after the transaction.
Payment for shares redeemed by mail and payment for telephone redemptions in
amounts of less than $1,000 may 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 $1,000 by check when it is
considered to be in the Company's best interest to do so.
The shares of the Class are not redeemable at the option of the Company
unless the Board of Directors of the Company determines in its sole discretion
that failure to so redeem may have materially adverse consequences to the
shareholders of the Company.
Any request for correction to a redemption transaction of Portfolio shares
must be submitted in writing to the Transfer Agent as described above in
"Purchase of Shares."
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DIVIDENDS
The Company declares a dividend from net investment income (not including
any net short-term capital gains) earned by the Portfolio on each Business Day
of the Company. Dividends are paid to settled shareholders of the Company as
of 3:00 p.m. Eastern time on such Business Day. Shareholders whose purchase
orders have been received by the Company prior to 3:00 p.m. Eastern time and
shareholders whose redemption proceeds have not been wired to them on any
Business Day are settled and eligible to receive dividends on that Business
Day. The dividend declared on any day preceding on a non-Business 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 expect to
realize any long-term capital gains and losses. Dividends and distributions
are paid in cash unless the shareholder has elected to have such dividends and
distributions reinvested in the form of additional full and fractional shares
at the net asset value thereof. Such election, or any revocation thereof, must
be made in writing and sent by the Institution to AFS at P.O. Box 4333,
Houston, Texas 77210-4333. Such election or revocation will be effective with
dividends paid after it is received by AFS.
All dividends declared during a month will normally be paid by wire
transfer. Payment will normally be made on the first Business Day of the
following month. If a shareholder redeems all the shares in his account at any
time during the month, all dividends declared through the date of redemption
are paid to the shareholder along with the proceeds of the redemption.
The dividend accrued and paid for each class of the Portfolio will consist
of: (a) interest accrued and original issue discount earned less amortization
of premiums if any, for the Portfolio, the allocation of which is based upon
each such class' pro rata share of the total shares outstanding, less (b)
Company expenses accrued for the applicable dividend period, such as custodian
fees and accounting expenses, based upon each such class' pro rata share of
the net assets of the Portfolio, less (c) expenses directly attributable to
each class that are accrued for the applicable dividend period, such as
distribution expenses, if any.
The Company uses its best efforts to maintain the net asset value per share
of the Portfolio at $1.00 for purposes of sales and redemptions. See "Net
Asset Value." Should the Company incur or anticipate any unusual expense, loss
or depreciation which could adversely affect the income or net asset value of
the Portfolio, the Company's 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 the then prevailing circumstances. For example, under such
unusual circumstances the Board of Directors might reduce or suspend the daily
dividend in order to prevent to the extent possible the net asset value per
share of the Portfolio from being reduced below $1.00. Thus, such expenses,
losses or depreciation may result in a shareholder receiving no dividends for
the period during which shares of the Class were held and cause such a
shareholder to receive upon redemption a price per share lower than the
shareholder's original cost.
TAXES
The Portfolio has qualified and intends to qualify for treatment as a
regulated 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 will not be subject to federal income taxes on amounts
distributed to shareholders.
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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
exempt-interest dividends and other tax-exempt interest on their federal
income tax returns. Moreover, exempt-interest dividends from the Portfolio may
be subject 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 the shareholder and may have other collateral federal
income tax consequences. The Portfolio intends to avoid investment in those
Municipal Securities where the interest thereon will constitute an item of tax
preference, and therefore which 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
realized short-term capital gains, they will constitute ordinary income for
federal income tax purposes, whether received in cash or additional shares.
Distributions of net long-term capital gains will be taxable as long-term
capital gains (capital gain dividends), 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
Municipal Securities. If such a proposal were enacted, the ability of the
Portfolio to pay exempt-interest dividends would 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 Portfolio, which may differ significantly from the
federal income tax consequences described above.
Foreign persons who file a United States tax return for a U.S. tax refund
and who are not eligible to obtain a social security number must apply to the
Internal Revenue Service ("IRS") for an individual taxpayer identification
number, using IRS Form W-7. For a copy of the IRS Form W-7 and accompanying
instructions, please contact your tax advisor or AFS.
NET ASSET VALUE
The Company determines the net asset value of its shares as of 12:30 p.m.
and 3:00 p.m. Eastern time on each Business Day. Net asset value 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 is made in
accordance with generally accepted accounting principles. Among other items,
the Portfolio's liabilities include accrued expenses and dividends payable,
and its total assets include portfolio securities valued at their market value
as well as income accrued but not yet received.
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Securities held by the Portfolio are valued on the basis of amortized cost
pursuant to rules promulgated by the SEC applicable to money market funds.
This method values a security at its cost on the date of purchase and
thereafter assumes a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the security. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Portfolio would receive if the security
were sold. During such periods, the daily yield on shares of the Portfolio
computed as described in "Purchases and Redemptions--Yield Information" in the
Statement of Additional Information may differ somewhat from an identical
computation made by an investment company with identical investments utilizing
available indications as to market value to value its portfolio securities.
YIELD INFORMATION
Yield information for the shares of the Class can be obtained by calling the
Company at (800) 877-7748. Yields will vary from time to time and past results
are not necessarily indicative of future results. Accordingly, the yield
information for the shares of the Class may not provide a basis for comparison
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. Yield is a function of the type
and quality of a Portfolio's investments, a Portfolio's maturity and the
operating expense ratio of the Classes and a Portfolio. A SHAREHOLDER'S
INVESTMENT IN THE PORTFOLIO IS NOT INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT OR BY ANY INSTITUTION. THESE FACTORS SHOULD BE CAREFULLY CONSIDERED
BY THE INVESTOR BEFORE MAKING AN INVESTMENT IN THE PORTFOLIO.
Comparative performance information using data from the industry
publications may be used from time to time in advertising or marketing the
shares of the Class.
The yield of the Class calculated as described below, will fluctuate from
day to day. 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 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 yield of such classes can be
expected to vary. To the extent that Institutions charge fees in connection
with services provided in conjunction with the Portfolio, the yield will be
lower for those beneficial owners paying such fees.
From time to time and in its discretion, AIM or its subsidiaries 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 Portfolio's yield and total return.
The current yield, effective yield (which assumes the reinvestment of
dividends for a 365 day year and a return for the entire year equal to the
average annualized current yield for the period) and tax equivalent yield for
the Class are calculated according to a formula prescribed by the SEC. See
"Performance Information" in the Statement of Additional Information. For the
seven-day period ended March 31, 1998, the current and effective yield for the
Class were 3.27% and 3.32%, respectively.
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REPORTS TO SHAREHOLDERS
The Company furnishes shareholders with semi-annual reports containing
information about the Company and its operations, including a list of the
investments held in the Portfolio's financial statements. The annual financial
statements are audited by the Company's independent auditors. The Board of
Directors has selected KPMG Peat Marwick LLP, 700 Louisiana, Houston, Texas
77002, as the Company's independent auditors to audit the Company's financial
statements and review the Portfolio's tax returns.
MANAGEMENT OF THE COMPANY
BOARD OF DIRECTORS
The overall management of the business and affairs of the Company is vested
with its Board of Directors. The Board of Directors approves all significant
agreements between the Company, on behalf of the Portfolio, and persons or
companies furnishing services to the Company, including agreements with the
Company's investment advisor, 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 Company and to
the general supervision of the Company's Board of Directors. Certain directors
and officers of the Company are affiliated with AIM and A I M Management Group
Inc. ("AIM Management"), the parent corporation of AIM. AIM Management is a
holding company engaged in the financial services business and is an indirect
wholly owned subsidiary of AMVESCAP PLC. AMVESCAP PLC and its subsidiaries are
an independent investment management group engaged in institutional investment
management and retail mutual fund businesses in the United States, Europe and
the Pacific Region. Information concerning the Board of Directors may be found
in the Statement of Additional Information.
For a discussion of AIM Management and its subsidiaries' Year 2000
Compliance Project, see "General Information--Year 2000 Compliance Project."
INVESTMENT ADVISOR
A I M Advisors, Inc., 11 Greenway Plaza, Suite 100, Houston, Texas 77046-
1173, serves as the investment advisor for the Portfolio pursuant to a Master
Investment Advisory Agreement dated as of February 28, 1997 (the "Agreement").
AIM was organized in 1976 and, together with its subsidiaries, manages or
advises approximately 90 investment company portfolios encompassing a broad
range of investment objectives. Pursuant to the terms of the Agreement, AIM
manages the investment of the Portfolio's assets. AIM obtains and evaluates
economic, statistical and financial information 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 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. Certain of
the directors and officers of AIM are also directors or executive officers of
the Company.
Pursuant to the Agreement, AIM is paid a fee from the Company 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 such
Portfolio's average daily net assets in excess of $500 million.
For the fiscal year ended March 31, 1998, AIM was paid fees from the Company
with respect to the Portfolio which represented 0.16% of the Portfolio's
average net assets. During such fiscal year, those expenses
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of the Company (relating exclusively to the Portfolio) which were borne by the
Class, including fees paid to AIM, amounted to 0.45% of the Class' average net
assets. For the fiscal year ended March 31, 1998, AIM waived a portion of its
fees from the Company with respect to the Portfolio. Had AIM not waived its
fee, AIM would have received an amount from the Company pursuant to the
Agreement with respect to the Portfolio which represented 0.23% of the
Portfolio's average daily net assets. AIM also reimbursed the Company for
expenses of $135,349 with respect to the Class for the year ended March 31,
1998.
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
Information for a detailed description of these other charges.
DISTRIBUTOR
The Company has entered into a distribution agreement dated as of February
28, 1997 (the "Distribution Agreement") with FMC, a registered broker-dealer
and a wholly owned subsidiary of AIM, to act as the exclusive distributor of
the shares of the Class. The address of FMC is 11 Greenway Plaza, Suite 100,
Houston, Texas 77046-1173. Mail addressed to FMC should be sent to P.O. Box
4333, Houston, Texas 77210-4333. Certain directors and officers of the Company
are affiliated with FMC and AIM Management. The Distribution Agreement
provides that FMC has the exclusive right to distribute shares of the Company
either directly or through other broker-dealers. FMC is the distributor of
several of the mutual funds managed or advised by AIM.
FMC may, from time to time, at its expense, pay a bonus or other
consideration or incentive to financial institutions who sell a minimum dollar
amount of the shares of the Class during a specific period of time. In some
instances, these incentives may be offered only to certain Institutions 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 shares in the Class
or the amount received as proceeds from such sales. Sales of shares of the
Class may not be used to qualify for any incentives to the extent that such
incentives may be prohibited by the laws of any jurisdiction.
DISTRIBUTION PLAN
The Company has adopted the Plan pursuant to Rule 12b-1 under the 1940 Act
with respect to the Class. The Plan provides that the Company may incur
expenses in connection with the distribution of the shares of the Class of up
to 0.50% on an annualized basis of the average daily net assets of the shares
of the Class. Such amounts may be expended when and if authorized by the Board
of Directors and may be used to finance such distribution-related services as
expenses of organizing and conducting sales seminars, printing of prospectuses
and statements of additional information (and supplements thereto) and reports
for other than existing shareholders, preparation and distribution of
advertising material and sales literature, costs of administering the Plan and
payment of service fees to certain Institutions. The Plan provides for payment
of a service fee to Institutions that provide continuing personal shareholder
services to their customers who purchase and own shares of the Class, in
amounts of up to 0.25% of the average net assets of the Class attributable to
the Institutions. Payments to Institutions in excess of such amount and
payments to FMC would be characterized as an asset-based sales charge pursuant
to the Plan. The Plan also imposes a cap on the total amount of sales charges,
including asset-based sales charges, that may be paid by the Portfolio with
respect to the Class. The Plan does not obligate the Company to reimburse FMC
for the actual expenses FMC may incur in fulfilling its obligations under the
Plan on behalf of the Class. Thus, under the Plan, even if FMC's actual
expenses exceed the fee payable to FMC thereunder at any given time, the
Company will not be obligated to pay more than that fee. If FMC's expenses are
less than the fee it receives, FMC will retain the full amount of the fee.
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FMC is a wholly owned subsidiary of AIM, an indirect wholly owned subsidiary
of AMVESCAP PLC. Both Charles T. Bauer, a Director and Chairman of the Company
and Robert H. Graham, a Director and President of the Company, own shares of
AMVESCAP PLC.
The Plan requires the officers of the Company to provide the Board of
Directors at least quarterly with a written report of the amounts expended
pursuant to the Plan and the purposes for which such expenditures were made.
The Board of Directors will review these reports in connection with their
decisions with respect to the Plan.
As required by Rule 12b-1 under the 1940 Act, the Plan was most recently
approved by the Board of Directors, including a majority of the directors who
are not "interested persons" (as defined in the 1940 Act) of the Company and
who have no direct or indirect financial interest in the operation of the Plan
or in any agreements related to the Plan ("Qualified Directors") on May 13,
1998. In approving the Plan in accordance with the requirements of Rule 12b-1,
the directors considered various factors and determined that there is a
reasonable likelihood that the Plan would benefit the Company and the holders
of the shares of the Class.
The Plan became effective on May 1, 1992 and unless sooner terminated in
accordance with its terms, shall continue in effect for each year thereafter
as long as such continuance is specifically approved at least annually by the
Board of Directors, including a majority of the Qualified Directors. On May
13, 1998, the Board of Directors, including the Qualified Directors, voted to
continue the Plan until June 30, 1999.
The Plan may be terminated by a vote of a majority of the Qualified
Directors, or by a vote of a majority of the holders of the outstanding voting
securities of the Class. Any change in the Plan that would increase materially
the distribution expenses paid by the Class requires shareholder approval;
otherwise the Plan may be amended by the Board of Directors, including a
majority of the Qualified Directors, by vote cast in person at a meeting
called for the purpose of voting upon such amendment. As long as the Plan is
in effect, the selection or nomination of the Qualified Directors is committed
to the discretion of the Qualified Directors.
PORTFOLIO TRANSACTIONS
AIM is responsible for decisions to buy and sell securities for the
Portfolio, broker-dealer selection and negotiation of commission rates. Since
purchases and sales of portfolio securities by the Portfolio are usually
principal 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. In the event the Portfolio
purchases securities traded over-the-counter, the Portfolio deals directly
with dealers who make markets in the securities involved, except when better
prices are available elsewhere. Portfolio transactions placed through dealers
who are primary market makers are effected at net prices without commissions,
but which include compensation in the form of a mark up or mark down. The
Portfolio may also purchase securities from underwriters at prices which
include a concession 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 execution and prices offered by more than one dealer are
comparable, AIM may, in its discretion, effect transactions with dealers that
furnish statistical, research or other information or services which are
deemed by AIM to be beneficial to the Portfolio's investment program. Certain
research services furnished by dealers may be useful to AIM with clients other
than the Portfolio. Similarly, research services received by AIM through
placement of Portfolio transactions of other clients may be of value to AIM in
fulfilling its obligations to the Portfolio.
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FEE WAIVERS
In order to increase the yield to investors, AIM or its subsidiaries may
from time to time 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
Agreement, may be rescinded at any time without further notice to investors.
AIM has agreed, however, to provide the Board of Directors with 60 days'
notice prior to terminating the current voluntary fee waiver described below.
AIM has voluntarily agreed to reduce its advisory fee from the Portfolio to
the extent necessary so that the amount of ordinary expenses of the Class
(excluding interest, taxes, brokerage commissions, directors' fees,
extraordinary expenses and federal registration fees) paid or incurred by the
Class does not exceed 0.20% of the Class' average daily net assets. As a
result, AIM's advisory fee on the Class is reduced in the same proportion as
the Institutional Cash Reserve Shares. For the year ended March 31, 1998, AIM
reduced its fees from the Portfolio by $683,910. AIM also assumed expenses of
$135,349 on the Class during the same period.
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. Effective August 30, 1985, the
Company was reorganized as a Massachusetts business trust and, effective May
1, 1992, it was reorganized as a Maryland corporation. The Company currently
offers shares of one portfolio, the Portfolio, which has two classes. 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 solely to that class. For example, holders of
shares of a particular class will have the exclusive right to vote on any
matter, such as distribution arrangements, which relates solely to such class.
In the event of liquidation or termination of the Company, holders of shares
of each class will receive pro rata, subject to the rights of creditors, (a)
the proceeds of the sale of the assets held in the Portfolio, less (b) the
liabilities of the Company attributable to the respective class of the
Portfolio allocated between the two classes thereof based on the respective
liquidation value of the class. Fractional shares of the Class have the same
rights as full shares to the extent of their proportionate interest.
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 without shareholder approval.
As of May 1, 1998, NationsBank of Texas, N.A., was the owner of record of
29.41% of the outstanding shares of the Portfolio, and, therefore could be
deemed to "control" the Portfolio, as the term is defined in the 1940 Act.
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TRANSFER AGENT AND CUSTODIAN
A I M Fund Services, Inc., 11 Greenway Plaza, Suite 100, Houston, Texas
77046-1173, acts as transfer agent for the Class offered 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 portfolio securities and
cash for the Class offered pursuant to this Prospectus.
LEGAL MATTERS
The law firm of Ballard Spahr Andrews & Ingersoll, LLP, Philadelphia,
Pennsylvania, serves as counsel to the Company, and has passed upon the
legality of the shares of the Portfolio offered by this Prospectus.
SHAREHOLDER INQUIRIES
Shareholder inquiries concerning the status of an account should be directed
to an investor's Institution, or to the Company at P.O. Box 4333, Houston,
Texas 77210-4333, or may be made by calling (800) 877-7748.
YEAR 2000 COMPLIANCE PROJECT
In providing services to the Portfolio, AIM Management and its subsidiaries
rely on both internal software systems as well as external software systems
provided by third parties. Many software systems in use today are unable to
distinguish between the year 2000 and the year 1900. This defect if not cured
will likely adversely affect the services that AIM Management, its
subsidiaries and other service providers provide the Portfolio and its
shareholders.
To address this issue, AIM Management and its subsidiaries, together with
independent technology consultants, are undertaking a comprehensive Year 2000
Compliance Project (the "Project"). The Project consists of three phases,
namely (i) inventorying every software application in use at AIM Management
and its subsidiaries, as well as remote, third party software systems on which
AIM Management and its subsidiaries rely, (ii) identifying those applications
that may not function properly after December 31, 1999, and (iii) correcting
and subsequently testing those applications that may not function properly
after December 31, 1999. Phases (i) and (ii) are complete and phase (iii) has
commenced. The Project is scheduled to be completed during the fourth quarter
of 1998. Software applications acquired by AIM Management and its subsidiaries
after completion of the Project will be reviewed to confirm Year 2000
compliance upon installation.
OTHER INFORMATION
This Prospectus sets forth basic information that investors should know
about the Company prior to investing. A Statement of Additional Information
has been filed with the SEC. Copies of the Statement of Additional Information
are available upon request and without charge by writing or calling the
Company or FMC. This Prospectus omits certain information contained in the
registration statement filed with the SEC. Copies of the registration
statement, including items omitted herein, may be obtained from the SEC by
paying the charges prescribed under its rules and regulations.
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INVESTMENT ADVISOR
A I M ADVISORS, INC.
11 Greenway Plaza, Suite 100 TAX-FREE
Houston, Texas 77046-1173 INVESTMENTS CO.
(713) 626-1919 (TFIC)
DISTRIBUTOR PRIVATE
FUND MANAGEMENT COMPANY INVESTMENT CLASS
11 Greenway Plaza, Suite 100 OF THE
Houston, Texas 77046-1173 -------------------------------------
(800) 877-7748 CASH RESERVE PROSPECTUS
PORTFOLIO
AUDITORS
KPMG PEAT MARWICK LLP JULY 24, 1998
700 Louisiana
Houston, Texas 77002
CUSTODIAN
THE BANK OF NEW YORK
90 Washington Street, 11th Floor
New York, New York 10286
TRANSFER AGENT
A I M FUND SERVICES, INC.
P.O. Box 4333
Houston, Texas 77210-4333
NO PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN
THIS PROSPECTUS IN CONNECTION WITH
THE OFFERING MADE BY THIS
PROSPECTUS, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE FUND OR THE
DISTRIBUTOR. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER IN ANY
JURISDICTION TO ANY PERSON TO WHOM
SUCH OFFERING MAY NOT LAWFULLY BE
MADE.
[LOGO]
FUND MANAGEMENT COMPANY
<PAGE>
STATEMENT OF
ADDITIONAL INFORMATION
PRIVATE INVESTMENT CLASS
OF THE
CASH RESERVE PORTFOLIO
OF
TAX-FREE INVESTMENTS CO.
11 GREENWAY PLAZA
SUITE 100
HOUSTON, TEXAS 77046-1173
(800) 877-7748
-------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS.
IT SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS,
COPIES OF WHICH
MAY BE OBTAINED BY WRITING
FUND MANAGEMENT COMPANY, P.O. BOX 4333,
HOUSTON, TEXAS 77210-4333
OR CALLING (800) 877-7748
-------------------
STATEMENT OF ADDITIONAL INFORMATION DATED: JULY 24, 1998
RELATING TO THE PROSPECTUS DATED: JULY 24, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
INTRODUCTION 1
GENERAL INFORMATION ABOUT THE COMPANY 1
The Company and its Shares 1
Directors and Officers 2
Remuneration of Directors 6
AIM Funds Retirement Plan for Eligible Directors/Trustees 7
Deferred Compensation Agreements 8
The Investment Advisor 9
Expenses 10
Transfer Agent and Custodian 11
Reports 12
Sub-Accounting 12
Principal Holders of Securities 12
SHARE PURCHASES AND REDEMPTIONS 14
Purchases and Redemptions 14
Net Asset Value Determination 14
The Distribution Agreement 15
Distribution Plan 16
PERFORMANCE INFORMATION 18
INVESTMENT PROGRAM AND RESTRICTIONS 18
Investment Program 18
Municipal Securities 20
Diversification Requirements 20
Investment Ratings 21
When-Issued Securities and Delayed Delivery Transactions 26
Variable or Floating Rate Instruments 26
Synthetic Municipal Instruments 27
Investment Restrictions 27
PORTFOLIO TRANSACTIONS 28
General Brokerage Policy 28
Allocation of Portfolio Transactions 29
Section 28(e) Standards 30
DIVIDENDS, DISTRIBUTIONS AND TAX MATTERS 31
Dividends and Distributions 31
Tax Matters 32
Qualification as a Regulated Investment Company 32
Excise Tax on Regulated Investment Companies 33
Distributions 33
Foreign Shareholders 35
Effect of Future Legislation; Local Tax Considerations 35
FINANCIAL STATEMENTS FS
</TABLE>
<PAGE>
INTRODUCTION
Tax-Free Investments Co. (the "Company") is a mutual fund organized with
one portfolio, the Cash Reserve Portfolio, which has two classes of shares. The
rules and regulations of the 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
investment. This information is included in a Prospectus dated July 24, 1998.
Copies of the Prospectus and additional copies of the Statement of Additional
Information may be obtained without charge by writing the principal distributor
of the Company's shares, Fund Management Company ("FMC"), 11 Greenway Plaza,
Suite 100, Houston, Texas 77046-1173 or by calling (800) 877-7748. Investors
must receive a Prospectus before they invest.
This Statement of Additional Information is intended to furnish prospective
investors with additional information concerning the Company and the Private
Investment Class of the Cash Reserve Portfolio (the "Class"). Some of the
information required to be in this Statement of Additional Information is also
included in the current Prospectus and, in order to avoid repetition, reference
will be made to sections of the Prospectus. Additionally, the Prospectus and
this Statement of Additional Information omit certain information contained in
the registration statement filed with the SEC. Copies of the registration
statement, including items omitted from the Prospectus and this Statement of
Additional Information, may be obtained from the SEC by paying the charges
prescribed under its rules and regulations.
GENERAL INFORMATION ABOUT THE 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
reorganized as a Maryland corporation on May 1, 1992. Shares of common stock of
the Company are redeemable at the net asset value thereof at the option of the
shareholder or at the option of the Company in certain circumstances. For
information concerning the methods of redemption and the rights of share
ownership, investors should consult the Prospectus under the captions "General
Information" and "Redemption of Shares."
The Company offers shares of one portfolio, the Cash Reserve Portfolio
(referred to as the "Portfolio"). This Statement of Additional Information and
the Prospectus referred to above relate solely to the Class.
As used in the Prospectus, the term "majority of the outstanding shares" of
the Company, the Portfolio or a particular class means, respectively, the vote
of the lesser of (i) 67% or more of the shares of the Company, the Portfolio or
such class present at a meeting of the Company's shareholders, if the holders of
more than 50% of the outstanding shares of the Company, the Portfolio or such
class are present or represented by proxy, or (ii) more than 50% of the
outstanding shares of the Company, the Portfolio or such class.
Shareholders of the Portfolio do not have cumulative voting rights, and
therefore the holders of a majority of a quorum of the outstanding shares of the
Portfolio 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, prior to the issuance
of such shares, the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, or terms or
conditions of redemption, of such shares. Any such
1
<PAGE>
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 at $.001 par value. A share of the Portfolio represents
an equal proportionate interest in the Portfolio with each other share of the
Portfolio and is entitled to a proportionate interest in the dividends and
distributions with respect to its class. Additional information concerning the
rights of share ownership is set forth in the Prospectus.
The assets received by the Company for the issue or sale of shares of each
class relating to a Portfolio and all income, earnings, profits, losses and
proceeds therefrom, subject only to the rights of creditors, constitute the
underlying assets of that Portfolio. The underlying assets of the Portfolio are
segregated and are charged with the expenses with respect to the Portfolio. See
"Expenses."
The Articles of Incorporation further provide that the directors will not
be liable for errors of judgment or mistakes of fact or law. However, nothing
in the Articles of Incorporation protects a director against any liability to
which a 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
indemnification 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 and 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
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 also authorize the purchase of liability
insurance on behalf of the Company's directors and officers.
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 office by
a written consent signed by the holders of two-thirds of the outstanding shares
of the Company and filed with the Company's transfer agent or by a vote of the
holders of two-thirds of the 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 1% of the 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
Additional Information, the directors shall continue to hold office and may
appoint their successors.
DIRECTORS AND OFFICERS
The directors and executive officers of the Company and their principal
occupations during at least the last five years are set forth below. Unless
otherwise indicated, the address of each director and executive officer is 11
Greenway Plaza, Suite 100, Houston, Texas 77046.
2
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD
NAME, ADDRESS AND AGE WITH REGISTRANT PRINCIPAL OCCUPATION DURING PAST 5 YEARS
--------------------- --------------- ----------------------------------------
<S> <C> <C>
*CHARLES T. BAUER (79) Director and Chairman of the Board of Directors, A I M Management
Chairman Group Inc.; A I M Advisors, Inc., A I M Capital
Management, Inc., A I M Distributors, Inc., A I M Fund
Services, Inc. and Fund Management Company; and Vice
Chairman and Director, AMVESCAP PLC.
BRUCE L. CROCKETT (54) Director Director, ACE Limited (insurance company). Formerly,
906 Frome Lane Director, President and Chief Executive Officer,
McLean, VA 22102 COMSAT Corporation and Chairman, Board of
Governors of INTELSAT (international communications
company).
OWEN DALY II (73) Director Director, Cortland Trust Inc. (investment company).
Six Blythewood Road Formerly, Director, CF & I Steel Corp., Monumental Life
Baltimore, MD 21210 Insurance Company and Monumental General Insurance
Company; and Chairman of the Board of Equitable
Bancorporation.
EDWARD K. DUNN, JR. (62) Director Chairman of the Board of Directors, Mercantile Mortgage
P. O. Box 1477 Corp.; and Director, AEGON USA (insurance company).
Baltimore, MD 21203 Formerly, Vice Chairman of the Board of Directors and
President, Mercantile - Safe Deposit & Trust Co.; and
President, Mercantile Bankshares.
JACK FIELDS (46) Director Chief Executive Officer, Texana Global, Inc. (foreign
8810 Will Clayton Pkwy. trading company). Formerly, Member of the U.S. House
Jetero Plaza, Suite E of Representatives.
Humble, Texas 77338
**CARL FRISCHLING (61) Director Partner, Kramer, Levin, Naftalis & Frankel (law firm).
919 Third Avenue Director, ERD Waste, Inc. (waste management company),
New York, NY 10022 Aegis Consumer Finance (auto leasing company) and
Lazard Funds, Inc. (investment companies). Formerly,
Partner, Reid & Priest (law firm); and prior thereto,
Partner, Spengler Carlson Gubar Brodsky & Frischling
(law firm).
</TABLE>
- ----------------------
* 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.
3
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD
NAME, ADDRESS AND AGE WITH REGISTRANT PRINCIPAL OCCUPATION DURING PAST 5 YEARS
--------------------- --------------- ----------------------------------------
<S> <C> <C>
*ROBERT H. GRAHAM (51) Director and Director, President and Chief Executive Officer, A I M
President Management Group Inc.; Director and President, A I M
Advisors, Inc.; Director and Senior Vice President, A I M
Capital Management, Inc., A I M Distributors, Inc.,
A I M Fund Services, Inc. and Fund Management
Company; and Director, AMVESCAP PLC.
LEWIS F. PENNOCK (55) Director Attorney in private practice in Houston, Texas.
6363 Woodway, Suite 825
Houston, TX 77057
IAN W. ROBINSON (75) Director Formerly, Executive Vice President and Chief Financial
183 River Drive Officer, Bell Atlantic Management Services, Inc.
Tequesta, FL 33469 (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 (58) Director Executive Vice President, Development and Operations,
Transco Tower, 50th Floor Hines Interests Limited Partnership (real
2800 Post Oak Blvd. estate development).
Houston, TX 77056
</TABLE>
- ----------------------
* A director who is an "interested person" of the Company and A I M Advisors,
Inc. as defined in the 1940 Act.
4
<PAGE>
<TABLE>
<CAPTION>
POSITIONS HELD
NAME, ADDRESS AND AGE WITH REGISTRANT PRINCIPAL OCCUPATION DURING PAST 5 YEARS
--------------------- --------------- ----------------------------------------
<S> <C> <C>
***JOHN J. ARTHUR (53) Senior Vice Senior Vice President, Treasurer and Director, A I M
President and Advisors, Inc.; Vice President and Treasurer, A I M
Treasurer Management Group Inc., A I M Capital Management,
Inc., A I M Distributors, Inc., A I M Fund Services, Inc.
and Fund Management Company.
GARY T. CRUM (50) Senior Vice Director and President, A I M Capital Management, Inc.;
President Director and Senior Vice President, A I M Management
Group Inc. and A I M Advisors, Inc.; and Director, A I M
Distributors, Inc. and AMVESCAP PLC.
***CAROL F. RELIHAN (43) Senior Vice Senior Vice President, General Counsel, Secretary, and
President Director, A I M Advisors, Inc.; Vice President, General
and Secretary Counsel and Secretary, A I M Management Group Inc.;
Vice President, General Counsel and Director, Fund
Management Company; Vice President, A I M Capital
Management, Inc. and A I M Distributors, Inc.; and Vice
President and General Counsel, A I M Fund Services, Inc.
DANA R. SUTTON (39) Vice President Vice President and Fund Controller, A I M Advisors, Inc.;
and Assistant and Assistant Vice President and Assistant Treasurer,
Treasurer Fund Management Company.
STUART W. COCO (43) Vice President Senior Vice President, A I M Capital Management, Inc.;
and Vice President, A I M Advisors, Inc.
MELVILLE B. COX (54) Vice President Vice President and Chief Compliance Officer, A I M
Advisors, Inc., A I M Capital Management, Inc., A I M
Distributors, Inc., A I M Fund Services, Inc. and Fund
Management Company.
KAREN DUNN KELLEY (38) Vice President Senior Vice President, A I M Capital Management, Inc.;
and Vice President, A I M Advisors, Inc.
J. ABBOTT SPRAGUE (43) Vice President Director, Fund Management Company; Senior Vice
President, A I M Advisors, Inc.; and Senior Vice
President, A I M Management Group Inc.
</TABLE>
The standing committees of the Board of Directors are the Audit Committee,
the Investments Committee and the Nominating and Compensation Committee.
The members of the Audit Committee are Messrs. Crockett, Daly, Dunn,
Fields, Frischling, Pennock, Robinson (Chairman) and Sklar. The Audit
Committee is responsible for meeting with the Company's auditors to review audit
procedures and results and to consider any matters arising from an audit to be
brought
- ----------------------
*** Mr. Arthur and Ms. Relihan are married to each other.
5
<PAGE>
to the attention of the directors as a whole with respect to the Company's fund
accounting or its internal accounting controls, and for considering such matters
as may from time to time be set forth in a charter adopted by the Board of
Directors and such committee.
The members of the Investments Committee are Messrs. Bauer, Crockett, Daly
Dunn, Fields, Frischling, Pennock, Robinson and Sklar (Chairman). The
Investments Committee is responsible for reviewing portfolio compliance,
brokerage allocation, portfolio investment pricing issues, interim dividend and
distribution issues, and considering such matters as may from time to time be
set forth in a charter adopted by the Board of Directors and such committee.
The members of the Nominating and Compensation Committee are Messrs.
Crockett (Chairman), Daly, Dunn, Fields, Pennock, Robinson and Sklar. The
Nominating and Compensation Committee is responsible for considering and
nominating individuals to stand for election as directors who are not interested
persons as long as the Company maintains a distribution plan pursuant to Rule
12b-1 under the 1940 Act, reviewing from time to time the compensation payable
to the disinterested directors, and considering such matters as may from time to
time be set forth in a charter adopted by the Board of Directors 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 FMC. 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 managed,
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.
6
<PAGE>
Set forth below is information regarding compensation paid or accrued for
each director of the Company:
<TABLE>
<CAPTION>
RETIREMENT
AGGREGATE BENEFITS TOTAL
COMPENSATION ACCRUED COMPENSATION
DIRECTOR FROM COMPANY(1) BY ALL AIM FUNDS(2) FROM ALL AIM FUNDS(3)
<S> <C> <C> <C>
Charles T. Bauer -0- -0- -0-
Bruce L. Crockett $1,639 $ 67,774 $ 84,000
Owen Daly II $1,639 $103,542 $ 84,000
Edward K. Dunn, Jr.(4) $ 110 -0- -0-
Jack Fields $1,628 -0- $ 71,000
Carl Frischling $1,639 $ 96,520 $ 84,000(5)
Robert H. Graham -0- -0- -0-
John F. Kroeger(6) $1,586 $ 94,132 $ 82,500
Lewis F. Pennock $1,639 $ 55,777 $ 84,000
Ian W. Robinson $1,639 $ 85,912 $ 84,000
Louis S. Sklar $1,639 $ 84,370 $ 83,500
</TABLE>
- ----------------------
(1) The total amount of compensation deferred by all Directors of the Company
during the fiscal year ended March 31, 1998, including interest earned
thereon, was $9,056.
(2) During the fiscal year ended March 31, 1998, the total amount of expenses
allocated to the Company in respect of such retirement benefits was
$6,544. Data reflect compensation for the calendar year ended December 31,
1997.
(3) Each Director serves as a director or trustee of a total of 12 registered
investment companies advised by AIM (comprised of over 50 portfolios).
Data reflects total compensation for the calendar year ended December 31,
1997.
(4) Mr. Dunn did not serve as a Director during the calendar year ended
December 31, 1997.
(5) The Fund paid the law firm of Kramer, Levin, Naftalis & Frankel $4,852 in
legal fees for services provided to the Fund during the fiscal year ended
March 31, 1998. Mr. Frischling, a director of the Company, is a partner in
such firm.
(6) Mr. Kroeger resigned as a Director of the Company on June 11, 1998 and on
that date became a consultant to the Company.
AIM FUNDS RETIREMENT PLAN FOR ELIGIBLE DIRECTORS/TRUSTEES
Under the terms of the AIM Funds Retirement Plan for Eligible
Directors/Trustees (the "Plan"), each director (who is not a employee of any of
the AIM Funds, A I M Management Group Inc. or any of their affiliates) may be
entitled to certain benefits upon retirement from the Board of Directors.
Pursuant to the Plan, the normal retirement date is the date on which the
eligible director has attained age 65 and has completed at least five years of
continuous service with one or more of the regulated
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investment companies managed, administered or distributed by AIM or its
affiliates (the "Applicable AIM Funds"). Each eligible director is entitled to
receive an annual benefit from the AIM Funds commencing on the first day of the
calendar quarter coincident with or following his date of retirement equal to
75% of the retainer paid or accrued by the Applicable AIM Funds for such
director during the twelve-month period immediately preceding the director's
retirement (including amounts deferred under a separate agreement between the
Applicable AIM Funds and the director) 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 benefit is payable to each eligible director in quarterly
installments. If an eligible director dies after attaining the normal retirement
date but before receipt of any benefits under the Plan commences, the director's
surviving spouse (if any) shall receive a quarterly survivor's benefit equal to
50% of the amount payable to the deceased director, for no more than ten years
beginning the first day of the calendar quarter following the date of the
director's death. Payments under the Plan are not secured or funded by any AIM
Fund.
Set forth below is a table that shows the estimated annual benefits payable
to an eligible director upon retirement assuming the retainer amount reflected
below and various years of service. The estimated credited years of service as
of March 31, 1998, for Messrs. Crockett, Daly, Dunn, Fields, Frischling,
Kroeger, Pennock, Robinson and Sklar are 10, 11, 0, 1, 20, 20, 16, 10 and 8
years, respectively.
ESTIMATED BENEFITS
UPON RETIREMENT
Annual Retainer Paid By
All AIM Funds
$80,000
---------
Number of
Years of 10 $60,000
Service with
the 9 $54,000
AIM Funds
8 $48,000
7 $42,000
6 $36,000
5 $30,000
DEFERRED COMPENSATION AGREEMENTS
Messrs. Daly, Frischling, Kroeger, Robinson and Sklar (for purposes of this
paragraph only, the "deferring directors") have each executed a Deferred
Compensation Agreement (collectively, the "Agreements"). Pursuant to the
Agreements, the deferring directors elected to defer receipt of 100% of their
compensation payable by the Company, and such amounts are placed into a deferral
account. Currently, the deferring directors may select various AIM Funds in
which all or part of their deferral accounts shall be deemed to be invested.
Distributions from the deferring directors' deferral accounts
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will be paid in cash, in generally equal quarterly installments over a period of
five (5) or ten (10) years (depending on the Agreement) beginning on the date
the deferring director's retirement benefits commence under the Plan. The
Company's Board of Directors, in its sole discretion, may accelerate or extend
the distribution of such deferral accounts after the deferring director's
termination of service as a director of the Company. If a deferring director
dies prior to the distribution of amounts in his deferral account, the balance
of the deferral account will be distributed to his designated beneficiary in a
single lump sum payment as soon as practicable after such deferring director's
death. The Agreements are not funded and, with respect to the payments of
amounts held in the deferral accounts, the deferring directors have the status
of unsecured creditors of the Company and of each other AIM Fund from which they
are deferring compensation.
THE INVESTMENT ADVISOR
A I M Advisors, Inc., 11 Greenway Plaza, Suite 100, Houston, Texas 77046-
1173, serves as investment advisor to the Portfolio pursuant to a Master
Investment Advisory Agreement dated February 28, 1997 (the "Advisory
Agreement"). AIM, which was organized in 1976, together with its subsidiaries,
advises or manages approximately 90 investment company portfolios encompassing a
broad range of investment objectives.
AIM is a wholly owned subsidiary of A I M Management Group Inc. ("AIM
Management"), a holding company that has been engaged in the financial services
business since 1976. AIM is the sole shareholder of the Portfolio's principal
underwriter, FMC. AIM Management is an indirect wholly owned subsidiary of
AMVESCAP PLC, 11 Devonshire Square, London EC2M 4YR, United Kingdom. AMVESCAP
PLC and its subsidiaries are an independent investment management group engaged
in the business of investment management on an international basis. All of the
directors and certain of the officers of AIM are also executive officers of the
Company and their affiliations are shown under "Directors and Officers." The
address of each director and officer of AIM is 11 Greenway Plaza, Suite 100,
Houston, Texas 77046-1173.
FMC is a registered broker-dealer and wholly owned subsidiary of AIM. FMC
acts as distributor of the shares of the Class.
AIM and the Company have adopted a Code of Ethics which requires investment
personnel and certain other employees (a) to pre-clear all personal securities
transactions subject to the Code of Ethics, (b) to file reports or duplicate
confirmations regarding such transactions, (c) to refrain from personally
engaging in (i) short-term trading of a security, (ii) transactions involving a
security within seven days of an AIM Fund transaction involving the same
security, and (iii) transactions involving securities being considered for
investment by an AIM Fund, and (d) 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 Directors reviews quarterly and annual reports (including information
on any substantial violations of the Code of Ethics). Sanctions for violations
of the Code of Ethics may include censure, monetary penalties, suspension or
termination of employment.
The Advisory Agreement provides that it will continue in effect from year
to year only if such continuance is specifically approved at least annually by
the Company's Board of Directors and by the affirmative vote of a majority of
the directors who are not parties to the agreement or "interested persons" of
any such party (the "Qualified Directors") by votes cast in person at a meeting
called for such purpose. The Advisory Agreement was approved by the Company's
Board of Directors (including
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the affirmative vote of all the Qualified Directors) on December 11, 1996. The
Advisory Agreement was approved by the Portfolio's shareholders on February 7,
1997. The agreement became effective as of February 28, 1997 and provides that
either party may terminate such agreement on 60 days' written notice without
penalty. The agreement terminates automatically in the event of its assignment.
Pursuant to the terms of the Advisory Agreement, AIM: (a) supervises and
manages 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
Company, 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
supplements thereto), proxy materials, tax returns, reports to the Company's
shareholders 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 Company's operations and the
operation of comparable 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
Company and whether concerning the individual issuers whose securities are
included in the Company's Portfolio; (g) determines which issuers and securities
shall be represented in the Portfolio and regularly reports thereon to the Board
of Directors; (h) formulates 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 the Company to be necessary to carry into
effect such purchase and sale programs, including the placing of orders for the
purchase and sale of portfolio securities. 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 Company or its shareholders for any
act or omission by AIM or for any loss sustained by the Company 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 advisory services under the Advisory Agreement, AIM
receives a fee from the Company with respect 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 average daily net assets in excess of $500 million. For the fiscal
years ended March 31, 1998, 1997 and 1996, the fees paid by the Company to AIM
with respect to the Portfolio were $1,670,427, $1,720,635 and $1,819,232,
respectively (after giving effect to fee waivers for the fiscal years ended
March 31, 1998, 1997 and 1996 of $683,910, $625,513 and $690,397,
respectively).
In order to increase the yield to investors, AIM or FMC 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
notice to investors. The fee waivers currently in effect, are shown in the
Prospectus.
EXPENSES
AIM and FMC furnish, without cost to the Company, the services of the
President, 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
Distribution 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
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sale of portfolio securities for the Company. FMC bears the expenses of printing
and distributing prospectuses and statements of additional information (other
than those prospectuses and statements of additional information distributed to
existing shareholders) 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 the shares of the Class.
The Company pays, or causes to be paid, all other expenses of the Company,
including, 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 Company; all taxes, including
securities 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
maintenance 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 prospectuses 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 accountants; membership dues of industry associations;
interest payable on borrowings; postage; insurance premiums on property or
personnel (including officers and directors) of the Company; extraordinary
expenses (including, but not limited to, legal claims and liabilities and
litigation costs and any indemnification 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
officer 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 Portfolio's
net asset value and the daily dividend for its two 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, 1998, 1997 and 1996, AIM was reimbursed $66,515, $70,077 and
$75,960, respectively, by the Portfolio with respect to the Institutional Cash
Reserve Shares.
Expenses of the Company except those stated below are pro-rated among the
classes of the Company based upon the relative net assets of each class.
Distribution expenses of a class are charged against the income available for
distribution as dividends to such class.
TRANSFER AGENT AND CUSTODIAN
A I M Fund Services, Inc. ("AFS") serves as transfer agent and dividend
disbursing agent for the shares of the Class and receives an annual fee from the
Company for its services in such capacity in the amount of 0.009% of average
daily net assets of the Company, payable monthly. Such compensation may be
changed from time to time as is agreed to by AFS. The address of AFS is A I M
Fund Services, Inc., 11 Greenway Plaza, Suite 100, Houston, Texas 77046-1173.
The Bank of New York ("BONY") acts as custodian for the Company's portfolio
securities and cash. BONY receives
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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.
REPORTS
The Company furnishes shareholders with semi-annual reports containing
information about the Company and its operations, including a schedule of
investments held in the Company's Portfolios and its financial statements. The
annual financial statements are audited by the Company's independent auditors.
The Board of Directors has selected KPMG Peat Marwick LLP, 700 Louisiana,
Houston, Texas 77002, as the independent auditors to audit the financial
statements and review the tax returns of the Portfolio.
SUB-ACCOUNTING
The Company and FMC have arranged for AFS or the Portfolio to offer sub-
accounting services to shareholders of the Class and to maintain information
with respect to the underlying beneficial ownership of the shares. Investors
who purchase shares of the Class for the account of others can make arrangements
through the Company or FMC for these sub-accounting services. In addition,
shareholders utilizing certain versions of AIM LINK (Registered Trademark)
Remote, a personal computer application software product, may receive sub-
accounting services via such software.
PRINCIPAL HOLDERS OF SECURITIES
The names and addresses of the holders of 5% or more of each class of the
Company's shares are set forth below.
INSTITUTIONAL CASH RESERVE SHARES OF THE CASH RESERVE PORTFOLIO
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 May 1, 1998, and the amount of outstanding shares held of
record by such holders are set forth below:
NAME AND ADDRESS PERCENT OWNED
OF RECORD OWNER OF RECORD*
---------------- -------------
NationsBank of Texas, N.A. 31.61%*
1401 Elm Street, 11th Floor
P.O. Box 831000
Dallas, TX 75283-1000
- -------------------
* The Company has no knowledge as to whether all or any portfolio of the
shares owned of record are also owned beneficially.
** A shareholder who holds more than 25% of the outstanding shares of the
Portfolio may be presumed to be in "control" of the Portfolio as defined in
the 1940 Act.
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NAME AND ADDRESS PERCENT OWNED
OF RECORD OWNER OF RECORD*
---------------- -------------
Frost National Bank 11.40%
P.O. Box 2358
San Antonio, TX 78299
SunTrust Bank 10.95%
P.O. Box 105504
Atlanta, GA 30308
Chase Bank of Texas 10.05%
Attn: STIF UNIT
18 HCB 340
P.O. Box 2558
Houston, TX 77252-8098
U.S. Banks 7.18%
First Trust/Var & Co.
Funds Control Suite 0404
180 East Fifth Street
St. Paul, MN 55101
PRIVATE INVESTMENT CLASS OF THE CASH RESERVE PORTFOLIO
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
as of May 1, 1998 , and the amount of outstanding shares held of record by such
holders are set forth below:
NAME AND ADDRESS PERCENT OWNED
OF RECORD OWNER OF RECORD*
---------------- -------------
The Bank of New York 36.74%
4 Fisher Lane
White Plains, NY 10603
Cullen/Frost Discount Brokers 36.03%
P.O. Box 2358
San Antonio, TX 78299
Oppenheimer & Co., Inc. 5.13%
Oppenheimer Tower
World Financial Center
New York, NY 10281
- -------------------
* The Company has no knowledge as to whether all or any Portfolio of the
shares owned of record are owned beneficially.
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As of May 1, 1998 , the directors and officers of the Company beneficially
owned less than 1% of each class of shares of the Company.
SHARE PURCHASES AND REDEMPTIONS
PURCHASES AND REDEMPTIONS
A complete description of the manner by which the shares 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
determined 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.
A "Business Day" of the Company is any day on which member banks of the New
York Federal Reserve are open for business. The Company, however, reserves the
right to change the time for which purchase and redemption requests must be
submitted to the Company for execution on the same day on any day when the U.S.
primary broker-dealer community is closed for business or trading is restricted
due to national holidays.
NET ASSET VALUE DETERMINATION
The net asset value of a share of the Portfolio is determined twice daily
as of the times shown in the Prospectus on each Business Day of the Company, as
defined 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) deducting 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
amortized cost. This method involves valuing an instrument at its cost and
thereafter 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 result 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
portfolio.
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
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<PAGE>
conditions. The Portfolio will invest only in "Eligible Securities," as defined
in Rule 2a-7 of the 1940 Act, which the Board of Directors has determined
present minimal credit risks. Rule 2a-7 also requires, among other things, that
the Portfolio maintain a dollar-weighted portfolio maturity of 90 days or less
and purchase only U.S. dollar-denominated instruments having remaining
maturities of 397 calendar days or less.
The Board of Directors is required to establish procedures designed to
stabilize, to the extent reasonably possible, the Portfolio's price per share at
$1.00 as computed for the purpose of sales and redemptions. Such procedures
include review of the portfolio holdings by the Board of Directors, at such
intervals as they may deem appropriate, to determine whether the net asset value
calculated by using available market quotations or other reputable sources for
the 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 existing
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 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
establishment of a net asset value per share by using available market
quotations.
THE DISTRIBUTION AGREEMENT
The Company has entered into a distribution agreement dated as of February
28, 1997 (the "Distribution Agreement") with FMC, a registered broker-dealer and
a wholly owned subsidiary of AIM, to act as the exclusive distributor of the
shares of the Class. The address of FMC is 11 Greenway Plaza, Suite 100,
Houston, Texas 77046-1173. Mail addressed to FMC should be sent to P.O. Box
4333, Houston, Texas 77210-4333. See "Directors and Officers" and "The
Investment Advisor" for information as to the affiliation of certain directors
and officers of the Company with FMC and AIM Management.
The Distribution Agreement provides that FMC has the exclusive right to
distribute shares either directly or through other broker-dealers. The
Distribution Agreement also provides that, except as may otherwise be provided
in a distribution plan pursuant to Rule 12b-1 adopted by the Company's Board of
Directors, FMC will pay promotional expenses, including the incremental costs of
printing prospectuses and statements of additional information, annual reports
and other periodic reports for distribution to persons who are not shareholders
of the Company and the costs of preparing and distributing any other
supplemental sales literature. FMC has not undertaken to sell any specified
number of shares.
The Distribution Agreement will continue in effect until June 30, 1999 and
from year to year thereafter, provided that it is specifically approved at least
annually by the Company's Board of Directors and the affirmative vote of the
directors who are not parties to the Distribution Agreement or "interested
persons'' of any such party by votes cast in person at a meeting called for such
purpose. The Company or FMC may terminate the Distribution Agreement on sixty
days' written notice without penalty. The Distribution Agreement will terminate
automatically in the event of its "assignment," as defined in the 1940 Act.
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 shares of the class during a specific period of time. In some instances,
these incentives may be offered only to certain dealers or institutions who
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<PAGE>
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 asset value of the shares of the class sold. Any such bonus or incentive
programs will not change the price paid by investors for the purpose of shares
or the amount received as proceeds from such sales. Dealers or institutions may
not use sales of the shares to qualify for any incentives to the extent that
such incentives may be prohibited by the laws of any jurisdiction.
DISTRIBUTION PLAN
The Company has adopted a distribution plan (the "Plan") pursuant to Rule
12b-1 under the 1940 Act with respect to the Class. The Plan applicable to the
Portfolio provides that the Class may pay up to 0.50% per annum of the average
daily net assets of the Portfolio as follows: (1) to FMC, as an asset-based
sales charge, (2) as a service fee to certain banks ("Service Providers") who
offer continuing personal shareholder services to their customers who invest in
the shares of the class, and who have entered into Shareholder Service
Agreements, and (3) as a service fee to certain broker-dealers and other
financial institutions ("Institutions") who offer continuing personal
shareholder services to their customers who invest in the shares of the class,
and who have entered into Shareholder Service Agreements.
Pursuant to the Plan, the Company may enter into Shareholder Service
Agreements ("Service Agreements") with selected broker-dealers, banks, other
financial institutions or their affiliates. Such firms may receive from the
Portfolio compensation for servicing investors as beneficial owners of shares of
the Class. These services may include among other things: (i) answering
customer inquiries regarding the shares and the Portfolio; (ii) assisting
customers in changing dividend options, account designations and addresses;
(iii) performing sub-accounting; (iv) establishing and maintaining shareholder
accounts and records; (v) processing purchase and redemption transactions; (vi)
automatic investment in shares of the class of customer cash account balances;
(vii) providing periodic statements showing a customer's account balance and
integrating such statements with those of other transactions and balances in the
customer's other accounts serviced by such firm; (viii) arranging for bank
wires; and (ix) such other services as the Company may request on behalf of the
shares of the class, to the extent such firms are permitted to engage in such
services by applicable statute, rule or regulation.
The Plan may only be used for the purposes specified above and as stated in
the Plan. Expenses may not be carried over from year to year.
The Plan requires the officers of the Company to provide the Board of
Directors at least quarterly with a written report of the amounts expended
pursuant to the Plan and the purposes for which such expenditures were made.
The Board of Directors shall review these reports in connection with their
decisions with respect to the Plan.
For the fiscal year ended March 31, 1998, $135,349 (or an amount equal to
0.25% of the average daily net assets of the Class) was paid to dealers and
financial institutions pursuant to the Plan. In addition, for the fiscal year
ended March 31, 1998, FMC received no compensation pursuant to the Plan.
As required by Rule 12b-1 under the 1940 Act, the Plan was most recently
approved by the Board of Directors, including a majority of the directors who
are not "interested persons" (as defined in the 1940 Act) of the Company and who
have no direct or indirect financial interest in the operation
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<PAGE>
of the Plan or in any agreements related to the Plan ("Qualified Directors") on
May 13, 1998. In approving the Plan in accordance with the requirements of Rule
12b-1, the directors considered various factors and determined that there is a
reasonable likelihood that the Plan will benefit the Class and the holders of
the shares.
The Plan shall continue in effect until June 30, 1999. The Plan shall
continue in effect thereafter as long as such continuance is specifically
approved at least annually by the Board of Directors, including a majority of
the Qualified Directors.
FMC is a wholly owned subsidiary of AIM, an indirect wholly owned
subsidiary of AMVESCAP PLC. Charles T. Bauer, a Director and Chairman of the
Company, owns shares of AMVESCAP PLC and Robert H. Graham, a Director and
President of the Company, also owns shares of AMVESCAP PLC.
The Plan may be terminated by vote of a majority of the Qualified
Directors, or by vote of a majority of the holders of the outstanding voting
securities of the Class. Any change in the Plan that would increase materially
the distribution expenses paid by the Class requires shareholder approval;
otherwise, the Plan may be amended by the directors, including a majority of the
Qualified Directors, by vote cast in person at a meeting called for the purpose
of voting upon such amendment. As long as the Plan is in effect, the selection
or nomination of the Qualified Directors is committed to the discretion of the
Qualified Directors.
The Glass-Steagall Act and other applicable laws, among other things,
generally prohibit federally chartered or supervised banks from engaging in the
business of underwriting, selling or distributing securities, but permit banks
to make shares of mutual funds available to their customers and to perform
administrative and shareholder servicing functions. However, judicial or
administrative decisions or interpretations of such laws, as well as changes in
either federal or state statutes or regulations relating to the permissible
activities of banks or their subsidiaries or affiliates, could prevent a bank
from continuing to perform all or a part of its servicing activities. If a bank
were prohibited from so acting, shareholder clients of such bank would be
permitted to remain shareholders of the Company and alternate means for
continuing the servicing of such shareholders would be sought. In such event,
changes in the operation of the Company might occur and shareholders serviced by
such bank might no longer be able to avail themselves of any automatic
investment or other services then being provided by such bank. It is not
expected that shareholders would suffer any adverse financial consequences as a
result of any of these occurrences.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and certain banks and financial
institutions may be required to register as dealers pursuant to state law.
The Plan complies with the Conduct Rules of the National Association of
Securities Dealers, Inc. and provides for payment of a service fee to dealers
and other financial institutions that provide continuing personal shareholder
services to their customers who purchase and own shares of the Class, in amounts
of up to 0.25% of the average net assets of such class of the Portfolio
attributable to the customers of such dealers or financial institutions.
Payments to dealers and other financial institutions in excess of such amount
and payments to FMC would be characterized as an asset-based sales charge
pursuant to the amended Plan. The Plan also imposes a cap on the total amount
of sales charges, including asset-based sales charges, that may be paid by the
Portfolio with respect to the class.
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PERFORMANCE INFORMATION
As stated under the caption "Yield Information" in the Prospectus, yield
information for the shares of the class may be obtained by calling the Company
at (800) 877-7748.
Calculations of yield will take into account the total income received by
the Portfolio, including taxable income, if any; however, the Company intends to
invest its assets so that 100% of its annual interest income will be tax-exempt.
To the extent that institutions charge fees in connection with services provided
in conjunction with the Company, the yield will be lower for those beneficial
owners paying such fees.
The current yields quoted for the Class will be the net average annualized
yield for an identified period, usually seven consecutive calendar days. Yields
for the 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 dividends accrued with respect to
the share, and dividends declared on shares purchased with dividends accrued and
paid, if any, but would not include any realized gains and losses or unrealized
appreciation or depreciation and income other than investment income) will be
multiplied 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 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.
In addition, the Company may furnish a tax equivalent yield which is the
rate an investor would have to earn from a fully taxable investment in order to
equal the share's yield after taxes. Tax equivalent yields are calculated by
dividing the share's yield by one minus the stated federal or combined federal
and state tax rate (if only a portion of the share's yield was tax-exempt, only
that portion is adjusted in the calculation).
For the seven-day period ended March 31, 1998, the current and effective
yield for the Class were 3.27% and 3.32%, respectively. Assuming a tax rate of
39.6% these yields for the Class on a tax-equivalent basis were 5.41% and 5.50%,
respectively.
INVESTMENT PROGRAM AND RESTRICTIONS
INVESTMENT PROGRAM
Information concerning the Portfolio's investment objective 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
securities 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 portfolio instruments eligible for purchase
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<PAGE>
by the Portfolio, 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
securities to U.S. dollar-denominated securities which are "First Tier"
securities, as such term is defined from time to time in Rule 2a-7 under the
1940 Act. A First Tier Security is generally a security that: (i) has received
a short-term rating, or is subject to a guarantee that has received a short-term
rating, or, in either case, is issued by an issuer with a short-term rating from
the Requisite NRSROs in the highest short-term rating category for debt
obligations; (ii) is an unrated security that the Portfolio's investment adviser
has determined is of comparable quality to a rated security described in (i);
(iii) is a security issued by a registered investment company that is a money
market fund; or (iv) is a Government Security. The term "Requisite NRSROs"
means (a) any two nationally recognized statistical rating organizations that
have issued a rating with respect to a security or class of debt obligations of
an issuer, or (b) if only one NRSRO has issued a rating with respect to such
security or issuer at the time the Portfolio acquires the security, that NRSRO.
At present, the NRSROs are: Standard & Poor's Corp., Moody's Investors Services,
Inc., Thomson Bankwatch, One, Duff and Phelps, Inc., Fitch Investors Services,
Inc. and, with regard to certain types of securities, IBCA Ltd and its
subsidiary, IBCA, Inc. Subcategories or gradations in ratings (such as "+" or
"-") do not count as rating categories.
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 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 category 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 Investments, for example, due to market conditions or pending the
investment of proceeds 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, on short-term tax-exempt securities, which may include shares of
other investment companies whose dividends are tax-exempt. See "Investment
Restrictions" for limitations on the Fund's ability to invest in repurchase
agreements and in shares of other investment companies. It is a fundamental
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 taxes,
and it is the Company's present intention (but it is not a fundamental policy)
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.
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MUNICIPAL SECURITIES
"Municipal Securities" include debt obligations issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets and water and sewer works. Other public
purposes for which Municipal Securities may be issued include the refunding of
outstanding 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 authorities to obtain funds to provide for the construction, equipment,
repair or improvement of privately operated housing facilities, airport, mass
transit, industrial, port or parking facilities, air or water pollution control
facilities and certain local facilities 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 provided 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 alternative
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-exempt
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
municipalities or agencies and are sold in anticipation of a bond sale,
collection of taxes or receipt of other revenues. There are, of course,
variations in the risks associated with Municipal Securities, both within a
particular classification 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.
The yields on Municipal Securities are dependent 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 a 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 Portfolio will be affected by changes in the yields
available on similar securities. 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.
DIVERSIFICATION REQUIREMENTS
As a money market fund, the Portfolio is subject to the diversification
requirements of Rule 2a-7 under the 1940 Act. This Rule sets forth two
different diversification requirements: one applicable to the issuer of
Municipal Securities (provided that such securities are not subject to a demand
feature or a guarantee), and one applicable to Municipal Securities with demand
features or guarantees.
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The issuer diversification requirement provides that the Portfolio may not
invest in the securities of any issuer if, as a result, more than 5% of its
total assets would be invested in securities issued by such issuer. If the
securities are subject to a demand feature or guarantee, however, they are not
subject to this requirement. Moreover, for purposes of this requirement, the
issuer of a security is not always the nominal issuer. Instead, in certain
circumstances, the underlying obligor of a security is deemed to be the issuer
of the security. Such circumstances arise for example when another political
subdivision agrees to be ultimately responsible for payments of principal of an
interest on a security or when the assets and revenues of a non-governmental
user of the facility financed with the Municipal Securities secures repayment of
such securities.
The diversification requirement applicable to Municipal Securities subject
to a demand feature or guarantee provides that, with respect to 75% of its total
assets, the Portfolio may not invest more than 10% of its total assets in
securities issued by or subject to demand features or guarantees from the same
entity. A demand feature permits the Portfolio to sell a Municipal Security at
approximately its amortized cost value plus accrued interest at specified
intervals upon no more than 30 days' notice. A guarantee includes a letter of
credit, bond insurance and an unconditional demand feature (provided the demand
feature is not provided by the issuer of the security.)
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, Inc. ("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
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than in Aaa securities.
Note: Bonds in the Aa group which Moody's believes possess the strongest
investment 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
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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
designated Moody's Investment Grade (or MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors affecting
the liquidity 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 may be differentiated by the use of the VMIG
symbol to reflect 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.
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
repay 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.
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PRIME-1
Issuers (or related supporting institutions) rated Prime-1 (P-1) have a
superior 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
financial 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 protection
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
interest and repay principal is extremely strong.
AA
Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in 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
interest 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 demand feature (e.g.,
AAA/A-1+). With short-term demand debt, the note rating symbols are used with
the commercial paper rating symbols (e.g., SP-1+/A-l+).
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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:
amortization 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).
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
determining the credit risk associated with a particular security. The ratings
represent 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
relationship to other obligations of the issuer, the current and prospective
financial 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 guarantees 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
differences in the degrees of credit risk.
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Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security 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. Ratings 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
principal, which is unlikely to be affected by reasonably foreseeable events.
AA
Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated "AAA." Because bonds rated in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1."
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.
FITCH SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial 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.
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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
obligation 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 Securities 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
Company will direct its custodian bank to collateralize the when-issued or
delayed delivery commitment by segregating liquid assets of a dollar value
sufficient at all times to make payment for the when-issued or delayed delivery
securities. Such segregated liquid assets will be marked-to-market, and the
amount segregated will be increased if necessary to maintain adequate coverage
of the Portfolio's when-issued or delayed delivery commitments.
Securities purchased on a when-issued or delayed delivery basis and the
other securities 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 securities 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 market value of its assets.
Furthermore, when the time comes for the Portfolio to meet its obligations
under when-issued or delayed delivery commitments, the Portfolio will do so by
use of its then available cash, by the sale of segregated liquid assets, 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 capital 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
floating interest rates which are readjusted on set dates (such as the last day
of the month or calendar quarter) in the case of variable rates or whenever a
specified interest rate change occurs in the case of a floating rate instrument.
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
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interest rates generally reduce changes in the market price of Municipal
Securities from their original purchase price because, upon readjustment, such
rates approximate market rates. Accordingly, as interest rates decrease or
increase, the potential for capital appreciation or depreciation is less for
variable or floating rate Municipal Securities than for fixed rate obligations.
Rule 2a-7 under the 1940 Act provides special rules for calculating the maturity
date of variable and floating rate securities for purposes of determining
whether such securities qualify as "Eligible Securities."
Many Municipal Securities with variable or floating interest rates
purchased by the Portfolio are subject to payment of principal and accrued
interest (usually within seven days) on the Portfolio's demand. The terms of
such demand instruments require payment of principal and accrued interest from
the issuer, a guarantor and/or a liquidity provider. All variable or floating
rate instruments will meet the quality standards of the Portfolio. AIM will
monitor the pricing, quality and liquidity of the variable or floating rate
Municipal Securities 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-exempt bonds or notes ("Underlying Bonds"), and the sale of certificates
evidencing interests in the trust or custodial account to investors such as the
Portfolio. The trustee or custodian 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 "tender
option bond" provides a certificate holder with the conditional right to sell
its certificate to the Sponsor or some designated third party at specified
intervals and receive the par value of the certificate plus accrued interest (a
demand feature). 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 demand feature the right to tender 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
potential risks that may not be present where a municipal security is owned
directly. For further information regarding certain risks associated with
investing in synthetic municipal instruments see the Prospectus under the
caption "Investment 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) 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 objectives and policies; provided that the Portfolio will repay all
borrowings (other than when-issued purchases) before making additional
investments;
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(2) lend money or securities except to the extent that the Portfolio's
investments may be considered loans;
(3) purchase or sell puts, calls, straddles, spreads or combinations
thereof;
(4) invest in companies for the purpose of exercising control, except that
the Portfolio may purchase securities of other investment companies to the
extent permitted by applicable law or exemptive order;
(5) 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;
(6) purchase or sell real estate, but this shall not prevent investments in
securities secured by real estate or interests therein;
(7) sell, securities short or purchase any securities on margin, except for
such short-term credits as are necessary for the clearance of transactions; or
(8) purchase or sell commodities or commodity futures contracts.
PORTFOLIO TRANSACTIONS
GENERAL BROKERAGE POLICY
AIM makes decisions to buy and sell securities for the Portfolio, selects
broker-dealers, effects the Portfolio's investment transactions, allocates
brokerage fees in such transactions, and where applicable, negotiates
commissions and spreads on transactions. Since purchases and sales of portfolio
securities by the Portfolio are usually principal transactions, the Portfolio
incurs little or no brokerage commission. AIM's primary consideration in
effecting a security transaction is to obtain the most favorable execution of
the order, which includes the best price on the security and a low commission
rate (as applicable). While AIM seeks reasonably competitive commission rates,
the Portfolio may not pay the lowest commission or spread available. See
"Section 28(e) Standards" below.
In the event the Portfolio purchases securities traded over-the-counter,
the Portfolio deals directly with dealers who make markets in the securities
involved, except when better prices are available elsewhere. Portfolio
transactions placed through dealers who are primary market makers are effected
at net prices without commissions, but which include compensation in the form of
a mark up or mark down.
AIM may determine target levels of commission business with various brokers
on behalf of its clients (including the Portfolio) over a certain time period.
The target levels will be based upon the following factors, among others: (1)
the execution services provided by the broker; (2) the research services
provided by the broker; and (3) the broker's interest in mutual funds in general
and in the Portfolio and other mutual funds advised by AIM or A I M Capital
Management, Inc. (collectively, the "AIM Funds") in particular, including sales
of the Portfolio and of the other AIM Funds. In connection with (3) above, the
Portfolio's trades may be executed directly by dealers which sell shares of the
AIM
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Funds or by other broker-dealers with which such dealers have clearing
arrangements. AIM will not use a specific formula in connection with any of
these considerations to determine the target levels.
AIM will seek, whenever possible, to recapture for the benefit of the
Portfolio any commissions, fees, brokerage or similar payments paid by the
Portfolio on portfolio transactions. Normally, the only fees which AIM can
recapture are the soliciting dealer fees on the tender of the Portfolio's
securities in a tender or exchange offer.
The Portfolio may engage in certain principal and agency transactions with
banks and their affiliates that own 5% or more of the outstanding voting
securities of the Portfolio, provided the conditions of an exemptive order
received by the Portfolio from the SEC are met. In addition, the Portfolio may
purchase or sell a security from or to another AIM Fund provided the Portfolio
follows procedures adopted by the Board of Directors/Trustees of the various AIM
Funds, including the Company. These inter-fund transactions do not generate
brokerage commissions but may result in custodial fees or taxes or other related
expenses.
Under the 1940 Act, certain persons affiliated with the Company are
prohibited from dealing with the Company as principal in any purchase or sale of
securities unless an exemptive order allowing such transactions is obtained from
the SEC. The 1940 Act also prohibits the Company from purchasing a security
being publicly underwritten by a syndicate of which certain persons affiliated
with the Company are members except in accordance with certain conditions.
These conditions may restrict the ability of the Portfolio to purchase municipal
securities being publicly underwritten by such 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
issuer 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 determination
is made that the placement fee or other remuneration paid by the issuer to a
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, 1998, 1997 and 1996, 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.
ALLOCATION OF PORTFOLIO TRANSACTIONS
AIM and its affiliates manage several other investment accounts. Some of
these accounts may have investment objectives similar to the Portfolio.
Occasionally, identical securities will be appropriate for investment by the
Portfolio and one or more of these investment accounts. However, the position
of each account in the same securities and the length of time that each account
may hold its investment in the same securities may vary. The timing and amount
of purchase by each account will also be determined by its cash position. If
the purchase or sale of securities is consistent with the investment policies of
the Portfolios and one or more of these accounts, and is considered at or about
the same time, AIM will fairly allocate transactions in such securities among
the Portfolio and these accounts. AIM may combine such transactions, in
accordance with applicable laws and regulations, to obtain the most favorable
execution. Simultaneous transactions could, however, adversely affect the
Portfolio's ability to obtain or dispose of the full amount of a security which
it seeks to purchase or sell.
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Sometimes the procedure for allocating portfolio transactions among the
various investment accounts advised by AIM could have an adverse effect on the
price or amount of securities available to the Portfolio. In making such
allocations, AIM considers the investment objectives and policies of its
advisory clients, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held, and the judgments of the persons
responsible for recommending the investment.
SECTION 28(e) STANDARDS
Section 28(e) of the Securities Exchange Act of 1934 provides that AIM,
under certain circumstances, lawfully may cause an account to pay a higher
commission than the lowest available. Under Section 28(e), AIM must make a good
faith determination that the commissions paid are "reasonable in relation to the
value of the brokerage and research services provided ... viewed in terms of
either that particular transaction or [AIM's] overall responsibilities with
respect to the accounts as to which it exercises investment discretion." The
services provided by the broker also must lawfully and appropriately assist AIM
in the performance of its investment decision-making responsibilities.
Accordingly, in recognition of research services provided to it, the Portfolio
may pay a broker higher commissions than those available from another broker.
Research services received from broker-dealers supplement AIM's own
research (and the research of its affiliates), and may include the following
types of information: statistical and background information on the U.S. and
foreign economies, industry groups and individual companies; forecasts and
interpretations with respect to the U.S. and foreign economies, securities,
markets, specific industry groups and individual companies; information on
federal, state, local and foreign political developments; portfolio management
strategies; performance information on securities, indexes and investment
accounts; information concerning prices of securities; and information supplied
by specialized services to AIM and to the Company's directors with respect to
the performance, investment activities, and fees and expenses of other mutual
funds. Broker-dealers may communicate such information electronically, orally
or in written form. Research services may also include the providing of custody
services, as well as the providing of equipment used to communicate research
information, the providing of specialized consultations with AIM personnel with
respect to computerized systems and data furnished to AIM as a component of
other research services, the arranging of meetings with management of companies,
and the providing of access to consultants who supply research information.
The outside research assistance is useful to AIM since the broker-dealers
used by AIM tend to follow a broader universe of securities and other matters
than AIM's staff can follow. In addition, the research provides AIM with a
diverse perspective on financial markets. Research services provided to AIM by
broker-dealers are available for the benefit of all accounts managed or advised
by AIM or by its affiliates. Some broker-dealers may indicate that the
provision of research services is dependent upon the generation of certain
specified levels of commissions and underwriting concessions by AIM's clients,
including the Portfolio. However, the Portfolio is not under any obligation to
deal with any broker-dealer in the execution of transactions in portfolio
securities.
In some cases, the research services are available only from the broker-
dealer providing them. In other cases, the research services may be obtainable
from alternative sources in return for cash payments. AIM believes that the
research services are beneficial in supplementing AIM's research and analysis
and that they improve the quality of AIM's investment advice. The advisory fee
paid by the Portfolio is not reduced because AIM receives such services.
However, to the extent that AIM would
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have purchased research services had they not been provided by broker-dealers,
the expenses to AIM could be considered to have been reduced accordingly.
DIVIDENDS, DISTRIBUTIONS AND TAX MATTERS
DIVIDENDS AND DISTRIBUTIONS
Dividends with respect to the 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 Class is effective, provided that the purchase order has been accepted
prior to 3:00 p.m. Eastern time and payment in the form of federal funds wired
has been received by AFS. Dividends do not accrue on the day that a redemption
order is effective, unless the redemption is effective after 12:30 p.m. on that
day and redemption proceeds have not been wired to the shareholder on the same
day. Thus, if a purchase order is accepted prior to 3:00 p.m. Eastern time, the
shareholder will receive its pro rata share of dividends beginning with those
declared on that day.
Should the Company incur or anticipate any unusual expense, loss or
depreciation, which would adversely affect the net asset value per share of the
Portfolio 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.
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TAX MATTERS
The following is only a summary of certain additional tax considerations
generally 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, dividends 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 distributes to shareholders, provided that it distributes at least (a)
90% of its investment company taxable income (i.e., net investment 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) for the taxable year (the "Distribution Requirement"), and satisfies
certain other requirements of the Code that are described below. Distributions
by the Portfolio made during the taxable 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 derive at least 90% of its gross income from dividends,
interest, 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 company's
principal business of investing in stock or securities) and other income
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies.
In addition to satisfying the requirements described above, the Portfolio
must satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the
Portfolio'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 total 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 securities 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 businesses.
If for any taxable year the Portfolio does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable as
ordinary dividends to the extent of the Portfolio's current and accumulated
earnings and profits.
32
<PAGE>
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
ordinary 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 liquidate portfolio investments to make sufficient distributions to
avoid excise tax liability.
DISTRIBUTIONS
The Portfolio intends to qualify to pay exempt-interest dividends by
satisfying the requirement that at the close of each quarter of the Portfolio's
taxable year at least 50% of the Portfolio's total assets consists of Municipal
Securities, which are exempt from federal income tax. 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 distributed 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 excluded 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. 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 excess of
a corporate taxpayer's adjusted current earnings over its AMTI (determined
without regard to this item and the AMT net operating loss deduction))
includable in AMTI. Pursuant to the Taxpayer Relief Act of 1997, certain small
corporations are wholly exempt from the AMT.
Exempt-interest dividends must be taken into account in computing the
portion, if any, of social security or railroad retirement benefits that must be
included in an individual shareholder's gross income subject to federal income
tax. Further, a 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 financed by industrial development bonds held by the
Portfolio will likely be subject to tax on dividends paid by the Portfolio which
are derived from interest on such bonds. Receipt of exempt-interest dividends
may result in
33
<PAGE>
other collateral federal income tax consequences to certain taxpayers, including
financial 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
federal 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
distribute 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
capital 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 Securities 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
dividends, 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
additional shares of the Portfolio (or of another portfolio). Shareholders
electing to reinvest a distribution in additional shares will be treated as
receiving a distribution in an amount equal to the net asset value of the shares
acquired, 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, dividends 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 a Portfolio that it is not subject to backup
withholding or that it is a corporation or other "exempt recipient."
34
<PAGE>
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
partnership ("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 dividends
(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
applicable to U.S. citizens or domestic corporations.
In the case of foreign noncorporate shareholders, the Portfolio may be
required to withhold U.S. federal income tax at a rate of 31% on distributions
(other than exempt-interest dividends) that are otherwise exempt from
withholding tax (or taxable at a reduced treaty rate) unless such shareholders
furnish the Portfolio with proper notification of their foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Recently proposed regulations may change 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,
including 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 May 1,
1998. Future legislative or administrative changes or court decisions may
significantly change the conclusions expressed herein, and any such changes or
decisions may have a retroactive effect with respect to the transactions
contemplated herein.
Rules of state and local taxation of ordinary income dividends, exempt-
interest 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 Portfolio.
35
<PAGE>
FINANCIAL STATEMENTS
FS
<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, 1998, and the related statement of
operations 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
highlights for each of the years in the five-year period then ended. 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
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and the financial highlights. Our procedures included confirmation
of securities owned as of March 31, 1998, 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 presentation. We believe that our audits provide a
reasonable basis for our opinion.
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, 1998, 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 five-year period then ended, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
May 1, 1998
FS-1
<PAGE>
SCHEDULE OF INVESTMENTS
March 31, 1998
<TABLE>
<S> <C> <C> <C> <C>
RATING(a) PAR
S&P MOODY'S (000) VALUE
SHORT-TERM MUNICIPAL OBLIGATIONS -
102.40%
ALABAMA - 1.73%
Birmingham (City of)(YMCA-Birmingham);
Public Park and Recreation Board RB
3.75%, 06/01/16(b)(c) -- VMIG-1 $ 3,255 $ 3,255,000
- -------------------------------------------------------------------------------
BMC Special Care Facilities Financing
Authority (VHA of Alabama Inc. Capital
Asset Financing Program); Variable Rate
Hospital RB
3.65%, Series 1985 E 12/01/30(b)(d) A-1 Aaa 4,600 4,600,000
- -------------------------------------------------------------------------------
3.65%, Series 1985 G 12/01/30(b)(d) A-1 Aaa 6,390 6,390,000
- -------------------------------------------------------------------------------
Marshall (County of); Special Obligation
School Refunding Series 1994 Warrants
3.80%, 02/01/12(b)(c) A-1+ -- 2,695 2,695,000
- -------------------------------------------------------------------------------
16,940,000
- -------------------------------------------------------------------------------
ALASKA - 1.58%
Alaska Housing Finance Corp.; General
Mortgage Series 1991 A RB
3.70%, 06/01/26(b) A-1+ VMIG-1 5,200 5,200,000
- -------------------------------------------------------------------------------
Alaska Housing Finance Corp. (University
L.C. of Alaska); Governmental Purpose
Series 1997 A RB
3.75%, 12/01/27(b)(d) A-1 VMIG-1 5,200 5,200,000
- -------------------------------------------------------------------------------
Valdez (City of) (ARCO Transportation
Alaska, Inc. Project); Marine Terminal
Refunding Series 1994 B RB
3.70%, 05/01/31(b)(d) A-1 VMIG-1 5,000 5,000,000
- -------------------------------------------------------------------------------
15,400,000
- -------------------------------------------------------------------------------
ARIZONA - 1.69%
Apache (County of) Industrial Development
Authority (Tucson
Electric); Series 1983 C IDR
3.85%, 12/15/18(b)(c) A-1 VMIG-1 12,400 12,400,000
- -------------------------------------------------------------------------------
Chandler (City of) Industrial Development
Authority (Southpark
Apartments Project); Multifamily Housing
Series 1989 RB
3.75%, 12/01/02(b)(c) A-1+ -- 4,125 4,125,000
- -------------------------------------------------------------------------------
16,525,000
- -------------------------------------------------------------------------------
ARKANSAS - 0.51%
University of Arkansas Board of Trustees
(UAMS Campus) (Central Arkansas Radia-
tion Therapy); Refunding Series 1998 RB
3.75%, 12/01/19(b)(c) -- VMIG-1 5,000 5,000,000
- -------------------------------------------------------------------------------
COLORADO - 2.92%
Colorado (State of) General Fund; Series
1997 A TRAN
4.50%, 06/26/98 SP-1+ -- 5,000 5,007,372
- -------------------------------------------------------------------------------
</TABLE>
FS-2
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
RATING(a) PAR
S&P MOODY'S (000) VALUE
COLORADO - (CONTINUED)
Colorado Housing Finance Authority (Coven-
try Village Project);
Multifamily Housing Refunding Series 1996
B RB
3.75%, 10/15/16(b)(c) A-1+ -- $ 5,370 $ 5,370,000
- -------------------------------------------------------------------------------
Colorado Housing Finance Authority
(Winridge Project); Adjustable
Refunding Multifamily Housing Series 1998
RB
3.70%, 02/15/28(b)(c) A-1+ -- 5,000 5,000,000
- -------------------------------------------------------------------------------
Denver (City of) (Seasons Apartment Proj-
ect); Refunding Multifamily Housing Se-
ries 1990 RB
3.65%, 10/01/06(b)(c) A-1+ VMIG-1 8,700 8,700,000
- -------------------------------------------------------------------------------
Douglas (County of) (Autumn Chase Proj-
ect); Variable Rate Demand Multifamily
Housing Series 1985 RB
3.75%, 07/01/06(b)(c) -- VMIG-1 4,450 4,450,000
- -------------------------------------------------------------------------------
28,527,372
- -------------------------------------------------------------------------------
CONNECTICUT - 0.59%
Connecticut (State of) (Transportation
Infrastructure Purpose S-1); Special Tax
Obligation RB
3.65%, 12/01/10(b)(c) A-1+ VMIG-1 2,165 2,165,000
- -------------------------------------------------------------------------------
Connecticut (State of) Power and Light
Development Authority; Series 1993 A RB
3.65%, 09/01/28(b)(c) A-1+ VMIG-1 3,640 3,640,000
- -------------------------------------------------------------------------------
5,805,000
- -------------------------------------------------------------------------------
DELAWARE - 0.32%
Delaware (State of) Economic Development
Authority; Adjustable Rate Hospital Se-
ries C RB
3.70%, 12/01/15(b)(c) A-1+ VMIG-1 3,100 3,100,000
- -------------------------------------------------------------------------------
FLORIDA - 4.10%
Florida State Board of Education; Public
Education Series B GO
5.00%, 06/01/98 AA+ Aa2 1,700 1,703,053
- -------------------------------------------------------------------------------
Gulf Breeze (City of) (Florida Municipal
Bond Fund); Variable Rate Demand Series
1995 A RB
3.80%, 03/31/21(b)(c) A-1 -- 12,900 12,900,000
- -------------------------------------------------------------------------------
Lee (County of) Housing Finance Authority
(Forestwood Apartments Project); Housing
Series 1995 A RB
3.70%, 06/15/25(b)(c) A-1+ -- 8,000 8,000,000
- -------------------------------------------------------------------------------
Putnam County Development Authority (Semi-
nole Electric Cooperative, Inc. Project);
National Rural Utilities Cooperative Fi-
nance Corp. Guaranteed Floating/Fixed
Rate Pooled Series 1984 H-1 PCR
3.80%, 03/15/14(b)(c) A-1+ P-1 3,865 3,865,000
- -------------------------------------------------------------------------------
</TABLE>
FS-3
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
RATING(a) PAR
S&P MOODY'S (000) VALUE
FLORIDA - (CONTINUED)
University Athletic Association Inc.
(University of Florida Stadium Project);
Capital Improvement Adjustable Series
1990 RB
3.80%, 02/01/20(b)(c) -- VMIG-1 $13,600 $ 13,600,000
- -------------------------------------------------------------------------------
40,068,053
- -------------------------------------------------------------------------------
GEORGIA - 4.14%
Cobb (County of) Housing Authority
(Greenhouse Frey Apartment Project);
Multifamily Housing RB
3.70%, 09/15/26(b)(c) A-1+ -- 5,000 5,000,000
- -------------------------------------------------------------------------------
Decatur County Bainbridge Industrial
Development Authority (Kaiser
Agriculture Chemical Inc. Project);
Series 1985 IDR
3.70%, 12/01/02(b)(c) A-1+ -- 2,100 2,100,000
- -------------------------------------------------------------------------------
Dekalb (County of) Housing Authority
(Clairmont Crest Project); Multifamily
Housing Refunding Series 1995 RB
3.70%, 06/15/25(b)(c) A-1+ -- 6,400 6,400,000
- -------------------------------------------------------------------------------
Development Authority of Cobb County
(Institute of Nuclear Power Operations
Project); Series 1998 RB
3.70%, 02/01/13(b)(c) A-1+ VMIG-1 9,170 9,170,000
- -------------------------------------------------------------------------------
Development Authority of Floyd County
(Shorter College Project); Series 1998
RB
3.75%, 06/01/17(b)(c) A-1+ -- 4,000 4,000,000
- -------------------------------------------------------------------------------
Gwinnett (County of) Housing Authority
(Greens Apartment Project); Variable
Rate Demand Multifamily Housing Series
1995 RB
3.70%, 06/15/25(b)(c) A-1+ -- 10,300 10,300,000
- -------------------------------------------------------------------------------
Savannah (City of) Housing Authority
(Somerset Place Project); Variable Rate
Demand Multifamily Housing Series 1996 A
RB
3.70%, 06/15/26(b)(c) A-1+ -- 3,500 3,500,000
- -------------------------------------------------------------------------------
40,470,000
- -------------------------------------------------------------------------------
IDAHO - 1.08%
Idaho (State of); Series 1997 TAN
4.625%, 06/30/98 SP-1+ MIG-1 5,000 5,008,840
- -------------------------------------------------------------------------------
Power (County of) (FMC Corporation
Project); PCR
3.80%, 12/01/10(b)(c) -- VMIG-1 5,500 5,500,000
- -------------------------------------------------------------------------------
10,508,840
- -------------------------------------------------------------------------------
ILLINOIS - 8.29%
Burbank (City of) (Service Merchandise
Co. Inc. Project); Floating Rate Monthly
Demand Industrial Building Series 1984
RB
3.35%, 09/15/24(b)(c) A-1+ -- 3,600 3,600,000
- -------------------------------------------------------------------------------
</TABLE>
FS-4
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
RATING(a) PAR
S&P MOODY'S (000) VALUE
ILLINOIS - (CONTINUED)
East Peoria (City of) (Radnor/East Peoria
Partnership Project); Multifamily Housing
Series 1983 RB
3.90%, 06/01/08(b)(c) -- Aa3 $ 5,770 $ 5,770,000
- -------------------------------------------------------------------------------
Illinois Development Finance Authority
(Adventist Health System/Sunbelt
Obligated Group); Variable Rate Demand
Series 1997 A RB
3.75%, 11/15/27(b)(c) A-1+ VMIG-1 5,000 5,000,000
- -------------------------------------------------------------------------------
Illinois Development Finance Authority
(American College of Surgeons Project);
Tax Exempt Series 1996 RB
3.70%, 08/01/26(b)(c) A-1+ -- 7,700 7,700,000
- -------------------------------------------------------------------------------
Illinois Development Finance Authority
(Jewish Charities Revenue Anticipation
Note Progam); Variable Rate Demand Series
1997-1998 A RAN
3.75%, 06/30/98(b)(c) A-1+ -- 9,720 9,720,000
- -------------------------------------------------------------------------------
Illinois Educational Facilities Authority
(Museum of Science & Industry);
Adjustable Rate Series 1992 RB
3.70%, 10/01/26(b)(c) -- VMIG-1 1,500 1,500,000
- -------------------------------------------------------------------------------
Illinois Educational Facilities Authority
(Northwestern University); Adjustable
Rate Series 1988 RB
3.75%, 03/01/28(b)(d) A-1+ VMIG-1 6,450 6,450,000
- -------------------------------------------------------------------------------
Illinois Educational Facilities Authority
(Pooled Financing Program); Adjustable
Rate Series 1985 RB
3.70%, 12/01/05(b)(c) A-1+ VMIG-1 3,715 3,715,000
- -------------------------------------------------------------------------------
Illinois Health Facilities Authority;
Revolving Fund Pooled Series D RB
3.70%, 08/01/15(b)(c) A-1+ VMIG-1 3,970 3,970,000
- -------------------------------------------------------------------------------
Illinois Health Facilities Authority
(Advocate Health Care Network); Variable
Rate Demand Series 1997 B RB
3.75%, 08/15/22(b)(d) A-1+ VMIG-1 9,940 9,940,000
- -------------------------------------------------------------------------------
Illinois Health Facilities Authority
(Northwestern Memorial Hospital);
Variable Rate Demand Series 1995 RB
3.80%, 08/15/25(b)(d) A-1+ VMIG-1 7,000 7,000,000
- -------------------------------------------------------------------------------
Illinois Health Facilities Authority
(Streetville Corp.); Variable Rate Series
1994 RB
3.70%, 08/15/24(b)(c) A-1+ P-1 3,000 3,000,000
- -------------------------------------------------------------------------------
Oak Forest (City of) (Homewood Pool);
Series 1989 RB
3.70%, 07/01/24(b)(c) -- VMIG-1 3,000 3,000,000
- -------------------------------------------------------------------------------
Village of Lisle (Four Lakes Project Phase
Five); Multifamily Housing Revenue
Refunding Series 1996 RB
3.70%, 09/15/26(b)(c) A-1+ -- 10,700 10,700,000
- -------------------------------------------------------------------------------
81,065,000
- -------------------------------------------------------------------------------
</TABLE>
FS-5
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
RATING(a) PAR
S&P MOODY'S (000) VALUE
INDIANA - 4.32%
Auburn (City of) (Sealed Power Corp.
Project); Variable Rate Demand Economic
Development Series 1985 RB
3.55%, 07/01/10(b)(c) -- VMIG-1 $ 1,200 $ 1,200,000
- -------------------------------------------------------------------------------
Indiana (State of) (Advance Funding
Program); Series 1998 A-2 RB
4.00%, 01/20/99 SP-1+ MIG-1 5,000 5,015,577
- -------------------------------------------------------------------------------
Indiana Development Finance Authority
(Southern Indiana Gas and Electric
Project); Series 1998 A PCR
3.65%, 03/01/99(b) AA- VMIG-1 16,000 16,000,000
- -------------------------------------------------------------------------------
Indiana Health Facility Financing
Authority (St. Anthony Medical Center,
Inc.); Variable Rate Demand Series 1997
RB
3.65%, 12/01/17(b)(c) -- VMIG-1 2,000 2,000,000
- -------------------------------------------------------------------------------
Indianapolis (City of); Local Improvement
Series 1997 E RB
4.25%, 07/09/98 SP-1+ -- 7,500 7,508,961
- -------------------------------------------------------------------------------
Indianapolis (City of) (Jewish Community
Campus Project); Variable Rate Economic
Development RB
3.70%, 04/01/05(b)(c) -- VMIG-1 2,295 2,295,000
- -------------------------------------------------------------------------------
Petersburg (City of) (Indianapolis Power
and Light Co. Project); Adjustable Rate
Tender Securities Series 1995 B PCR
3.70%, 01/01/23(b)(d) A-1+ VMIG-1 6,000 6,000,000
- -------------------------------------------------------------------------------
Rockport (City of) Indiana Development
Authority (AEP Generating Company
Project B); Series 1995 B PCR
3.80%, 07/01/25(b)(d) A-1+c Aaa 2,235 2,235,000
- -------------------------------------------------------------------------------
42,254,538
- -------------------------------------------------------------------------------
IOWA - 1.74%
Iowa Higher Education Loan Authority;
Private College Facility RB
3.80%, 12/01/15(b)(c) A-1+ VMIG-1 5,000 5,000,000
- -------------------------------------------------------------------------------
Iowa School Corporations (Iowa School
Cash Anticipation Program); Warrant
Certificates Series 1997-1998 A TRAN
4.50%, 06/26/98(c) SP-1+ MIG-1 12,000 12,019,056
- -------------------------------------------------------------------------------
17,019,056
- -------------------------------------------------------------------------------
KANSAS - 1.02%
Mission (City of) (Silverwood Apartment
Project); Multifamily RB
3.70%, 09/15/26(b)(c) A-1+ -- 5,000 5,000,000
- -------------------------------------------------------------------------------
Wichita (City of); General Obligation
Renewal and Improvement Series 194
Temporary Notes
4.25%, 08/27/98 SP-1+ VMIG-1 5,000 5,012,035
- -------------------------------------------------------------------------------
10,012,035
- -------------------------------------------------------------------------------
</TABLE>
FS-6
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
RATING(a) PAR
S&P MOODY'S (000) VALUE
KENTUCKY - 1.70%
Kentucky Asset/Liability Commission;
General Fund Series 1998 A RB
3.55%, 06/04/98(b) -- VMIG-1 $ 5,000 $ 5,000,000
- -------------------------------------------------------------------------------
Kentucky Asset/Liability Commission;
General Fund Series 1997 A TRAN
4.50%, 06/25/98 SP-1+ MIG-1 7,500 7,510,929
- -------------------------------------------------------------------------------
Mayfield (City of) (Kentucky League of
Cities Funding Trust Pooled Lease
Financing Program); Variable Rate Multi-
City Lease Series 1996 RB
3.80%, 07/01/26(b)(c) A-1 VMIG-1 4,100 4,100,000
- -------------------------------------------------------------------------------
16,610,929
- -------------------------------------------------------------------------------
LOUISIANA - 3.32%
Louisana Public Facilities Authority
(Sisters of Charity of the Incarnate
Word); Unit Priced Demand Adjustable
Series 1997 E RB
3.70%, 07/01/23(b)(d) A-1+c VMIG-1 9,900 9,900,000
- -------------------------------------------------------------------------------
Louisana Public Facilities Authority
(Willis-Knighton Medical Center
Project); Hospital Series 1995 RB
3.75%, 09/01/25(b)(d) A-1 VMIG-1 17,500 17,500,000
- -------------------------------------------------------------------------------
New Orleans (City of); Aviation Board
Series B RB
3.75%, 08/01/16(b)(c) A-1+ VMIG-1 5,000 5,000,000
- -------------------------------------------------------------------------------
32,400,000
- -------------------------------------------------------------------------------
MASSACHUSETTS - 0.37%
Massachusetts Health and Educational
Facilities Authority; Variable Rate
Series E RB
3.70%, 01/01/35(b)(c) -- VMIG-1 3,600 3,600,000
- -------------------------------------------------------------------------------
MICHIGAN - 1.98%
Jackson County Economic Development Corp.
(Sealed Power Corp.); Economic
Development Variable Refunding RB
3.55%, 10/01/19(b)(c) -- VMIG-1 1,000 1,000,000
- -------------------------------------------------------------------------------
Michigan State Hospital Finance Authority
(Hospital Equipment Loan Program);
Adjustable Series 1996 A RB
3.75%, 12/01/23(b)(c) -- VMIG-1 6,600 6,600,000
- -------------------------------------------------------------------------------
Michigan State Strategic Fund (Peachwood
Center Association Project); Limited
Obligation Series 1995 RB
3.65%, 06/01/16(b)(c) A-1+ -- 2,275 2,275,000
- -------------------------------------------------------------------------------
Michigan Strategic Fund (Consumer's Power
Corp.); Variable Rate Demand Series 1988
A PCR
3.80%, 04/15/18(b)(c) -- P-1 1,570 1,570,000
- -------------------------------------------------------------------------------
</TABLE>
FS-7
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
RATING(a) PAR
S&P MOODY'S (000) VALUE
MICHIGAN - (CONTINUED)
Michigan Strategic Fund (260 Brown St.
Associates Project); Convertible Variable
Rate Demand Limited Obligation Series
1985 RB
3.60%, 10/01/15(b)(c) -- VMIG-1 $ 3,550 $ 3,550,000
- -------------------------------------------------------------------------------
Michigan Strategic Fund (The Norcor Corp.
Project); IDR
3.70%, 12/01/00(b)(c) -- P-1 4,400 4,400,000
- -------------------------------------------------------------------------------
19,395,000
- -------------------------------------------------------------------------------
MINNESOTA - 1.23%
Bloomington (City of) Port Authority (Mall
of America Project); Special Tax Revenue
Series 1996 B RB
3.70%, 02/01/13(b)(c) A-1+ VMIG-1 1,900 1,900,000
- -------------------------------------------------------------------------------
Mankato (City of) (Northern States Power
Co. Project); Floating Collateralized
Series 1985 PCR
3.80%, 03/01/11(b) AA- Aa3 2,900 2,900,000
- -------------------------------------------------------------------------------
Minneapolis (City of) Community
Development Agency (Walker Methodist
Health Systems); Adjustable Refunding
Series 1995 RB
3.80%, 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
3.80%, 03/01/11(b)(d) AA- A1 1,200 1,200,000
- -------------------------------------------------------------------------------
12,000,000
- -------------------------------------------------------------------------------
MISSOURI - 1.06%
Kansas City (Sleepy Hollow Apartment
Project); Multifamily Housing Series 1996
RB
3.70%, 09/15/26(b)(c) A-1+ -- 7,500 7,500,000
- -------------------------------------------------------------------------------
Missouri State Development Finance Board
(Science City Union Station);
Infrastructure Facilities Series A RB
3.80%, 12/01/98(b)(c) AA- Aa3 2,850 2,851,739
- -------------------------------------------------------------------------------
10,351,739
- -------------------------------------------------------------------------------
MISSISSIPPI - 1.75%
Mississippi Hospital Equipment and
Facilities Authority (Northern
Mississippi Health Services); Series 1 RB
3.55%, 06/12/98(b)(d) A-1+ VMIG-1 10,000 10,000,000
- -------------------------------------------------------------------------------
Perry (County of) (Leaf River Forest
Project); Series 1989 PCR
3.70%, 10/01/12(b)(c) -- P-1 7,100 7,100,000
- -------------------------------------------------------------------------------
17,100,000
- -------------------------------------------------------------------------------
NEW HAMPSHIRE - 0.96%
New Hampshire Business Finance Authority
(Wheelabrator Concord Company, L.P.
Project); Adjustabe Rate Resource
Recovery Refunding Series 1997 A RB
3.70%, 01/01/18(b)(c) A-1+ -- 4,000 4,000,000
- -------------------------------------------------------------------------------
</TABLE>
FS-8
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
RATING(a) PAR
S&P MOODY'S (000) VALUE
NEW HAMPSHIRE - (CONTINUED)
New Hampshire Housing Finance Authority
(EQR-Bond
Partnership-Manchester Project);
Multifamily Housing Refunding Series
1996 RB
3.70%, 09/15/26(b)(c) -- VMIG-1 $ 5,000 $ 5,000,000
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
9,400,000
- -------------------------------------------------------------------------------
NEW YORK - 18.02%
Eagle Tax Exempt Trust; Class A COP(e)
3.77%, Series 97C4703 01/01/01(b)(c)(f) A-1+c Aaa 10,800 10,800,000
- -------------------------------------------------------------------------------
3.82%, Series 1993 F 08/01/06(b)(d) A-1+c -- 20,500 20,500,000
- -------------------------------------------------------------------------------
3.82%, Series 1993 E 08/01/06(b)(d) A-1+c -- 15,000 15,000,000
- -------------------------------------------------------------------------------
3.77%, Series 943802 05/01/07(b)(d) A-1+c -- 17,800 17,800,000
- -------------------------------------------------------------------------------
3.82%, Series 943901 06/15/07(b)(c) A-1+c -- 14,500 14,500,000
- -------------------------------------------------------------------------------
3.82%, Series 94C2102 06/01/14(b)(c) A-1+c -- 10,000 10,000,000
- -------------------------------------------------------------------------------
3.77%, Series 97C4702 01/01/20(b) A-1+c -- 9,500 9,500,000
- -------------------------------------------------------------------------------
3.82%, Series 950901 06/01/21(b)(f) A-1+c -- 12,700 12,700,000
- -------------------------------------------------------------------------------
3.77%, Series 943207 07/01/29(b)(c) A-1+c -- 14,200 14,200,000
- -------------------------------------------------------------------------------
Eagle Tax Exempt Trust (Washington Public
Power Supply System Project No. 2);
Series 964703 Class A COP
3.77%, 07/01/11(b)(c)(e) A-1+c -- 5,600 5,600,000
- -------------------------------------------------------------------------------
Eagle Tax Exempt Trust (Washington State
GO); Series 984701 Class A COP
3.75%, 05/01/18(b)(d)(e) A-1+c -- 14,400 14,400,000
- -------------------------------------------------------------------------------
Merrill Lynch Group Float Program, New
York State Medical Facilities Finance
Agency (St.Lukes- Roosevelt Hospital
Center); Floating Option Tax-Exempt
Receipts Series PA-113 1993 A Mortgage
RB
3.77%, 02/15/29(b)(c)(e) A-1+c -- 9,700 9,700,000
- -------------------------------------------------------------------------------
Merrill Lynch Group Float Program, New
York State Mortgage Agency; Floating
Option Tax-Exempt Receipts Series PT 158
RB
3.77%, 04/01/12(b)(c)(e) AA VMIG-1 8,210 8,210,000
- -------------------------------------------------------------------------------
New York (City of); Series 1995 Subseries
B-5 GO
3.70%, 08/15/22(b)(c) A-1+ VMIG-1 7,200 7,200,000
- -------------------------------------------------------------------------------
New York (City of); Series A RAN
4.50%, 06/30/98(c) SP-1+ MIG-1 6,000 6,010,381
- -------------------------------------------------------------------------------
176,120,381
- -------------------------------------------------------------------------------
</TABLE>
FS-9
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
RATING(a) PAR
S&P MOODY'S (000) VALUE
NORTH CAROLINA - 0.58%
North Carolina Medical Care Commission
Retirement Community (Adult Communities
Total Services Inc.); Variable Rate
Demand Series 1996 RB
3.75%, 11/15/09(b)(c) A-1+ -- $ 5,655 $ 5,655,000
- -------------------------------------------------------------------------------
OHIO - 5.31%
Akron-Summit (County of); Library
Improvement Bonds Series
1998 A GO
4.00%, 12/01/98(c) -- Aaa 2,000 2,005,774
- -------------------------------------------------------------------------------
Cuyahoga (County of) (Cleveland Clinic);
Hospital Series A RB
3.70%, 01/01/24(b)(d) A-1 VMIG-1 33,262 33,262,000
- -------------------------------------------------------------------------------
Cuyahoga (County of) (S&R Playhouse
Realty Co.); Adjustable Rate Demand
Series 1984 IDR
3.60%, 12/01/09(b)(c) -- MIG-1 615 615,000
- -------------------------------------------------------------------------------
Franklin (County of) (Bricker & Eckler
Building Co. Project); Variable Rate
Demand Series 1984 IDR
3.90%, 11/01/14(b)(c) -- P-1 8,500 8,500,000
- -------------------------------------------------------------------------------
Marion (County of) (Pooled Lease Pro-
gram); Hospital RB
3.75%, 10/01/22(b)(c) A-1+ -- 1,540 1,540,000
- -------------------------------------------------------------------------------
Ohio Housing Finance Agency (Kenwood
Congregate Retirement Community
Project); Variable Rate Demand
Multifamily Housing Series 1985 RB
3.45%, 12/01/15(b)(c) -- VMIG-1 956 956,000
- -------------------------------------------------------------------------------
Summit (County of) Various Purpose Notes;
Series 1997 A General Obligation BAN
4.50%, 06/04/98 SP-1+ MIG-1 5,000 5,005,314
- -------------------------------------------------------------------------------
51,884,088
- -------------------------------------------------------------------------------
OKLAHOMA - 1.02%
Oklahoma Water Resource Board (State Loan
Program);
Series 1994 A RB
3.55%, 09/01/98(g) A-1+ -- 10,000 10,000,000
- -------------------------------------------------------------------------------
OREGON - 2.28%
Klamath Falls (City of) (Salt Caves
Hydroelectric); Adjustable/Fixed RB
4.50%, Series 1986 C 05/01/98(f)(g) SP-1+ -- 10,000 10,005,090
- -------------------------------------------------------------------------------
4.50%, Series E 05/01/98(f) SP-1+ -- 12,250 12,256,857
- -------------------------------------------------------------------------------
22,261,947
- -------------------------------------------------------------------------------
</TABLE>
FS-10
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
RATING(a) PAR
S&P MOODY'S (000) VALUE
PENNSYLVANIA - 6.30%
Delaware County Industrial Development
Authority (Henderson-Radnor Joint
Venture Project); Limited Obligation
Series 1985 IDR
3.70%, 04/01/15(b)(c) -- Aa3 $ 855 $ 855,000
- -----------------------------------------------------------------------------
Emmaus (City of) General Authority;
Series 1996 RB
3.75%, 12/01/28(b)(c) A-1+ Aaa 3,000 3,000,000
- -----------------------------------------------------------------------------
Philadelphia (City of); Water and
Wastewater Series 1997 B RB
3.82%, 08/05/98(b)(d)(g) A-1+ VMIG-1 3,300 3,300,000
- -----------------------------------------------------------------------------
Philadelphia (City of) Hospital and
Higher Facilities Authority
(Children's Hospital of Philadelphia);
Hospital RB
3.75%, 03/01/27(b)(d) A-1+ VMIG-1 13,160 13,160,000
- -----------------------------------------------------------------------------
Philadelphia School District; Series
1997-1998 TRAN
4.50%, 06/30/98(c) SP-1+ MIG-1 5,000 5,006,521
- -----------------------------------------------------------------------------
Quakertown Hospital Authority (HPF
Group); Series 1985 A RB
3.75%, 07/01/05(b)(c) -- VMIG-1 29,100 29,100,000
- -----------------------------------------------------------------------------
Schuykill County Industrial Development
Authority (Gilberton Power Project);
Variable Rate Resource Recovery Series
1985 RB
3.70%, 12/01/02(b)(c) A-1 -- 2,300 2,300,000
- -----------------------------------------------------------------------------
Wilkes-Barre (City of) Industrial De-
velopment Authority (Toys "R" Us/Penn
Inc. Project); Economic Development
Series 1984 RB
3.575%, 07/01/14(b)(c) -- A1 2,300 2,300,000
- -----------------------------------------------------------------------------
York (City of) General Authority;
Adjustable Rate Pooled Financing
Series 1996 RB
3.80%, 09/01/26(b)(c) A-1 -- 2,575 2,575,000
- -----------------------------------------------------------------------------
61,596,521
- -----------------------------------------------------------------------------
RHODE ISLAND - 0.30%
Rhode Island Port Authority and Eco-
nomic Development Corp.
(Newport Electric Corp. Project); En-
ergy Facilities Series RB
3.70%, 09/01/11(b)(c) A-1+ VMIG-1 2,925 2,925,000
- -----------------------------------------------------------------------------
SOUTH CAROLINA - 4.14%
Rock Hill (City of); Utilities System
RB
3.80%, 01/01/22(b)(c) A-1+ VMIG-1 7,440 7,440,000
- -----------------------------------------------------------------------------
South Carolina Public Service Authority
(Santee Cooper Hydroelectric Project);
Revenue Promissory Notes
3.60%, 06/19/98 A-1+ P-1 15,000 15,000,000
- -----------------------------------------------------------------------------
York (County of) (North Carolina
Electric Membership Corp.); Pooled PCR
3.50%, Series 1984 N-3 09/15/98(b)(c) A-1+ VMIG-1 5,000 5,000,000
- -----------------------------------------------------------------------------
3.50%, Series 1984 N-4 09/15/98(b)(c) A-1+ VMIG-1 13,000 13,000,000
- -----------------------------------------------------------------------------
40,440,000
- -----------------------------------------------------------------------------
</TABLE>
FS-11
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
RATING(a) PAR
S&P MOODY'S (000) VALUE
TENNESSEE - 1.84%
Health and Educational Facilities Board of
the Metropolitan Government of Nashville
and Davidson County (Vanderbilt
University); Adjustable Rate Series 1985
A RB
3.75%, 01/15/99(b)(d) A-1+ VMIG-1 $ 4,000 $ 4,000,000
- -------------------------------------------------------------------------------
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+ -- 1,945 1,945,000
- -------------------------------------------------------------------------------
Industrial Development Board of the City
of Hendersonville (Windsor Park Project);
Multifamily Housing Refunding Series 1998
IDR
3.70%, 02/15/28(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
3.90%, 05/01/14(b)(c) -- A1 1,150 1,150,000
- -------------------------------------------------------------------------------
Industrial Development Board of the
Metropolitan Government of Nashville and
Davidson County (Amberwood Ltd. Project);
Multifamily Housing RB
3.97%, Series 1993 A 07/01/13(b)(c) -- VMIG-1 2,250 2,250,000
- -------------------------------------------------------------------------------
3.97%, Series 1993 B 07/01/13(b)(c) A-1 VMIG-1 1,910 1,910,000
- -------------------------------------------------------------------------------
Knox (County of) Industrial Development
Board (Weisgarber Partners); Floating
Rate Series 1984 IDR
3.35%, 12/01/14(b)(c) A-1+ -- 700 700,000
- -------------------------------------------------------------------------------
Shelby (County of); Series 1997 A BAN
3.65%, 05/20/98 A-1+ P-1 4,000 4,000,000
- -------------------------------------------------------------------------------
17,955,000
- -------------------------------------------------------------------------------
TEXAS - 9.81%
Bexar (County of) Texas Housing Finance
Authority (Altamonte Apt. Project);
Series 1996 RB
3.70%, 09/15/26(b)(c) A-1+ -- 5,800 5,800,000
- -------------------------------------------------------------------------------
Bexar (County of) Texas Housing Finance
Authority (Fountainhead Apartments);
Multifamily RB
3.70%, 09/15/26(b)(c) A-1+ -- 5,000 5,000,000
- -------------------------------------------------------------------------------
Brazos River Harbor Navigation District of
Brazoria County (Hoffman-La Roche Inc.
Project); Series 1985 RB
3.575%, 04/01/02(b)(c) -- A1 2,750 2,750,000
- -------------------------------------------------------------------------------
Harris County Health Facilities
Development Corp. (Buckner Retirement
Services, Inc. Project); Series 1996 RB
3.75%, 08/15/26(b)(c) -- VMIG-1 5,000 5,000,000
- -------------------------------------------------------------------------------
Harris County Health Facilities
Development Corp. (Greater Houston Pooled
Health); Series 1985 A RB
3.75%, 11/01/25(b)(c) A-1 -- 2,800 2,800,000
- -------------------------------------------------------------------------------
</TABLE>
FS-12
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
RATING(a) PAR
S&P MOODY'S (000) VALUE
TEXAS - (CONTINUED)
Harris County Health Facilities
Development Corp. (Gulf Coast Regional
Blood Center Project); Series 1992 Blood
Center RB
3.70%, 04/01/17(b)(c) A-1 -- $ 3,450 $ 3,450,000
- -------------------------------------------------------------------------------
Harris County Health Facilities
Development Corp. (TIRR Project); Series
1987 Hospital RB
3.80%, 10/01/17(b)(c) -- VMIG-1 1,900 1,900,000
- -------------------------------------------------------------------------------
Harris County Industrial Development
Corp. (Baytank Inc. Project); Refunding
Series 1998 RB
3.70%, 02/01/20(b)(c) A-1+ -- 25,000 25,000,000
- -------------------------------------------------------------------------------
Houston (City of); Series 1997 TRAN
4.50%, 06/30/98 SP-1+ MIG-1 14,000 14,021,600
- -------------------------------------------------------------------------------
Sabine River Pollution Control Authority
(Texas Utilities Project); Series A RB
3.85%, 03/01/26(b)(d) A-1+c VMIG-1 2,500 2,500,000
- -------------------------------------------------------------------------------
Tarrant (County of) Texas Housing Finance
Corp.
(Windcastle Project); Multifamily
Housing RB
3.75%, 08/01/26(b)(c) A-1+ -- 2,100 2,100,000
- -------------------------------------------------------------------------------
Texas (State of); Series 1997 TRAN
4.75%, 08/31/98 SP-1+ MIG-1 16,000 16,057,864
- -------------------------------------------------------------------------------
Texas Department of Housing and Community
Affairs; SFM Tax Exempt Refunding Series
B Commercial Paper Notes
3.60%, 07/08/98 A-1+ -- 7,320 7,320,000
- -------------------------------------------------------------------------------
Trinity River Industrial Development Au-
thority (Radiation Sterilizers, Inc.
Project); Variable Rate Demand IDR
3.60%, Series 1985 A 11/01/05(b)(c) A-1 -- 500 500,000
- -------------------------------------------------------------------------------
3.60%, Series 1985 B 11/01/05(b)(c) A-1 -- 1,650 1,650,000
- -------------------------------------------------------------------------------
95,849,464
- -------------------------------------------------------------------------------
UTAH - 0.44%
Intermountain Power Agency;
Variable Rate Refunding Series 1985 F RB
3.80%, 06/15/98 A-1+ VMIG-1 3,000 3,001,099
- -------------------------------------------------------------------------------
Salt Lake (City of); Series 1997 TRAN
4.50%, 06/30/98 -- MIG-1 1,300 1,301,878
- -------------------------------------------------------------------------------
4,302,977
- -------------------------------------------------------------------------------
VERMONT - 0.84%
Vermont Educational and Health Buildings
Financing Agency
(VHA New England); Variable Rate Hospi-
tal RB
3.70%, Series B 12/01/25(b)(d) A-1 Aaa 1,000 1,000,000
- -------------------------------------------------------------------------------
3.70%, Series E 12/01/25(b)(d) A-1 Aaa 2,500 2,500,000
- -------------------------------------------------------------------------------
3.70%, Series F 12/01/25(b)(d) A-1+ Aaa 2,100 2,100,000
- -------------------------------------------------------------------------------
3.70%, Series G 12/01/25(b)(d) A-1+ Aaa 2,560 2,560,000
- -------------------------------------------------------------------------------
8,160,000
- -------------------------------------------------------------------------------
</TABLE>
FS-13
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
RATING(a) PAR
S&P MOODY'S (000) VALUE
VIRGINIA - 0.52%
Fairfax (County of); Public Improvement
Series 1997 A GO
5.50%, 06/01/98 AAA -- $ 3,700 $ 3,710,197
- ---------------------------------------------------------------------------------
Henrico (County of) Virginia Industrial
Development Authority (Hermitage
Project); Variable Rate Health
Facilities Series 1994 RB
4.00%, 05/01/24(b)(c) -- VMIG-1 400 400,000
- ---------------------------------------------------------------------------------
Industrial Development Authority of the
City of Lynchburg (VHA
Mid-Atlantic States, Inc.) Capital
Asset Financing Program; Variable Rate
Hospital Series 1985 F RB
3.70%, 12/01/25(b)(d) A-1 Aaa 1,000 1,000,000
- ---------------------------------------------------------------------------------
5,110,197
- ---------------------------------------------------------------------------------
WASHINGTON - 0.32%
Industrial Development Corp. of Port
Townsend (Port Townsend Paper Corp.
Project); Variable Rate Refunding
Series 1988 A RB
3.65%, 03/01/09(b)(c) -- VMIG-1 3,100 3,100,000
- ---------------------------------------------------------------------------------
WEST VIRGINIA - 1.48%
West Virginia Hospital Finance Authority
(VHA Mid-Atlantic States, Inc. Capital
Asset Financing Program); RB
3.70%, Series 1985 B 12/01/25(b)(c)(d) A-1+ Aaa 3,000 3,000,000
- ---------------------------------------------------------------------------------
3.70%, Series 1985 C 12/01/25(b)(c)(d) A-1+ Aaa 3,500 3,500,000
- ---------------------------------------------------------------------------------
3.70%, Series 1985 H 12/01/25(b)(c)(d) A-1 Aaa 8,000 8,000,000
- ---------------------------------------------------------------------------------
14,500,000
- ---------------------------------------------------------------------------------
WISCONSIN - 2.37%
Milwaukee (City of); Series G GO
5.00%, 06/15/98 AA+ Aa1 2,165 2,170,182
- ---------------------------------------------------------------------------------
Wisconsin (State of); TAN
4.50%, 06/15/98 SP-1+ MIG-1 $21,000 .$ 21,028,515
- ---------------------------------------------------------------------------------
23,198,697
- ---------------------------------------------------------------------------------
WYOMING - 0.43%
Kemmerer (City of) (Exxon Project);
Series 1984 PCR
3.75%, 11/01/14(b)(d) A-1+ P-1 2,400 2,400,000
- ---------------------------------------------------------------------------------
Uinta (County of) (Chevron USA Project);
Series 1992 PCR
3.85%, 12/01/22(b)(d) -- VMIG-1 1,800 1,800,000
- ---------------------------------------------------------------------------------
4,200,000
- ---------------------------------------------------------------------------------
TOTAL INVESTMENTS - 102.40% 1,000,811,834(h)
- ---------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES - (2.40%) (23,445,572)
- ---------------------------------------------------------------------------------
NET ASSETS - 100.00% $ 977,366,262
=================================================================================
</TABLE>
FS-14
<PAGE>
INVESTMENT ABBREVIATIONS:
<TABLE>
<C> <S> <C> <C>
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 03/31/98.
(c) Secured by a letter of credit.
(d) Secured by bond insurance.
(e) 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.
(f) Secured by an escrow fund of U.S. Treasury obligations.
(g) Subject to an irrevocable call or mandatory put by the issuer. Par value
and maturity date reflect such call or put.
(h) Also represents cost for federal income tax purposes.
See Notes to Financial Statements.
FS-15
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investments, at value (amortized cost) $1,000,811,834
- ------------------------------------------------------------------------
Cash 28,607,473
- ------------------------------------------------------------------------
Interest receivable 7,092,995
- ------------------------------------------------------------------------
Investment for deferred compensation plan 33,476
- ------------------------------------------------------------------------
Other assets 67,106
- ------------------------------------------------------------------------
Total assets 1,036,612,884
- ------------------------------------------------------------------------
LIABILITIES:
Payables for:
Investments purchased 56,149,839
- ------------------------------------------------------------------------
Dividends 2,801,759
- ------------------------------------------------------------------------
Deferred compensation 33,476
- ------------------------------------------------------------------------
Accrued administrative services fees 5,653
- ------------------------------------------------------------------------
Accrued advisory fees 142,291
- ------------------------------------------------------------------------
Accrued directors' fees 3,167
- ------------------------------------------------------------------------
Accrued transfer agent fees 7,900
- ------------------------------------------------------------------------
Accrued distribution fees 15,595
- ------------------------------------------------------------------------
Accrued operating expenses 86,942
- ------------------------------------------------------------------------
Total liabilities 59,246,622
- ------------------------------------------------------------------------
Net assets applicable to shares outstanding $ 977,366,262
========================================================================
NET ASSETS:
Institutional Shares $ 896,903,856
========================================================================
Private Investment Class $ 80,462,406
========================================================================
CAPITAL STOCK, $0.001 PAR VALUE PER SHARE:
Institutional Shares:
Authorized 3,000,000,000
========================================================================
Outstanding 896,906,132
========================================================================
Private Investment Class:
Authorized 1,000,000,000
========================================================================
Outstanding 80,462,611
========================================================================
Net asset value, offering and redemption price per share $1.00
========================================================================
</TABLE>
See Notes to Financial Statements.
FS-16
<PAGE>
STATEMENT OF OPERATIONS
For the year ended March 31, 1998
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Interest income $38,794,672
- ------------------------------------------------------------------
EXPENSES:
Advisory fees 2,354,337
- ------------------------------------------------------------------
Administrative services fees 66,515
- ------------------------------------------------------------------
Transfer agent fees 99,968
- ------------------------------------------------------------------
Custody fees 92,785
- ------------------------------------------------------------------
Directors' fees 11,636
- ------------------------------------------------------------------
Distribution fees (Note 2) 270,698
- ------------------------------------------------------------------
Other expenses 184,070
- ------------------------------------------------------------------
Total expenses 3,080,009
- ------------------------------------------------------------------
Less: Fees waived and expenses assumed (819,259)
- ------------------------------------------------------------------
Net expenses 2,260,750
- ------------------------------------------------------------------
Net investment income 36,533,922
- ------------------------------------------------------------------
Net realized gain on sales of investments 9,664
- ------------------------------------------------------------------
Net increase in net assets resulting from operations $36,543,586
==================================================================
</TABLE>
See Notes to Financial Statements.
FS-17
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
For the years ended March 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 36,533,922 $ 34,164,404
- -----------------------------------------------------------------------------
Net realized gain on sales of investments 9,664 79,682
- -----------------------------------------------------------------------------
Net unrealized appreciation (depreciation) of
investments -- (5,777)
- -----------------------------------------------------------------------------
Net increase in net assets resulting from
operations 36,543,586 34,238,309
- -----------------------------------------------------------------------------
Distributions to shareholders from net
investment income:
Institutional Shares (34,792,247) (33,140,042)
- -----------------------------------------------------------------------------
Private Investment Class (1,741,675) (1,024,362)
- -----------------------------------------------------------------------------
Capital stock transactions - net:
Institutional Shares (69,673,016) (42,543,201)
- -----------------------------------------------------------------------------
Private Investment Class 42,918,457 2,402,025
- -----------------------------------------------------------------------------
Net increase (decrease) in net assets (26,744,895) (40,067,271)
- -----------------------------------------------------------------------------
NET ASSETS:
Beginning of period 1,004,111,157 1,044,178,428
- -----------------------------------------------------------------------------
End of period $ 977,366,262 $1,004,111,157
=============================================================================
NET ASSETS CONSIST OF:
Capital (par value and additional paid-in):
Institutional Shares $ 896,906,132 $ 966,579,148
- -----------------------------------------------------------------------------
Private Investment Class 80,462,611 37,544,154
- -----------------------------------------------------------------------------
Undistributed net realized gain (loss) on
sales of investments (2,481) (12,145)
- -----------------------------------------------------------------------------
$ 977,366,262 $1,004,111,157
=============================================================================
</TABLE>
See Notes to Financial Statements.
FS-18
<PAGE>
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
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. Net realized capital gains (including net short-term capital
gains and market discounts), if any, are distributed annually.
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 $85,975 (w hich 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 - Distribution expenses directly attributable to a class of shares
are charged to that class' operations. All other expenses which are
attributable to more than one class are allocated between the classes.
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 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) 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, 1998, AIM reduced its advisory fee from the Fund by
$683,910.
The Fund, pursuant to a master administrative services agreement with AIM, has
agreed to reimburse AIM for certain administrative costs incurred in providing
accounting services to the Fund. During the year ended March 31, 1998, the Fund
reimbursed AIM $66,515 for such services.
FS-19
<PAGE>
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, 1998, the Private Investment Class paid
$135,349 as compensation to FMC under the Plan. FMC waived fees of $135,349
during the same period.
The Fund, pursuant to a transfer agency and service agreement, has agreed to
pay A I M Fund Services, Inc. ("AFS") a fee for providing transfer agent and
shareholder services to the Fund. On September 20, 1997, the Board of Directors
of the Fund approved appointment of AFS as transfer agent of the Fund effective
December 29, 1997. During the year ended March 31, 1998, the Fund paid AFS
$25,471 for such services. Prior to effective date of the agreement with AFS,
the Fund paid A I M Institutional Fund Services, Inc. $74,497 pursuant to a
transfer agency and shareholder services agreement for the period April 1, 1997
through December 28, 1997.
During the year ended March 31, 1998, the Fund paid legal fees of $4,852 for
services rendered by Kramer, Levin, Naftalis & 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, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------ -------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Sold:
Institutional Shares 5,302,472,459 $5,302,472,459 4,746,443,085 $ 4,746,443,085
- ----------------------------------------------------------------------------------------
Private Investment
Class 484,657,926 484,657,926 204,111,511 204,111,511
- ----------------------------------------------------------------------------------------
Issued as reinvestment
of dividends:
Institutional Shares 2,107,154 2,107,154 192,345 192,345
- ----------------------------------------------------------------------------------------
Private Investment
Class 1,514,378 1,514,378 860,021 860,021
- ----------------------------------------------------------------------------------------
Redeemed:
Institutional Shares (5,374,252,629) (5,374,252,629) (4,789,178,631) (4,789,178,631)
- ----------------------------------------------------------------------------------------
Private Investment
Class (443,253,847) (443,253,847) (202,569,507) (202,569,507)
- ----------------------------------------------------------------------------------------
Net increase
(decrease) (26,754,559) $ (26,754,559) (40,141,176) $ (40,141,176)
========================================================================================
</TABLE>
FS-20
<PAGE>
NOTE 5 - FINANCIAL HIGHLIGHTS
Shown below are the financial highlights for a share of Private Investment
Class capital stock outstanding during each of the years in the five-year
period ended March 31, 1998.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $1.00 $1.00 $1.00 $1.00 $1.00
- ------------------------------ ------- ------- ------- ------- -------
Income from investment
operations:
Net investment income 0.03 0.03 0.03 0.03 0.02
- ------------------------------ ------- ------- ------- ------- -------
Less distributions:
Dividends from net investment
income (0.03) (0.03) (0.03) (0.03) (0.02)
- ------------------------------ ------- ------- ------- ------- -------
Net asset value, end of period $1.00 $1.00 $1.00 $1.00 $1.00
============================== ======= ======= ======= ======= =======
Total return 3.29% 3.07% 3.41% 2.80% 2.07%
============================== ======= ======= ======= ======= =======
Ratios/supplemental data:
Net assets, end of period
(000s omitted) $80,462 $37,544 $35,139 $29,286 $16,601
============================== ======= ======= ======= ======= =======
Ratio of expenses to average
net assets(a) 0.45%(b) 0.45% 0.45% 0.45% 0.45%
============================== ======= ======= ======= ======= =======
Ratio of net investment income
to average net assets(c) 3.24%(b) 3.02% 3.35% 2.89% 2.05%
============================== ======= ======= ======= ======= =======
</TABLE>
(a) After fee waivers and/or expense reimbursements. Ratios of expenses to
average net assets prior to fee waivers and/or expense reimbursements were
0.77%, 0.83%, 0.76%, 1.17% and 1.15% for the periods 1998-1994,
respectively.
(b) Ratios are based on average net assets of $54,089,253.
(c) After fee waivers and/or expense reimbursements. Ratios of net investment
income to average net assets prior to fee waivers and/or expense
reimbursements were 2.92%, 2.65%, 3.04%, 2.17% and 1.35% for the periods
1998-1994, respectively.
FS-21
