<PAGE>
LOGO
FLAG INVESTORS
CASH RESERVE PRIME SHARES
(Class A and Class B Shares)
Alex. Brown Cash Reserve Fund, Inc. (the "Fund") is a money market fund
designed to seek as high a level of current income as is consistent with
preservation of capital and liquidity.
This Prospectus relates to the Flag Investors Cash Reserve Prime
Shares--Class A and Class B (the "Flag Investors Shares") of the Prime Series
of the Fund. Flag Investors Shares are available through Alex. Brown & Sons
Incorporated ("Alex. Brown") as well as Participating Dealers and Shareholder
Servicing Agents. However, Flag Investors Class B Shares are available only
through the exchange of Class B shares of other funds in the Flag Investors
family of funds. (See "How to Invest in the Fund.")
The Fund's Statement of Additional Information and separate prospectuses
concerning the other Series and classes of shares of the Fund may be obtained
without charge from Alex. Brown, P.O. Box 515, Baltimore, Maryland 21203 or
any securities dealer that has entered into a dealer agreement with Alex.
Brown with respect to such other Series or classes.
This Prospectus sets forth basic information that investors should know
about the Flag Investors Shares prior to investing and should be read and
retained for future reference. A Statement of Additional Information dated
August 1, 1996 has been filed with the Securities and Exchange Commission
(the "SEC") and is hereby incorporated by reference. It is available upon
request and without charge by calling the Fund at (800) 553-8080.
For current yield information and for purchase and redemption information,
call your investment representative or (800) 553-8080.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE UNITED STATES
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE PRIME SERIES WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK. THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
LOGO
The date of this Prospectus is August 1, 1996.
<PAGE>
FLAG INVESTORS
CASH RESERVE PRIME SHARES
(Class A and Class B Shares)
135 East Baltimore Street
Baltimore, Maryland 21202
TABLE OF CONTENTS
------
Page
1. Fund Expenses .................. 2
2. Financial Highlights ........... 3
3. Investment Program ............. 6
4. Investment Restrictions ........ 9
5. How to Invest in the Fund ...... 9
6. How to Redeem Shares ........... 15
7. Telephone Transactions ......... 16
8. Dividends and Taxes ............ 17
9. Management of the Fund ......... 18
10. Investment Advisor ............. 19
11. Distributor .................... 20
12. Custodian, Transfer Agent and
Accounting Services ............ 21
13. Current Yield .................. 21
14. General Information ............ 22
No person has been authorized to give any information or to make
representations not contained in this Prospectus in connection with any
offering made by this Prospectus and, if given or made, such information must
not be relied upon as having been authorized by the Fund or its distributor.
This Prospectus does not constitute an offering by the Fund or by its
distributor in any jurisdiction in which such offering may not lawfully be
made. Shares may be offered only to residents of those states in which such
shares are eligible for purchase.
1
<PAGE>
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1. Fund Expenses
.............................................................................
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
FLAG INVESTORS FLAG INVESTORS
CLASS A CLASS B
SHARES SHARES
----------------------------------------------------------- ------------------ ------------------
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases ................. None* None
Maximum Sales Charge Imposed on Reinvested Dividends ...... None None
Maximum Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, whichever is lower) ........ None* 4.00%**
</TABLE>
ANNUAL FUND OPERATING EXPENSES:
(as a percentage of average daily net assets)
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<TABLE>
<CAPTION>
<S> <C> <C>
Management Fees ......................................... .27% .27%
12b-1 Fees .............................................. .25% .75%
Other Expenses (including a .25% shareholder servicing fee
for Flag Investors Class B Shares) ..................... .10% .35%***
------ ---------
Total Operating Expenses ................................ .62% 1.37%
====== =========
</TABLE>
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* Flag Investors Class A Shares are not subject to a sales charge, however,
shareholders of other Flag Investors funds who exchange their Class A
shares of such funds for Flag Investors Class A Shares will retain
liability for any contingent deferred sales charge due on such shares
upon redemption. (See "How to Invest in the Fund -- Purchases by
Exchange.")
** A declining contingent deferred sales charge will be imposed on
redemptions of Flag Investors Class B Shares made within six years of
purchase. Flag Investors Class B Shares will automatically convert to
Flag Investors Class A Shares six years after purchase. (See "How to
Invest in the Fund -- Flag Investors Class B Shares.")
*** A portion of the shareholder servicing fee is allocated to member firms
of the National Association of Securities Dealers, Inc. and qualified
banks for continued personal service by such members to investors in Flag
Investors Class B Shares, such as responding to shareholder inquiries,
quoting net asset values, providing current marketing materials and
attending to other shareholder matters.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Example:
You 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: 1 year 3 years 5 years 10 years
- ----------------------------------------------------------------------------------------------------------
Flag Investors Class A Shares ................ $ 6 $20 $35 $ 80
Flag Investors Class B Shares ................ $54 $74 $98 $132*
- ----------------------------------------------------------------------------------------------------------
You would pay the following expenses on the same
investment, assuming no redemption: 1 year 3 years 5 years 10 years
- ----------------------------------------------------------------------------------------------------------
Flag Investors Class B Shares ................ $14 $44 $78 $132*
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* Expenses assume that Class B Shares are converted to Class A Shares at the
end of six years. Therefore, the expense figures assume six years of Class
B expenses and four years of Class A expenses.
The Example shown in the table above should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown.
2
<PAGE>
The purpose of the foregoing table is to describe the various costs and
expenses that an investor in Flag Investors Shares may bear directly or
indirectly. A person who purchases Flag Investors Shares through a financial
institution may be charged separate fees by the financial institution. (For
more complete descriptions of the various costs and expenses, see "How to
Invest in the Fund--Offering Price," "Investment Advisor and Sub-Advisor"
and "Distributor.")
The percentages shown above expressing Annual Fund Operating Expenses are
restated using current rather than historical expenses. Actual expenses may be
greater or less than those shown. Due to the continuous nature of Rule 12b-1
fees, long-term shareholders of the Fund may pay more than the equivalent of the
maximum front-end sales charges permitted by the Rules of Fair Practice of the
National Association of Securities Dealers, Inc.
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2. Financial Highlights
...............................................................................
The financial highlights included in this table are a part of the Fund's
financial statements for the Prime Series for the indicated fiscal periods
that have been audited by the Fund's independent accountants. The financial
statements and financial highlights for the fiscal year ended March 31, 1996
and the report of the Fund's independent accountants thereon are included in
the Statement of Additional Information which can be obtained at no charge by
calling the Fund at (800) 767-FLAG.
3
<PAGE>
PRIME SERIES (INCLUDING FLAG INVESTORS CLASS A SHARES((1))
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
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<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------------------------------------------------------
1996(1) 1995(1) 1994(1) 1993(1)
----------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
----------------- -------------- -------------- --------------
Income from Investment
Operations:
Net investment income and
short-term gains 0.0524 0.0442 0.0262 0.0295
Less Distributions:
Dividends from net
investment income and
short-term gains (0.0524) (0.0442) (0.0262) (0.0295)
Net asset value at end of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00
================= ============== ============== ==============
Total Return ** 5.36% 4.51% 2.65% 2.99%
Ratios to Average Net
Assets:
Expenses 0.60% 0.61% 0.62% 0.63%
Net investment income 5.25% 4.46% 2.62% 2.95%
Supplemental Data:
Net assets at end of
period $2,392,658,047(2) $ 1,479,806,435 $ 1,368,451,627 $1,481,103,834
Number of shares
outstanding at end of
period 2,392,661,216 1,479,804,186 1,368,449,549 1,481,101,756
</TABLE>
4
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
For the
eleven
months
ended
Year Ended March 31, March 31, Year Ended April 30,
------------------------------------------------ -------------- ----------------------------
1992(1) 1991(1) 1990(1) 1989+(1) 1988 1987
-------------- -------------- -------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------- -------------- -------------- -------------- ------------ ------------
Income from Investment
Operations:
Net investment income and
short-term gains 0.0485 0.0734 0.0846 0.0712 0.0647 0.0572
Less Distributions:
Dividends from net
investment income and
short- term gains (0.0485) (0.0734) (0.0846) (0.0712) (0.0647) (0.0572)
-------------- -------------- -------------- -------------- ------------ ------------
Net asset value at end of
period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============== ============== ============= ============== ============ ============
Total Return ** 4.96% 7.59% 8.80% 8.01%* 6.67% 5.87%
Ratios to Average Net
Assets:
Expenses 0.61% 0.59% 0.52% 0.54%* 0.52% 0.55%
Net investment income 4.84% 7.31% 8.42% 7.81%* 6.46% 5.71%
Supplemental Data:
Net assets at end of
period $1,512,362,510 $1,295,888,161 $1,312,276,151 $1,084,793,157 $874,051,953 $831,784,041
Number of shares
outstanding at end of
period 1,512,360,432 1,295,888,161 1,312,272,415 1,084,789,421 874,047,336 831,779,424
</TABLE>
- ------
*Annualized.
**Total return represents aggregate total return for the periods indicated
and does not reflect any applicable sales charges.
+The Fund's fiscal year-end was changed to March 31.
(1) Per share information and ratios of the Flag Investors Class A Shares are
identical to the Prime Shares since January 5, 1989 (date Flag Investors
Class A Shares commenced operations).
(2) Net assets consist of: Prime Shares -- $2,386,216 and Flag Investors
Class A Shares -- $5,976,831.
5
<PAGE>
PRIME SERIES (FLAG INVESTORS CLASS B SHARES)
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
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April 3, 1995*
through
March 31, 1996
--------------
Per Share Operating Performance:
Net asset value at beginning of period $1.00
------
Income from Investment Operations:
Net investment income and short-term gains 0.0361
Less Distributions:
Dividends from net investment income and short-term
gains (0.0361)
--------
Net asset value at end of period $1.00
========
Total Return**: 3.69%
Ratios to Average Daily Net Assets:
Expenses 1.38%
Net investment income 4.30%
Supplemental Data:
Net assets at end of period $10,200
Number of shares outstanding at end of period 10,200
- ------
*Commencement of operations.
**Annualized.
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3. Investment Program
The Fund is a money market fund which seeks as high a level of current
income as is consistent with preservation of capital and liquidity. This
Prospectus relates exclusively to the Flag Investors Class A and Class B
Shares, which are two of the five classes of shares currently offered by the
Prime Series.
...............................................................................
INVESTMENT OBJECTIVE
The investment objective of the Prime Series is to seek as high a level of
current income as is consistent with preservation of capital and liquidity.
The Prime Series endeavors to achieve its objective by investing in a
diversified portfolio of high quality money market instruments with
maturities of one year or less from the date of purchase.
...............................................................................
PORTFOLIO INVESTMENTS
The Prime Series seeks to achieve its objective by investing in domestic
money market instruments that satisfy strict credit quality standards and
6
<PAGE>
that mature within one year or less from the date of purchase. The Prime
Series may invest in U.S. Treasury obligations, obligations issued or
guaranteed by agencies or instrumentalities of the U.S. Government and a
broad range of bank and commercial obligations that the investment advisor,
under guidelines established by the Board of Directors, believes present
minimal credit risk and that satisfy the criteria for such obligations
discussed below:
U.S. Treasury Obligations consisting of marketable securities and
instruments issued by the United States Treasury, including bills, notes,
bonds and other obligations.
Obligations of U.S. Government Agencies consisting of obligations issued
or guaranteed as to principal and interest by agencies or instrumentalities
of the U.S. Government. Some of these obligations are backed by the full
faith and credit of the U.S. Government (e.g., the Government National
Mortgage Association), others are supported by the issuing agency's right to
borrow from the U.S. Treasury (e.g., securities of Federal Home Loan Banks)
and still others are backed only by the credit of the instrumentality (e.g.,
the Federal National Mortgage Association).
Bank Instruments consisting mainly of certificates of deposit and bankers'
acceptances that (a) are issued by U.S. banks which satisfy applicable
quality standards; or (b) are fully insured as to principal and interest by
the Federal Deposit Insurance Corporation.
Commercial Instruments consisting of commercial paper and variable amount
master demand notes. Eligible commercial paper is limited to short-term
unsecured promissory notes issued by corporations which (i) are rated Prime-1
by Moody's Investors Service, Inc. ("Moody's") or A-1(+) or A-1 by Standard &
Poor's Ratings Group ("S&P"); or (ii) if not rated by Moody's or S&P, are of
comparable quality to Prime-1 or A-1(+) or A-1 instruments as determined by
the Fund's investment advisor; and (iii) are otherwise "Eligible Securities"
as defined in Rule 2a-7 under the Investment Company Act of 1940. Variable
amount master demand notes are unsecured demand notes that permit investment
of fluctuating amounts of money at variable rates of interest pursuant to
arrangements with issuers who meet the foregoing quality criteria. The
interest rate on a variable amount master demand note is periodically
redetermined according to a prescribed formula. Although there is no
secondary market in master demand notes, the payee may demand payment of the
principal amount of the note on relatively short notice. All master demand
notes acquired by the Prime Series will be payable within a prescribed notice
period not to exceed seven days. (See the Statement of Additional Information
for information with respect to commercial paper and bond ratings.)
7
<PAGE>
The Prime Series may enter into the following arrangements:
Repurchase Agreements under which the purchaser (for example, the Prime
Series) acquires ownership of an obligation and the seller agrees, at the
time of the sale, to repurchase the obligation at a mutually agreed upon time
and price, thereby determining the yield during the purchaser's holding
period. Although the underlying collateral for repurchase agreements may have
maturities exceeding one year, repurchase agreements entered into by the
Prime Series will not have a stated maturity in excess of seven days from the
date of purchase. If the seller of a repurchase agreement fails to repurchase
the obligation in accordance with the terms of the agreement, the Prime
Series may incur a loss to the extent that the proceeds it realizes on the
sale of the underlying obligation are less than the repurchase price. In the
event of the insolvency of a seller that defaults on its repurchase
obligation, disposition of the securities underlying the repurchase agreement
could be delayed pending court or administrative action.
When-Issued Securities involving commitments by the Prime Series to
purchase portfolio securities on a "when-issued" basis. When-issued
securities are securities purchased for delivery beyond the normal settlement
date at a stated price and yield. The Prime Series will generally not pay for
such securities or start earning interest on them until they are received.
When-issued commitments will not be used for speculative purposes and will be
entered into only with the intention of actually acquiring the securities.
Reverse Repurchase Agreements involving the sale of money market
instruments held by the Prime Series, with an agreement to repurchase the
instrument at an agreed upon price and date. The Prime Series will employ
reverse repurchase agreements only when necessary to meet unanticipated net
redemptions so as to avoid liquidating other money market instruments during
unfavorable market conditions. The Prime Series will utilize reverse
repurchase agreements when the interest income to be earned from portfolio
investments which would otherwise have to be liquidated to meet redemptions
is greater than the interest expense incurred as a result of the reverse
repurchase transactions. Reverse repurchase agreements involve the risk that
the market value of securities retained by the Prime Series in lieu of
liquidation may decline below the repurchase price of the securities sold by
the Prime Series which it is obligated to repurchase.
8
<PAGE>
4. Investment Restrictions
The Prime Series' 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 which are set forth
below. The Prime Series will not:
(1) purchase securities of any one issuer (other than obligations of the U.S.
Government, its agencies or instrumentalities), if immediately after such
purchase more than 5% of the value of the Prime Series' assets would be
invested in such issuer;
(2) purchase any commercial paper or variable rate demand notes which would
cause more than 25% of the value of the Prime Series' total assets at the
time of such purchase to be invested in the securities of one or more
issuers conducting their principal business activities in the same
industry;
(3) borrow money or issue senior securities, except that the Prime Series may
(a) borrow money from banks for temporary purposes in amounts up to 10%
of the value of the Prime Series' total assets at the time of borrowing,
provided that any such borrowings will be repaid prior to the purchase of
additional portfolio securities by the Prime Series, (b) enter into
reverse repurchase agreements in accordance with its investment program,
and (c) enter into commitments to purchase securities in accordance with
the Prime Series' investment program, which commitments may be considered
the issuance of senior securities; or
(4) lend money or securities except to the extent that the Prime Series'
investments may be considered loans.
The Prime Series' investment objective as described under "Investment
Objective" and the foregoing restrictions are matters of fundamental policy
and may not be changed without the affirmative vote of a majority of the
outstanding shares of the Prime Series.
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5. How to Invest in the Fund
...............................................................................
GENERAL INFORMATION ON PURCHASES
Flag Investors Class A Shares may be purchased from Alex. Brown, 135 East
Baltimore Street, Baltimore, Maryland 21202, through any securities dealer
which has entered into a dealer agreement with Alex. Brown
9
<PAGE>
("Participating Dealers") or through any financial institution which has
entered into a Shareholder Servicing Agreement with the Fund ("Shareholder
Servicing Agents"). Flag Investors Class A Shares may also be purchased by
completing the Application Form attached to this Prospectus and returning it,
together with payment of the purchase price, to the address shown on the
Application Form. In addition, Flag Investors Class A Shares may be purchased
through the exchange of Class A Shares of other funds in the Flag Investors
family of funds (see "Purchases by Exchange" below).
Flag Investors Class B Shares may be purchased only through the exchange
of Class B shares of other funds in the Flag Investors family of funds (see
"Purchases by Exchange" below). Exchanges may be effected through Alex. Brown
or any Participating Dealer or Shareholder Servicing Agent.
Purchase orders for Flag Investors Shares will be executed at a per share
price equal to the net asset value next determined after receipt of a
completed purchase order for such shares (the "Offering Price").
The minimum initial investment in Flag Investors Class A Shares is $2,000,
except that the minimum initial investment for shareholders of any other Flag
Investors fund or class is $500 and the minimum initial investment for
participants in the Flag Investors Class A Shares' Automatic Investing Plan
is $250. The minimum initial investment in Flag Investors Class B Shares,
which are available only through exchange, is $500. Each subsequent
investment must be at least $100 per class, except that the minimum
subsequent investment under the Flag Investors Class A Shares' Automatic
Investing Plan is $250 for quarterly investments and $100 for monthly
investments. (See "Purchases Through Automatic Investing Plan" below.) There
is no minimum investment requirement for qualified retirement plans (i.e.,
401(k) plans or pension and profit sharing plans). IRA accounts are, however,
subject to the $2,000 minimum initial investment requirement. There is no
minimum investment requirement for spousal IRA accounts. Orders for purchases
of Flag Investors Shares are accepted on any day on which PNC Bank, National
Association ("PNC"), the Fund's custodian, and the New York Stock Exchange
are open for business (a "Business Day"). It is expected that during the next
twelve months, PNC and/or the New York Stock Exchange will be closed on
Saturdays and Sundays and on New Year's Day, Martin Luther King, Jr.'s
Birthday, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Columbus Day, Veterans' Day, Thanksgiving Day and Christmas Day.
An order to purchase Flag Investors Shares is effective only when Alex.
Brown, a Participating Dealer, or a Shareholder Servicing Agent receives an
10
<PAGE>
order in proper form and federal funds are available to the Fund for
investment. The Fund reserves the right to reject any order for purchase of
Flag Investors Shares. Flag Investors Shares are purchased or exchanged at
the net asset value next determined after acceptance of the order.
The net asset value of Flag Investors Shares is determined once daily as
of 12:00 noon (Eastern Time) on each Business Day. Because the Prime Series
uses the amortized cost method of valuing its portfolio securities and rounds
the per share net asset value of shares, it is anticipated that the net asset
value of Flag Investors Shares will remain constant at $1.00 per share, but
there can be no assurance that this objective can be met. Share purchases
effected before 12:00 noon (Eastern Time) begin to earn dividends on the same
Business Day. Share purchases received after 12:00 noon (Eastern Time) begin
to earn dividends on the following day. Payments transmitted by check are
normally converted into federal funds within two Business Days and are
accepted subject to collection at full face amount. If purchases of Flag
Investors Shares are made by check, redemption of those shares may be
restricted. (See "How to Redeem Shares.")
- -------------------------------------------------------------------------------
OFFERING PRICE
Flag Investors Shares may be purchased or exchanged through Alex. Brown,
Participating Dealers or Shareholder Servicing Agents at net asset value.
Flag Investors Class B Shares are subject to a contingent deferred sales
charge described below.
- -------------------------------------------------------------------------------
FLAG INVESTORS CLASS B SHARES
A contingent deferred sales charge will be imposed on certain Flag
Investors Class B Shares redeemed within six years of the initial purchase of
the original Class B shares tendered for exchange (the "Initial Purchase").
The charge is assessed on an amount equal to the lesser of the then-current
market value of the Flag Investors Class B Shares redeemed or the total cost
of such shares. Accordingly, even if the market value increases, the
contingent deferred sales charge will not be applied to dollar amounts
representing appreciation or reinvestment of dividends or capital gains
distributions.
In determining whether the contingent deferred sales charge is applicable
to a redemption, the calculation is made in the manner that results in the
lowest possible rate. Therefore, it is assumed that the redemption is first
of any Flag Investors Class B Shares in the shareholder's account that rep-
11
<PAGE>
resent reinvested dividends and distributions and second of Flag Investors
Class B Shares held the longest during the six year period. The amount of the
contingent deferred sales charge, if any, will vary depending on the number
of years from the time of payment for the Initial Purchase until the
redemption of the Flag Investors Class B Shares (the "holding period"). For
purposes of determining this holding period, all payments during a month are
aggregated and deemed to have been made on the first day of the month. The
following table sets forth the rates of the contingent deferred sales charge.
Contingent Deferred Sales Charge
Year Since Initial Purchase (as a percentage of the dollar amount
Payment was Made subject to charge)
- ---------------------------------------------------------------------------
First ......................... 4.0%
Second ........................ 4.0%
Third ......................... 3.0%
Fourth ........................ 3.0%
Fifth ......................... 2.0%
Sixth ......................... 1.0%
Thereafter .................... None*
- ---------------------------------------------------------------------------
* As described more fully below, Flag Investors Class B Shares automatically
convert to Flag Investors Class A Shares six years after the beginning of
the calendar month in which the purchase order is accepted.
There are other classes of Alex. Brown Cash Reserve Fund, Inc. that may be
purchased and redeemed without the payment of any sales charge.
Waiver of Contingent Deferred Sales Charge. The contingent deferred sales
charge will be waived on the redemption of Flag Investors Class B Shares (i)
following the death or initial determination of disability (as defined in the
Internal Revenue Code of 1986, as amended) of a shareholder; or (ii) to the
extent that the redemption represents a minimum required distribution from an
individual retirement account or other retirement plan to a shareholder who
has attained the age of 70 1/2 . The waiver with respect to (i) above is only
applicable in cases where the shareholder account is registered (a) in the
name of an individual person, (b) as a joint tenancy with rights of
survivorship, (c) as community property or (d) in the name of a minor child
under the Uniform Gifts or Uniform Transfers to Minors Act. A shareholder, or
his or her representative, must notify the Fund's transfer agent (the
"Transfer Agent") prior to the time of redemption if such circumstances exist
and the shareholder is eligible for this waiver. For information on the
imposition and waiver of the contingent deferred sales charge, contact the
Transfer Agent at (800) 553-8080.
Automatic Conversion to Class A Shares. Six years after the beginning of
the calendar month in which the Initial Purchase is accepted, Flag Investors
12
<PAGE>
Class B Shares will automatically convert to Flag Investors Class A Shares
and will no longer be subject to the higher distribution and service fees.
Such conversion will be on the basis of the relative net asset values of the
two classes, without the imposition of any sales load, fee or other charge.
The conversion is not a taxable event to the shareholder.
For purposes of conversion to Flag Investors Class A Shares, shares
received as dividends and other distributions paid on Flag Investors Class B
Shares in the shareholder's account will be considered to be held in a
separate sub-account. Each time any Flag Investors Class B Shares in the
shareholder's account (other than those in the sub-account) convert to Flag
Investors Class A Shares, an equal pro rata portion of the Flag Investors
Class B Shares in the sub-account will also convert to Flag Investors Class A
Shares.
...............................................................................
SYSTEMATIC PURCHASE PLAN
The Fund has established a Systematic Purchase Plan pursuant to which
shareholders may elect to have a predetermined amount of their Flag Investors
Class A Shares redeemed, on a regular basis (for example, monthly), and the
proceeds of such redemption used to purchase (at net asset value plus any
applicable front-end sales charge) shares of any other fund or funds in the
Flag Investors family of mutual funds selected in advance by the shareholder.
Shareholders may establish a Systematic Purchase Plan at any time by
completing a Systematic Purchase Plan Participation and Authorization Form
and delivering or mailing the completed form to Alex. Brown, a Participating
Dealer or a Shareholder Servicing Agent. For more information and to obtain a
form, shareholders should contact Alex. Brown, a Participating Dealer or a
Shareholder Servicing Agent.
...............................................................................
PURCHASES BY EXCHANGE
As permitted pursuant to any rule, regulation or order promulgated by the
SEC, shareholders of other Flag Investors funds may exchange their shares of
those funds for an equal dollar amount of Flag Investors Shares of the same
class. When a shareholder acquires Flag Investors Shares through an exchange
from shares of another fund in the Flag Investors family of funds, the Fund
will combine the period for which the original shares were held prior to the
exchange with the holding period of the shares acquired in the exchange for
purposes of determining what, if any, contingent deferred sales charge is
applicable upon redemption of the acquired shares.
13
<PAGE>
Flag Investors Class A Shares may be exchanged for Class A shares of other
Flag Investors funds upon payment of the applicable sales charges. An investor
that has paid a sales charge on Class A shares may thereafter exchange those
Class A shares for Class A shares of other Flag Investors Funds with i) a higher
sales charge, upon payment of an incremental sales charge or ii) an equal or
lower sales charge, at net asset value (i.e., without a sales charge). In
addition, Flag Investors Class A Shares may be exchanged for Class B shares of
other Flag Investors funds at net asset value, subject thereafter to any
contingent deferred sales charge.
The net asset value of shares purchased and redeemed in an exchange
request received on a Business Day will be determined on the same day,
provided that the exchange request is received prior to 12:00 noon (Eastern
Time). Exchange requests received after 12:00 noon (Eastern Time) will be
effected on the next Business Day.
The exchange privilege with respect to other Flag Investors funds may also
be exercised by telephone. (See "Telephone Transactions" below.)
The exchange privilege may be exercised only in those states where the
class of shares of such other funds may legally be sold. Investors should
receive and read the applicable prospectus prior to tendering shares for
exchange. The Fund may modify or terminate this offer of exchange at any time
on 60 days' prior written notice to shareholders.
...............................................................................
PURCHASES THROUGH AUTOMATIC INVESTING PLAN
Shareholders may purchase Flag Investors Class A Shares regularly by means
of an Automatic Investing Plan with a pre-authorized check drawn on their
checking accounts. Under this plan, the shareholder may elect to have a
specified amount invested monthly or quarterly in Flag Investors Class A
Shares. The amount specified by the shareholder will be withdrawn from the
shareholder's checking account using the preauthorized check. This amount
will be invested in Flag Investors Class A Shares at net asset value.
Participation in the Automatic Investing Plan may be discontinued either by
the Fund or the shareholder upon 30 days' prior written notice to the other
party. A shareholder who wishes to enroll in the Automatic Investing Plan or
who wishes to obtain additional purchase information may do so by completing
the appropriate section of the Application Form attached to this Prospectus.
14
<PAGE>
...............................................................................
PURCHASES THROUGH DIVIDEND REINVESTMENT
Dividends are declared daily and reinvested monthly in the form of
additional full and fractional Flag Investors Shares of the same class at net
asset value, unless a shareholder has elected on his account application to
have dividends paid in cash.
Alternatively, shareholders may have their distributions invested in
shares of other funds in the Flag Investors family of funds. Shareholders who
are interested in this option should call (800) 553-8080 for additional
information.
Reinvestments of distributions will be effected without a sales charge.
- -------------------------------------------------------------------------------
6. How to Redeem Shares
Shareholders may redeem all or part of their Flag Investors Shares on any
Business Day by transmitting a redemption order through Alex. Brown, a
Participating Dealer, a Shareholder Servicing Agent or by regular or express
mail to the Transfer Agent. Shareholders may also redeem Flag Investors
Shares by telephone (in amounts up to $50,000). (See "Telephone Transactions"
below.) Redemption orders received after 12:00 noon (Eastern Time) will be
effected the following Business Day at the net asset value per share (reduced
by any applicable contingent deferred sales charge) next determined after
receipt of the order. If the shares to be redeemed were purchased by check,
the Fund reserves the right not to honor the redemption request until the
check has cleared, and redemption of such shares by wire, by check redemption
or by telephone will be restricted for a period of fifteen calendar days
unless the proceeds of redemption are used to purchase other securities
through Alex. Brown. Exchange privileges terminate upon redemption of shares.
Payment for redeemed shares will be made by check and will ordinarily be
mailed within seven days after receipt by Alex. Brown, a Participating
Dealer, a Shareholder Servicing Agent or the Transfer Agent of a duly
authorized telephone redemption request or of a redemption request fully
completed and, as applicable, accompanied by the documents described below:
(a) A letter of instructions, specifying the shareholder's account number
with a Participating Dealer, if applicable, and the number of shares or
dollar amount of Flag Investors Class A or Class B Shares to be redeemed,
signed by all owners of the shares in the exact names in which their
account is maintained;
15
<PAGE>
(b) For redemptions in excess of $50,000, a guarantee of the signature of
each registered owner by a member of the Federal Deposit Insurance
Corporation, a trust company, broker, dealer, credit union (if authorized
under state law), securities exchange or association, clearing agency or
savings association; and
(c) Any additional documents required for redemption by corporations,
partnerships, trusts or fiduciaries.
Dividends payable up to the date of redemption on redeemed shares will be
paid on the next dividend payable date. If all Flag Investors Shares in an
account have been redeemed on the dividend payable date, the dividend will be
remitted in cash to the shareholder.
The Board of Directors may authorize redemption of all Flag Investors
Shares in an account which has been reduced by the shareholder to less than
$500, if the Board of Directors determines that it is necessary to reduce
disproportionately burdensome expenses of servicing small accounts or is
otherwise in the best interest of the Fund. At least 60 days' prior notice
will be given to allow a shareholder to make an additional minimum investment
set by the Board of Directors to avoid redemption.
- -------------------------------------------------------------------------------
7. Telephone Transactions
Shareholders may exercise the exchange privilege with respect to other
Flag Investors funds, or redeem Flag Investors Shares of either class in
amounts up to $50,000, by notifying the Transfer Agent by telephone at (800)
553-8080 on any Business Day between the hours of 8:30 a.m. and 5:30 p.m.
(Eastern Time) or by regular or express mail to its address listed under
"Custodian, Transfer Agent and Accounting Services." Telephone transaction
privileges are automatic. However, shareholders may specifically request that
no telephone redemptions or exchanges be accepted for their accounts. This
election may be made on the Application Form or at any time thereafter by
completing and returning appropriate documentation supplied by the Transfer
Agent.
A telephone exchange or redemption placed by 12:00 noon (Eastern Time) is
effective that day. Telephone orders placed after 12:00 noon (Eastern Time)
will be effected on the following Business Day at the net asset value (less
any applicable contingent deferred sales charge on redemptions) next
determined after receipt of the order.
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine.
16
<PAGE>
These procedures include requiring the investor to provide certain personal
identification information at the time an account is opened and prior to
effecting each transaction requested by telephone. In addition, all telephone
transaction requests will be recorded and investors may be required to
provide additional telecopied instructions of such transaction requests. The
Fund or the Transfer Agent may be liable for any losses due to unauthorized
or fraudulent telephone instructions if either of them does not employ these
procedures. If these procedures are followed, neither the Fund nor the
Transfer Agent will be responsible for any loss, liability, cost or expense
for following instructions received by telephone that either of them
reasonably believes to be genuine. During periods of extreme economic or
market changes, shareholders may experience difficulty in effecting telephone
transactions. In such event, requests should be made by regular or express
mail. (See "How to Invest in the Fund -- Purchases by Exchange" and "How to
Redeem Shares.")
- -------------------------------------------------------------------------------
8. Dividends and Taxes
...............................................................................
DIVIDENDS
All of the net income earned on the Flag Investors Shares is normally
declared as dividends daily to the respective shareholders of record of such
shares. Dividends on Flag Investors Shares are normally payable on the first
day that a purchase or exchange order is effective but not on the date that a
redemption order is effective.
...............................................................................
TAXES
The following is only a general summary of certain federal income tax
considerations affecting the Fund and the shareholders. No attempt is made to
present a detailed explanation of the tax treatment of the Fund or the
shareholders, and the discussion herein is not intended as a substitute for
careful tax planning.
The following summary is based on current tax laws and regulations, which
may be changed by legislative, judicial or administrative action. The
Statement of Additional Information sets forth further information regarding
taxes.
17
<PAGE>
The Prime Series has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. As long
as the Prime Series qualifies for this tax treatment, it will not be required
to pay federal income taxes on amounts distributed to shareholders; but
shareholders, unless otherwise exempt, will pay taxes on the amounts so
distributed.
Distributions of net investment company taxable income (generally, net
investment income plus short-term capital gains, if any) are taxed to
shareholders as ordinary income. Although the Prime Series does not expect to
realize any long-term capital gains, any distributions of net capital gains
(the excess of net long-term capital gains over net short-term capital
losses) will be taxable to shareholders as long-term capital gains,
regardless of the length of time a shareholder has held Flag Investors
Shares. Distributions from the Fund will not be eligible for the dividends
received deduction otherwise available for corporate shareholders.
Ordinarily, shareholders will include all dividends declared by a Series in
the year of payment. However, dividends declared payable to shareholders of
record in December of one year, but paid in January of the following year, will
be deemed for tax purposes to have been received by the shareholders and paid by
the Prime Series on December 31 of the year in which the dividends were
declared.
The Fund intends to make sufficient distributions of its ordinary income
and capital gain net income prior to the end of each calendar year to avoid
liability for federal excise tax.
The sale, exchange or redemption of Flag Investors Shares is a taxable
event for the shareholder. 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 own tax advisors concerning the application
of state, local or other taxes to investments in the Prime Series, which may
differ from the federal income tax consequences described above.
- -------------------------------------------------------------------------------
9. Management of the Fund
The overall business and affairs of the Fund are managed by its Board of
Directors. The Board of Directors approves all significant agreements between
the Fund and persons or companies furnishing services to the Fund, including
the Fund's agreements with its investment advisor, sub-advisor, distributor,
custodian and transfer agent. The day-to-day operations
18
<PAGE>
of the Fund are delegated to its officers, to Alex. Brown and to Investment
Company Capital Corp. ("ICC"), the Fund's investment advisor, subject always to
the investment objective and policies of each Series of the Fund and to general
supervision by the Fund's Board of Directors. Alex. Brown and ICC also furnish
or procure on behalf of the Fund all services necessary to the proper conduct of
the Fund's business. Four Directors and all of the officers of the Fund are
officers or employees of Alex. Brown or ICC. A majority of the Board of
Directors of the Fund have no affiliation with Alex. Brown or ICC.
The Fund's Directors and officers are as follows:
<TABLE>
<S> <C> <C> <C>
* W. James Price Chairman Edward J. Veilleux Executive Vice President
* Richard T. Hale President and Director Brian C. Nelson Vice President
* Charles W. Cole, Jr. Director Paul D. Corbin Vice President
James J. Cunnane Director M. Elliott Randolph, Jr. Vice President
John F. Kroeger Director Monica M. Hausner Vice President
Louis E. Levy Director Joseph A. Finelli Treasurer
Eugene J. McDonald Director Edward J. Stoken Secretary
Rebecca W. Rimel Director Laurie D. DePrine Assistant Secretary
* Truman T. Semans Director
Carl W. Vogt Director
Harry Woolf Director
</TABLE>
- ----------
* Messrs. Price, Hale, Cole and Semans are "interested persons" of the Fund
Director within the meaning of Section 2(a)(19) under the Investment Company
Act of 1940.
- -------------------------------------------------------------------------------
10. Investment Advisor
Investment Company Capital Corp., 135 East Baltimore Street, Baltimore,
Maryland 21202, an indirect subsidiary of Alex. Brown Incorporated (described
below), was organized in 1987 and acts as investment advisor to the Prime
Series. ICC supervises and manages the Prime Series' operations and generally
provides management and administrative services for the Prime Series. In
addition, ICC is responsible for managing the Prime Series' investments. ICC
is also investment advisor to, and Alex. Brown acts as distributor for,
several funds in the Flag Investors family of funds which, as of May 31,
1996, had net assets of approximately $1.1 billion.
Pursuant to a new advisory agreement, which became effective August 22,
1995, ICC is entitled to receive a fee from the Fund, calculated daily and
payable monthly, at the following annual rates based upon the Fund's
aggregate average daily net assets: .30% of the first $500 million, .26% of
the next $500 million, .25% of the next $500 million, .24% of the next $1
billion, .23% of the next $1 billion and .22% of that portion in excess of
$3.5 billion. The Prime Series pays its share of the fee based on the
proportion its net assets bear to those of the Fund. In addition, ICC is
entitled to
19
<PAGE>
receive an additional fee with respect to the Prime Series, calculated daily
and paid monthly, at the annual rate of .02% of the Prime Series' average
daily net assets. ICC may, from time to time, voluntarily waive a portion of
its advisory fee with respect to the Prime Series to preserve or enhance the
performance of the Series. As compensation for providing investment advisory
services to the Prime Series for the period August 22, 1995 to March 31,
1996, ICC received an annualized advisory fee at the rate of .27% of the
Prime Series' average daily net assets.
In the fiscal year ended March 31, 1996, the expenses borne by the Prime
Series, including the fees to ICC, amounted to .60% of the Prime Series'
average daily net assets.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Prime Series. (See "Custodian, Transfer
Agent and Accounting Services.")
- -------------------------------------------------------------------------------
11. Distributor
Alex. Brown serves as the exclusive distributor for the Flag Investors
Shares. Alex. Brown is an investment banking firm which offers a broad range
of investment services to individual, institutional, corporate and municipal
clients. It is a wholly-owned subsidiary of Alex. Brown Incorporated, which
has engaged directly and through subsidiaries and affiliates in the
investment business since 1800. Alex. Brown is a member of the New York Stock
Exchange and other leading securities exchanges. Headquartered in Baltimore,
Maryland, Alex. Brown has offices throughout the United States and, through
subsidiaries, maintains offices in London, England, Geneva, Switzerland and
Tokyo, Japan.
Pursuant to Distribution Agreements and Plans of Distribution in effect
for the Flag Investors Class A and Class B Shares, the Fund pays Alex. Brown
an annual distribution fee, paid monthly, equal to .25% of the Flag Investors
Class A Shares' average daily net assets and .75% of the Flag Investors Class
B Shares' average daily net assets. Alex. Brown may use a portion of this fee
to compensate its investment representatives for opening shareholder
accounts, processing investor purchases, exchanges and redemption orders,
responding to inquiries from Fund shareholders concerning the status of their
accounts and operations of the Fund, and communicating with the Fund and the
Transfer Agent on behalf of the Fund's shareholders. Alex. Brown may also
retain Shareholder Servicing Agents, including securities dealers, banks and
other financial institutions, to provide services to shareholders. Alex.
Brown bears all expenses associated with advertisements,
20
<PAGE>
promotional materials, sales literature and printing and mailing prospectuses
to prospective shareholders. Alex. Brown may retain, as profit, any amount of
the distribution fee that is not so expended. As compensation for
distributing the Flag Investors Class A Shares for the fiscal year ended
March 31, 1996, Alex. Brown received a fee equal to .25% and .75%,
respectively, of the Flag Investors Class A and Class B Shares' average daily
net assets.
Flag Investors Class B Shares are also subject to a shareholder servicing
fee at an annual rate of .25% of the average daily net assets of the Flag
Investors Class B Shares. This fee is used to compensate Alex. Brown,
Participating Dealers and Shareholder Servicing Agents for services provided
and expenses incurred in maintaining shareholder accounts, responding to
shareholder inquiries and providing information on their investments. As
compensation for providing shareholder servicing for the Flag Investors Class
B Shares for the fiscal year ended March 31, 1996, Alex. Brown received a
shareholder servicing fee equal to .25% of the Flag Investors Class B Shares'
average daily net assets.
Financial institutions that act as Shareholder Servicing Agents may impose
separate fees in connection with these services, and investors should review
this Prospectus in conjunction with any such institution's fee schedule. In
addition, these financial institutions may be required to register as dealers
pursuant to state securities laws.
- -------------------------------------------------------------------------------
12. Custodian, Transfer Agent and
Accounting Services
PNC, a national banking association with offices at Airport Business Center,
200 Stevens Drive, Lester, Pennsylvania 19113, acts as custodian for the Fund's
portfolio securities and cash. Investment Company Capital Corp., 135 East
Baltimore Street, Baltimore, Maryland 21202 (telephone: (800) 553-8080) is the
Fund's transfer and dividend disbursing agent and provides accounting services
to the Prime Series. As compensation for providing accounting services to the
Prime Series for the fiscal year ended March 31, 1996, ICC received a fee equal
to .01% of the Prime Series' average daily net assets. (See the Statement of
Additional Information.) ICC also serves as the Fund's investment advisor.
- -------------------------------------------------------------------------------
13. Current Yield
From time to time the Fund advertises the "yield" and "effective yield" of
a particular Series or class. Both figures are based on historical earnings
and
21
<PAGE>
are not intended to indicate future performance. The "yield" of a Series or
class refers to the income generated by an investment in that Series or class
over a seven-day period (which period will be stated in the advertisement).
This income is then "annualized," that is, the income earned in the period is
assumed to be earned every seven days over a 52-week period and is stated as
a percentage of the investment. The "effective yield" is calculated similarly
but when annualized, the income earned by the investment is assumed to be
reinvested in Flag Investors Class A or Class B Shares and thus compounded in
the course of a 52-week period. The effective yield will be slightly higher
than the yield because of the compounding effect of this assumed
reinvestment. Yield may vary between classes as a result of differences in
expenses. The yield for Flag Investors Class A or Class B Shares can be
obtained by calling the Fund at (410) 234-3737.
- -------------------------------------------------------------------------------
14. General Information
...............................................................................
DESCRIPTION OF SHARES
Shares of the Fund are divided into three series, each with a par value of
$.001 -- the Prime Series, the Treasury Series and the Tax-Free Series. Each of
the Series currently offers one or more classes, which classes differ from each
other principally in distribution fees, in some instances shareholder servicing
fees, and the method of distribution, which may affect performance. For
information regarding the other classes, please call 1-800-553-8080. Shares of
the Fund have equal rights with respect to voting, except that the holders of
shares of a particular Series or class will have the exclusive right to vote on
matters affecting only the rights of the holders of such Series or class. For
example, holders of a particular Series will have the exclusive right to vote on
any investment advisory agreement or investment restriction that relates only to
such Series. The holders of each Series have distinctive rights with respect to
dividends and redemption which are more fully described in this Prospectus. In
the event of dissolution or liquidation, holders of each Series will receive pro
rata, subject to the rights of creditors, (a) the proceeds of the sale of the
assets held in the respective Series, less (b) the liabilities of the Fund
attributable to the respective Series or allocated among all Series based on the
respective liquidation value of each Series.
There are no preemptive or conversion rights applicable to any of the
Fund's shares. The Fund's shares, when issued, will be fully paid and non-
22
<PAGE>
assessable. The Board of Directors may create additional series or classes of
Fund shares without shareholder approval.
...............................................................................
ANNUAL MEETINGS
Unless required under applicable Maryland law, the Fund does not expect to
hold annual meetings of shareholders. However, shareholders may remove
directors from office by votes cast at a meeting of shareholders or by
written consent. A meeting of shareholders may be called at the request of
the holders of 10% or more of the Fund's outstanding shares.
...............................................................................
REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The annual
financial statements are audited by the Fund's independent accountants,
Coopers & Lybrand L.L.P.
...............................................................................
FUND COUNSEL
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
...............................................................................
SHAREHOLDER INQUIRIES
Shareholders with inquiries concerning their shares should contact the
Transfer Agent at (800) 553-8080, Alex. Brown, or any Participating Dealer or
Shareholder Servicing Agent.
23
<PAGE>
FLAG INVESTORS CASH RESERVE PRIME CLASS A SHARES
NEW ACCOUNT APPLICATION
- -----------------------------------------------------------------------------
<TABLE>
<S> <C>
Make check payable to "Flag Investors Cash Reserve Prime For assistance in completing this application please call:
Class A Shares" and mail with this application to: 1-800-553-8080, Monday-Friday, 8:30 a.m. to 5:30 p.m. (Eastern Time).
Alex. Brown & Sons Incorporated/Flag Investors Funds To open an IRA account please call 1-800-767-3524 for an
P.O. Box 419663 IRA information kit.
Kansas City, MO 64141-6663
Attn: Flag Investors Cash Reserve Prime Class A Shares
</TABLE>
I wish to purchase Flag Investors Cash Reserve Prime Class A Shares in the
amount of $------.
The minimum initial purchase is $2,000, except that the minimum initial
purchase for shareholders of any other Flag Investors Fund or class is $500 and
the minimum initial purchase for participants in the Flag Investors Cash Reserve
Prime Class A Shares' Automatic Investing Plan is $250. Each subsequent purchase
requires a $100 minimum, except that the minimum subsequent purchase under the
Flag Investors Cash Reserve Prime Class A Shares' Automatic Investing Plan is
$250 for quarterly purchases and $100 for monthly purchases. The Fund reserves
the right not to accept checks for more than $50,000 that are not certified or
bank checks.
- -----------------------------------------------------------------------------
YOUR ACCOUNT REGISTRATION (PLEASE PRINT)
Existing Account No., if any:________________
<TABLE>
INDIVIDUAL OR JOINT TENANT GIFTS TO MINORS
<S> <C>
- ------------------------------------------------------------------------ -----------------------------------------------------
First Name Initial Last Name Custodian's Name (only one allowed by law)
- ------------------------------------------------------------------------ -----------------------------------------------------
Social Security Number Minor's Name (only one)
- ------------------------------------------------------------------------ -----------------------------------------------------
Joint Tenant Initial Last Name Social Security Number of Minor
under the Uniform Gifts to Minors Act
------------------
State of Residence
CORPORATIONS, TRUSTS, PARTNERSHIPS, ETC. MAILING ADDRESS
- ------------------------------------------------------------------------ -----------------------------------------------------
Name of Corporation, Trust or Partnership Street
- ------------------------------------------------------------------------ -----------------------------------------------------
Tax ID Number Date of Trust City State Zip
- ------------------------------------------------------------------------ -----------------------------------------------------
Name of Trustees (If to be included in the Registration) Daytime Phone
- ------------------------------------------------------------------------
For the Benefit of
</TABLE>
DISTRIBUTION OPTIONS
Please check appropriate boxes. If none of the options is selected, all
distributions will be reinvested in additional Flag Investors Class A Shares
at no sales charge.
Income Dividends Capital Gains
[ ] Reinvested in additional shares [ ] Reinvested in additional shares
[ ] Paid in Cash [ ] Paid in Cash
Call (800) 553-8080 for information about reinvesting your dividends in other
funds in the Flag Investors Family of Funds.
<PAGE>
AUTOMATIC INVESTING PLAN (OPTIONAL)
[ ] I authorize you as Agent for the Automatic Investing Plan to
automatically invest $------ in Flag Investors Class A Shares for me, on a
monthly or quarterly basis, on or about the 20th of each month or if
quarterly, the 20th of January, April, July and October, and to draw a bank
draft in payment of the investment against my checking account. (Bank drafts
may be drawn on commercial banks only.)
<TABLE>
<S> <C>
Minimum Initial Investment: $250 Please attach a voided check.
Subsequent Investment (check one):
[ ] Monthly ($100 minimum)
[ ] Quarterly ($250 minimum)
- ---------------------------------------- ------------------------------------
Bank Name Depositor's Signature Date
- ---------------------------------------- ------------------------------------
Existing Flag Investors Fund Account No., if any Depositor's Signature Date
(if joint acct., both must sign)
- --------------------------------------------------------------------------------------------
</TABLE>
TELEPHONE TRANSACTIONS
I understand that I will automatically have telephone redemption privileges
(for amounts up to $50,000) and telephone exchange privileges (with respect
to other Flag Investors Funds) unless I mark one or both of the boxes below.
No, I/We do not want
[ ] Telephone redemption privileges
[ ] Telephone exchange privileges
Redemptions effected by telephone will be mailed to the address of record. If
you would prefer redemptions mailed to a pre-designated bank account, please
provide the following information:
Bank:______________________________ Bank Account No.: ________________________
Address:___________________________ Bank Account Name: _______________________
SIGNATURE AND TAXPAYER CERTIFICATION
I have received a copy of the Fund's prospectus dated August 1, 1996. Unless
the box below is checked, I certify under penalties of perjury, (1) that the
number shown on this form is my correct taxpayer identification number and
(2) that I am not subject to backup withholding as a result of a failure to
report all interest or dividends, or the Internal Revenue Service has
notified me that I am no longer subject to backup withholding. [ ] Check here
if you are subject to backup withholding.
If a non-resident alien, please indicate country of residence:
- -----------------------------------------------------------------------------
I acknowledge that the telephone redemption and exchange privileges are
automatic and will be effected as described in the Fund's current prospectus
(see "Telephone Transactions"). I also acknowledge that I may bear the risk
of loss in the event of fraudulent use of such privileges. If I do not want
telephone redemption or exchange privileges, I have so indicated on this
Application.
- ------------------------------- -----------------------------------------------
Signature Date Signature (if joint acct., both must sign) Date
For Dealer Use Only
Dealer's Name:___________________________ Dealer Code: _______________________
Dealer's Address:________________________ Branch Code: _______________________
________________________
Representative:__________________________ Rep. No.: __________________________
<PAGE>
ALEX. BROWN CASH RESERVE FUND, INC.
P.O. Box 17250
Baltimore, Maryland 21203
- ------------------------
Third Class Mail
U.S. POSTAGE
PAID
Baltimore, M.D.
Permit No. 8614
- -----------------------
LOGO
ALEX. BROWN
CASH RESERVE
FUND, INC.
PRIME SERIES
TREASURY SERIES
TAX-FREE SERIES
Prospectus
& Application
August 1, 1996
<PAGE>
ALEX. BROWN CASH RESERVE FUND, INC.
P.O. Box 17250
Baltimore, Maryland 21203
Alex. Brown Cash Reserve Fund, Inc. (the "Fund") is a money market fund
designed for individuals, businesses, institutions and fiduciaries which
seek as high a level of current income (tax-exempt current income in the case
of the Tax-Free Series) as is consistent with preservation of capital and
liquidity.
The Fund offers three Series of Shares:
o Prime Series
o Treasury Series
o Tax-Free Series
This Prospectus relates to the Alex. Brown Cash Reserve Shares of each of the
above Series.
Other principal features of the Fund:
o Fund shares are sold without purchase or redemption charges;
o Dividends are declared daily and paid monthly in additional shares or
cash; and
o Wire transfers, free check redemptions and other convenient cash
management services are available.
For current yield information and for purchase and redemption information,
call your Alex. Brown & Sons Incorporated investment representative or (410)
234-3737.
THIS PROSPECTUS SETS FORTH BASIC INFORMATION THAT INVESTORS SHOULD KNOW ABOUT
THE FUND PRIOR TO INVESTING AND SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE. A STATEMENT OF ADDITIONAL INFORMATION DATED AUGUST 1, 1996 HAS
BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS HEREBY
INCORPORATED BY REFERENCE. IT IS AVAILABLE UPON REQUEST AND WITHOUT CHARGE BY
CALLING THE FUND AT (800) 553-8080.
<PAGE>
TABLE OF CONTENTS
Page
1. Table of Fees and Expenses 2
2. Financial Highlights 3
3. Investment Program 6
4. How to Invest in the Fund 9
5. How to Redeem Shares 11
6. Dividends and Taxes 13
7. Management of the Fund 14
8. Current Yield 16
9. General Information 16
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT ANY SERIES WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus Dated: August 1, 1996
1
<PAGE>
Table of Fees and
1 Expenses
The following table of fees and expenses is provided to assist investors in
understanding the various costs and expenses that an investor in each Series
of the Fund may bear directly and indirectly. A person who purchases shares
of the Fund through a financial institution may be charged separate fees by
the financial institution. The percentages shown below expressing Annual Fund
Operating Expenses are restated using current, rather than historical,
expenses. Actual expenses may be greater or less than those shown.
<TABLE>
<CAPTION>
Prime Treasury Tax-Free
Series Series Series
------------ ------------ ------------
<S> <C> <C> <C>
Shareholder Transaction Expenses
- --------------------------------
Maximum Sales Charge Imposed on Purchase .................................. None None None
Maximum Sales Charge Imposed on Reinvested Dividends ...................... None None None
Maximum Deferred Sales Charge ............................................. None None None
Redemption Fees ........................................................... None None None
Annual Fund Operating Expenses As a % of Average Daily Net Assets
- ------------------------------ -------------------------------------------
Management Fees (See "Management of the Fund -- Investment Advisor and
Sub-Advisor")............................................................. .27% .25% .28%
12b-1 Fees (See "Management of the Fund -- Distributor") .................. .25% .25% .25%
Other Expenses ............................................................ .10% .10% .10%
------------ ------------ ------------
Total Fund Operating Expenses ............................................. .62% .60% .63%
============ ============ ============
</TABLE>
EXAMPLE
Assuming a hypothetical investment of $1,000, a 5% annual return and
redemption at the end of each time period, an investor in each Series would
have paid transaction and operating expenses at the end of each year as
follows:
Prime Treasury Tax-Free
Series Series Series
---------- ------------ ------------
1 year .... $ 6 $ 6 $ 6
3 years ... $20 $19 $20
5 years ... $35 $34 $36
10 years .. $80 $77 $81
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
2
<PAGE>
2 Financial Highlights
The financial highlights included in these tables are a part of the Fund's
financial statements for the Prime Series, the Treasury Series and the Tax-
Free Series for the indicated fiscal periods that have been audited by the
Fund's independent accountants. The financial statements and financial
highlights for the fiscal year ended March 31, 1996 and the report of the
Fund's independent accountants thereon are included in the Statement of
Additional Information, which can be obtained at no charge by calling the
Fund at (800) 553-8080.
PRIME SERIES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------------
1996(1) 1995(1) 1994(1) 1993(1)
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at
beginning of period .... $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------- -------------- -------------- --------------
Income from Investment
Operations:
Net investment income ..... 0.0524 0.0442 0.0262 0.0295
Less Distributions:
Dividends from net
investment income and
short-term gains ....... (0.0524) (0.0442) (0.0262) (0.0295)
-------------- -------------- -------------- --------------
Net asset value at end of
period ................. $ 1.00 $ 1.00 $ 1.00 $ 1.00
============== ============== ============== ==============
Total Return ................ 5.36% 4.51% 2.65% 2.99%
Ratios to Average Net Assets:
Expenses .................. 0.60% 0.61% 0.62% 0.63%
Net investment income ..... 5.25% 4.46% 2.62% 2.95%
Supplemental Data:
Net assets at end of period $2,392,658,047 $1,479,806,435 $1,368,451,627 $1,481,103,834
Number of shares
outstanding at end of
period ................. 2,392,661,216 1,479,804,186 1,368,449,549 1,481,101,756
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED)
<TABLE>
<CAPTION>
For the
eleven
months
ended Year Ended April 30,
March 31, ---------------------------
1992(1) 1991(1) 1990 1989+ 1988 1987
-------------- -------------- -------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at
beginning of period .... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------- -------------- -------------- -------------- ------------ ------------
Income from Investment
Operations:
Net investment income ..... 0.0485 0.0734 0.0846 0.0712 0.0647 0.0572
Less Distributions:
Dividends from net
investment income and
short-term gains ....... (0.0485) (0.0734) (0.0846) (0.0712) (0.0647) (0.0572)
-------------- -------------- -------------- -------------- ------------ ------------
Net asset value at end of
period ................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============== ============== ============== ============== ============ ============
Total Return ................ 4.96% 7.59% 8.80% 8.01%* 6.67% 5.87%
Ratios to Average Net Assets:
Expenses .................. 0.61% 0.59% 0.52% 0.54%* 0.52% 0.55%
Net investment income ..... 4.84% 7.31% 8.42% 7.81%* 6.46% 5.71%
Supplemental Data:
Net assets at end of period $1,512,362,510 $1,295,888,161 $1,312,276,151 $1,084,793,157 $874,051,953 $831,784,041
Number of shares
outstanding at end of
period ................. 1,512,360,432 1,295,888,161 1,312,272,415 1,084,789,421 874,047,336 831,779,424
</TABLE>
- ------
* Annualized.
+ The Fund's fiscal year-end was changed to March 31.
(1) Financial information for fiscal years ended March 31, 1996, 1995, 1994,
1993, 1992 and 1991, respectively, is given for the Alex. Brown Cash
Reserve Shares class of the Prime Series.
3
<PAGE>
TREASURY SERIES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------------
1996(1) 1995(1) 1994(1) 1993(1)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at
beginning of period .. $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ ------------ ------------ ------------
Income from Investment
Operations:
Net investment income ... 0.0494 0.0411 0.0255 0.0285
Less Distributions:
Dividends from net
investment income and
short-term gains ..... (0.0494) (0.0411) (0.0255) (0.0285)
------------ ------------ ------------ ------------
Net asset value at end of
period ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00
============ ============ ============ ============
Total Return .............. 5.05% 4.19% 2.58% 2.89%
Ratios to Average Net
Assets:
Expenses ................ 0.58% 0.55%* 0.54%* 0.55%*
Net investment income ... 4.94% 4.09%** 2.55%** 2.87%**
Supplemental Data:
Net assets at end of
period ............... $666,814,158 $512,167,212 $581,724,214 $618,175,839
Number of shares
outstanding at end of
period ............... 666,762,028 512,162,864 581,723,448 618,152,465
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED)
<TABLE>
<CAPTION>
For the
eleven
months
ended Year Ended April 30,
March 31, ---------------------------
1992(1) 1991(1) 1990 1989+ 1988 1987
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at
beginning of period .. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ ------------ ------------ ------------ ------------ ------------
Income from Investment
Operations:
Net investment income ... 0.0477 0.0698 0.0829 0.0696 0.0617 0.0578
Less Distributions:
Dividends from net
investment income and
short-term gains ..... (0.0477) (0.0698) (0.0829) (0.0696) (0.0617) (0.0578)
------------ ------------ ------------ ------------ ------------ ------------
Net asset value at end of
period ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============ ============ ============ ============ ============ ============
Total Return .............. 4.88% 7.21% 8.61% 7.82%*** 6.35% 5.94%
Ratios to Average Net
Assets:
Expenses ................ 0.55% 0.56% 0.41% 0.44%*** 0.45% 0.45%
Net investment income ... 4.76% 6.82% 8.25% 7.50%*** 6.17% 5.74%
Supplemental Data:
Net assets at end of
period .............. $725,010,207 $716,551,599 $272,467,125 $235,086,589 $280,628,025 $251,097,755
Number of shares
outstanding at end of
period ............... 725,010,207 716,551,599 272,509,276 235,197,074 280,519,083 251,101,013
</TABLE>
- ------
* Ratio of expenses to average net assets prior to partial fees waived was
0.56% for the fiscal years ended March 31, 1995, 1994 and 1993,
respectively.
** Ratio of net investment income to average net assets prior to partial
fees waived was 4.14%, 2.80%, and 3.15% for the years ended March 31,
1995, 1994 and 1993, respectively.
*** Annualized.
+ The Fund's fiscal year-end was changed to March 31.
(1) Financial information for fiscal years ended March 31, 1996, 1995, 1994,
1993, 1992 and 1991, respectively, is given for the Alex. Brown Cash
Reserve Shares class of the Treasury Series.
4
<PAGE>
TAX-FREE SERIES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------------------------
1996 1995 1994 1993
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning
of period ................. $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------- -------------- -------------- --------------
Income from Investment
Operations:
Net investment income ........ 0.0318 0.0271 0.0184 0.0213
Less Distributions:
Dividends from net investment
income and short-term gains (0.0318) (0.0271) (0.0184) (0.0213)
-------------- -------------- -------------- --------------
Net asset value at end of
period .................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
============== ============== ============== ==============
Total Return ................... 3.23% 2.75% 1.86% 2.15%
Ratios to Average Net Assets:
Expenses ..................... 0.60% 0.57% 0.58% 0.60%
Net investment income ........ 3.16% 2.74% 1.84% 2.13%
Supplemental Data:
Net assets at end of period .. $571,507,000 $475,384,229 $378,859,232 $315,661,447
Number of shares outstanding
at end of period .......... 571,593,265 475,474,913 378,939,262 315,700,742
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
For the period
Dec. 17, 1990*
through
1992 March 31, 1991
-------------- ----------------
<S> <C> <C>
Per Share Operating Performance:
Net asset value at beginning
of period ................. $ 1.00 $ 1.00
-------------- --------------
Income from Investment
Operations:
Net investment income ........ 0.0353 0.0124
Less Distributions:
Dividends from net investment
income and short-term gains (0.0353) (0.0124)
-------------- --------------
Net asset value at end of
period .................... $ 1.00 $ 1.00
============== ==============
Total Return ................... 3.59% 4.35%**
Ratios to Average Net Assets:
Expenses ..................... 0.56%(1) 0.53%**
Net investment income ........ 3.49%(2) 4.25%**
Supplemental Data:
Net assets at end of period .. $304,987,823 $256,895,180
Number of shares outstanding
at end of period .......... 305,008,959 256,895,680
</TABLE>
- ------
* Date operations commenced.
** Annualized.
(1) Ratio of expenses to average net assets prior to partial fees waived was
.57% for the year ended March 31, 1992.
(2) Ratio of net investment income to average net assets prior to partial fees
waived was 3.48% for the year ended March 31, 1992.
5
<PAGE>
3 Investment Program
INVESTMENT OBJECTIVES
The investment objective of each Series of the Fund is to seek as high a
level of current income as is consistent with preservation of capital and
liquidity. Each Series endeavors to achieve this objective by investing in a
diversified portfolio of domestic money market instruments that satisfy
strict credit quality standards and that mature within one year or less from
the date of purchase. The Tax-Free Series endeavors to achieve its objective
by investing in a diversified portfolio of high quality, short-term municipal
obligations. (See "Portfolio Investments -- Treasury Series -- Prime Series
- -- Tax-Free Series.")
PORTFOLIO INVESTMENTS
-- Treasury Series
The Treasury Series may invest in U.S. Treasury obligations consisting of
marketable securities and instruments issued by the U.S. Treasury, including
bills, notes, bonds and other obligations. It is management's intention to
have 100% of the portfolio invested in such instruments at all times. In
unusual circumstances, up to 10% of the Series may be invested in repurchase
agreements collateralized by U.S. Treasury obligations. Such investments will
be made only when it is necessary to ensure that the Series is fully invested
while satisfying its liquidity requirements.
-- Prime Series
In addition to the U.S. Treasury obligations described above and repurchase
agreements collateralized by U.S. Treasury securities, the Prime Series may
invest in obligations issued or guaranteed as to principal and interest by
agencies or instrumentalities of the U.S. Government. Some of these
obligations are backed by the full faith and credit of the U.S. Government
(e.g., the Government National Mortgage Association), others are supported by
the issuing agency's right to borrow from the U.S. Treasury (e.g., securities
of Federal Home Loan Banks) and still others are backed only by the credit of
the instrumentality (e.g., the Federal National Mortgage Association).
The Prime Series may also invest in a broad range of commercial and bank
obligations that the investment advisor, under guidelines established by the
Board of Directors, believes present minimal credit risk and that satisfy the
criteria for such obligations described below:
The Prime Series may invest in instruments consisting of commercial paper and
variable amount master demand notes. Eligible commercial paper is limited to
short term, unsecured promissory notes issued by corporations that (i) are
rated Prime-1 by Moody's Investors Service, Inc. ("Moody's") or A-1+ or A-1
by Standard and Poor's Ratings Group ("S&P") or (ii) if not rated by Moody's
or S&P, are of comparable quality to Prime-1 or A-1+ or A-1 instruments as
determined by the Fund's investment advisor; and (iii) are otherwise
"Eligible Securities" as defined in Rule 2a-7 under the Investment Company
Act of 1940. Variable amount master demand notes are unsecured demand notes
that permit investment of fluctuating amounts of money at variable rates of
interest pursuant to arrangements with issuers who meet the foregoing quality
criteria. The interest rate on a variable amount master demand note is
periodically redetermined according to a prescribed formula. Although there
is no secondary market in master demand notes, the payee
6
<PAGE>
may demand payment of the principal amount of the note on relatively short
notice. All master demand notes acquired by the Prime Series will be payable
within a prescribed notice period not to exceed seven days. (See the
Statement of Additional Information with respect to commercial paper and bond
ratings.)
The Prime Series may also invest in bank instruments, consisting mainly of
certificates of deposit and bankers' acceptances, that (i) are issued by U.S.
banks that satisfy applicable quality standards; or (ii) are fully insured as
to principal and interest by the Federal Deposit Insurance Corporation.
-- Tax-Free Series
The Tax-Free Series may invest in municipal securities consisting of (i) debt
obligations issued by or on behalf of public authorities to obtain funds to
be used for various public purposes (including the construction of a wide
range of public facilities), for refunding outstanding obligations, for
general operating expenses and for lending such funds to other public
institutions and facilities, and (ii) certain types of industrial development
bonds issued by or on behalf of public authorities to obtain funds to provide
for the construction, equipment, repair or improvement of privately operated
facilities ("private activity bonds"); provided that the interest paid on
such debt obligations and private activity bonds, in the opinion of bond
counsel, is exempt from federal income taxes.
The Tax-Free Series invests in high quality municipal securities that the
investment advisor believes, under guidelines established by the Board of
Directors, present minimal credit risk and that at the time of purchase are
rated within the two highest credit categories assigned by the recognized
rating agencies, including: (1) bonds rated Aaa or Aa by Moody's or AAA or AA
by S&P; (2) municipal commercial paper rated Prime-1 or Prime-2 by Moody's or
A-1+, A-1 or A-2 by S&P (provided that such purchases would be further
limited unless the instrument meets the definition of "Eligible Security" as
defined in Rule 2a-7 under the Investment Company Act of 1940); (3) municipal
notes and floating and variable rate demand obligations rated SP-1 or higher
by S&P or MIG2 or VMIG or higher by Moody's; and (4) obligations secured by
letters of credit providers rated within the two highest categories by any
nationally recognized bank rating agency approved by the Fund's Board of
Directors. The Series may purchase unrated securities if they are determined
by the investment advisor, under guidelines established by the Board of
Directors, to be of comparable value to those obligations rated in the
categories described above.
The Tax-Free Series may hold cash reserves pending investment of such
reserves in municipal securities.
It is a fundamental policy of the Tax-Free Series to have its assets invested
so that at least 80% of the Series' income will be exempt from federal income
taxes, and it is the Tax-Free Series' present intention (but it is not a
fundamental policy) to invest its assets so that 100% of its annual interest
income will be tax-exempt. From time to time, on a temporary basis or for
defensive purposes, however, the Fund may invest in taxable short-term
investments that meet the criteria for investment for the Treasury or Prime
Series as described above.
The Tax-Free Series will seek to avoid the purchase of private activity bonds
the interest on which will be considered to be an item of prefer-
7
<PAGE>
ence for purposes of alternative minimum tax liability for individuals under
the Internal Revenue Code of 1986, as amended (the "Code"). (See "Dividends
and Taxes.")
OTHER INVESTMENT PRACTICES
The Fund may enter into the following arrangements with respect to any Series
of the Fund:
When-Issued Securities involving commitments by a Series to purchase
portfolio securities on a "when-issued" basis. When-issued securities are
securities purchased for delivery beyond the normal settlement date at a
stated price and yield. A Series will generally not pay for such securities
or start earning interest on them until they are received. When-issued
commitments will not be used for speculative purposes and will be entered
into only with the intention of actually acquiring the securities.
The Prime Series and the Treasury Series may also enter into the following
arrangements:
Repurchase Agreements under which the purchaser (for example, a Series of the
Fund) acquires ownership of an obligation and the seller agrees, at the time
of the sale, to repurchase the obligation at a mutually agreed upon time and
price, thereby determining the yield during the purchaser's holding period.
Although the underlying collateral for repurchase agreements may have
maturities exceeding one year, repurchase agreements entered into by a Series
will not have a stated maturity in excess of seven days from the date of
purchase. A Series may enter into repurchase agreements with institutions
that the Fund's Board of Directors believes present minimal credit risk. If
the seller of a repurchase agreement fails to repurchase the obligation in
accordance with the terms of the agreement, the Series of the Fund that
entered into the repurchase agreement may incur a loss to the extent that the
proceeds realized on the sale of the underlying obligation are less than the
repurchase price. In the event of the insolvency of a seller that defaults on
its repurchase obligation, disposition of the securities underlying the
repurchase agreement could be delayed pending court or administrative action.
The Prime Series may also enter into the following arrangements:
Reverse Repurchase Agreements involving the sale of money market instruments
held by the Prime Series, with an agreement to repurchase the instruments at
an agreed upon price and date. The Prime Series will employ reverse
repurchase agreements only when necessary to meet unanticipated net
redemptions so as to avoid liquidating other money market instruments during
unfavorable market conditions. The Prime Series will utilize reverse
repurchase agreements when the interest income to be earned from portfolio
investments that would otherwise have to be liquidated to meet redemptions is
greater than the interest expense incurred as a result of the reverse
repurchase transactions. Reverse repurchase agreements involve the risk that
the market value of securities retained by the Prime Series in lieu of
liquidation may decline below the repurchase price of the securities sold by
the Prime Series which it is obligated to repurchase.
INVESTMENT RESTRICTIONS
The Fund's investment program is subject to a number of investment
restrictions that reflect self-imposed standards as well as federal and state
regulatory limitations, the most significant of which are set forth on the
following page:
8
<PAGE>
(1) No Series may purchase securities of any issuer (other than obligations
of the U.S. Government, its agencies or instrumentalities and any municipal
securities guaranteed by the U.S. Government), if immediately after such
purchase more than 5% of the value of such Series' assets would be invested
in such issuer;
(2) No Series may borrow money or issue senior securities, except that (i)
any Series may borrow money from banks for temporary purposes in amounts up
to 10% of the value of such Series' total assets at the time of borrowing,
provided that any such borrowings are repaid prior to the purchase of
additional portfolio securities, (ii) the Prime Series may enter into reverse
repurchase agreements in accordance with its investment program and (iii) any
Series of the Fund may enter into commitments to purchase securities in
accordance with its investment program;
(3) No Series may lend money or securities except to the extent that a
Series' investments may be considered loans;
(4) The Prime Series may not purchase any commercial paper or variable rate
demand notes that would cause more than 25% of the value of the Series' total
assets at the time of such purchase to be invested in the securities of one
or more issuers conducting their principal business activities in the same
industry; and
(5) The Tax-Free Series may not purchase any securities (other than
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, certificates of deposit and guarantees of banks) that
would cause more than 25% of the value of the Series' total net assets at the
time of such purchase to be invested in: (i) securities of one or more
issuers conducting their principal activities in the same state; (ii)
securities, the interest on which is paid from revenues of projects with
similar characteristics; or (iii) industrial development bonds the obligors
of which are in the same industry.
The investment objectives of each Series of the Fund as described under
"Investment Objectives" and the foregoing restrictions are matters of
fundamental policy except where noted and may not be changed without the
affirmative vote of a majority of the outstanding shares of the Series
affected. The Treasury Series has a policy, which may be changed by the
Fund's Board of Directors and without shareholder approval, of limiting
investments in U.S. Government obligations to U.S. Treasury obligations.
4 How to Invest in the Fund
GENERAL INFORMATION ON PURCHASES
Shares of any Series may be purchased from Alex. Brown & Sons Incorporated
("Alex. Brown") or through securities dealers that have entered into dealer
agreements with Alex. Brown ("Participating Dealers") or through institutions
that maintain accounts with the Fund on behalf of their customers. The terms
and conditions under which purchases will be effected may be subject to terms
and conditions set forth in agreements between the investor and Alex. Brown,
a Participating Dealer or other institution through which investments are
made.
The minimum initial investment in any Series of the Fund is $1,500.
Subsequent investments in the same Series must be at least $100. Orders for
9
<PAGE>
the purchase of Fund shares are accepted only on a "business day of the Fund"
which means any day on which PNC Bank, National Association ("PNC"), the
Fund's custodian, and the New York Stock Exchange are open for business. It
is expected that during the next twelve months, PNC and/or the New York Stock
Exchange will be closed on Saturdays and Sundays and on New Year's Day,
Martin Luther King, Jr.'s Birthday, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving
Day and Christmas Day.
An order to purchase Fund shares is effective only when Alex. Brown receives
an order in proper form and federal funds are available to the Fund for
investment. The Fund reserves the right to reject any order for the purchase
of Fund shares. Fund shares are purchased at the net asset value next
determined after acceptance of the order.
The net asset value of each of the Fund's Series is determined once daily as of
12:00 noon (Eastern Time) on each business day of the Fund. Because the Fund
uses the amortized cost method of valuing the portfolio securities of each
Series and rounds the per share net asset value of shares of each Series, it is
anticipated that the net asset value of each Series will remain constant at
$1.00 per share, but there can be no assurance that this objective can be met.
Share purchases for the Treasury Series and Tax-Free Series effected before 11
a.m. (Eastern Time) and share purchases for the Prime Series effected before
12:00 noon (Eastern Time) begin to earn dividends on the same business day.
Share purchases received after these times begin to earn dividends
on the following day. Payments transmitted by check are normally converted into
federal funds within two business days and are accepted subject to collection at
full face amount. If purchases of shares are made by check, redemption of those
shares may be restricted. (See "How to Redeem Shares.")
PURCHASES THROUGH ALEX. BROWN
Shares of any Series of the Fund may be purchased with funds on account with
Alex. Brown. Any investor who does not already maintain an Alex. Brown
account may open one by calling an Alex. Brown investment representative or
by completing the application included with this prospectus and mailing it,
together with the initial purchase amount, to the address indicated.
Investments in any Series of the Fund may be made by any one of the following
convenient methods.
1. By telephone -- Investors may call their Alex. Brown investment
representative and request that available cash balances in their Alex. Brown
account be invested in one or more Series of the Fund.
2. By mail -- Investors may mail checks for purchases of shares of any
Series of the Fund to their Alex. Brown investment representative or deliver
checks directly to their local Alex. Brown office. Alternatively, investors
may mail checks to Alex. Brown through the use of convenient share purchase
order tickets and pre-addressed envelopes. A supply of order tickets and
envelopes may be obtained through any Alex. Brown investment representative
or by calling (800) 553-8080.
3. By wire -- Shares of any Series may be purchased by wiring funds to an
Alex. Brown account. Investors should call an Alex. Brown investment
representative or (410) 727-1700 for instructions.
4. Through an automatic investment and redemption program -- Alex. Brown has
established a special procedure whereby proceeds
10
<PAGE>
from sales of securities will be combined with other available credit
balances in an Alex. Brown customer's account (the "account") on settlement
date and invested in shares of the Series of the Fund selected by the
customer. In addition, all credit balances in an account at the end of each
day are invested on the next business day of the Fund so long as the
resulting Fund balance is $100 or more. Additionally, Fund shares will be
redeemed automatically to pay for securities purchases in the account. Such
redemption will be made on the settlement date of the securities purchase.
The initial purchase requirement of $1,500 does not apply to those
shareholders who elect to take part in the Automatic Investment and
Redemption Program.
PURCHASES THROUGH DEALERS AND INSTITUTIONS
Special procedures are established for expediting transactions on behalf of
securities dealers and institutional accounts. The Fund and Alex. Brown have
arranged for PNC to offer sub-accounting services to Fund shareholders and
maintain information with respect to underlying share owners. Bank trust
departments, investment counselors, brokers, and others desiring sub-accounting
services can make the necessary arrangements through the Fund or Alex. Brown.
Check redemption services cannot be made available, however, for shares held in
sub-accounts.
5 How to Redeem Shares
In addition to participation in the automatic purchase and redemption program
described above, shareholders may redeem all or part of their shares of any
Series on any business day of the Fund by transmitting a redemption order to
Alex. Brown by any of three convenient methods outlined below. A redemption
request is effected at the net asset value next determined after tender of
shares for redemption. Redemption orders for the Treasury Series and the
Tax-Free Series received after 11 a.m. (Eastern Time) and redemption orders for
the Prime Series received after 12:00 noon (Eastern Time) will be executed at
the net asset value, of the Series to be redeemed, next determined after receipt
of the order. If the shares to be redeemed were purchased by check, the Fund
reserves the right not to honor the redemption request until the check has
cleared, and redemption of such shares by wire or by check redemption will be
restricted for a period of fifteen calendar days unless the proceeds of
redemption are used to purchase other securities through Alex. Brown. The right
to redeem shares may be affected by the terms and conditions of the
shareholder's account agreement with Alex. Brown, a Participating Dealer or
other institution.
REDEMPTION BY CHECK
Shareholders who complete the necessary forms may establish special check
redemption privileges that entitle them to write checks drawn on the Fund
that will clear through the Fund's account with PNC, in any amount not less
than $500. The payee of the check may cash or deposit it in the same way as
an ordinary bank check. Shareholders are entitled to dividends on the shares
redeemed until the check has been presented to PNC for payment. If the amount
of the check exceeds the value of the Fund shares of all Series in the
account, the check will be returned to the payee marked "nonsufficient
funds." Checks written in amounts less than $500 may also be returned. The
Fund in its discretion will honor such checks but will charge the account a
servicing fee of $15. Cancelled checks will not be returned to the
shareholder,
11
<PAGE>
but the amounts will be reflected on the shareholder's monthly Alex. Brown
statement of account. Since the total amount of shares in an account may
vary, shareholders should not attempt to redeem their entire account by
check.
The Fund reserves the right to terminate or alter check redemption privileges
at any time, to impose a service charge, or to charge for checks. The Fund
also may charge a shareholder's account for returned checks and for effecting
stop orders.
If a shareholder of more than one Series presents a check redemption request,
the Fund will automatically redeem shares of such Series in the following
order until the full amount of the check redemption has been satisfied:
Tax-Free Series, Prime Series and Treasury Series.
If a shareholder desires check redemption privileges, the necessary forms may
be obtained through Alex. Brown.
REDEMPTION BY WIRE
A shareholder who wishes to redeem $10,000 or more and who has previously
completed the necessary authorizations, may request that payment be made by
wire transfer of federal funds. In such case, once the redemption is
effected, payment will be made in federal funds wired to the shareholder's
bank on the same day. Alex. Brown will subtract from the redemption proceeds
the cost of effecting the wire transfer.
REDEMPTION BY MAIL
A shareholder may redeem Fund shares in any amount by mailing a redemption
request to Alex. Brown at P.O. Box 17250, Baltimore, Maryland 21203. Payment
for shares redeemed by mail will be made by check and will ordinarily be
mailed within seven days after receipt by Alex. Brown of a written redemption
request in good order. The request must include the following:
(a) a letter of instruction specifying the Alex. Brown account number and the
Series (Prime, Treasury or Tax-Free) and the number of shares or dollar
amount to be redeemed (or that all shares of a Series credited to an Alex.
Brown account be redeemed), signed by all owners of the shares in the exact
names in which their Alex. Brown account is maintained;
(b) a guarantee of the signature of each registered owner by a member of the
Federal Deposit Insurance Corporation, a trust company, broker, dealer,
credit union (if authorized under state law), a securities exchange or
association, clearing agency or savings association; and
(c) any additional documents required by the Fund or transfer agent for
redemption by corporations, partnerships, trusts or fiduciaries.
ADDITIONAL INFORMATION ON REDEMPTION
Dividends payable up to the date of redemption on redeemed shares will be
paid on the next dividend payment date. If all of the shares of a Series of
the Fund in an Alex. Brown account have been redeemed on the dividend payment
date, the dividend will be credited in cash to the shareholder's account at
Alex. Brown.
The Board of Directors may authorize redemption of all shares in an account
of any Series that has been reduced by the shareholder to less than $500, if
the Board of Directors determines that it is necessary to reduce
disproportionately burdensome expenses of servicing small accounts or is
otherwise in the best interest of the Fund. At least 60 days' prior notice
will be given
12
<PAGE>
to allow a shareholder to make an additional minimum investment set by the
Board of Directors to avoid redemption.
6 Dividends and Taxes
DIVIDENDS
All of the net income earned on each Series is normally declared as dividends
daily to the respective shareholders of record of each Series. Dividends on
each Series are normally payable on the first day that a share purchase order
is effective but not on the date that a redemption order is effective.
Dividends are declared daily and reinvested monthly in the form of additional
full and fractional shares of the same Series at net asset value, unless the
shareholder has elected to have dividends paid in cash.
TAXES
The following is only a general summary of certain federal tax considerations
affecting the Fund and the shareholders. No attempt is made to present a
detailed explanation of the tax treatment of the Fund or the shareholders,
and the discussion herein is not intended as a substitute for careful tax
planning.
The following summary is based on current tax laws and regulations, which may
be changed by legislative, judicial or administrative action.
Each Series of the Fund has elected to be taxed as a regulated investment
company under Subchapter M of the Code. As long as a Series qualifies for
this tax treatment, it will not be required to pay federal income taxes on
amounts distributed to shareholders; but shareholders, unless otherwise
exempt, will pay taxes on taxable amounts so distributed.
The Tax-Free Series intends to qualify to pay "exempt-interest dividends" to
its shareholders, by satisfying certain Code requirements described in the
Statement of Additional Information. So long as these and certain other
requirements are met, dividends of the Tax-Free Series derived from net
tax-exempt interest income will be exempt-interest dividends that are
excluded from the gross income of such Series' shareholders for federal
income tax purposes. Exempt-interest dividends may, however, have collateral
federal income tax consequences, including alternative minimum tax
consequences. (See the Statement of Additional Information.)
Current federal tax limits the types and volume of bonds qualifying for the
federal income tax exemption of interest, which may have an effect on the
ability of the Fund to purchase sufficient amounts of tax-exempt securities
to satisfy the Code's requirements for the payment of exempt- interest
dividends. All or a portion of the interest on indebtedness incurred or
continued by a shareholder to purchase or carry Shares is not deductible for
federal income tax purposes. Furthermore, entities or persons who are
"substantial users" (or persons related to "substantial users") of facilities
financed by "private activity bonds" or "industrial development bonds" should
consult their tax advisers before purchasing Shares. (See the Statement of
Additional Information.)
Distributions of net investment company taxable income (generally, net
investment income plus the excess, if any, of net short-term capital gains
over net long-term capital losses) are taxed to
13
<PAGE>
shareholders as ordinary income. Distributions will not be eligible for the
dividends received deduction otherwise available to corporate shareholders.
Although no Series expects to realize any long-term capital gains, any
distributions of net capital gains (the excess of net long-term capital gains
over net short-term capital losses) will be taxable to shareholders as
long-term capital gains, regardless of the length of time a shareholder has
held the shares.
Ordinarily, shareholders will include in their taxable income all dividends
declared by a Series in the year of payment. However, dividends declared
payable to shareholders of record in December of one year, but paid in
January of the following year, will be deemed for tax purposes to have been
received by the shareholders and paid by a Series in the year in which the
dividends were declared.
The Fund intends to make sufficient distributions of its ordinary income and
capital gain net income prior to the end of each calendar year to avoid
liability for federal excise tax.
The sale, exchange or redemption of shares is a taxable event for the
shareholder.
Shareholders of the Treasury Series may not be required to pay state income
tax on dividends to the extent such dividends are derived from interest on
U.S. Treasury obligations. State laws vary and investors are encouraged to
consult with their tax advisors on this issue.
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 own tax advisors concerning the application of state and local taxes to
investments in the Fund, which may differ from the federal income tax
consequences described above. Additional information concerning taxes is set
forth in the Statement of Additional Information.
7 Management of the Fund
BOARD OF DIRECTORS
The overall business and affairs of the Fund are managed by its Board of
Directors. The Board of Directors approves all significant agreements between
the Fund and persons or companies furnishing services to the Fund, including
the Fund's agreements with its investment advisor, sub-advisor, distributor,
custodian and transfer agent. The day-to-day operations of the Fund are
delegated to its officers and to Alex. Brown, Investment Company Capital
Corp. ("ICC"), the Fund's investment advisor, and PNC Institutional
Management Corporation ("PIMC"), the sub-advisor to the Tax-Free Series,
subject to the investment objectives and policies of each series of the Fund
and to general supervision by the Fund's Board of Directors. Alex. Brown, ICC
and PIMC also furnish or procure on behalf of the Fund all services necessary
to the proper conduct of the Fund's business. Four Directors and all of the
officers of the Fund are officers or employees of Alex. Brown or ICC. A
majority of the Board of Directors of the Fund have no affiliation with Alex.
Brown, ICC, or PIMC.
INVESTMENT ADVISOR
Investment Company Capital Corp., 135 East Baltimore Street, Baltimore,
Maryland 21202, an indirect subsidiary of Alex. Brown Incorporated (described
below), was organized in 1987 and acts as the Fund's investment advisor. ICC
super-
14
<PAGE>
vises and manages the Fund's operations and generally provides management and
administrative services for the Fund. ICC may delegate its duties and has
delegated certain of such duties for the Tax-Free Series to PIMC as described
below. ICC is also investment advisor to, and Alex. Brown acts as distributor
for, several funds in the Flag Investors family of funds which, as of May 31,
1996, had net assets of approximately $1.1 billion.
Pursuant to a new advisory agreement, which became effective August 22, 1995,
ICC is entitled to receive a fee from the Fund, calculated daily and payable
monthly, at the following annual rates based upon the Fund's aggregate
average daily net assets: .30% of the first $500 million, .26% of the next
$500 million, .25% of the next $500 million, .24% of the next $1 billion,
.23% of the next $1 billion and .22% of that portion in excess of $3.5
billion. Each Series pays its share of the foregoing fee in proportion to its
relative net assets. In addition, ICC is entitled to receive an additional
fee with respect to the Prime Series and the Tax-Free Series, calculated
daily and paid monthly, at the annual rate of .02% of the Prime Series'
average daily net assets and .03% of the Tax-Free Series' average daily net
assets. As compensation for providing investment advisory services to the
Fund for the period from August 22, 1995 to March 31, 1996, ICC received an
annualized advisory fee at the rate of .27% of the Prime Series' average
daily net assets, .25% of the Treasury Series' average daily net assets and
.28% of the Tax-Free Series' average daily net assets. ICC may, from time to
time, voluntarily waive a portion of its advisory fee with respect to any
Series to preserve or enhance the performance of the Series.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Prime and Treasury Series. (See
"Custodian, Transfer Agent and Accounting Services.")
SUB-ADVISOR
PIMC, Bellevue Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware
19809, acts as sub-advisor to the Tax-Free Series pursuant to a sub-advisory
agreement between ICC and PIMC. PIMC is a wholly-owned subsidiary of PNC, the
Fund's custodian. Subject to the oversight of ICC, PIMC is responsible for
managing the Tax-Free Series' investments. PIMC was organized in 1977 to
perform advisory services for investment companies. PNC and its predecessors
have been in the business of managing the investments of fiduciary and other
accounts in the Philadelphia, Pennsylvania area since 1847. PIMC advises or
manages approximately 30 open-end investment portfolios with total assets of
approximately $31 billion as of May 31, 1996.
As compensation for its services as sub-advisor to the Tax-Free Series for
the fiscal year ended March 31, 1996, PIMC received a fee from ICC equal to
.14% of the average daily net assets of the Tax-Free Series. If ICC voluntarily
waives a portion of its fee with respect to the Tax-Free Series (see
"Investment Advisor"), PIMC has agreed to waive a portion of its fee in the
same proportion and for the same time periods as ICC's waiver.
In the fiscal year ended March 31, 1996, the expenses borne by each Series of
the Fund, including the fees to ICC, amounted to .60% of the Prime Series'
average daily net assets, .58% of the Treasury Series' average daily net assets
and .60% of the Tax-Free Series' average daily net assets.
15
<PAGE>
DISTRIBUTOR
Alex. Brown, 135 East Baltimore Street, Baltimore, Maryland 21202, serves as
the exclusive distributor for shares of the Fund's three Series. Alex. Brown
is an investment banking firm that offers a broad range of investment
services to individual, institutional, corporate and municipal clients. It is
a wholly-owned subsidiary of Alex. Brown Incorporated which has engaged
directly and through subsidiaries and affiliates in the investment business
since 1800. Alex. Brown is a member of the New York Stock Exchange and other
leading securities exchanges. Headquartered in Baltimore, Maryland, Alex.
Brown has offices throughout the United States and, through subsidiaries,
maintains offices in London, England, Geneva, Switzerland and Tokyo, Japan.
As compensation for its services for the fiscal year ended March 31, 1996,
Alex. Brown received a fee from the Fund that represented .25% of the Fund's
average net assets.
Alex. Brown may make payments to shareholder servicing agents, including
securities dealers, banks and other financial institutions, that provide
shareholder services. Such financial institutions may impose separate fees in
connection with these services and investors should review this Prospectus in
conjunction with any such institution's fee schedule. In addition, financial
institutions may be required to register as dealers pursuant to state
securities laws.
Alex. Brown may use a portion of the fee it receives from the Fund to
compensate its investment representatives for opening shareholder accounts,
processing investor purchase and redemption orders, responding to inquiries
from Fund shareholders concerning the status of their accounts and operations
of the Fund, and communicating with the Fund and its transfer agent on behalf
of the Fund's shareholders. Additionally, Alex. Brown bears all expenses
associated with advertisements, promotional materials, sales literature and
printing and mailing prospectuses to other than Fund shareholders.
8 Current Yield
From time to time the Fund advertises the "yield" and "effective yield" of a
particular Series or class. Both figures are based on historical earnings and
are not intended to indicate future performance. The "yield" of a Series or
class refers to the income generated by an investment in that Series or class
over a seven-day period (which period will be stated in the advertisement).
This income is then "annualized," that is, the amount of income generated by
the investment during that week is assumed to be generated each week of a
52-week period and is shown as a percentage of the investment. The "effective
yield" is calculated similarly, but when annualized, the income earned by an
investment in the Fund is assumed to be reinvested. The "effective yield"
will be slightly higher than the "yield" because of the compounding effect of
this assumed reinvestment. The Tax-Free Series may also advertise a
taxable-equivalent yield or effective yield, which are calculated by applying
a stated income tax rate to the Series' tax-exempt income for the same
periods and annualized as described above.
The yield for any Series or class of the Fund can be obtained by calling an
Alex. Brown investment representative or (410) 234-3737.
16
<PAGE>
9 General Information
DESCRIPTION OF SHARES
Shares of the Fund are divided into three series, each with a par value of $.001
- - the Prime Series, the Treasury Series and the Tax-Free Series. Each of the
Series currently offers one or more classes, which classes differ from each
other principally in distribution fees, in some instances shareholders servicing
fees, and the method of distribution, which may affect performance. For
information regarding the other classes of shares, please call (800) 553-8080.
Shares of the Fund have equal rights with respect to voting, except that the
holders of shares of a particular Series or class will have the exclusive right
to vote on matters affecting only the rights of the holders of such Series or
class. For example, holders of a particular Series will have the exclusive right
to vote on any investment advisory agreement or investment restriction that
relates only to such Series. In the event of dissolution or liquidation, holders
of shares of each Series will receive pro rata, subject to the rights of
creditors, (a) the proceeds of the sale of the assets held in the respective
Series less (b) the liabilities of the Fund attributable to the respective
Series or allocated among all Series based on the respective liquidation value
of each Series.
There are no preemptive or conversion rights applicable to any of the Fund's
shares. The Fund's shares, when issued, will be fully paid and non-
assessable. The Board of Directors may create additional series or classes of
Fund shares without shareholder approval.
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
PNC, a national banking association with offices at Airport Business Center, 200
Stevens Drive, Lester, Pennsylvania 19113, acts as custodian for the Fund's
portfolio securities and cash. PFPC Inc. ("PFPC"), an affiliate of PNC with
offices at 400 Bellevue Parkway, Wilmington, Delaware 19809, provides accounting
services to the Tax- Free Series. Investment Company Capital Corp., 135 East
Baltimore Street, Baltimore, Maryland 21202 (telephone: (800) 553-8080), the
Fund's investment advisor, also serves as the Fund's transfer and dividend
disbursing agent and provides accounting services to the Prime Series and the
Treasury Series. As compensation for providing accounting services the Prime
Series and the Treasury Series for the fiscal year ended March 31, 1996, ICC
received from the Fund a fee for each such Series, equal to .01% of the Series'
aggregate average daily net assets. (See the Statement of Additional
Information.)
ANNUAL MEETINGS
Unless required under applicable Maryland law, the Fund does not expect to
hold annual meetings of shareholders. However, shareholders may remove
directors from office by votes cast at a meeting of shareholders or by
written consent. A meeting of shareholders may be called at the
17
<PAGE>
request of the holders of 10% or more of the Fund's outstanding shares.
REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The annual
financial statements are audited by the Fund's independent accountants,
Coopers & Lybrand L.L.P.
FUND COUNSEL
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
SHAREHOLDER INQUIRIES
Shareholders with inquiries concerning their shares should contact an Alex.
Brown investment representative or (800) 553-8080.
18
<PAGE>
ALEX. BROWN CASH RESERVE FUND, INC.
APPLICATION FORM
<TABLE>
<S> <C>
TO OPEN A NEW ACCOUNT EXISTING ALEX. BROWN ACCOUNTS
1.) Complete application below in full. 1.) My account number is
2.) Check enclosed for $------------------- ----------------------------------------------------
2.) Name(s)
3. (a). $------ to be invested in Prime Series. ----------------------------------------------------
3.) Check enclosed for $
(b). $------ to be invested in Treasury Series. ----------------------------------------------------
4. (a). $------ to be invested in Prime Series.
(c). $------ to be invested in Tax-Free Series. (b). $------ to be invested in Treasury Series.
(c). $------ to be invested in Tax-Free Series.
</TABLE>
All checks should be made payable to Alex. Brown & Sons Incorporated and
mailed to:
Alex. Brown Cash Reserve Fund, Inc.
P.O. Box 17250
Baltimore, Maryland 21203
PLEASE NOTE: The minimum initial investment in each Series is $1,500.
Subsequent investments in each Series must be $100 or more.
- -----------------------------------------------------------------------------
1. ACCOUNT REGISTRATION -- Please Print
- ------------------------------------------------------- -----------------
Name Social Security
or Tax ID No.**
- -------------------------------------------------------
Joint Owner's Name (if applicable)*
- -----------------------------------------------------------------------------
Street Address
- ----------------- ------------- ----------- -------------- -------------
City State Zip Code Home Phone Office Phone
* In the case of joint ownership, joint tenancy with right of survivorship
will be presumed unless otherwise indicated.
** Enter "Applied" if number has been applied for and not received.
- -----------------------------------------------------------------------------
2. DIVIDEND INSTRUCTIONS
[ ] Place an "X" in this box if you want your dividends paid to you in cash.
Otherwise, they will be reinvested in additional shares of the Fund.
- -----------------------------------------------------------------------------
3. CHECK REDEMPTION PRIVILEGE (Optional)
[ ] Place an "X" in this box if you want information regarding the Check
Redemption Privilege.
- -----------------------------------------------------------------------------
4. SIGNATURE(S) I (we) am (are) of legal age and have read the prospectus
dated August 1, 1996.
Under penalties of perjury, I certify (1) that the number shown on this
form is my correct taxpayer identification number, and (2) that I am not
subject to backup withholding either because I have not been notified that I
am subject to backup withholding as a result of a failure to report all
interest or dividends, or the Internal Revenue Service has notified me that I
am no longer subject to backup withholding.
- ------------------------------------------------------------- ----------------
Date
- ------------------------------------------------------------- ----------------
Date
<PAGE>
ALEX. BROWN CASH RESERVE FUND, INC.
BOARD OF DIRECTORS
W. JAMES PRICE
Chairman
RICHARD T. HALE EUGENE J. McDONALD
Director Director
CHARLES W. COLE, JR. REBECCA W. RIMEL
Director Director
JAMES J. CUNNANE TRUMAN T. SEMANS
Director Director
JOHN F. KROEGER CARL W. VOGT
Director Director
LOUIS E. LEVY HARRY WOOLF
Director Director
- -----------------------------------------------------------------------------
OFFICERS
W. JAMES PRICE M. ELLIOTT RANDOLPH, JR. JOSEPH A. FINELLI
Chairman Vice President Treasurer
RICHARD T. HALE PAUL D. CORBIN EDWARD J. STOKEN
President Vice President Secretary
EDWARD J. VEILLEUX BRIAN C. NELSON LAURIE D. DEPRINE
Executive Vice President Vice President Assistant Secretary
MONICA M. HAUSNER
Vice President
- -----------------------------------------------------------------------------
Distributor Custodian
ALEX. BROWN & SONS PNC BANK
INCORPORATED Airport Business Center
135 East Baltimore Street 200 Stevens Drive
Baltimore, Maryland 21202 Lester, Pennsylvania 19113
(410) 727-1700
Investment Advisor Transfer Agent
INVESTMENT COMPANY CAPITAL CORP. INVESTMENT COMPANY CAPITAL CORP.
135 East Baltimore Street 135 East Baltimore Street
Baltimore, Maryland 21202 Baltimore, Maryland 21202
(800) 553-8080
Sub-Advisor
Tax-Free Series Independent Accountants
PNC INSTITUTIONAL COOPERS & LYBRAND L.L.P.
MANAGEMENT CORP. 2400 Eleven Penn Center
400 Bellevue Parkway Philadelphia, Pennsylvania 19103
Wilmington, Delaware 19809
<PAGE>
ALEX. BROWN CASH RESERVE FUND, INC.
P.O. Box 17250
Baltimore, Maryland 21203
- ------------------------
Third Class Mail
U.S. POSTAGE
PAID
Baltimore, M.D.
Permit No. 8614
- -----------------------
LOGO
ALEX. BROWN
CASH RESERVE
FUND, INC.
INSTITUTIONAL
SHARES
Prospectus
August 1, 1996
<PAGE>
ALEX. BROWN CASH RESERVE FUND, INC.
INSTITUTIONAL SHARES
P.O. Box 17250
Baltimore, Maryland 21203
Alex. Brown Cash Reserve Fund, Inc. (the "Fund") is a money market fund
designed to seek as high a level of current income as is consistent with
preservation of capital and liquidity. The class of shares of the Fund
offered by this Prospectus may be purchased only by eligible institutions.
The Fund offers:
o Prime Series -- a portfolio invested in U.S. Treasury obligations,
repurchase agreements backed by such instruments, obligations issued or
guaranteed by agencies or instrumentalities of the U.S. Government,
domestic bank instruments and commercial paper of the highest quality; and
o Treasury Series -- a portfolio invested in U.S. Treasury bills, notes,
bonds and other obligations issued by the U.S. Treasury.
Other principal features of the Fund:
o No direct or indirect purchase or redemption charges;
o Dividends are declared daily and paid monthly in additional shares or
cash; and
o Wire and telephone transfers.
For current yield information and for purchase and redemption information,
call (410) 234- 3737.
THIS PROSPECTUS SETS FORTH BASIC INFORMATION THAT INVESTORS SHOULD KNOW ABOUT
THE FUND PRIOR TO INVESTING AND SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE. A STATEMENT OF ADDITIONAL INFORMATION DATED AUGUST 1, 1996 HAS
BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS HEREBY
INCORPORATED BY REFERENCE. IT IS AVAILABLE UPON REQUEST AND WITHOUT CHARGE BY
CALLING THE FUND AT (800) 553-8080.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1. Table of Fees and Expenses 2
2. Financial Highlights 3
3. The Fund and the Institutional Shares 5
4. Investment Program 5
5. How to Invest in Institutional Shares
of the Fund 8
6. Dividends and Taxes 9
7. How to Redeem Shares 10
8. Management of the Fund 11
9. Current Yield 12
10. General Information 12
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT ANY SERIES WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
Prospectus Dated: August 1, 1996
1
<PAGE>
1 Table of Fees and
Expenses
The following table of fees and expenses is provided to assist investors
in understanding the various costs and expenses that an investor in
Institutional Shares of the Prime or Treasury Series of the Fund may bear
directly and indirectly. The percentages shown below expressing Annual Fund
Operating Expenses are restated using current, rather than historical,
expenses. Actual expenses may be greater or less than those shown.
<TABLE>
<CAPTION>
Institutional Institutional
Shares Shares
Prime Treasury
Series Series
----------------- -----------------
Shareholder Transaction Expenses
--------------------------------
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases ...................................... None None
Maximum Sales Charge Imposed on Reinvested Dividends ........................... None None
Maximum Deferred Sales Charge .................................................. None None
Redemption Fees ................................................................ None None
As a % of Average
Annual Fund Operating Expenses Daily Net Assets
------------------------------ ------------------------------------
Management Fees (See "Management of the Fund -- Investment Advisor") ........... .27% .25%
12b-1 Fees (See "Management of the Fund -- Distributor") ....................... None None
Other Expenses ................................................................. .10% .10%
----------------- -----------------
Total Fund Operating Expenses .................................................. .37% .35%
================= =================
</TABLE>
Example
Assuming a hypothetical investment of $1,000, a 5% annual return and
redemption at the end of each time period, an investor in Institutional
Shares of either Series would have paid transaction and operating expenses at
the end of each year as follows:
<TABLE>
<CAPTION>
Institutional Institutional
Shares Shares
Prime Treasury
Series Series
----------------- -----------------
<S> <C> <C>
1 year ......................................................................... $ 4 $ 4
3 years ........................................................................ $12 $11
5 years ........................................................................ $21 $20
10 years ....................................................................... $48 $45
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
2
<PAGE>
2 Financial Highlights
The Fund has offered the Institutional Shares since June 4, 1990. The
financial highlights included in these tables are a part of the Fund's
financial statements for the periods indicated that have been audited by the
Fund's independent accountants. The financial statements and financial
highlights for the fiscal year ended March 31, 1996 and the report of the
Fund's independent accountants thereon are included in the Statement of
Additional Information which can be obtained at no charge by calling the Fund
at (800) 553-8080.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
Institutional Prime Shares
----------------------------
Year Ended March 31,
----------------------------
1996 1995
------------- -----------
<S> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period .... $ 1.00 $ 1.00
------------- -------------
Income from Investment Operations:
Net investment income ..................... 0.0548 0.0472
Less Distributions:
Dividends from net investment income and
short-term gains ....................... (0.0548) (0.0472)
------------- -------------
Net asset value at end of period .......... $ 1.00 $ 1.00
============= =============
Total Return ................................ 5.62% 4.82%
Ratios to Average Net Assets:
Expenses .................................. 0.35% 0.36%
Net investment income ..................... 5.32% 4.57%
Supplemental Data:
Net assets at end of period ............... $53,699,315 $11,904,716
Number of shares outstanding at end of
period ................................. 53,699,535 11,904,663
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
June 4, 1990*
through
March 31,
1994 1993 1992 1991
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period .... $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------- ------------- ------------- ---------------
Income from Investment Operations:
Net investment income ..................... 0.0294 0.0327 0.0515 0.0617
Less Distributions:
Dividends from net investment income and
short-term gains ....................... (0.0294) (0.0327) (0.0515) (0.0617)
------------- ------------- ------------- ---------------
Net asset value at end of period .......... $ 1.00 $ 1.00 $ 1.00 $ 1.00
============= ============= ============= ===============
Total Return ................................ 2.98% 3.32% 5.27% 7.70%**
Ratios to Average Net Assets:
Expenses .................................. 0.30%* 0.31% 0.32% 0.35%**
Net investment income ..................... 2.94%* 3.24% 5.34% 7.53%**
Supplemental Data:
Net assets at end of period ............... $23,437,449 $28,884,078 $21,867,108 $117,633,558
Number of shares outstanding at end of
period ................................. 23,437,512 28,884,132 21,867,108 117,633,558
</TABLE>
- ------
* The Institutional Prime Shares commenced operations on June 4, 1990.
** Annualized.
3
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
Institutional Treasury Shares
------------------------------
Year Ended March 31,
------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period .... $ 1.00 $ 1.00
------------- -------------
Income from Investment
Operations:
Net investment income ..................... 0.0523 0.0438
Less Distributions:
Dividends from net investment income and
short-term gains ....................... (0.0523) (0.0438)
------------- -------------
Net asset value at end of period .......... $ 1.00 $ 1.00
============= =============
Total Return ................................ 5.36% 4.47%
Ratios to Average Net Assets:
Expenses .................................. 0.33% 0.30%(1)
Net investment income ..................... 5.12% 4.15%(2)
Supplemental Data:
Net assets at end of period ............... $51,822,757 $14,051,995
Number of shares outstanding at end of
period ................................. 51,813,226 14,046,467
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
June 4, 1990*
through
March 31,
1994 1993 1992 1991
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period .... $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------- ------------- ------------- ---------------
Income from Investment
Operations:
Net investment income ..................... 0.0282 0.0314 0.0504 0.0590
Less Distributions:
Dividends from net investment income and
short-term gains ....................... (0.0282) (0.0314) (0.0504) (0.0590)
------------- ------------- ------------- ---------------
Net asset value at end of period .......... $ 1.00 $ 1.00 $ 1.00 $ 1.00
============= ============= ============= ===============
Total Return ................................ 2.86% 3.19% 5.17% 7.36%**
Ratios to Average Net Assets:
Expenses .................................. 0.27%(1) 0.26%(1) 0.27% 0.29%**
Net investment income ..................... 2.82%(2) 3.16%(2) 4.90% 7.02%**
Supplemental Data:
Net assets at end of period ............... $39,692,848 $60,146,987 $63,834,323 $58,017,844
Number of shares outstanding at end of
period ................................. 39,688,259 60,140,874 63,834,323 58,017,844
</TABLE>
- ------
* The Institutional Treasury Shares commenced operations on June 4, 1990.
** Annualized.
(1) Ratio of expenses to average net assets prior to partial fees waived was
0.31%, 0.29% and 0.27% for the years ended March 31, 1995, 1994 and 1993,
espectively.
(2) Ratio of net investment income to average net assets prior to partial fees
waived was 4.14%, 2.80% and 3.15% for the years ended March 31, 1995, 1994,
and 1993, respectively.
4
<PAGE>
3 The Fund and
The Institutional Shares
The Fund is a money market fund that seeks a high level of current income
consistent with preservation of capital and liquidity. The Fund has two
separate portfolios that offer Institutional Shares: the Prime Series and the
Treasury Series (the "Series"). This Prospectus relates exclusively to one of
five classes of shares currently offered by the Prime Series and one of two
classes of shares currently offered by the Treasury Series. The classes of
shares of the Fund offered pursuant to this Prospectus are designed primarily
for institutions as an economical and convenient means for the investment of
short-term funds that they hold for their own account or hold or manage for
others. Such institutions include banks and trust companies, savings
institutions, corporations, insurance companies, investment counselors,
pension funds, employee benefit plans, trusts, estates and educational,
religious and charitable institutions. The other classes of shares of the
Fund are offered to both individual and institutional investors.
All classes of each Series share a common investment objective, portfolio and
advisory fee, but each class has different expenses, shareholder
qualifications and methods of distribution. Expenses of the Fund that are not
directly attributable to the operations of any class or Series are prorated
among all classes of the Fund based upon the relative net assets of each
class. Expenses of the Fund that are not directly attributable to a specific
class but are directly attributable to a specific Series are prorated among
all the classes of such Series based upon the relative net assets of each
such class. Expenses of the Fund that are directly attributable to a class
are charged against the income available for distribution as dividends to
such class.
4 Investment Program
INVESTMENT OBJECTIVE
The investment objective of each Series of the Fund is to seek as high a
level of current income as is consistent with preservation of capital and
liquidity. Each Series endeavors to achieve its objective by investing in a
diversified portfolio of domestic money market instruments that satisfy
strict credit quality standards and that mature within one year or less from
the date of purchase.
PORTFOLIO INVESTMENTS
The Prime Series and the Treasury Series may invest in U.S. Treasury
obligations consisting of marketable securities and instruments issued by the
U.S. Treasury, including bills, notes, bonds and other obligations. It is
management's intention to have 100% of the Treasury Series' assets invested
in such instruments at all times. In unusual circumstances, up to 10% of the
Treasury Series' assets may be invested in repurchase agreements
collateralized by U.S. Treasury obligations. Such investments will be made
only when it is necessary to ensure that the Treasury Series is fully
invested while satisfying its liquidity requirements.
In addition to U.S. Treasury obligations, the Prime Series may invest in
obligations issued or guaranteed as to principal and interest by agencies or
instrumentalities of the U.S. Government. Some of these obligations are
backed by the full
5
<PAGE>
faith and credit of the U.S. Government (e.g., the Government National
Mortgage Association), others are supported by the issuing agency's right to
borrow from the U.S. Treasury (e.g., securities of Federal Home Loan Banks)
and still others are backed only by the credit of the instrumentality (e.g.,
the Federal National Mortgage Association).
The Prime Series may also invest in a broad range of bank and commercial
obligations that the investment advisor, under guidelines established by the
Board of Directors, believes present minimal credit risk and that satisfy the
criteria for such obligations described below:
Bank Instruments consisting mainly of certificates of deposit and bankers'
acceptances that (i) are issued by U.S. banks that satisfy applicable quality
standards; or (ii) are fully insured as to principal and interest by the
Federal Deposit Insurance Corporation.
Commercial Instruments consisting mainly of commercial paper and variable
amount master demand notes. Eligible commercial paper is limited to
short-term unsecured promissory notes issued by corporations that (i) are
rated Prime-1 by Moody's Investors Service, Inc. ("Moody's") or A-1+ or A-1
by Standard & Poor's Ratings Group ("S&P"); or (ii) if not rated by Moody's
or S&P, are of comparable quality to Prime-1 or A-1+ and A-1 instruments as
determined by the Fund's investment advisor; and (iii) are otherwise
"Eligible Securities" under Rule 2a-7 of the Investment Company Act of 1940.
Variable amount master demand notes are unsecured demand notes that permit
investment of fluctuating amounts of money at variable rates of interest
pursuant to arrangements with issuers who meet the foregoing quality
criteria. The interest rate on a variable amount master demand note is
periodically redetermined according to a prescribed formula. Although there
is no secondary market in master demand notes, the payee may demand payment
of the principal amount of the note on relatively short notice. All master
demand notes acquired by the Prime Series will be payable within a prescribed
notice period not to exceed seven days. (See the Statement of Additional
Information for information with respect to commercial paper and bond
ratings.)
The Fund may enter into the following arrangements with respect to both
Series:
Repurchase Agreements under which the purchaser (for example, a Series of
the Fund) acquires ownership of an obligation and the seller agrees, at the
time of the sale, to repurchase the obligation at a mutually agreed upon time
and price, thereby determining the yield during the purchaser's holding
period. Although the underlying collateral for repurchase agreements may have
maturities exceeding one year, repurchase agreements entered into by a Series
of the Fund will not have a stated maturity in excess of seven days from the
date of purchase. If the seller of a repurchase agreement fails to repurchase
the obligation in accordance with the terms of the agreement, the Series of
the Fund that entered into the repurchase agreement may incur a loss to the
extent that the proceeds realized on the sale of the underlying obligation
are less than the repurchase price. In the event of the insolvency of a
seller that defaults on its repurchase obligation, disposition of the
securities underlying the repurchase agreement could be delayed pending court
or administrative action.
When-Issued Securities involving commitments by a Series to purchase
portfolio securities on a "when-issued" basis. When-issued securities are
securities purchased for delivery beyond the normal settlement date at a
stated price and
6
<PAGE>
yield. A Series will generally not pay for such securities or start earning
interest on them until they are received. When-issued commitments will not be
used for speculative purposes and will be entered into only with the
intention of actually acquiring the securities.
The Prime Series may also enter into the following arrangements:
Reverse Repurchase Agreements involving the sale of money market instruments
held by the Prime Series with an agreement to repurchase the instruments at
an agreed upon price and date. The Prime Series will employ reverse
repurchase agreements only when necessary to meet unanticipated net
redemptions so as to avoid liquidating other money market instruments during
unfavorable market conditions. The Prime Series will utilize reverse
repurchase agreements when the interest income to be earned from portfolio
investments that would otherwise have to be liquidated to meet redemptions is
greater than the interest expense incurred as a result of the reverse
repurchase transactions. Reverse repurchase agreements involve the risk that
the market value of securities retained by the Prime Series in lieu of
liquidation may decline below the repurchase price of the securities sold by
the Prime Series that it is obligated to repurchase.
INVESTMENT RESTRICTIONS
The Fund's investment program for both Series is subject to a number of
investment restrictions that reflect self-imposed standards as well as
federal and state regulatory limitations, the most significant of which are
set forth below. The Fund will not:
(1) purchase securities of any one issuer (other than obligations of the
U.S. Government, its agencies or instrumentalities) if immediately after such
purchase more than 5% of the value of a Series' assets would be invested in
such issuer;
(2) with respect to the Prime Series only, purchase any commercial paper or
variable rate demand notes that would cause more than 25% of the value of the
Prime Series' total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry;
(3) borrow money or issue senior securities, except that (i) either Series
may borrow money from banks for temporary purposes in amounts up to 10% of
the value of such Series' total assets at the time of borrowing, provided
that any such borrowings by such Series will be repaid prior to the purchase
of additional portfolio securities by such Series, (ii) the Prime Series may
enter into reverse repurchase agreements in accordance with its investment
program and (iii) either Series of the Fund may enter into commitments to
purchase securities in accordance with the investment program of such Series,
which commitments may be considered the issuance of senior securities; or
(4) lend money or securities except to the extent that a Series' investments
may be considered loans.
Each Series' investment objective as described under "Investment Objective"
and the foregoing restrictions are matters of fundamental policy and may not
be changed without the affirmative vote of a majority of the outstanding
shares of the Series affected. The Treasury Series has a policy, which may be
changed by the Fund's Board of Directors and without shareholder approval, of
limiting investments in U.S. Government obligations to U.S. Treasury
obligations.
7
<PAGE>
5 How to Invest in
Institutional Shares
of the Fund
GENERAL INFORMATION ON PURCHASES
Institutions (e.g., banks and trust companies, savings institutions,
corporations, insurance companies, investment counsellors, pension funds,
employee benefit plans, trusts, estates and educational, religious and
charitable institutions) may purchase Institutional Shares of both Series
through Alex. Brown & Sons Incorporated ("Alex. Brown"). Institutions
interested in establishing an account with the Fund should contact Alex.
Brown for details at (410) 727-1700.
The minimum initial investment in Institutional Shares of either Series of
the Fund is $1,000,000; there is no minimum for clients of investment
advisory affiliates of Alex. Brown; and there is no minimum for subsequent
investments in the same Series. Orders for the purchase of Institutional
Shares are accepted only on a "business day of the Fund," which means any day
on which PNC Bank, National Association ("PNC"), the Fund's custodian, and
the New York Stock Exchange are open for business. It is expected that during
the next twelve months, PNC and/or the New York Stock Exchange will be closed
on Saturdays and Sundays and on New Year's Day, Martin Luther King, Jr.'s
Birthday, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Columbus Day, Veterans' Day, Thanksgiving Day and Christmas Day.
Orders to purchase Institutional Shares are executed at the net asset value
of Fund shares as next determined after the order is effective. Because the
Fund uses the amortized cost method of valuing the portfolio securities of
each Series and rounds the per share net asset value of shares of each
Series, it is anticipated that the net asset value of each Series will remain
constant at $1.00 per share, but there can be no assurance that this
objective can be met.
The net asset value of all shares of each of the Fund's Series is determined
once daily as of 12:00 noon (Eastern Time) on each business day of the Fund. An
order placed in the manner described below will be effective the same day if
federal funds are wired to the Fund's custodian before the close of business on
that day. Share purchases for the Treasury Series effected before 11 a.m.
(Eastern Time) and share purchases for the Prime Series effected before 12:00
noon (Eastern Time) begin to earn dividends on the same business day. Share
purchases received after these times begin to earn dividends on the following
day.
Institutions may place orders to purchase Institutional Shares either by calling
Alex. Brown at (410) 727-1700 and then wiring federal funds, or by wiring
federal funds with the necessary instructions as described below. A shareholder
who places an order by telephone will be asked to furnish:
--The shareholder's Fund account number
--The amount to be invested
--The Series selected for investment (Prime Series or Treasury Series)
Federal Funds should be wired to:
PNC Bank
a/c Alex. Brown & Sons Incorporated
Acct. #5918197
Philadelphia, PA 19103
8
<PAGE>
referring in the wire to:
--Alex. Brown Cash Reserve Fund, Inc. (Institutional Shares)
--The Fund account number (and, if available, the shareholder account
number)
--The amount to be invested
--Either the Prime Series or the Treasury Series
OTHER INFORMATION
Periodic statements of account from Alex. Brown will reflect all dividends,
purchases and redemptions of Institutional Shares. The Fund and Alex. Brown
have arranged for PNC to offer sub-accounting services to Fund shareholders
and maintain information with respect to underlying share owners.
The Fund reserves the right to reject any order for the purchase of
Institutional Shares.
6 Dividends and Taxes
DIVIDENDS
All of the net income earned on the Prime Series and the Treasury Series is
normally declared as dividends daily to the respective shareholders of record of
each Series. Dividends on both Series are normally payable on the first day that
a share purchase order is effective but not on the date that a redemption order
is effective. Dividends are declared daily and reinvested monthly in the form of
additional full and fractional shares of the same Series at net asset value,
unless the shareholder has elected to have dividends paid in cash.
TAXES
The following is only a general summary of certain federal tax considerations
affecting the Fund and the shareholders. No attempt is made to present a
detailed explanation of the tax treatment of the Fund or the shareholders,
and the discussion herein is not intended as a substitute for careful tax
planning.
The following summary is based on current tax laws and regulations, which may
be changed by legislative, judicial or administrative action.
Each Series 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 long as a Series qualifies for this tax treatment, it will not be required
to pay federal income taxes on amounts distributed to shareholders; but
shareholders, unless otherwise exempt, will pay taxes on the amount so
distributed.
Distributions of net investment company taxable income (generally, net
investment income plus the excess, if any, of net short-term capital gains
over net long-term capital losses) are taxed to shareholders as ordinary
income. Distributions will not be eligible for the dividends received
deduction otherwise available to corporate shareholders. Although neither
Series expects to realize any long-term capital gains, any distributions of
net capital gains (the excess of net long-term capital gains over net
short-term capital losses) will be taxable to shareholders as long-term
capital gains, regardless of the length of time a shareholder has held the
shares.
9
<PAGE>
Under certain circumstances, shareholders of the Treasury Series may not be
required to pay state income tax on dividends to the extent such dividends
are derived from interest on U.S. Treasury obligations. State laws vary and
investors are encouraged to consult with their tax advisors on this issue.
The Fund intends to make sufficient distributions of its ordinary income and
capital gain net income prior to the end of each calendar year to avoid
liability for federal excise tax.
The sale, exchange or redemption of Institutional Shares is a taxable event
for the shareholder.
Ordinarily, shareholders will include in their taxable income all dividends
declared by a Series in the year of payment. However, dividends declared
payable to shareholders of record in December of one year, but paid in
January of the following year, will be deemed for tax purposes to have been
received by the shareholders and paid by a Series in the year in which the
dividends were declared.
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 own tax advisors concerning the application of state and local taxes to
investments in the Fund, which may differ from the federal income tax
consequences described above. Additional information concerning taxes is set
forth in the Statement of Additional Information.
7 How to Redeem Shares
Shareholders may redeem all or part of their Institutional Shares of either
Series on any business day of the Fund by transmitting a redemption order to
Alex. Brown by either of the methods outlined below. A redemption request is
effected at the net asset value next determined after tender of Institutional
Shares for redemption.
Shareholders may submit redemption orders by calling Alex. Brown at
(410) 727-1700. Telephone redemption privileges are automatic. Both Alex. Brown
and the Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. These procedures include requiring the
investor to provide certain personal identification information at the time
the account is opened and prior to effecting each transaction requested by
telephone. In addition, investors may be required to provide additional
telecopied instructions of redemption requests. The Fund or Alex. Brown may
be liable for any losses due to unauthorized or fraudulent telephone
instructions if either of them does not employ these procedures. Neither the
Fund nor Alex. Brown will be responsible for any loss, liability, cost or
expense incurred in following instructions received by telephone that either
reasonably believes to be genuine. During periods of extreme economic or
market changes, shareholders may experience difficulty in effecting telephone
redemptions. In such event, requests should be made by regular or express
mail to Alex. Brown, 135 East Baltimore Street, Baltimore, Maryland 21202 or
to the Fund's transfer agent at its address listed under "General Information
- -- Custodian, Transfer Agent and Accounting Services."
Redemption orders for the Treasury Series received after 11:00 a.m. (Eastern
Time) and redemption orders for the Prime Series received after 12:00 noon
(Eastern Time) will be executed at the net asset value of the Series to be
redeemed, next determined after the receipt of the order.
10
<PAGE>
Dividends payable up to the date of redemption on redeemed shares will be
paid on the next dividend payment date. If all of the Institutional Shares of
a Series of the Fund in an Alex. Brown account have been redeemed on the
dividend payment date, the dividend will be paid in cash to the shareholder.
8 Management of the Fund
BOARD OF DIRECTORS
The overall business and affairs of the Fund are managed by its Board of
Directors. The Board of Directors approves all significant agreements between
the Fund and persons or companies furnishing services to the Fund, including
the Fund's agreements with its investment advisor, sub-advisor, distributor,
custodian and transfer agent. The day-to-day operations of the Fund are
delegated to its officers, to Alex. Brown and to Investment Company Capital
Corp. ("ICC"), the Fund's investment advisor subject to the investment
objectives and policies of each Series of the Fund and to general supervision
of the Fund's Board of Directors. Alex. Brown and ICC also furnish or procure
on behalf of the Prime and Treasury Series all services necessary to the
proper conduct of such Series' business. Four Directors and all of the
officers of the Fund are officers or employees of Alex. Brown or ICC. A
majority of the Board of Directors of the Fund have no affiliation with Alex.
Brown or ICC.
INVESTMENT ADVISOR
Investment Company Capital Corp., 135 East Baltimore Street, Baltimore,
Maryland 21202, an indirect subsidiary of Alex. Brown Incorporated (described
below), was organized in 1987 and acts as the investment advisor to the Prime
Series and the Treasury Series. ICC supervises and manages the Series'
operations and generally provides management and administrative services for
the Series. ICC is also investment advisor to, and Alex. Brown acts as
distributor for, several funds in the Flag Investors family of funds which,
as of May 31, 1996, had net assets of approximately $1.1 billion.
Pursuant to a new advisory agreement, which became effective August 22, 1995,
ICC is entitled to receive a fee from the Fund, calculated daily and payable
monthly, at the following annual rates based upon the Fund's aggregate
average daily net assets: .30% of the first $500 million, .26% of the next
$500 million, .25% of the next $500 million, .24% of the next $1 billion,
.23% of the next $1 billion and .22% of that portion in excess of $3.5
billion. Each Series pays its share of the foregoing fee in proportion to its
relative net assets. In addition, ICC is entitled to receive an additional
fee with respect to the Prime Series, calculated daily and paid monthly, at
the annual rate of .02% of the Prime Series' average daily net
11
<PAGE>
assets. As compensation for providing investment advisory services to the Prime
Series and the Treasury Series for the period from August 22, 1995 through March
31, 1996, ICC received an annualized fee equal to .27% of the Prime Series'
average daily net assets and .25% of the Treasury Series' average daily net
assets. ICC may, from time to time, voluntarily waive a portion of its advisory
fee with respect to either series to preserve or enhance the performance of the
Series.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Treasury Series. (See "Custodian,
Transfer Agent and Accounting Services.")
In the fiscal year ended March 31, 1996, the expenses borne by the Prime Series
and the Treasury Series, respectively, for the Institutional Shares, including
the fees to ICC, amounted to .35% of the Prime Series' average daily net assets
and .33% of the Treasury Series' average daily net assets.
DISTRIBUTOR
The Fund has entered into a distribution agreement dated as of April 4, 1990
(the "Distribution Agreement") with Alex. Brown, 135 East Baltimore Street,
Baltimore, Maryland 21202. Alex. Brown is an investment banking firm that
offers a broad range of investment services to individual, institutional,
corporate and municipal clients. It is a wholly-owned subsidiary of Alex.
Brown Incorporated, which has engaged directly and through subsidiaries and
affiliates in the investment business since 1800. Alex. Brown is a member of
the New York Stock Exchange and other leading securities exchanges.
Headquartered in Baltimore, Maryland, Alex. Brown has offices throughout the
United States and, through subsidiaries, maintains offices in London,
England, Geneva, Switzerland and Tokyo, Japan. Alex. Brown serves as the
exclusive distributor for shares of the Fund's three Series. Alex. Brown
receives no compensation for its services with respect to the Institutional
Shares.
Alex. Brown bears all expenses associated with advertisements, promotional
materials, sales literature and printing and mailing prospectuses to other
than Fund shareholders.
9 Current Yield
From time to time the Fund advertises the "yield" and "effective yield" of
the Institutional Shares of either Series. Both yield figures are based on
historical earnings and are not intended to indicate future performance. The
"yield" of the Series refers to the income generated by an investment in the
Series over a seven-day period (which period will be stated in the
advertisement). This income is then "annualized," that is, the amount of
income generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly, but when
annualized, the income earned by an investment in the Series is assumed to be
reinvested. The "effective yield" will be slightly higher than the "yield"
because of the compounding effect of this assumed reinvestment.
10 General Information
DESCRIPTION OF SHARES
Shares of the Fund are divided into three series, each with a par value of
$.001 -- the Prime
12
<PAGE>
Series, the Treasury Series and the Tax-Free Series. Each of the Series
currently issues one or more classes, which classes differ from each other
principally in distribution fees, in some instances shareholder servicing fees,
and the method of distribution, which may affect performance. For information
regarding the other classes of shares, please call (800) 553- 8080. Shares of
the Fund have equal rights with respect to voting, except that the holders of
shares of a particular Series or class will have the exclusive right to vote on
matters affecting only the rights of the holders of such Series or class. For
example, holders of a particular Series or class will have the exclusive right
to vote on any investment advisory agreement or investment restriction that
relates only to such Series or class. The holders of each Series have
distinctive rights with respect to dividends and redemption that are more fully
described in this Prospectus. In the event of dissolution or liquidation,
holders of each Series will receive prorata, subject to the rights of creditors,
(a) the proceeds of the sale of the assets held in the respective Series less
(b) the liabilities of the Fund attributable to the respective Series or
allocated among all Series based on the respective liquidation value of each
Series. 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. A meeting of shareholders may be called at the request of
the holders of 10% or more of the Fund's outstanding shares.
There are no preemptive or conversion rights applicable to any of the Fund's
shares. The Fund's shares, when issued, will be fully paid and
non-assessable. The Board of Directors may create additional series or
classes of Fund shares without shareholder approval.
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
PNC, a national banking association with offices at Airport Business Center,
200 Stevens Drive, Lester, Pennsylvania 19113, acts as custodian for the
Fund's portfolio securities and cash. Investment Company Capital Corp., 135
East Baltimore Street, Baltimore, Maryland 21202 (telephone: (800) 553-8080),
the Fund's investment advisor, also serves as the Fund's transfer and
dividend disbursing agent and provides accounting services to the Prime
Series and the Treasury Series. As compensation for providing accounting
services to the Prime Series and the Treasury Series for the fiscal year
ended March 31, 1996, ICC received from the Fund an annual fee equal to .01%
of the Prime Series' average daily net assets and .02% of the Treasury
Series' average daily net assets. (See the Statement of Additional
Information.)
ANNUAL MEETINGS
Unless required under applicable Maryland law, the Fund does not expect to
hold annual meetings of shareholders. However, shareholders may remove
directors from office by votes cast at a meeting of shareholders or by
written consent. A meeting of shareholders may be called at the request of
the holders of 10% or more of the Fund's outstanding shares.
13
<PAGE>
REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The annual
statements are audited by the Fund's independent accountants, Coopers &
Lybrand L.L.P.
FUND COUNSEL
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
SHAREHOLDER INQUIRIES
Shareholders with inquiries concerning their shares should contact the Fund
at (800) 553-8080.
14
<PAGE>
ALEX. BROWN CASH RESERVE FUND, INC.
BOARD OF DIRECTORS
W. JAMES PRICE
Chairman
RICHARD T. HALE EUGENE J. McDONALD
Director Director
CHARLES W. COLE, JR. REBECCA W. RIMEL
Director Director
JAMES J. CUNNANE TRUMAN T. SEMANS
Director Director
JOHN F. KROEGER CARL W. VOGT
Director Director
LOUIS E. LEVY HARRY WOOLF
Director Director
- -----------------------------------------------------------------------------
OFFICERS
W. JAMES PRICE M. ELLIOTT RANDOLPH, JR. JOSEPH A. FINELLI
Chairman Vice President Treasurer
RICHARD T. HALE PAUL D. CORBIN EDWARD J. STOKEN
President Vice President Secretary
EDWARD J. VEILLEUX BRIAN C. NELSON LAURIE D. DEPRINE
Executive Vice President Vice President Assistant Secretary
MONICA M. HAUSNER
Vice President
- -----------------------------------------------------------------------------
Distributor Custodian
ALEX. BROWN & SONS PNC BANK
INCORPORATED Airport Business Center
135 East Baltimore Street 200 Stevens Drive
Baltimore, Maryland 21202 Lester, Pennsylvania 19113
(410) 727-1700
Investment Advisor Independent Accountants
INVESTMENT COMPANY CAPITAL CORP. COOPERS & LYBRAND L.L.P.
135 East Baltimore Street 2400 Eleven Penn Center
Baltimore, Maryland 21202 Philadelphia, Pennsylvania 19103
Transfer Agent
INVESTMENT COMPANY CAPITAL CORP.
135 East Baltimore Street
Baltimore, Maryland 21202
(800) 553-8080
<PAGE>
QUALITY CASH RESERVE PRIME SHARES
P.O. Box 17250
Baltimore, Maryland 21203
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Third Class Mail
U.S. POSTAGE
PAID
Baltimore, M.D.
Permit No. 8614
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QUALITY
CASH RESERVE
PRIME SHARES
Prospectus
August 1, 1996
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QUALITY CASH RESERVE PRIME SHARES
(A Class of Alex. Brown Cash Reserve Fund, Inc.)
P.O. Box 17250
Baltimore, Maryland, 21203
Alex. Brown Cash Reserve Fund, Inc. (the "Fund") is a money market fund
designed to seek as high a level of current income as is consistent with
preservation of capital and liquidity. This Prospectus relates to the Quality
Cash Reserve Prime Shares (the "Shares"). Shares are available exclusively
through broker-dealers that provide certain shareholder services
("Participating Dealers"). These include broker-dealers that have
correspondent relationships with Alex. Brown & Sons Incorporated ("Alex.
Brown"), the Fund's distributor.
Other principal features of the Shares:
o Shares are sold without purchase or redemption charges;
o Dividends are declared daily and paid monthly in additional shares or
cash; and
o Wire and telephone transfers, free check redemptions and other convenient
cash management services are available.
For current yield information and for purchase and redemption information,
call any Participating Dealer.
The Fund's Statement of Additional Information and separate prospectuses for
the other Series and classes of the Fund may be obtained without charge from
Alex. Brown or any securities dealer that has entered into a dealer agreement
with Alex. Brown with respect to such other Series or classes.
THIS PROSPECTUS SETS FORTH BASIC INFORMATION THAT INVESTORS SHOULD KNOW ABOUT
THE FUND PRIOR TO INVESTING AND SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE. A STATEMENT OF ADDITIONAL INFORMATION DATED AUGUST 1, 1996 HAS
BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS HEREBY
INCORPORATED BY REFERENCE. IT IS AVAILABLE UPON REQUEST AND WITHOUT CHARGE BY
CALLING THE FUND AT (800) 553-8080.
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TABLE OF CONTENTS
Page
1. Table of Fees and Expenses 2
2. Financial Highlights 3
3. The Fund and the Quality
Cash Reserve Prime Shares 4
4. Investment Program 4
5. How to Invest in the Quality
Cash Reserve Prime Shares 6
6. How to Redeem Shares 8
7. Dividends and Taxes 9
8. Management of the Fund 10
9. Current Yield 12
10. General Information 12
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE PRIME SERIES WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK. THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus Dated: August 1, 1996
1
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1 Table of Fees and
Expenses
The following table of fees and expenses is provided to assist investors in
understanding the various costs and expenses that an investor in the Quality
Cash Reserve Prime Shares may bear directly or indirectly. The percentages
shown below expressing Annual Fund Operating Expenses are restated using
current, rather than historical, expenses. Actual expenses may be greater or
less than those shown. Due to the continuous nature of Rule 12b-1 fees,
long-term shareholders of the Fund may pay more than the equivalent of the
maximum front-end sales charges otherwise permitted by the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses
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<S> <C>
Maximum Sales Charge Imposed on Purchases .......................................... None
Masimum Sales Charge Imposed on Reinvested Dividends ............................... None
Maximum Deferred Sales Charge ...................................................... None
Redemption Fees .................................................................... None
Annual Fund Operating Expenses (after fee waivers)
(as a percentage of average daily net assets)
---------------------------------------------
Management Fees .................................................................... .27%
12b-1 Fees (after fee waivers) ..................................................... .53%*
Other Expenses ..................................................................... .10%
-----
Total Fund Operating Expenses (after fee waivers) .................................. .90%*
=====
</TABLE>
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* Alex. Brown currently intends to reduce its annual 12b-1 Fees, on a
voluntary basis, to .53% of the Quality Cash Reserve Prime Shares' average
daily net assets. Absent fee waivers, 12b-1 Fees would be .60% and Total
Fund Operating Expenses would be .97% of the Quality Cash Reserve Prime
Shares' average daily net assets.
EXAMPLE OF QUALITY CASH RESERVE PRIME SHARES EXPENSES
The following is an illustration of the total transaction and operating
expenses that an investor in Quality Cash Reserve Prime Shares would bear
over different periods of time, assuming a hypothetical investment of $1,000,
a 5% annual return on the investment, and redemption at the end of the
period:*
1 year ............................................. $ 9
3 years ............................................. $ 29
5 years ............................................. $ 51
10 years ............................................. $116
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* The example is based on Total Fund Operating Expenses after fee waivers.
Absent fee waivers, expenses would be higher.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
2
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2 Financial Highlights
The Fund has offered the Quality Cash Reserve Prime Shares since May 6, 1991.
The financial highlights included in this table are a part of the Fund's
financial statements for the periods indicated that have been audited by the
Fund's independent accountants. The financial statements and financial
highlights for the fiscal year ended March 31, 1996 and the report of the Fund's
independent accountants thereon are included in the Statement of Additional
Information, which can be obtained at no charge by calling the Fund at (800)
553-8080.
Financial Highlights
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Quality Cash Reserve Prime Shares
----------------------------------------------------------------------------------
Year Ended March 31, May 6, 1991
---------------------------------------------------------------- through
1996 1995 1994 1993 March 31, 1992*
-------------- ------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------- ------------- ------------- -------------- ---------------
Income from Investment Operations:
Net investment income ................. 0.0493 0.0402 0.0218 0.0253 0.0399
Less Distributions:
Dividends from net investment income
and short-term gains ................ (0.0493) (0.0402) (0.0218) (0.0253) (0.0399)
-------------- ------------- ------------- -------------- ---------------
Net asset value at end of period ...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============== ============= ============= ============== ===============
Total Return ............................ 5.04% 4.09% 2.20% 2.53% 4.30%**
Ratios to Average Net Assets:
Expenses .............................. 0.90%(1) 0.96% 1.06% 1.04% 0.96%**
Net investment income ................. 4.91%(2) 4.04% 2.18% 2.53% 4.30%**
Supplemental Data:
Net assets at end of period ........... $ 156,412,213 $ 94,592,158 $ 92,678,440 $ 101,321,868 $ 94,887,669
Number of shares outstanding at end of
period ............................. 156,412,393 94,591,979 92,678,268 101,321,668 94,887,669
</TABLE>
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* The Quality Cash Reserve Prime Shares commenced operations on May 6, 1991.
** Annualized.
(1) Ratio of expenses to average daily net assets prior to partial fee waivers
was 0.95%.
(2) Ratio of net investment income to average daily net assets prior to partial
fee waivers was 4.86%.
3
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3 The Fund and the Quality
Cash Reserve Prime Shares
The Fund is a money market fund that seeks a high level of current income
consistent with preservation of capital and liquidity. The Fund consists of
three separate portfolios: the Prime Series, the Treasury Series and the
Tax-Free Series. This Prospectus relates exclusively to one of five classes
of shares currently offered by the Prime Series. The class of shares of the
Prime Series offered pursuant to this Prospectus has been designated as the
Quality Cash Reserve Prime Shares. All classes of the Prime Series share a
common investment objective, portfolio and advisory fee, but each class has
different expenses, shareholder qualifications and methods of distribution.
Expenses of the Fund that are not directly attributable to the operations of
any class or Series are prorated among all classes of the Fund based upon the
relative net assets of each class. Expenses of the Fund that are not directly
attributable to a specific class but are directly attributable to a specific
Series are prorated among all the classes of such Series based upon the
relative net assets of each such class. Expenses of the Fund that are
directly attributable to a class are charged against the income available for
distribution as dividends to such class.
Quality Cash Reserve Prime Shares are offered primarily to customers of
Participating Dealers that have correspondent relationships with Alex. Brown
as a convenient means of investing cash in their brokerage accounts. Quality
Cash Reserve Prime Shares are also offered through other Participating
Dealers that agree to provide certain shareholder services. (See "How to
Invest in the Quality Cash Reserve Prime Shares.")
4 Investment Program
INVESTMENT OBJECTIVE
The investment objective of the Prime Series is to seek as high a level of
current income as is consistent with preservation of capital and liquidity.
The Prime Series endeavors to achieve this objective by investing in a
diversified portfolio of domestic money market instruments that satisfy
strict credit quality standards and that mature within one year or less from
the date of purchase.
PORTFOLIO INVESTMENTS
The Prime Series may invest in U.S. Treasury obligations consisting of
marketable securities and instruments issued by the U.S. Treasury, including
bills, notes, bonds and other obligations. In addition to U.S. Treasury
obligations and repurchase agreements collateralized by U.S. Treasury
securities, the Prime Series may invest in obligations issued or guaranteed
as to principal and interest by agencies or instrumentalities of the U.S.
Government. Some of these obligations are backed by the full faith and credit
of the U.S. Government (e.g., the Government National Mortgage Association),
others are supported by the issuing agency's right to borrow from the U.S.
Treasury (e.g., securities of Federal Home Loan Banks) and still others are
backed only by the credit of the instrumentality (e.g., the Federal National
Mortgage Association).
The Prime Series may also invest in a broad range of commercial and bank
obligations that the investment advisor, under guidelines established by the
Board of Directors, believes present minimal credit risk and that satisfy the
criteria for such obligations described below:
The Prime Series may invest in instruments consisting of commercial paper and
variable amount master demand notes. Eligible commercial paper is limited to
short-term, unsecured promissory
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notes issued by corporations that (i) are rated Prime-1 by Moody's Investor
Services, Inc. ("Moody's") or A-1+ or A-1 by Standard and Poor's Ratings
Group ("S&P"), or (ii) if not rated by Moody's or S&P, are of comparable
quality to Prime-1 or A-1+ or A-1 instruments as determined by the Fund's
investment advisor, and (iii) are otherwise "Eligible Securities" as defined
in Rule 2a-7 under the Investment Company Act of 1940. Variable amount master
demand notes are unsecured demand notes that permit investment of fluctuating
amounts of money at variable rates of interest pursuant to arrangements with
issuers who meet the foregoing quality criteria. The interest rate on a
variable amount master demand note is periodically redetermined according to
a prescribed formula. Although there is no secondary market in master demand
notes, the payee may demand payment of the principal amount of the note on
relatively short notice. All master demand notes acquired by the Prime Series
will be payable within a prescribed notice period not to exceed seven days.
(See the Statement of Additional Information with respect to commercial paper
and bond ratings.)
The Prime Series may also invest in bank instruments, consisting mainly of
certificates of deposit and bankers' acceptances, that (i) are issued by U.S.
banks that satisfy applicable quality standards, or (ii) are fully insured as
to principal and interest by the Federal Deposit Insurance Corporation.
OTHER INVESTMENT PRACTICES
The Prime Series may enter into the following arrangements:
Repurchase Agreements under which the purchaser (for example, the Prime
Series) acquires ownership of an obligation and the seller agrees, at the
time of the sale, to repurchase the obligation at a mutually agreed upon time
and price, thereby determining the yield during the purchaser's holding
period. Although the underlying collateral for repurchase agreements may have
maturities exceeding one year, repurchase agreements entered into by the
Prime Series will not have a stated maturity in excess of seven days from the
date of purchase. If the seller of a repurchase agreement fails to repurchase
the obligation in accordance with the terms of the agreement, the Prime
Series may incur a loss to the extent that the proceeds realized on the sale
of the underlying obligation are less than the repurchase price. In the event
of the insolvency of a seller that defaults on its repurchase obligation,
disposition of the securities underlying the repurchase agreement could be
delayed pending court or administrative action.
When-Issued Securities involving commitments by the Prime Series to purchase
portfolio securities on a "when-issued" basis. When-issued securities are
securities purchased for delivery beyond the normal settlement date at a
stated price and yield. The Prime Series will generally not pay for such
securities or start earning interest on them until they are received.
When-issued commitments will not be used for speculative purposes and will be
entered into only with the intention of actually acquiring the securities.
Reverse Repurchase Agreements involving the sale of money market instruments
held by the Prime Series, with an agreement to repurchase the instruments at
an agreed upon price and date. The Prime Series will employ reverse
repurchase agreements only when necessary to meet unanticipated net
redemptions so as to avoid liquidating other money market instruments during
unfavorable market conditions. The Prime Series will utilize reverse
repurchase agreements when the interest income to be earned from portfolio
investments, which would otherwise have to be
5
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liquidated to meet redemptions, is greater than the interest expense incurred
as a result of the reverse repurchase transactions. Reverse repurchase
agreements involve the risk that the market value of securities retained by
the Prime Series in lieu of liquidation may decline below the repurchase
price of the securities sold by the Prime Series, which it is obligated to
repurchase.
INVESTMENT RESTRICTIONS
The Prime Series investment program is subject to a number of investment
restrictions that reflect self-imposed standards as well as federal and state
regulatory limitations, the most significant of which are set forth below.
The Prime Series will not:
(1) purchase securities of any issuer (other than obligations of the U.S.
Government, its agencies or instrumentalities), if immediately after such
purchase more than 5% of the value of the Prime Series' assets would be
invested in such issuer;
(2) borrow money or issue senior securities, except that the Prime Series may
(i) borrow money from banks for temporary purposes in amounts up to 10% of
the value of its total assets at the time of borrowing, provided that any
such borrowings will be repaid prior to the purchase of additional portfolio
securities, (ii) enter into reverse repurchase agreements in accordance with
its investment program and (iii) enter into commitments to purchase
securities in accordance with its investment program;
(3) lend money or securities except to the extent that the Prime Series'
investments may be considered loans; or
(4) purchase any commercial paper or variable rate demand notes that would
cause more than 25% of the value of the Prime Series' total assets at the
time of such purchase to be invested in the securities of one or more issuers
conducting their principal business activities in the same industry.
The investment objective of the Prime Series as described under "Investment
Objective" and the foregoing restrictions are matters of fundamental policy
except where noted and may not be changed without the affirmative vote of a
majority of the outstanding shares of the Prime Series.
5 How to Invest in the
Quality Cash Reserve
Prime Shares
GENERAL INFORMATION ON PURCHASES
Quality Cash Reserve Prime Shares are offered primarily to customers of
Participating Dealers that have correspondent relationships with Alex. Brown,
but Quality Cash Reserve Prime Shares are also offered through other
Participating Dealers that provide certain shareholder services. Purchases of
Quality Cash Reserve Prime Shares may be made only through Participating
Dealers. The terms and conditions under which purchases may be effected are
governed by the investor's agreement with the Participating Dealer.
The minimum initial investment is $1,500. Subsequent investments must be at
least $100. Orders for purchase of Quality Cash Reserve Prime Shares are
accepted only on a "business day of the Fund," which means any day on which
PNC Bank, National Association ("PNC"), the Fund's custodian, and the New
York Stock
6
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Exchange are open for business. It is expected that during the next twelve
months, PNC and/or the New York Stock Exchange will be closed on Saturdays
and Sundays and on New Year's Day, Martin Luther King, Jr.'s Birthday,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans' Day, Thanksgiving Day and Christmas Day.
An order to purchase Quality Cash Reserve Prime Shares is effective only when
a Participating Dealer receives it in proper form and the investor has an
available cash balance in his account for investment. The Fund reserves the
right to reject any order for purchase of Quality Cash Reserve Prime Shares.
Quality Cash Reserve Prime Shares are purchased at the net asset value next
determined after acceptance of the order.
The net asset value of the Prime Series is determined once daily as of 12:00
noon (Eastern Time) on each business day of the Fund. Because the Fund uses
the amortized cost method of valuing the portfolio securities of the Prime
Series and rounds the per share net asset value of shares of the Prime
Series, it is anticipated that the net asset value of the Prime Series will
remain constant at $1.00 per share, but there can be no assurance that this
objective can be met. Share purchases effected before 12:00 noon (Eastern
Time) begin to earn dividends on the same business day. Share purchases
received after 12:00 noon (Eastern Time) begin to earn dividends on the
following day. Payments transmitted by check are normally converted into
federal funds within two business days and are accepted subject to collection
at full face amount.
PURCHASES THROUGH AN ACCOUNT
Share purchases may be effected through an investor's account maintained with
a Participating Dealer, through procedures established in connection with the
requirements of the Fund and such Participating Dealer. A Participating
Dealer may impose minimum investor account requirements. Although
Participating Dealers do not impose sales charges for purchases of Quality
Cash Reserve Prime Shares, brokers may charge an investor's account fees for
services provided to the account. (See "Management of the Fund--
Distributor.") Information concerning account requirements, services and
charges should be obtained from an investor's broker. This Prospectus should
be read in conjunction with any information received from a Participating
Dealer.
AUTOMATIC INVESTMENT AND REDEMPTION
PROGRAM
The Fund has established a special procedure whereby proceeds from sales of
securities will be combined with other available credit balances in a
Participating Dealer's customer's account (the "account") on the settlement date
and invested in Quality Cash Reserve Prime Shares. In addition, all credit
balances in an account at the end of each day are invested on the next business
day of the Fund so long as the resulting Fund balance is $100 or more.
Additionally, Fund shares will be redeemed automatically to pay for securities
purchases in the account. Such redemption will be made on the settlement date of
the securities purchase.
The initial purchase requirement of $1,500 does not apply to those shareholders
who elect to take part in the Automatic Investment and Redemption Program.
Investors should contact a Participating Dealer for more information.
7
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6 How to Redeem Shares
Shareholders may redeem all or part of their Quality Cash Reserve Prime
Shares on any business day of the Fund by transmitting a redemption order to
a Participating Dealer. A redemption request is effected at the net asset
value next determined after tender of shares for redemption. Redemption
orders received after 12:00 noon (Eastern Time) will be executed the
following business day at the net asset value of the Series to be redeemed
next determined after receipt of the order. The terms and conditions under
which redemptions may be effected are governed by the shareholder's agreement
with the Participating Dealer.
REDEMPTION BY TELEPHONE
Subject to terms and conditions contained in their Participating Dealer
Agreement, shareholders may submit redemption orders for $250 or more by
telephone to a Participating Dealer. Funds will be credited to the
shareholder's account with the Participating Dealer or invested as directed
by the shareholder. If a shareholder requests payment of redemption proceeds
by check, such payment will be sent promptly and in any event within seven
business days. During periods of extreme economic or market changes,
shareholders may experience difficulty in effecting telephone redemptions. In
such event, requests should be made by one of the other methods described
below.
REDEMPTION BY CHECK
Shareholders who complete the necessary forms may establish special check
redemption privileges that entitle them to write checks drawn on the Fund
that will clear through the Fund's account with PNC, in any amount not less
than $250. The payee of the check may cash or deposit it in the same way as
an ordinary bank check. Shareholders are entitled to dividends on the shares
redeemed until the check has been presented to PNC for payment. If the amount
of the check exceeds the value of the Quality Cash Reserve Prime Shares in
the account, the check will be returned to the payee marked "non-sufficient
funds." Checks written in amounts less than $250 may also be returned. The
Fund in its discretion will honor such checks but will charge the account a
servicing fee of $15. Cancelled checks will not be returned to the
shareholder, but the amounts will be reflected on the shareholder's monthly
statement of account with his Participating Dealer. Since the total amount of
shares in an account may vary, shareholders should not attempt to redeem
their entire account by check.
The Fund reserves the right to terminate or alter check redemption privileges
at any time, to impose a service charge, or to charge for checks. The Fund
also may charge a shareholder's account for returned checks and for effecting
stop orders.
If a shareholder desires check redemption privileges, the necessary forms may
be obtained through a Participating Dealer.
REDEMPTION BY WIRE
A shareholder who wishes to redeem $10,000 or more and who has previously
completed the necessary authorizations, may request that payment be made by
wire transfer of federal funds. In such case, once the redemption is
effected, payment will be made in federal funds wired to the shareholder's
bank on the same day. The Participating Dealer may subtract from the
redemption proceeds the cost of effecting the wire transfer.
8
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REDEMPTION BY MAIL
Shareholders may redeem Quality Cash Reserve Prime Shares in any amount by
mailing a redemption request to a Participating Dealer. Payment for shares
redeemed by mail will be made by check and will ordinarily be mailed within
seven days after receipt by the Participating Dealer of a written redemption
request in good order. The request must include the following:
(1) a letter of instruction specifying the Participating Dealer account
number and the number of Quality Cash Reserve Prime Shares or dollar amount
to be redeemed (or that all Quality Cash Reserve Prime Shares credited to a
Participating Dealer account be redeemed), signed by all owners of the
Quality Cash Reserve Prime Shares in the exact names in which their account
is maintained;
(2) a guarantee of the signature of each registered owner by a member of the
Federal Deposit Insurance Corporation, a trust company, broker, dealer,
credit union (if authorized under state law), a securities exchange or
association, clearing agency or savings association; and
(3) any additional documents required by the Fund or transfer agent for
redemption by corporations, partnerships, trusts or fiduciaries.
ADDITIONAL INFORMATION ON REDEMPTION
Dividends payable up to the date of redemption on redeemed shares will be
paid on the next dividend payment date. If all of the shareholder's shares
have been redeemed on the dividend payment date, the dividend will be
credited in cash to the shareholder's account.
The Board of Directors may authorize redemption of all shares in an account
that has been reduced by the shareholder to less than $500, if the Board of
Directors determines that it is necessary to reduce disproportionately
burdensome expenses of servicing small accounts or is otherwise in the best
interest of the Fund. At least 60 days' prior notice will be given to allow a
shareholder to make an additional minimum investment set by the Board of
Directors to avoid redemption.
7 Dividends and Taxes
DIVIDENDS
All of the net income earned on the Prime Series is normally declared as
dividends daily to the respective shareholders of record of the Prime Series.
Dividends on the Prime Series are normally payable on the first day that a
share purchase order is effective but not on the date that a redemption order
is effective. If a purchase order is received by Alex. Brown after 12:00 noon
(Eastern Time), the shareholder will receive dividends beginning on the
following day. Dividends are declared daily and reinvested monthly in the
form of additional full and fractional shares of the Prime Series at net
asset value, unless the shareholder has elected to have dividends paid in
cash.
TAXES
The following is only a general summary of certain federal tax considerations
affecting the Fund and the shareholders. No attempt is made to present a
detailed explanation of the tax treatment of the Fund or the shareholders,
and the discussion herein is not intended as a substitute for careful tax
planning.
9
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The following summary is based on current tax laws and regulations, which may
be changed by legislation, judicial or administrative action.
The Prime Series has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended. As long
as the Prime Series qualifies for this tax treatment, it will not be required
to pay federal income taxes on amounts distributed to shareholders; but
shareholders, unless otherwise exempt, will pay taxes on amounts so
distributed.
Distributions of net investment company taxable income (generally, net
investment income plus net short-term capital gains, if any) are taxed to
shareholders as ordinary income. Distributions will not be eligible for the
dividends received deduction otherwise available to corporate shareholders.
Although the Prime Series does not expect to realize any long-term capital
gains, any distributions of net capital gains (the excess of net long-term
capital gains over net short-term capital losses) will be taxable to
shareholders as long-term capital gains, regardless of the length of time a
shareholder has held the shares.
Ordinarily, shareholders will include in their taxable income all dividends
declared by a Series in the year of payment. However, dividends declared
payable to shareholders of record in December of one year, but paid in
January of the following year, will be deemed for tax purposes to have been
received by the shareholders and paid by the Prime Series in the year in
which the dividends were declared.
The Fund intends to make sufficient distributions of its ordinary income and
capital gain net income prior to the end of each calendar year to avoid
liability for federal excise tax.
The sale, exchange or redemption of shares is a taxable event for the
shareholder.
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 own tax advisors concerning the application of state and local taxes to
investments in the Prime Series, which may differ from the federal income tax
consequences described above. Additional information concerning taxes is set
forth in the Statement of Additional Information.
8 Management of the Fund
BOARD OF DIRECTORS
The overall business and affairs of the Fund are managed by its Board of
Directors. The Board of Directors approves all significant agreements between
the Fund and persons or companies furnishing services to the Fund, including
the Fund's agreements with its investment advisor, sub-advisor, distributor,
custodian and transfer agent. The day-to-day operations of the Fund are
delegated to its officers, to Alex. Brown and to Investment Company Capital
Corp. ("ICC"), the Fund's investment advisor, subject to the investment
objective and policies of each Series of the Fund and to general supervision
by the Fund's Board of Directors. Alex. Brown and ICC also furnish or procure
on behalf of the Fund all services necessary to the proper conduct of the
Fund's business. Four Directors and all of the officers of the Fund are
officers or employees of Alex. Brown or ICC. A majority of the Board of
Directors of the Fund have no affiliation with Alex. Brown or ICC.
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INVESTMENT ADVISOR
Investment Company Capital Corp., 135 East Baltimore Street, Baltimore,
Maryland 21202, an indirect subsidiary of Alex. Brown Incorporated (described
below), was organized in 1987 and acts as the investment advisor to the Prime
Series. ICC supervises and manages the Prime Series' operations and generally
provides management and administrative services for the Prime Series. ICC is
also investment advisor to, and Alex. Brown acts as distributor for, several
funds in the Flag Investors family of funds which, as of May 31, 1996, had
net assets of approximately $1.1 billion.
Pursuant to a new advisory agreement, which became effective August 22, 1995,
ICC is entitled to receive a fee from the Fund, calculated daily and payable
monthly, at the following annual rates based upon the Fund's aggregate
average daily net assets: .30% of the first $500 million, .26% of the next
$500 million, .25% of the next $500 million, .24% of the next $ 1 billion,
.23% of the next $1 billion and .22% of that portion in excess of $3.5
billion. The Prime Series pays its share of the fee based on the proportion
its net assets bear to those of the Fund. In addition, ICC is entitled to
receive an additional fee with respect to the Prime Series, calculated daily
and paid monthly, at the annual rate of .02% of the Prime Series' average
daily net assets.
As compensation for providing investment advisory services to the Prime
Series, for the period from August 22, 1995 to March 31, 1996, ICC received
an annualized advisory fee at the rate of .27% of the Prime Series'
average daily net assets. ICC may, from time to time, voluntarily waive a
portion of its advisory fee with respect to the Prime Series to preserve or
enhance the performance of such Series.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Prime Series. (See "Custodian, Transfer
Agent and Accounting Services.")
In the fiscal year ended March 31, 1996, the expenses borne by the Quality Cash
Reserve Prime Shares class of the Prime Series, including the fees to ICC,
amounted to .90% (net of fee waivers) of such class' average daily net assets.
DISTRIBUTOR
Alex. Brown, 135 East Baltimore Street, Baltimore, Maryland 21202, serves as the
exclusive distributor for the Quality Cash Reserve Prime Shares. Alex. Brown is
an investment banking firm that offers a broad range of investment services to
individual, institutional, corporate and municipal clients. Alex. Brown is a
wholly-owned subsidiary of Alex. Brown Incorporated, which has engaged directly
and through subsidiaries in the investment business since 1800. Alex. Brown is a
member of the New York Stock Exchange and other leading securities exchanges.
Headquartered in Baltimore, Maryland, Alex. Brown has offices throughout the
United States and, through subsidiaries, maintains offices in London, England,
Geneva, Switzerland and Tokyo, Japan. As compensation for its services, Alex.
Brown is entitled to receive an annual fee from the Fund, equal to .60% of the
average daily net assets invested in Quality Cash Reserve Prime Shares. Alex.
Brown is currently reducing its distribution fee, on a voluntary basis, to .53%
of the Quality Cash Reserve Prime Shares' average daily net assets. (See "Table
of Fees and Expenses.")
11
<PAGE>
Alex. Brown expects to allocate on a proportional basis up to all of its
annual fee received from the Fund to Participating Dealers as compensation
for opening shareholder accounts, processing investor purchase and redemption
orders, responding to inquiries from Fund shareholders concerning the status
of their accounts and operations of the Fund, and communicating with the Fund
and its transfer agent on behalf of the Fund's shareholders. Additionally,
Alex. Brown bears all expenses associated with advertisements, promotional
materials, sales literature and printing and mailing prospectuses to other
than Fund shareholders. Alex. Brown will from time to time and from its own
resources pay or allow additional discounts or promotional incentives in the
form of cash or other compensation (including merchandise or travel) to
Participating Dealers.
9 Current Yield
From time to time the Fund advertises the "yield" and "effective yield" of a
particular Series or class. Both figures are based on historical earnings and
are not intended to indicate future performance. The "yield" of a Series or
class refers to the income generated by an investment in that Series or class
over a seven-day period (which period will be stated in the advertisement.)
This income is then "annualized," that is, the amount of income generated by
the investment during that week is assumed to be generated each week of a
52-week period and is shown as a percentage of the investment. The "effective
yield" is calculated similarly, but when annualized, the income earned by an
investment in the Fund is assumed to be reinvested. The "effective yield"
will be slightly higher than the "yield" because of the compounding effect of
this assumed reinvestment. The yield for the Quality Cash Reserve Prime
Shares may be obtained by calling any Participating Dealer.
10 General Information
DESCRIPTION OF SHARES
Shares of the Fund are divided into three series, each with a par value of $.001
- - the Prime Series, the Treasury Series and the Tax-Free Series. Each of the
Series currently offers one or more classes of shares, which classes differ from
each other principally in the allocation of certain expenses and the method of
distribution, which may affect performance. For information regarding the other
classes of shares, please call (800) 553-8080 or a Participating Dealer. Shares
of the Fund have equal rights with respect to voting, except that the holders of
shares of a particular Series or class
12
<PAGE>
will have the exclusive right to vote on matters affecting only the rights of
the holders of such Series or class. For example, holders of a particular
Series will have the exclusive right to vote on any investment advisory
agreement or investment restriction that relates only to such Series. In the
event of dissolution or liquidation, holders of shares of each Series will
receive pro rata, subject to the rights of creditors, (a) the proceeds of the
sale of the assets held in the respective Series less (b) the liabilities of
the Fund attributable to the respective Series or allocated among all Series
based on the respective liquidation value of each Series.
There are no preemptive or conversion rights applicable to any of the Fund's
shares. The Fund's shares, when issued, will be fully paid and
non-assessable. The Board of Directors may create additional series or
classes of Fund shares without shareholder approval.
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING
SERVICES
PNC, a national banking association with offices at Airport Business Center, 200
Stevens Drive, Lester, Pennsylvania 19113, acts as custodian for the Fund's
portfolio securities and cash. Investment Company Capital Corp., 135 East
Baltimore Street, Baltimore, Maryland 21202 (telephone: (800) 553-8080) is the
Fund's transfer and dividend disbursing agent and provides accounting services
to the Prime Series. As compensation for providing accounting services to the
Prime Series for the fiscal year ended March 31, 1996, ICC received a fee equal
to .01% of the Prime Series' average daily net assets. (See the Statement of
Additional Information.) ICC also serves as the Fund's investment advisor.
ANNUAL MEETINGS
Unless required under applicable Maryland law, the Fund does not expect to
hold annual meetings of shareholders. However, shareholders may remove
directors from office by votes cast at a meeting of shareholders or by
written consent. A meeting of shareholders may be called at the request of
the holders of 10% or more of the Fund's outstanding shares.
REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The annual
financial statements are audited by the Fund's independent accountants,
Coopers & Lybrand L.L.P.
FUND COUNSEL
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
SHAREHOLDER INQUIRIES
Shareholders with inquiries concerning their shares should contact any
Participating Dealer.
13
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
----------------------------------------
ALEX. BROWN CASH RESERVE FUND, INC.
----------------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A
PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH A
PROSPECTUS FOR THE APPROPRIATE CLASS OF SHARES, WHICH
MAY BE OBTAINED BY WRITING OR CALLING YOUR ALEX. BROWN &
SONS INCORPORATED INVESTMENT REPRESENTATIVE, ANY
PARTICIPATING DEALER OF THE FUND'S SHARES, ALEX. BROWN &
SONS INCORPORATED, P.O. BOX 17250, BALTIMORE, MARYLAND
21203, OR THE FUND AT (800) 553-8080.
Statement of Additional Information dated August 1, 1996
Relating to Prospectuses dated August 1, 1996 for:
Alex. Brown Cash Reserve Fund, Inc.
(Prime Series, Treasury Series and Tax-Free Series)
Quality Cash Reserve Prime Shares
Institutional Shares
(Prime Series and Treasury Series)
and Flag Investors Cash Reserve Prime Shares
(Class A and Class B)
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Introduction..............................................................................................1
General Information About the Fund........................................................................1
The Fund and Its Shares.............................................................................1
Directors and Officers..............................................................................3
The Investment Advisor..............................................................................6
The Sub-Advisor.....................................................................................7
Distributor.........................................................................................8
Expenses............................................................................................12
Transfer Agent, Custodian and Accounting Services...................................................13
Sub-Accounting......................................................................................14
Principal Holders of Securities.....................................................................14
Reports.............................................................................................15
Share Purchases and Redemptions...........................................................................15
Purchases and Redemptions...........................................................................15
Net Asset Value Determination.......................................................................15
Dividends and Taxes.......................................................................................16
Dividends...........................................................................................16
Taxes...............................................................................................17
Current Yield.............................................................................................20
Investment Program and Restrictions.......................................................................21
Investment Restrictions.............................................................................23
Portfolio Transactions....................................................................................24
Financial Statements......................................................................................25
</TABLE>
<PAGE>
INTRODUCTION
Alex. Brown Cash Reserve Fund, Inc. (the "Fund") is a mutual
fund. The rules and regulations of the Securities and Exchange Commission (the
"SEC") require all mutual funds to furnish prospective investors certain
information concerning the activities of the company being considered for
investment. There is a Prospectus dated August 1, 1996 for each class of the
Fund's shares which contains this information and which may be obtained without
charge from an Alex. Brown & Sons Incorporated ("Alex. Brown") investment
representative or by writing Alex. Brown, P.O. Box 17250, Baltimore, Maryland
21203. Investors may also call (410) 727-1700 or (except in the case of the
Institutional Shares) dealers authorized by Alex. Brown to distribute the
respective classes of the Fund's shares. Some of the information required to be
in this Statement of Additional Information is also included in the Fund's
current Prospectuses; and, in order to avoid repetition, reference will be made
to sections of the Prospectuses. Unless otherwise noted, the term "Prospectus"
as used herein refers to the Prospectus for each class of the Fund's shares.
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 FUND
The Fund and Its Shares
The Fund is registered as an open-end diversified management
investment company under the Investment Company Act of 1940, as amended, (the
"1940 Act") and its shares are registered under the Securities Act of 1933. The
Fund was organized as a corporation under the laws of the State of Maryland on
November 19, 1980, reorganized as a business trust under the laws of the
Commonwealth of Massachusetts on August 30, 1985 and, following certain changes
in Maryland law, reorganized as a Maryland corporation effective April 5, 1990.
Shares of the Fund are redeemable at the net asset value thereof (less any
applicable contingent deferred sales charge with respect to Flag Investors Cash
Reserve Prime Class B Shares) at the option of the holders thereof or at the
option of the Fund in certain circumstances. For information concerning the
methods of redemption and the rights of share ownership, consult the Prospectus
under the captions "General Information" and "How to Redeem Shares."
The Fund offers three series of shares (each such series is
referred to herein as a "Series" and collectively as the "Series"):
o Prime Series
o Treasury Series
o Tax-Free Series
There are currently five classes of the Prime Series,
designated as the Alex. Brown Cash Reserve Prime Shares, the Flag Investors Cash
Reserve Prime Class A Shares, the Flag Investors Cash Reserve Prime Class B
Shares, the Alex. Brown Cash Reserve Prime Institutional Shares and the Quality
Cash Reserve Prime Shares. Flag Investors Cash Reserve Prime Class B Shares are
available only through the exchange of shares of other funds in the Flag
Investors family of funds and are subject to a contingent deferred sales charge
as described in the Prospectus for the shares. The Quality Cash Reserve Prime
Shares are offered primarily through broker-dealers that have correspondent
relationships with Alex. Brown. There are currently two classes of the Treasury
Series, designated as the Alex. Brown Cash Reserve Treasury Shares and the Alex.
Brown Cash Reserve Treasury Institutional Shares. The Institutional Shares of
the Prime and Treasury Series are offered primarily to institutions. There is
only one class of the Tax-Free Series, designated as the Alex. Brown Cash
Reserve Tax-Free Shares.
-1-
<PAGE>
As used in the Prospectus, the term "majority of the
outstanding shares" of either the Fund or a particular Series or class means,
respectively, the vote of the lesser of (i) 67% or more of the shares of the
Fund or such Series or class present or represented by proxy at a meeting, if
the holders of more than 50% of the outstanding shares of the Fund or such
Series or class are present or represented by proxy, or (ii) more than 50% of
the outstanding shares of the Fund or such Series or class.
Shareholders do not have cumulative voting rights, and
therefore the holders of more than 50% of the outstanding shares of all classes
voting together for the election of directors may elect all of the members of
the Board of Directors of the Fund. In such event, the remaining holders cannot
elect any members of the Board of Directors of the Fund.
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 classification or
reclassification will comply with the provisions of the 1940 Act.
The Fund's Articles of Incorporation authorize the issuance of
five billion shares, each with a par value of $.001. The Board of Directors may
increase or (within limits) decrease the number of authorized shares without
shareholder approval. A share of a Series represents an equal proportionate
interest in such Series with each other share of that Series and is entitled to
a proportionate interest in the dividends and distributions from that Series
except to the extent such dividends and distributions may be affected by
differences in the expenses allocated to a particular class. Additional
information concerning the rights of share ownership is set forth in the
Prospectus.
The assets received by the Fund for the issue or sale of
shares of each Series and all income, earnings, profits, losses and proceeds
therefrom, subject only to the rights of creditors, are allocated to that
Series, and constitute the underlying assets of that Series. The underlying
assets of each Series are segregated and are charged with the expenses
attributable to that Series and with a share of the general expenses of the Fund
as described below under "Expenses." While the expenses of the Fund are
allocated to the separate books of account of each Series, certain expenses may
be legally chargeable against the assets of all Series. In addition, expenses of
a Series that are attributable to a particular class of shares offered by that
Series are allocated to that class. See "Expenses."
The Fund's Charter provides that the directors and officers of
the Fund will not be liable to the Fund or its shareholders for any action taken
by such director or officer while acting in his capacity as such, except for any
liability to which the director or officer 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 Fund's Charter provides for
indemnification by the Fund of the directors and officers of the Fund except
with respect to any matter as to which any such person did not act in good faith
in the reasonable belief that his action was in or not opposed to the best
interests of the Fund. Such person may not be indemnified against any liability
to the Fund or the Fund'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 Fund's Charter also
authorizes the purchase of liability insurance on behalf of the directors and
officers.
As described in the Prospectus, the Fund will not normally
hold annual shareholders' meetings. Directors may be removed from office by a
vote of the holders of two-thirds of the outstanding shares at a meeting duly
called for that purpose, which meeting shall be held upon written request of the
holders of not less than 10% of the outstanding shares of the Fund. 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 Fund has undertaken to provide a list of shareholders or to
disseminate appropriate materials.
-2-
<PAGE>
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 Fund, their dates
of birth and their principal occupations during the last five years are set
forth below. Unless otherwise indicated, the address of each Director and
executive officer is 135 East Baltimore Street, Baltimore, Maryland 21202.
*W. JAMES PRICE, Director and Chairman of the Board (10/6/24) 6885 North Ocean
Boulevard, Apartment #306, Ocean Ridge, Florida 33435-3343. Director, Boca
Research, Inc. (computer peripherals); Managing Director Emeritus, Alex. Brown &
Sons Incorporated; Formerly, Director, CSX Corp. (transportation and natural
resources company) and PHH Corporation (business services).
*RICHARD T. HALE, Director and President (7/17/45)
Managing Director, Alex. Brown & Sons Incorporated; Chartered Financial Analyst;
President, Investment Company Capital Corp. (registered investment advisor).
*CHARLES W. COLE, JR., Director (11/11/35)
Vice Chairman, Alex. Brown Capital Advisory & Trust Company (registered
investment advisor); Director, Provident Bankshares Corporation and Provident
Bank of Maryland; President, Chief Executive Officer, Chief Administrative
Officer, and Director, First Maryland Bancorp, The First National Bank of
Maryland and First Omni Bank; Formerly, Director, York Bank and Trust Company.
JAMES J. CUNNANE, Director (3/11/38)
CBC Capital, 264 Carlyle Lake Drive, St. Louis, Missouri 63141. Managing
Director, CBC Capital (merchant banking), 1993-Present; Formerly, Senior
Vice-President and Chief Financial Officer, General Dynamics Corporation
(defense), 1989-1993 and Director, The Arch Fund (registered investment
company).
JOHN F. KROEGER, Director (8/11/24)
37 Pippins Way, Morristown, New Jersey 07960. Director/Trustee, AIM Funds
(registered investment companies); Formerly, Consultant, Wendell & Stockel
Associates, Inc. (consulting firm); General Manager, Shell Oil Company.
LOUIS E. LEVY, Director (11/16/32)
26 Farmstead Road, Short Hills, New Jersey 07078. Director, Kimberly-Clark
Corporation (personal consumer products) and Household International (banking
and finance); Chairman of the Quality Control Inquiry Committee, American
Institute of Certified Public Accountants; Formerly, Trustee, Merrill Lynch
Funds for Institutions, 1991-1993; Adjunct Professor, Columbia
University-Graduate School of Business, 1991-1992; Partner, KPMG Peat Marwick,
retired 1990.
REBECCA W. RIMEL, Director (4/10/51)
The Pew Charitable Trusts, One Commerce Square, 2005 Market Street, Suite 1700,
Philadelphia, PA 19103. President and Chief Executive Officer, The Pew
Charitable Trusts; Director and Executive Vice President, The Glenmede Trust
Company; Formerly, Executive Director, The Pew Charitable Trusts.
- --------
* Messrs. Price, Hale, Semans and Cole are "interested persons," as defined in
the Investment Company Act of 1940.
-3-
<PAGE>
*TRUMAN T. SEMANS, Director (10/27/27)
Managing Director, Alex. Brown & Sons Incorporated; Chartered Financial Analyst;
Director, ICC (registered investment advisor).
EUGENE J. MCDONALD, Director (7/14/32)
Duke Management Company, Erwin Square, Suite 100, 2200 West Main Street, Durham,
North Carolina 27705. President, Duke Management Company (investments);
Executive Vice President, Duke University (education, research and healthcare).
CARL W. VOGT, Director (4/20/36)
Fulbright & Jaworski L.L.P., 801 Pennsylvania Avenue, N.W., Washington, D.C.
20004-2604. Senior Partner, Fulbright & Jaworski L.L.P. (law); Formerly,
Chairman, National Transportation Safety Board; Director, National Railroad
Passenger Corporation (Amtrak) and Member, Aviation System Capacity Advisory
Committee (Federal Aviation Administration).
HARRY WOOLF, Director (8/12/23)
Institute for Advanced Study, South Olden Lane, Princeton, New Jersey 08540.
Professor-at-Large Emeritus, Institute for Advanced Study; Director, ATL and
Spacelabs Medical Corp (medical equipment) and Family Health International
(nonprofit research and education); Trustee, Reed College (education); Formerly,
Trustee, Rockefeller Foundation; Director, Merrill Lynch Cluster C Funds
(registered investment companies).
EDWARD J. VEILLEUX, Executive Vice President (8/26/43)
Principal, Alex. Brown & Sons Incorporated; President, Investment Company
Capital Corp. (registered investment advisor); Vice President, Armata Financial
Corp. (registered broker-dealer).
M. ELLIOTT RANDOLPH, JR., Vice President (1/10/42)
Principal, Alex. Brown & Sons Incorporated, 1991 - Present; Principal, Monument
Capital Management, Inc., 1988-1991.
PAUL D. CORBIN, Vice President (7/24/52)
Principal, Alex. Brown & Sons Incorporated, 1991 - Present; Senior Vice
President, First National Bank of Maryland, 1985-1991.
BRIAN C. NELSON, Vice President (7/31/59)
Vice President, Alex. Brown & Sons Incorporated, Investment Company Capital
Corp. (registered investment advisor) and Armata Financial Corp. (registered
broker-dealer).
MONICA M. HAUSNER, Vice President (10/26/61)
Fixed Income Management Department, Alex. Brown & Sons Incorporated,
1992-Present; Formerly, Assistant Vice President, First National Bank of
Maryland, 1984-1992.
JOSEPH A. FINELLI, Treasurer (1/24/57)
Vice President, Alex. Brown & Sons Incorporated, September 1995-Present;
Formerly, Vice President and Treasurer, The Delaware Group of Funds (registered
investment companies) and Vice President, Delaware Management Company, Inc.,
1980-1995.
EDWARD J. STOKEN, Secretary (8/7/47)
Compliance Officer, Alex. Brown & Sons Incorporated, April 1995-Present;
Formerly, Legal Advisor, Federated Investors (registered investment advisor),
1991-1995.
LAURIE D. DEPRINE, Assistant Secretary (1/1/66)
Asset Management Department, Alex. Brown & Sons Incorporated, 1991-Present;
Formerly, Student, 1989- 1991.
Directors and officers of the Fund are also directors and
officers of some or all of the investment companies managed, administered,
advised or distributed by Alex. Brown or its affiliates.
-4-
<PAGE>
There are currently 13 funds in the Flag Investors/ISI Funds
and Alex. Brown Cash Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr.
Hale serves as President and Director of one fund, Vice President of one fund
and as a Director of 11 other funds in the Fund Complex. Mr. Price serves as a
Director of eight funds in the Fund Complex. Mr. Semans serves as a Chairman of
one fund and as a Director of eight funds. Messrs. Cunnane, Kroeger, Levy,
McDonald and Woolf serve on the Board of each fund in the Fund Complex. Ms.
Rimel serves on the Board of six funds in the Fund Complex. Mr. Randolph serves
as President of two funds and as a Vice President of one fund in the Fund
Complex. Mr. Corbin serves as a Vice President of one fund and as Executive Vice
President of two other funds in the Fund Complex. Ms. Hausner serves as an
Assistant Vice President of one fund and as a Vice President of another fund in
the Fund Complex. Mr. Veilleux serves as Executive Vice President of one fund
and Vice President of 12 funds in the Fund Complex. Mr. Nelson, Mr. Finelli, Mr.
Stoken and Ms. DePrine serve as Vice President, Treasurer, Secretary and
Assistant Secretary, respectively, for each of the funds in the Fund Complex.
Each director who is not an "interested person" receives an
aggregate annual fee (plus reimbursement for reasonable out-of-pocket expenses
incurred in connection with his or her attendance at Board and committee
meetings) from the Fund and from all Flag Investors/ISI Funds for which he or
she serves. Payment of such fees and expenses are allocated among all such funds
described above in proportion to their relative net assets. For the fiscal year
ended March 31, 1996 Non-Interested Directors' fees attributable to the assets
of the Fund totalled $206,622.
<TABLE>
<CAPTION>
COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------------------------------
Name of Person, Aggregate Compensation Pension or Retirement Estimated Total Compensation from the
Position from the Fund for the Benefits Accrued as Annual Benefits Fund and Fund Complex
Fiscal Year Ended Part of Fund Upon Retirement Paid to Directors for the
March 31, 1996 Expenses Fiscal Year Ended March 31, 1996
- --------------------- -------------------------- ----------------------- ------------------- ---------------------------------
<S> <C> <C> <C> <C>
*W. James Price $0 $0 $0 $0
Chairman
*Richard T. Hale $0 $0 $0 $0
Vice Chairman
*Truman T. Semans $0 $0 $0 $0
Director
Charles W. Cole $0 $+ $0 $0
Director
James J. Cunnane $27,072(1) $+ $19,500 $39,000 for service
Director on 13 boards(2)
N. Bruce Hannay** $24,753(1) $+ $19,500 $35,786 for service
Director on 13 boards(2)
John F. Kroeger $31,945(1) $+ $24,500 $45,950 for service
Director on 13 boards(2)
Louis E. Levy $27,072(1) $+ $19,500 $39,000 for service
Director on 13 boards(2)
Eugene J. McDonald $27,072(1) $+ $19,500 $39,000 for service
Director on 13 boards(2)
Rebecca W. Rimel*** $28,098 $+ $19,500 $29,250 for service
Director on 6 boards in the Fund Complex
Carl W. Vogt $ 8,434 $+ $19,500 $9,750 for service
Director on 13 boards(2)
Harry Woolf $27,072 $+ $19,500 $39,000 for service
Director on 13 boards(2)
* A Director who is, or may be, an "interested person" as defined in the Investment Company Act.
** Retired on January 31, 1996 and is now deceased.
*** Elected to the Board on June 1, 1995
+ The Fund Complex has adopted a retirement plan for eligible Directors,
as described below. The actuarially computed pension expense for the
year ended March 31, 1996 was approximately $7,000.
</TABLE>
-5-
<PAGE>
(1) $0 of this amount has been deferred pursuant to a deferred compensation
plan.
(2) One of these funds ceased on May 17, 1995.
The Fund Complex has adopted a Retirement Plan (the
"Retirement Plan") for Directors who are not employees of the Fund, the Fund's
Advisor or their respective affiliates (the "Participants"). After completion of
six years of service, each Participant will be entitled to receive an annual
retirement benefit equal to a percentage of the fee earned by him or her in his
or her last year of service. Upon retirement, each Participant will receive
annually 10% of such fee for each year that he or she served after completion of
the first five years, up to a maximum annual benefit of 50% of the fee earned by
him or her in his or her last year of service. The fee will be paid quarterly,
for life, by each Fund for which he or she serves. The Retirement Plan is
unfunded and unvested. Messrs. Kroeger and Woolf have qualified but have not
received benefits, and no such benefits are being accrued for them since they
have not yet retired. The Fund has one Participant, a Director who retired
effective December 31, 1994 who has qualified for the Retirement Plan and who
will be paid a quarterly fee of $4,875 by the Fund Complex for the rest of his
life. Such fee is allocated to each fund in the Fund Complex based upon the
relative net assets of such fund to the Fund Complex.
Any Director who receives fees from the Fund is permitted to
defer a minimum of 50%, or up to all, of his or her annual compensation pursuant
to a Deferred Compensation Plan. Messrs. Cunnane, Kroeger, Levy, McDonald, Vogt,
Woolf and Ms. Rimel have each executed a Deferred Compensation Agreement.
Currently, the deferring Directors may select various Flag and Alex. Brown Funds
in which all or part of their deferral account shall be deemed to be invested.
Distributions from the deferring Directors' deferral accounts will be paid in
cash, in generally equal installments over a period of ten years.
The Investment Advisor
Investment Company Capital Corp. ("ICC"), 135 East Baltimore
Street, Baltimore, Maryland 21202, a wholly-owned subsidiary of Alex. Brown
(described below), acts as the Fund's investment advisor pursuant to three
separate Investment Advisory Agreements dated as of August 1, 1995, one relating
to the Prime Series, one relating to the Treasury Series and one relating to the
Tax-Free Series (the "Advisory Agreements"). ICC was organized in 1987. The
terms of the Advisory Agreements are the same except to the extent specified
below. Pursuant to the terms of the Advisory Agreements, ICC (a) supervises and
manages the Fund's operations; (b) formulates and implements continuing programs
for the purchases and sales of securities, consistent with the investment
objective and policies of each Series; (c) provides the Fund with such
executive, administrative and clerical services as are deemed advisable by the
Fund's Board of Directors; (d) provides the Fund with, or obtains for it,
adequate office space and all necessary office equipment and services; (e)
obtains and evaluates pertinent information about significant developments and
economic, statistical and financial data, domestic, foreign and otherwise,
whether affecting the economy generally or any Series of the Fund, and whether
concerning the individual issuers whose securities are included in the Fund's
Series or the activities in which they engage, or with respect to securities
which ICC considers desirable for inclusion in the portfolio of any of the
Fund's Series; (f) determines which issuers and securities shall be represented
in the Portfolio of any of the Fund's Series; (g) takes all actions necessary to
carry into effect the Fund's purchase and sale programs; (h) supervises the
operations of the Fund's transfer and dividend disbursing agent; (i) provides
the Fund with such administrative and clerical services for the maintenance of
certain shareholder records as are deemed advisable by the Fund's Board of
Directors; and (j) arranges, but does not pay for, the periodic updating of
prospectuses and supplements thereto, proxy material, tax returns, reports to
the Fund's shareholders and reports to and filings with the SEC and state Blue
Sky authorities. ICC may delegate its duties under the Advisory Agreements, and
has delegated certain of such duties with respect to the Tax-Free Series to PIMC
as described below.
-6-
<PAGE>
As compensation for its services for the Fund, ICC receives a
fee from the Fund, calculated daily and paid monthly, at the following annual
rates based upon the Fund's aggregate average daily net assets: .30% of the
first $500 million, .26% of the next $500 million, .25% of the next $500
million, .24% of the next $1 billion, .23% of the next $1 billion and .22% of
that portion in excess of $3.5 billion. In addition, the Advisor is entitled to
receive an additional fee with respect to the Prime Series' average daily net
assets as well as an additional fee with respect to the Tax-Free Series,
calculated daily and paid monthly, at the annual rate of .03% of the Tax-Free
Series' average daily net assets. ICC may, from time to time, voluntarily waive
a portion of its advisory fee with respect to any Series to preserve or enhance
the performance of the Series. The rates set forth above were approved by the
Fund's Board of Directors on June 1, 1995, and by shareholders of the Prime
Series, the Treasury Series and the Tax-Free Series, respectively, on August 22,
1995.
In the fiscal year ended March 31, 1996, ICC served as the Fund's
investment advisor pursuant to both current and prior investment advisory
agreements, in effect for such periods. For that fiscal year, the aggregate fees
paid by the Fund to ICC were $7,291,008.
Prior to August 1, 1995, ICC served as the Fund's investment
advisor pursuant to two separate Investment Advisory Agreements, one dated as of
April 4, 1990 with respect to the Prime Series and the Treasury Series, and one
dated as of October 5, 1990 with respect to the Tax-Free Series. For the fiscal
years ended March 31, 1995 and March 31, 1994, the aggregate fees paid by the
Fund to ICC (net of voluntary fee waivers of $156,200 and $152,838 for the
Treasury Series for the fiscal years ended March 31, 1995 and March 31, 1994)
were $4,941,395 and $4,856,245, respectively.
The Advisory Agreements will continue in effect for an initial
term of two years, and from year to year thereafter if each such agreement is
specifically approved at least annually by the Fund's Board of Directors and by
a majority of the directors who are not parties to either Advisory Agreement or
interested persons of any such party by votes cast in person at a meeting called
for such purpose. The Fund or ICC may terminate any Advisory Agreement on 60
days' written notice without penalty. The Advisory Agreements terminate
automatically in the event of an "assignment," as defined in the 1940 Act.
ICC advises other mutual funds which, as of May 31, 1996, had
net assets of approximately $1.1 billion.
ICC also serves as the Fund's transfer and dividend disbursing
agent and provides accounting services to the Prime Series and the Treasury
Series. (See "Transfer Agent, Custodian and Accounting Services.")
The Sub-Advisor
PNC Institutional Management Corporation ("PIMC") Bellevue
Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809 serves as a
sub-advisor to the Tax-Free Series pursuant to a sub-advisory agreement between
ICC and PIMC, dated as of June 1, 1991 (the "Sub-Advisory Agreement"). PIMC is a
wholly owned subsidiary of PNC Bank, National Association, a national banking
association ("PNC"). PIMC was organized in 1977 to perform advisory services for
investment companies. PNC and its predecessors have been in the business of
managing the investments of fiduciary and other accounts in the Philadelphia,
Pennsylvania area since 1847. PNC is a wholly-owned, indirect subsidiary of PNC
Bank Corp., a multi-bank holding company.
Pursuant to the terms of the Sub-Advisory Agreement, PIMC: (a)
provides the Fund with certain executive, administrative and clerical services
as deemed advisable by the Fund's Board of Directors; (b) formulates and
implements continuing programs for the purchase and sale of securities for the
Tax-Free Series; (c) determines which issuers and securities shall be
represented in the Tax-Free Series' portfolio; and (d) takes, on behalf of such
Series, all actions which appear to the Series to be necessary to carry into
effect such purchase and sale programs, including for the purchase and sale of
-7-
<PAGE>
portfolio securities. Any investment program undertaken by PIMC will at all
times be subject to the policies and control of the Fund's Board of Directors
and the supervision of ICC. PIMC shall not be liable to the Tax-Free Series or
its shareholders for any act or omission by PIMC or for any loss sustained by
such Series or its shareholders except in the case of PIMC's willful
misfeasance, bad faith, gross negligence or reckless disregard of duty.
As compensation for its services under the Sub-Advisory
Agreement, PIMC receives a fee from ICC, calculated daily and paid monthly, at
an annual rate based upon the following levels of the aggregate average daily
net assets of the Tax-Free Series: .15% of the first $250 million, .13% of the
next $250 million, .11% of the next $250 million, .09% of the next $250 million,
.075% of the next $3 billion and .06% of that portion of the aggregate average
daily net assets in excess of $4 billion. If ICC voluntarily waives a portion of
its fee with respect to the Tax-Free Series (see "Investment Advisor" above),
PIMC has agreed to waive a portion of its fee in the same proportion and for the
same time periods as ICC's waiver. Prior to November 1, 1994, PIMC served as
sub-advisor to the Prime Series pursuant to a sub-advisory agreement dated as of
April 1, 1992 between ICC and PIMC. As compensation for providing sub-advisory
services to the Tax-Free Series for the fiscal year ended March 31, 1996, ICC
paid PIMC fees of $742,568. As compensation for providing sub-advisory services
to the Prime Series and the Tax-Free Series, respectively, for the fiscal years
ended March 31, 1995 (with respect to the Prime Series for the period from April
1, 1994 through October 30, 1994) and March 31, 1994, ICC paid PIMC fees of
$1,377,476 and $1,740,475.
The Sub-Advisory Agreement was approved by the Fund's Board of
Directors, including a majority of those directors who are not parties to such
sub-advisory agreement or interested persons of any such party on March 19, 1991
and by shareholders of the Tax-Free Series on May 28, 1991. The Sub- Advisory
Agreement will continue in effect from year to year if it is specifically
approved at least annually by the Fund's Board of Directors and by the directors
who are not parties to such sub-advisory agreement or interested persons of any
such party by votes cast in person at a meeting called for such purpose. The
Fund, ICC or PIMC may terminate the Sub-Advisory Agreement on 60 days' written
notice without penalty. The Sub-Advisory Agreement terminates automatically in
the event of an "assignment," as defined in the 1940 Act. The Sub-Advisory
Agreement was most recently approved by the Board of Directors in the foregoing
manner on March 18, 1996.
Distributor
Alex. Brown serves as the distributor for each class of the
Fund's shares pursuant to five separate Distribution Agreements (the
"Distribution Agreements"), one relating to the Institutional Shares, one
relating to the Tax-Free Series, one relating to the Quality Cash Reserve Prime
Shares, one relating to the Flag Investors Cash Reserve Prime Class B Shares and
one relating to the other classes of the Fund's shares. The terms of each of the
Distribution Agreements are the same except to the extent specified below.
Pursuant to the Distribution Agreements, Alex Brown: (a) receives orders for the
purchase of the Fund's shares, accepts or rejects such orders on behalf of the
Fund in accordance with the Fund's currently effective Prospectus and transmits
such orders as are accepted to the Fund's transfer agent as promptly as
possible; (b) receives requests for redemption from holders of the Fund's shares
and transmits such redemption requests to the Fund's transfer agent as promptly
as possible; (c) responds to inquiries from the Fund's shareholders concerning
the status of their accounts; and (d) takes, on behalf of the Fund, all actions
which appear to the Fund's Board of Directors necessary to carry into effect the
distribution of the Fund's shares. Alex. Brown shall not be liable to the Fund
or its shareholders for any act or omission by Alex. Brown or any loss sustained
by the Fund or the Fund's shareholders except in the case of Alex. Brown's
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
As compensation for its services, Alex. Brown receives a
distribution fee from the Fund, calculated daily and paid monthly, at the annual
rate of .25% of the aggregate average daily net assets of all classes of the
Fund, excluding net assets attributable to the Institutional Shares, the Quality
Cash Reserve Prime Shares and the Flag Investors Cash Reserve Prime Class B
Shares. Alex. Brown receives
-8-
<PAGE>
no compensation with respect to its services as distributor for the
Institutional Shares (except to the extent that compensation to ICC may be
regarded as indirect compensation to Alex. Brown) and none of Alex. Brown's
compensation as distributor of the Fund's shares is allocated to the
Institutional Shares. Alex. Brown receives a distribution fee from the Fund,
calculated daily and paid monthly, at the annual rates of .60% of the average
daily net assets of the Quality Cash Reserve Prime Shares and .75% of the
average daily net assets of the Flag Investors Cash Reserve Prime Class B
Shares. In addition, Alex. Brown will receive a shareholder servicing fee, paid
monthly, at an annual rate equal to .25% of the Flag Investors Cash Reserve
Prime Class B Shares' average daily net assets. The fees set forth above were
approved, as appropriate, by shareholders of the Prime Series and the Treasury
Series on April 4, 1990, by shareholders of the Tax-Free Series on May 28, 1991,
by the sole shareholder of the Quality Cash Reserve Prime Shares class on
January 30, 1991 and by the sole shareholder of the Flag Investors Cash Reserve
Prime Class B Shares class on February 27, 1995. As compensation for
distribution services for the Prime and Treasury Series (except the
Institutional Shares, the Quality Cash Reserve Prime Shares and the Flag
Investors Cash Reserve Prime Class B Shares) for the fiscal years ended March
31, 1996, March 31, 1995 and March 31, 1994, Alex. Brown received from the Fund
aggregate fees of 6,327,179, $4,672,018 and $4,457,422, respectively. As
compensation for distribution services for the Tax-Free Series for the fiscal
years ended March 31, 1996, March 31, 1995 and March 31, 1994, Alex. Brown
received from the Fund fees of $960,441, $838,211 and $746,743, respectively. As
compensation for distribution services for the Quality Cash Reserve Prime Shares
for the fiscal years ended March 31, 1996, March 31, 1995 and March 31, 1994,
Alex. Brown received from the Fund fees of $738,961, $574,855 and $570,251,
respectively.
Prior to February 28, 1995, sales of the Flag Investors Cash
Reserve Prime Class A Shares were subject to a sales charge, a portion of which
was paid as a commission to the Distributor. For the period from April 1, 1994
through February 27, 1995 and for the fiscal year ended March 31, 1995 and March
31, 1994, Alex. Brown received commissions of $376 and $1,811, respectively from
sales of such Shares. Sales of the Flag Investors Cash Reserve Prime Class B
Shares are subject to a contingent deferred sales charge to be paid as a
commission to the Distributor.
Pursuant to the Distribution Agreements, Alex. Brown may pay
certain promotional and advertising expenses and, except in the case of the
Institutional Shares, may compensate its investment representatives, certain
registered securities dealers and banks and other financial institutions for
services provided in connection with the processing of orders for purchase or
redemption of the Fund's shares and furnishing other shareholder services.
Payments by Alex. Brown to its investment representatives and to certain
registered securities dealers are paid by Alex. Brown out of fees received by
Alex. Brown from the Fund. Specifically, Alex. Brown may compensate its
investment representatives and certain registered securities dealers for opening
accounts, processing investor purchase and redemption orders, responding to
inquiries from Fund shareholders concerning the status of their accounts and the
operations of the Fund, and communicating with the Fund and its transfer agent
on behalf of Fund shareholders. Alex. Brown may also enter into shareholder
processing and servicing agreements ("Shareholder Servicing Agreements") with
any securities dealer who is registered under the Securities Exchange Act of
1934 and is a member in good standing of the National Association of Securities
Dealers, Inc. and (except for the Quality Cash Reserve Prime Shares) with banks
and other financial institutions who may wish to establish accounts or
sub-accounts on behalf of their customers (collectively, such securities
dealers, banks and financial institutions are referred to as "Shareholder
Servicing Agents").
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.
Accordingly, Alex. Brown will engage banks as Shareholder Servicing Agents only
to perform administrative and shareholder servicing functions. Management of the
Fund believes that such laws should not preclude a bank from acting as a
Shareholder Servicing Agent. 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
-9-
<PAGE>
acting, shareholder clients would be permitted to remain as Fund shareholders
and alternate means for continuing the servicing of such shareholders would be
sought. In such event, changes in the operation of the Fund 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 banks and financial institutions may be required to
register as dealers pursuant to state law.
For processing investor purchase and redemption orders,
responding to inquiries from Fund shareholders concerning the status of their
accounts and operations of the Fund and communicating with the Fund, its
transfer agent and Alex. Brown, Alex. Brown may make payments to Shareholder
Servicing Agents out of Alex. Brown's distribution fee in an amount not to
exceed on an annual basis .25% (with respect to all classes or Series other than
the Institutional Shares, the Quality Cash Reserve Prime Shares or the Flag
Investors Cash Reserve Prime Class B Shares), .60% (with respect to the Quality
Cash Reserve Prime Shares only) or .75% (with respect to the Flag Investors Cash
Reserve Prime Class B Shares only) of the average daily net assets of the
respective classes that such Shareholder Servicing Agent's customers maintain
with the Fund during the term of any Shareholder Servicing Agreement.
The fees payable to Shareholder Servicing Agents under
Shareholder Servicing Agreements will be negotiated by Alex. Brown. Alex. Brown
will report quarterly to the Fund's Board of Directors on the rate to be paid
under each such agreement and the amounts paid or payable under such agreements.
The rate will be based upon Alex. Brown's analysis of: (1) the nature, quality
and scope of services being provided by the Shareholder Servicing Agent; (2) the
costs incurred by the Shareholder Servicing Agent in connection with providing
services to shareholders; (3) the amount of assets being invested in shares of
the Fund; and (4) the contribution being made by the Shareholder Servicing Agent
toward reducing the Fund's expense ratio. The provisions of the Distribution
Agreements authorizing payments by Alex. Brown for advertisements, promotional
materials, sales literature and printing and mailing of prospectuses to other
than Fund shareholders, payments by Alex. Brown to its investment
representatives and payments by Alex. Brown and the Fund to Shareholder
Servicing Agents may be deemed to constitute payments by the Fund to support
distribution. Accordingly, such Distribution Agreements (except relating to the
Institutional Shares which have not adopted a plan of distribution and the Flag
Investors Cash Reserve Prime Class B Shares which have adopted a separate plan
of distribution) constitute written plans pursuant to Rule 12b-1 under the 1940
Act. All such plans together with the plan of distribution for the Flag
Investors Cash Reserve Prime Class B Shares are hereafter collectively referred
to as the "Plans."
The Distribution Agreements and the Plans will remain in
effect from year to year provided that each agreement and Plan is specifically
approved at least annually by the Fund's Board of Directors and by the
affirmative vote of a majority of the directors who are not parties to the
Distribution Agreement or any Shareholder Servicing Agreement or interested
persons of any such party by votes cast in person at a meeting called for such
purpose. In approving the Plans, the directors determined, in the exercise of
their business judgment and in light of their fiduciary duties as directors of
the Fund, that there was a reasonable likelihood that such Plans would benefit
the Fund and its shareholders. Although it is a primary objective of each Plan
to reduce expenses of the Fund by fostering growth in the Fund's net assets,
there can be no assurance that this objective of each Plan will be achieved;
however, based on the data and information presented to the Board of Directors
by Alex. Brown, the Board of Directors determined that there is a reasonable
likelihood that the benefits of growth in the size of the Fund can be
accomplished under the Plan.
The Distribution Agreements and Plans were most recently
approved in the foregoing manner on March 18, 1996. The Distribution Agreement
and Plan for the Flag Investors Cash Reserve Prime Class B Shares were approved
by the sole shareholder of such class on March 29, 1995.
-10-
<PAGE>
For the fiscal year ended March 31, 1996, the Fund paid
$5,575,592, $1,549,949 and $1,345,261, respectively, to Alex Brown, the Fund's
distributor, pursuant to the 12b-1 plans of Alex. Brown Cash Reserve Fund,
Inc.'s Prime Series, Treasury Series and Tax-Free Series, respectively. Alex.
Brown, in turn, paid certain distribution-related expenses including one or more
of the following: advertising expenses; printing and mailing of prospectuses to
other than current shareholders; compensation to dealers and sales personnel;
and interest, carrying or other financing charges.
For the same period, the Fund paid $738,961 to Alex. Brown,
pursuant to the 12b-1 plan of the Quality Cash Reserve Prime Shares; and $19,190
and $70 to Alex. Bown, pursuant to the 12b-1 plans of the Flag Investors Cash
Reserve Prime Shares' Class A Shares and Class B Shares, respectively.
Each Plan will be renewed only if the directors make a similar
determination prior to each renewal term. The Plans may not be amended to
increase the maximum amount of payments by Alex. Brown to its investment
representatives or Shareholder Servicing Agents without shareholder approval,
and all material amendments to the provisions of any of the Distribution
Agreements relating to the Plan must be approved by a vote of the Board of
Directors and of the directors who have no direct or indirect interest in the
Plan, cast in person at a meeting called for the purpose of such vote.
When the Board of Directors of the Fund approved the
Distribution Agreements, the Plans and the form of Shareholder Servicing
Agreement, the Board of Directors requested and evaluated such information as it
deemed reasonably necessary to make an informed determination that the
agreements and Plans should be approved. The Board considered and gave
appropriate weight to all pertinent factors necessary to reach the good faith
judgment that the agreements and Plans would benefit the Fund and its
shareholders.
During the continuance of the Plans, Alex. Brown will report
in writing to the Fund's Board of Directors annually the amounts and purposes of
such payments for services rendered to shareholders by its registered account
representatives or by securities dealers and financial institutions who have
executed Shareholder Servicing Agreements.
The Plan relating to the Flag Investors Cash Reserve Prime
Class B Shares may be terminated at any time without penalty. The Fund or Alex.
Brown may terminate each of the Distribution Agreements on 60 days' written
notice without penalty. The Distribution Agreements terminate automatically in
the event of an "assignment," as defined in the 1940 Act. The services of Alex.
Brown to the Fund as Distributor are not exclusive, and it is free to render
similar services to others. The Fund has agreed that, should Alex. Brown cease
to have Distribution Agreements with the Fund, the Fund will cease to use the
words "Alex. Brown" or any trademark or identifying logotype indicating that the
Fund is distributed or administered by or otherwise connected with Alex. Brown.
Some of the directors of the Fund are customers of, and have
had normal brokerage transactions with, Alex. Brown in the ordinary course of
business. All such transactions are made on substantially the same terms as
those prevailing at the time for comparable transactions with unrelated persons.
Additional transactions may be expected to take place in the future.
Alex. Brown also serves as the distributor for other mutual
funds in the Flag Investors family of funds (currently: Flag Investors Telephone
Income Fund, Inc., Flag Investors International Fund, Inc., Flag Investors
Emerging Growth Fund, Inc., Flag Investors Total Return U.S. Treasury Fund
Shares of Total Return U.S. Treasury Fund, Inc., Flag
-11-
<PAGE>
Investors Managed Municipal Fund Shares of Managed Municipal Fund, Inc., Flag
Investors Intermediate-Term Income Fund, Inc., Flag Investors Value Builder
Fund, Inc., Flag Investors Maryland Intermediate Tax-Free Income Fund, Inc.,
Flag Investors Real Estate Securities Fund, Inc. and Flag Investors Equity
Partners Fund, Inc.
Expenses
Alex. Brown and ICC furnish, without cost to the Fund, the
services of the President, Secretary and one or more Vice Presidents of the Fund
and such other personnel as are required for the proper conduct of the Fund's
affairs and to carry out their obligations under the Distribution Agreements,
the Investment Advisory Agreements and the Sub-Advisory Agreement. PIMC (for the
Tax-Free Series) and ICC (for the Prime Series and the Treasury Series)
maintain, at their own expense and without cost to the Fund, trading functions
in order to carry out their respective obligations to place orders for the
purchase and sale of portfolio securities for the Tax-Free, Prime or Treasury
Series, as appropriate. Alex. Brown bears the expenses of printing and
distributing prospectuses (other than those prospectuses distributed to existing
shareholders of the Fund) and any other promotional or sales literature used by
Alex. Brown or furnished by Alex. Brown to purchasers or dealers in connection
with the public offering of the Fund's shares, the expenses of advertising in
connection with such public offering and all legal expenses in connection with
the foregoing.
The Fund pays or causes to be paid all other expenses of the
Fund, including, without limitation: the fees of Alex. Brown and ICC; the
charges and expenses of any registrar, any custodian or depository appointed by
the Fund for the safekeeping of its cash, portfolio securities and other
property, and any share transfer, dividend or accounting agent or agents
appointed by the Fund; brokers' commissions chargeable to the Fund in connection
with portfolio securities transactions to which the Fund is a party; all taxes,
including securities issuance and transfer taxes, and fees payable by the Fund
to federal, state or other governmental agencies; the costs and expenses of
engraving or printing certificates representing shares of the Fund; all costs
and expenses in connection with the registration and maintenance of registration
of the Fund and its shares 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
prospectuses of the Fund and supplements thereto to the Fund's shareholders
(prospectuses distributed to prospective shareholders are paid for by Alex.
Brown); all expenses of shareholders' and directors' meetings and of preparing,
printing and mailing of proxy statements and reports to shareholders; fees and
travel expenses of directors or director members of any advisory board or
committee; all expenses incident to the payment of any dividend, distribution,
withdrawal or redemption, whether in shares or in cash; charges and expenses of
any outside service used for pricing of the Fund's shares; fees and expenses of
legal counsel and of independent accountants, in connection with any matter
relating to the Fund; membership dues of industry associations; interest payable
on Fund borrowings; postage; insurance premiums on property or personnel
(including officers and directors) of the Fund which inure to its benefit;
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 Fund's operations unless otherwise explicitly
assumed by Alex. Brown, ICC or PIMC.
Expenses which are attributable to any of the Fund's three
Series are charged against the income of such Series in determining net income
for dividend purposes. Expenses of the Fund which are not directly attributable
to the operations of a particular Series are allocated among the Series based
upon the relative net assets of each Series. Expenses attributable to a class of
shares of a Series are allocated to that class.
If for any fiscal year the operating expenses of the Fund
(exclusive of any interest, taxes, brokerage commissions and extraordinary
expenses) should exceed 1% of the combined average daily net assets of all three
Series of the Fund, ICC will reimburse the Fund for such excess expenses up to
an amount equal to its aggregate fees from the Fund for such year. If ICC is
required to reimburse the Fund for such excess amount, PIMC has agreed to
reimburse ICC a proportionate amount of its aggregate fees from ICC for such
year. Additionally, ICC has agreed, if required by law, to reimburse the Fund,
to the extent required so that the amount of the ordinary expenses of the Fund
(excluding brokerage commissions, interest, taxes and extraordinary expenses
such as litigation costs) paid or incurred by any of the Fund's Series do not
exceed the expense limitations applicable to the Fund imposed by the securities
laws or regulations of any state or jurisdiction in which the Fund's shares are
registered or qualified for sale. Currently, the most restrictive of such
expense limitations requires ICC to reimburse the Fund, or reduce its fees, to
the extent required so that the amount of the ordinary expenses of the Fund
(excluding brokerage commissions, interest, taxes and extraordinary expenses
such as litigation costs) paid or incurred by any of the Fund's Series do not
exceed 2.5% of the first $30 million of the Fund's average daily net
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<PAGE>
assets, 2.0% of the next $70 million of the Fund's average daily net assets and
1.5% of the Fund's average daily net assets in excess of $100 million.
Transfer Agent, Custodian and Accounting Services
PNC acts as custodian for the Fund's portfolio securities and
cash. PFPC, an affiliate of PNC and PIMC, provides certain accounting services
for the Tax-Free Series. ICC, the Fund's investment advisor, provides accounting
services for the Prime Series and the Treasury Series. In addition, ICC serves
as the Fund's transfer and dividend disbursing agent. PNC, PFPC and ICC receive
such compensation from the Fund (or, with respect to accounting fees, from the
Tax-Free, Prime or Treasury Series, as appropriate) for services in such
capacities as are agreed to from time to time by PNC, PFPC, ICC and the Fund.
For the fiscal year ended March 31, 1996, PNC received custodian fees of
$610,914 (including reimbursement for out-of-pocket expenses) and, with respect
to the Tax-Free Series, PFPC received accounting fees (including reimbursement
for out-of-pocket expenses) of $101,924, respectively.
As compensation for providing accounting services to the Prime
Series and the Treasury Series, ICC receives an annual fee, calculated daily and
paid monthly as shown below.
Prime and Treasury Series
Average Net Assets Incremental Annual Accounting Fee Per Series
------------------ --------------------------------------------
$ 0 - $ 10,000,000 $13,000(fixed fee)
$ 10,000,000 - $ 20,000,000 .100%
$ 20,000,000 - $ 30,000,000 .080%
$ 30,000,000 - $ 40,000,000 .060%
$ 40,000,000 - $ 50,000,000 .050%
$ 50,000,000 - $ 60,000,000 .040%
$ 60,000,000 - $ 70,000,000 .030%
$ 70,000,000 - $ 100,000,000 .020%
$100,000,000 - $ 500,000,000 .015%
$500,000,000 - $1,000,000,000 .005%
over $1,000,000,000 .001%
In addition, the Prime Series and the Treasury Series, as
appropriate, will reimburse ICC for the following out-of-pocket expenses
incurred in connection with ICC's performance of accounting services for such
Series: express delivery, independent pricing and storage.
For the fiscal year ended March 31, 1996 and for the period
from November 10, 1995 through March 31, 1995, ICC received fees of $ 150,692
and $58,826, respectively, for providing accounting services to the Prime
Series. For the fiscal years ended March 31, 1996, March 31, 1995 and for the
period from January 1, 1994 through March 31, 1994, ICC received fees of
$122,841, $90,083 and $15,402, respectively, for providing accounting services
to the Treasury Series. Prior to January 1, 1994, Alex. Brown provided
accounting services to the Treasury Series and for the period from April 1, 1993
through December 31, 1993 received fees of $47,275.
As compensation for providing transfer agency services, the
Fund pays ICC up to $15.00 per account per year plus reimbursement for
out-of-pocket expenses incurred in connection therewith. For the fiscal year
ended March 31, 1996, such fees totalled $1,105,948 for Prime, $234,288 for
Treasury and $154,031 for Tax-Free, respectively.
The address of ICC is 135 East Baltimore Street, Baltimore,
Maryland 21202 (telephone: 800-553-8080), the address of PNC is Airport Business
Center, 200 Stevens Drive, Lester, Pennsylvania 19113, and the address of PFPC
is 400 Bellevue Parkway, Wilmington, Delaware 19809. PFPC may reimburse Alex.
Brown for certain shareholder servicing functions performed by Alex. Brown.
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<PAGE>
Sub-Accounting
The Fund and ICC have arranged for PFPC to offer
sub-accounting services to Fund shareholders and maintain information with
respect to underlying owners. Investors, such as financial institutions,
investment counselors and brokers, who purchase shares for the account of
others, can make arrangements through the Fund or ICC for these sub-accounting
services.
Principal Holders of Securities
The names and addresses of the holders of 5% or more of the
outstanding shares of any class of the Fund as of July 16, 1996 and the
percentage of outstanding shares of such classes owned by such shareholders as
of such date are, to Fund management's knowledge, as follows:
Title of Class
and Name and Percent Owned Percent
Address of of Record and Owned of
Record Owner 1/ and Beneficially Record Only
- --------------- ---------------- -----------
Institutional Prime Shares
Alex. Brown & Sons, Inc. 11.75% --%
A/C 0020170139
P.O. Box 1346
Baltimore, MD 21203-1346
Alex. Brown & Sons, Inc. 12.86% --%
A/C 0020170250
P.O. Box 1346
Baltimore, MD 21203-1346
Alex. Brown & Sons Inc. 15.98% --%
A/C 0020170321
P.O. Box 1346
Baltimore, MD 21203-1346
Alex. Brown & Sons Inc. 11.82% --%
A/C 0020170339
P.O. Box 1346
Baltimore, MD 21203-1346
Alex. Brown & Sons Inc. 6.03% --%
A/C 0020416928
P.O. Box 1346
Baltimore, MD 21203-1346
Institutional Treasury Shares
Alex. Brown & Sons, Inc. 6.52% --%
A/C 0020170073
P.O. Box 1346
Baltimore, MD 21203-1346
Alex. Brown & Sons, Inc. 16.79% --%
A/C 25010297
P.O. Box 1346
Baltimore, MD 21203-1346
<PAGE>
Flag Investors Cash Reserve Prime Class A Shares
Alex. Brown & Sons, Inc. 7.69% --%
FBO 242-06298-14
P.O. Box 1346
Baltimore, MD 21203-1346
Alex. Brown & Sons, Inc. 7.19% --%
FBO 242-06863-18
P.O. Box 1346
Baltimore, MD 21203-1346
Alex. Brown & Sons, Inc. 5.01% --%
FBO 601-80127-13
P.O. Box 1346
Baltimore, MD 21203-1346
Alex. Brown & Sons, Inc. *62.04% --%
135 E. Baltimore St.
Baltimore, MD 21202
Flag Investors Cash Reserve Prime Class B Shares
Marion L. Woss Tr. 96.14% --%
U/A 03/11/1992
Marion L. Woss Trust
13326 Plattner Dr.
Mokena, IL 60448-9227
Quality Prime Shares
Alex. Brown & Sons, Inc. 6.66% --%
A/C 0074255447
P.O. Box 1346
Baltimore, MD 210203-1346
Treasury Series
Alex. Brown & Sons, Inc. 7.92% --%
A/C 0023126873
P.O. Box 1346
Baltimore, MD 21203-1346
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<PAGE>
As of July 16, 1996, the directors and officers of the Fund as
a group (16 persons) owned an aggregate of less than 1% of the Fund's shares or
any class thereof.
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* As of such date, to Fund Management's knowledge, Alex. Brown & Sons, Inc.
owned beneficially less than 1% of such Shares.
Reports
The Fund furnishes shareholders with semi-annual reports
containing information about the Fund and its operations, including a schedule
of investments held in the Fund's portfolios and its financial statements. The
annual financial statements are audited by the Fund's independent accountants.
The Board of Directors has selected Coopers & Lybrand L.L.P., 2400 Eleven Penn
Center, Philadelphia, Pennsylvania 19103, as the Fund's independent accountants
to audit the Fund's financial statements and review the Fund's federal tax
returns for the fiscal year ending March 31, 1997.
SHARE PURCHASES AND REDEMPTIONS
Purchases and Redemptions
A complete description of the manner by which the Fund's
Shares may be purchased or redeemed appears in the Prospectus for that class
under the headings "How to Invest in the Fund" and "How to Redeem Shares." The
Fund reserves the right to suspend the sale of Shares at any time.
The right of redemption may be suspended or the date of
payment postponed when (a) trading on the New York Stock Exchange is restricted,
as determined by applicable rules and regulations of the SEC, (b) the New York
Stock Exchange 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 disposal of portfolio securities or the
valuation of the net assets of the Fund not reasonably practicable.
Net Asset Value Determination
The net asset value of each of the Fund's Series is determined
once daily as of 12:00 noon Eastern time each day that PNC and the New York
Stock Exchange are open for business.
For the purpose of determining the price at which shares of
each class of each Series are issued and redeemed, the net asset value per share
is calculated immediately after the daily dividend declaration by: (a) valuing
all securities and instruments of such Series as set forth below; (b) deducting
such Series' and class' liabilities; (c) dividing the resulting amount by the
number of shares outstanding of such class; and (d) rounding the per share net
asset value to the nearest whole cent. As discussed below, it is the intention
of the Fund to maintain a net asset value per share of $1.00 for each class of
each Series.
The instruments held in each Series' portfolio are valued on
the basis of amortized cost. This 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 Fund would receive if it sold all the
securities in its portfolios. During periods of declining interest rates, the
daily yield for any Series computed as described under "Dividends and Taxes"
below, may be higher than a like computation made by a fund with identical
investments utilizing a method of valuation based upon market prices and
estimates of market prices for all of its portfolio instruments. Thus, if the
use of amortized cost by the Fund results in a lower aggregate portfolio value
for a Series on a particular day, a prospective investor in such Series would be
able to obtain a somewhat higher yield than would result from an investment in a
fund utilizing solely market values, and existing investors in such Series would
receive less investment income. The converse would apply in a period of rising
interest rates.
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<PAGE>
The valuation of the portfolio instruments based upon their
amortized cost, the calculation of the per share net asset value to the nearest
whole cent and the concomitant maintenance of the net asset value per share of
$1.00 for each class of each Series is permitted in accordance with rules and
regulations of the SEC applicable to money market funds, as amended, effective
June 1, 1991, which require the Fund to adhere to certain quality, maturity and
diversification conditions. The Fund maintains a dollar-weighted average
portfolio maturity of 90 days or less for each Series, purchases only
instruments having remaining maturities of 397 days or less and invests only in
securities determined by the Board of Directors to be of high quality with
minimal credit risk. The Board of Directors is required to establish procedures
designed to stabilize, to the extent reasonably possible, the Fund's price per
share at $1.00 for each class of each Series as computed for the purpose of
sales and redemptions. Such procedures include review of each Series' portfolio
holdings by the Board of Directors, at such intervals as it may deem
appropriate, to determine whether the net asset value calculated by using
available market quotations or other reputable sources for any class of any
Series deviates from $1.00 per share and, if so, whether such deviation may
result in material dilution or is otherwise unfair to existing shareholders of
the relevant class or Series. In the event the Board of Directors determines
that such a deviation exists for any class of any Series, it will take such
corrective action as the Board of Directors deems necessary and appropriate with
respect to any class of such Series, including sales of portfolio instruments
prior to maturity to realize capital maturity; withholding of dividends;
redemption of shares in kind; or establishment of a net asset value per share by
using available market quotations.
DIVIDENDS AND TAXES
Dividends
All of the net income earned on the Treasury Series, the Prime
Series and the Tax-Free Series is declared daily as dividends to the respective
holders of record of shares of each class of each Series. The net income of each
Series for dividend purposes (from the time of the immediately preceding
determination thereof) consists of (a) interest accrued and discount earned
(including both original issue and market discount), if any, on the assets of
such Series and any general income of the Fund prorated to the Series based on
its relative net assets, less (b) amortization of premium and accrued expenses
for the applicable dividend period attributable directly to such Series and
general expenses of the Fund prorated to each such Series based on its relative
net assets. Expenses attributable to a class of a Series are allocated to that
class. Although realized gains and losses on the assets of each Series are
reflected in the net asset value of such Series, they are not expected to be of
an amount which would affect the net asset value of any Series of $1.00 per
share for the purposes of purchases and redemptions. Realized gains and losses
may be declared and paid yearly or more frequently. The amount of discount or
premium on instruments in each portfolio is fixed at time of their purchase. See
"Net Asset Value Determination" above.
Should the Fund incur or anticipate any unusual expense or
loss or depreciation which would adversely affect the net asset value per share
or net income per share of any class of a Series 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 any class of a
Series was reduced, or was anticipated to be reduced, below $1.00, the Board of
Directors might suspend further dividend payments with respect to such class or
Series until the net asset value returns to $1.00. Thus, the expense or loss or
depreciation might result in a shareholder (i) receiving no dividends for the
period during which the shareholder held shares of such class or Series or (ii)
receiving upon redemption a price per share lower than that which he paid.
Dividends on all classes of a Series are normally payable on
the first day that a share purchase or exchange order is effective but not on
the day that a redemption order is effective. However, if a purchase order is
received by Alex. Brown after 11:00 a.m. Eastern time for the Treasury Series
and Tax-Free Series and after 12:00 noon Eastern time for the Prime Series on
any business day, the shareholder will receive dividends beginning the following
business day. The net income of each Series for dividend purposes is determined
as of 12:00 noon Eastern time each day that the Fund is open for business and
immediately prior to the determination of each Series' net asset value on that
day. Dividends are
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<PAGE>
declared and reinvested monthly in the form of additional full and fractional
shares of the same Series at net asset value unless the shareholder has elected
to have dividends paid in cash.
Taxes
The following is only a summary of certain additional federal
income tax considerations generally affecting the Fund and its shareholders that
are not described in the Fund's Prospectus. No attempt is made to present a
detailed explanation of the federal, state or local tax treatment of the Fund or
its shareholders, and the discussion here and in the Fund's Prospectus is not
intended as a substitute for careful tax planning.
The following discussion of federal income tax consequences is
based on the Internal Revenue Code of 1986, as amended (the "Code") and the
regulations issued thereunder as in effect on the date of this Statement of
Additional Information. New legislation, as well as administrative changes or
court decisions, may significantly change the conclusions expressed herein, and
may have a retroactive effect with respect to the transactions contemplated
herein.
1. Generally
Through payment of all or substantially all of its net
investment company taxable income (generally, net investment income plus net
short term capital gains) plus, in the case of the Tax-Free Series, all or
substantially all of its net exempt interest income, to shareholders and by
meeting certain diversification of assets and other requirements of the Code,
each Series expects to qualify as a regulated investment company under
Subchapter M of the Code. This will enable each Series to be relieved from
payment of income taxes on that portion of its net investment company taxable
income and net capital gains (the excess of net long-term capital gains over net
short-term capital losses) distributed to shareholders. Each Series also intends
to meet the distribution requirements of the Code to avoid the imposition of a
4% federal excise tax.
In order to qualify for tax treatment as a regulated
investment company under the Code, each Series must distribute annually to its
shareholders at least the sum of 90% of its net interest income excludable from
gross income plus 90% of its investment company taxable income and also must
meet several additional requirements. Among those requirements are the
following: (i) each Series must derive less than 30% of its gross income from
the sale or other disposition of stock or securities held for less than three
months; (ii) each Series must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loans, and gains from the sale or other disposition of stock or securities, or
certain other income; (iii) at the close of each quarter of each Series' taxable
year, at least 50% of the value of its total assets must be represented by cash
and cash items, U.S. Government securities, securities of other registered
investment companies and other securities, with such other securities limited,
in respect to any one issuer, to an amount that does not exceed 5% of the value
of the Series' assets and that does not represent more than 10% of the
outstanding voting securities of such issuer; (iv) at the close of each quarter
of each Series' taxable year, not more than 25% of the value of its assets may
be invested in securities (other than U.S. Government securities or the
securities of other registered investment companies) of any one issuer or of two
or more issuers which the Series controls and which are engaged in the same,
similar or related trades or businesses.
Each Series' policy is to distribute to its shareholders
substantially all of its investment company taxable income for each year. Such
dividends generally will be taxable to shareholders as ordinary income.
Dividends will be subject to taxation whether paid in the form of cash or
additional shares of a Series.
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<PAGE>
Since all of each Series' net investment income is expected to
be derived from earned interest, it is anticipated that no part of any
distribution will be eligible for the dividends received deduction for corporate
shareholders.
If for any taxable year, the Fund does not qualify as a
regulated investment company, all of its taxable income will be subject to tax
at regular corporate income tax rates without any deduction for distribution to
shareholders, and all such distributions generally will be taxable to
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the 70% dividends received deduction for corporate shareholders.
Although no Series expects to recognize any long-term capital
gains, each Series' policy is to distribute substantially all of its net capital
gains (the excess of net long-term capital gains over net short-term capital
losses). Any such net capital gains distributions will be taxable to
shareholders as long-term capital gains regardless of how long a shareholder has
held shares. An ordinary income dividend or a distribution of net capital gains
received after the purchase of a Series' shares reduces the net asset value of
the shares by the amount of such dividend or distribution and will be subject to
income taxes.
Generally, when establishing an account, an investor must
supply a taxpayer identification number to the Series and certify that the
investor is not subject to backup withholding. Failure to do so will result in
the Series' having to withhold from distributions 31% of all amounts otherwise
payable. Backup withholding may also apply in certain other circumstances. The
amounts withheld will be credited against the shareholder's federal income tax
liability, and if withholding results in an overpayment of taxes, the
shareholder may obtain a refund from the Internal Revenue Service.
Dividends to shareholders who are non-resident individuals or
entities may be subject to a 30% United States withholding tax under existing
provisions of the Code applicable to foreign individuals and entities unless a
reduced rate of withholding or a withholding exemption is provided under
applicable treaty law. Non-resident shareholders are urged to consult their own
tax advisors concerning the applicability of the U.S. withholding tax.
The Code imposes a 4% non-deductible federal excise tax on a
regulated investment company that fails to distribute by the end of any calendar
year 98% of its ordinary income for that year and 98% of its capital gain net
income (the excess of short and long term capital gains over short and long term
capital losses) for the one-year period ending on October 31 of such calendar
year, plus certain other amounts. Each Series intends to make sufficient
distributions of its ordinary income and capital gains net income prior to the
end of each calendar year to avoid liability for this excise tax.
Any gain or loss recognized on a sale or redemption of shares
of the Series by a shareholder who is not a dealer in securities generally will
be treated as a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise generally will be treated as a short-term
capital gain or loss. Any loss recognized by a Shareholder upon the sale or
redemption of shares of the Series held for six months or less, however, will be
disallowed to the extent of any exempt-interest dividends received by the
Shareholder with respect to such shares. If shares on which a net capital gain
distribution has been received are subsequently sold or redeemed, and such
shares have been held for six months or less, any loss recognized will be
treated as a long-term capital loss to the extent of the capital gain
distribution.
Dividends and capital gains distributions may also be subject
to state and local taxes. Shareholders are urged to consult their tax advisors
regarding specific questions as to federal, state, or local taxes.
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<PAGE>
2. Additional Considerations for Tax-Free Series
The following additional considerations relate to the Tax-Free
Series. The Tax-Free Series intends to invest in sufficient Municipal Securities
so that it will qualify to pay "exempt-interest dividends" (as defined in the
Code) to shareholders. The Tax-Free Series' dividends payable from net
tax-exempt interest earned from Municipal Securities will qualify as
exempt-interest dividends if, at the close of each quarter of the taxable year
of the Series, at least 50% of the value of the Series' total assets consists of
Municipal Securities. In addition, the Series must distribute an amount equal to
at least the sum of 90% of the net exempt-interest income and 90% of the
investment company taxable income earned by the Series during the taxable year.
Exempt-interest dividends distributed to shareholders are not
includable in the shareholders' gross income for regular federal income tax
purposes. However, while such interest is exempt from regular federal income
tax, it may be subject to the alternative minimum tax (the "Alternative Minimum
Tax") imposed by Section 55 of the Code and in the case of corporate
shareholders, the environmental tax (the "Environmental Tax") imposed by Section
59A of the Code. The Alternative Minimum Tax will be imposed at rates of up to
28% in the case of noncorporate taxpayers and at the rate of 20% in the case of
corporate taxpayers, to the extent it exceeds the taxpayer's regular tax
liability. The Environmental Tax is imposed at the rate of 0.12% and applies
only to corporate taxpayers. The Alternative Minimum Tax and the Environmental
Tax may be imposed in two circumstances. First, exempt-interest dividends
derived from certain Municipal Securities that are "private activity bonds"
which are issued after August 7, 1986, will generally constitute an item of tax
preference (and therefore potentially be subject to the Alternative Minimum Tax
and the Environmental Tax) for both corporate and non-corporate taxpayers. The
Fund intends, when possible, to avoid investing in such Municipal Securities.
Second, exempt-interest dividends derived from all Municipal Securities,
regardless of the date of issue, or whether derived from private activity bonds,
must be taken into account by corporate taxpayers in determining the amount of
their "adjusted current earnings," as defined in Section 56(g) of the Code,
which is used in calculating their alternative minimum taxable income for
purposes of determining the Alternative Minimum Tax and the Environmental Tax.
The percentage of income that constitutes "exempt-interest
dividends" will be determined for each year for the Series and will be applied
uniformly to all dividends declared with respect to the Series during that year.
This percentage may differ from the actual percentage for any particular day.
As noted, it is the present policy of the Series to invest
only in securities the interest on which is exempt from federal tax. However,
distributions of net investment income received by the Series from investments
in debt securities other than Municipal Securities and any net realized
short-term capital gains distributed by the Series will be taxable to
shareholders as ordinary income and will not be eligible for the dividends
received deduction for corporate shareholders. Further, any distribution of net
capital gains (the excess of net long-term capital gains over net short-term
capital losses), such as gains from the sale of Municipal Securities held by the
Series for more than one year, will generally constitute taxable long-term
capital gains to shareholders.
Interest on indebtedness which is incurred or continued to
purchase or carry shares of an investment company which distributes
exempt-interest dividends during the year is not deductible for federal income
tax purposes. The deduction otherwise allowable to property and casualty
insurance companies for "losses incurred" will be reduced by an amount equal to
a portion of exempt-interest dividends received or accrued during any taxable
year. Foreign corporations engaged in a trade or business in the United States
will be subject to a "branch profits tax" on their "dividend equivalent amount"
for the taxable year, which will include exempt-interest dividends. Certain
Subchapter S corporations may also be subject to taxes on their "passive
investment income," which could include exempt-interest dividends. Up to 85% of
the Social Security benefits or railroad retirement benefits received by an
individual during any taxable year will be included in the gross income of such
individual, depending upon the individual's "modified adjusted gross income",
which includes exempt-interest dividends. Further, the Tax-Free Series may not
be an appropriate
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investment for persons who are "substantial users" of facilities financed by
industrial development bonds or are "related persons" to such users. A
"substantial user" is defined generally to include certain persons who regularly
use a facility in their trade or business. Such persons should consult with
their own tax advisors before investing in the Tax-Free Series.
Issuers of Municipal Securities (or the beneficiary of
Municipal Securities) may have made certain representations or covenants in
connection with the issuance of such Municipal Securities to satisfy certain
requirements of the Code that must be satisfied subsequent to the issuance of
such Municipal Securities. Investors should be aware that exempt-interest
dividends derived from such Municipal Securities may become subject to federal
income taxation retroactively to the date thereof if such representations are
determined to have been inaccurate or if the issuer of such Municipal Securities
(or the beneficiary of such Municipal Securities) fails to comply with such
covenants.
Receipt of exempt-interest dividends may also result in
collateral federal tax consequences to certain taxpayers. Prospective investors
should consult their own tax advisors as to such consequences.
CURRENT YIELD
Set forth below are the current, effective and
taxable-equivalent yields, as applicable, for each class or series of the Fund's
shares for the seven-day period ended March 31, 1996.
<TABLE>
<CAPTION>
Series or class Current Yield Effective Yield Taxable-Equivalent Yield***
- --------------- ------------- --------------- ---------------------------
<S> <C> <C> <C>
Prime Series* 4.72% 4.83% N/A
Institutional Prime Shares 4.97% 5.10% N/A
Quality Cash Reserve Prime Shares 4.50% 4.60% N/A
Cash Reserve Prime B Shares 4.72% 4.83% N/A
Treasury Series** 4.46% 4.55% N/A
Institutional Treasury Shares 4.73% 4.84% N/A
Tax-Free Series 2.75% 2.80% 4.06%
</TABLE>
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* Other than the Institutional, Quality Cash Reserve Prime Shares or Flag
Investors Cash Reserve Prime Class B Shares.
** Other than the Institutional Shares.
*** Assumes a tax rate of 31%.
The yield for each Series of the Fund can be obtained by
calling your sub-distributor or Alex. Brown at (410) 561-8686. Quotations of
yield on each Series of the Fund may also appear from time to time in the
financial press and in advertisements.
The current yields quoted will be the net average annualized
yield for an identified period, usually seven consecutive calendar days. Yield
for each Series or class will be computed by assuming that an account was
established with a single share of a Series (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 realized gains
and losses or unrealized appreciation or depreciation) 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 Fund may also furnish a
quotation of effective yield for each Series or class that assumes the
reinvestment of dividends for a 365 day year and a return for the entire year
equal to the average annualized yield for the period, which will be computed by
compounding the unannualized current yield for the period by adding 1 to the
unannualized current yield, 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 Fund may furnish a quotation of the Tax-Free Series'
taxable-equivalent yield, which will be computed by dividing the tax-exempt
portion of such Series' effective yield for a stated consecutive seven day
period by one minus the investor's income tax rate and adding the product to the
portion of the yield for the same consecutive seven day period that is not
tax-exempt. The resulting yield is what the investor would need to earn from a
taxable investment in order to realize an after-tax benefit equal to the
tax-free yield provided by the Tax-Free Series. Historical yields are
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not necessarily indicative of future yields. Rates of return will vary as
interest rates and other conditions affecting money market instruments change.
Yields also depend on the quality, length of maturity and type of instruments in
each of the Fund's Series and each Series' or class' operating expenses.
Quotations of yields will be accompanied by information concerning the average
weighted maturity of the portfolio of a Series. Comparison of the quoted yields
of various investments is valid only if yields are calculated in the same manner
and for identical limited periods. When comparing the yield for either Series of
the Fund with yields quoted with respect to other investments, shareholders
should consider (a) possible differences in time periods, (b) the effect of the
methods used to calculate quoted yields, and (c) the quality and average-
weighted maturity of portfolio investments, expenses, convenience, liquidity and
other important factors.
INVESTMENT PROGRAM AND RESTRICTIONS
Information concerning the Fund's investment program is
discussed in the Fund's Prospectus.
Each Series may invest in instruments that have certain
minimum ratings of either Moody's Investor Services, Inc. ("Moody's") or
Standard and Poor's Corporation ("S&P") as permitted by the investment
objective, policies and restrictions of each such Series. See "Investment
Program" in the Prospectus. Investments of commercial paper may be precluded
unless a particular instrument is an "Eligible Security" as defined in Rule 2a-7
under the 1940 Act. Rule 2a-7 defines "Eligible Security" as follows:
(i) a security with a remaining maturity of 397 days or less
that is rated (or that has been issued by an issuer that is rated with
respect to a class of Short-term debt obligations, or any security
within that class, that is comparable in priority and security with the
security) by the Requisite NRSROs(1) in one of the two highest rating
categories for Short-term debt obligations (within which there may be
sub-categories or gradations indicating relative standing); or
(ii) a security:
(A) that at the time of issuance was a Long-term
security but that has a remaining maturity of 397 calendar
days or less, and
(B) whose issuer has received from the Requisite
NRSROs a rating, with respect to a class of Short-term debt
obligations (or any security within that class) that is now
comparable in priority and security with the security, in one
of the two highest rating categories for Short-term debt
obligations (within which there may be sub-categories or
gradations indicating relative standing); or
(iii) an Unrated Security that is of comparable quality to a
security meeting the requirements of paragraphs (i) or (ii) of this
section, as determined by the money market fund's board of directors;
provided, however, that:
(A) the board of directors may base its determination
that a Standby Commitment is an Eligible Security upon a
finding that the issuer of the commitment presents a minimal
risk of default; and
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(1) "Requisite NRSRO" shall mean (a) any two nationally recognized statistical
rating organizations that have issued a rating with respect to a security
or class of debt obligations of an issuer, or (b) if only one NRSRO has
issued a rating with respect to such security or issuer at the time the
Fund purchases or rolls over the security, that NRSRO. At present the
NRSROs are: Standard & Poor's Ratings Group, Moody's Investors Service,
Inc., Duff and Phelps, Inc., Fitch Investors Services, Inc. and, with
respect to certain types of securities, IBCA Limited and its affiliates,
IBCA Inc. Subcategories or gradations in ratings (such as a "+" or "-") do
not count as rating categories.
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(B) a security that at the time of issuance was a
Long-term security but that has a remaining maturity of 397
calendar days or less and that is an Unrated Security(2) is
not an Eligible Security if the security has a Long-term
rating from any NRSRO that is not within the NRSRO's two
highest categories (within which there may be sub-categories
or gradations indicating relative standing).
The following is a description of the minimum ratings of
Moody's and S&P for instruments in which each Series may invest.
Commercial Paper Ratings
Moody's - The rating Prime-1 (P-1) is the highest commercial
paper rating assigned by Moody's. Among the factors considered by Moody's in
assigning ratings are the following: (1) evaluation of the management of the
issuer; (2) economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas; (3)
evaluation of the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend
of earnings over a period of ten years; (7) financial strength of a parent
company and the relationship which exists with the issuer; and (8) recognition
by the management of obligations which may be present or may arise as a result
of public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
P-1, P-2 or P-3.
S & P - Commercial paper rated A-1+ or A-1 by S&P has the
following characteristics. Liquidity ratios are adequate to meet cash
requirements. Long-term senior debt is rated "A" or better, although in some
cases "BBB" credits may be allowed. The issuer has access to at least two
channels of borrowing. Basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances. Typically, the issuer's industry is
well established and the issuer has a strong position within the industry. The
reliability and quality of management is unquestioned. Relative strength or
weakness of the above factors determines whether the issuer's commercial paper
is rated A-1, A-2 or A-3.
Short Term Debt Ratings
Moody's - State and municipal notes, as well as other
short-term obligations, are assigned a Moody's Investment Grade (MIG) rating.
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
evaluating bond risk may be less important over the short run.
MIG 1
Notes bearing this designation are of the best quality. Notes
are enjoying strong "protection" by established cash flows, superior
liquidity support or a demonstrated broad-based access to the market
for refinancing.
MIG 2
Notes bearing this designation are of high quality. Margins of
protection are ample although not as large as in the preceding group.
- --------
(2) An "unrated security" is a security (i) issued by an issuer that does not
have a current short-term - rating from any NRSRO, either as to the
particular security or as to any other short-term obligations of
comparable priority and security; (ii) that was a long-term security at
the time of issuance and whose issuer has not received from any NRSRO a
rating with respect to a class of short-term debt obligations now
comparable in priority and security; or (iii) a security that is rated but
which is the subject of an external credit support agreement not in effect
when the security was assigned its rating, provided that a security is not
an unrated security if any short-term debt obligation issued by the issuer
and comparable in priority and security is rated by any NRSRO.
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S&P - The note rating reflects the liquidity concerns and
market access risks unique to notes. Notes due in 3 years or less will receive a
note rating. Notes rated "SP-1" have a strong capacity to pay principal and
interest. Those issues determined to possess overwhelming safety characteristics
are assigned a plus (+) designation.
Tax-Exempt Demand Ratings
Moody's - Issues which have demand features (i.e., variable
rate demand obligations) are assigned a VMIG symbol. This symbol reflects such
characteristics as payment upon periodic demand rather than fixed maturity, and
payment relying on external liquidity. The VMIG rating is modified by the
numbers 1, 2 or 3. VMIG1 represents the best quality in the VMIG category, VMIG2
represents high quality, and VMIG3 represents favorable quality.
S&P - "dual" ratings are assigned to all long-term debt issues
that have as part of their provisions a demand feature. 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 are used to denote the put option (e.g., "AAA/A-1+").
Investment Restrictions
The most significant investment restrictions applicable to the
Fund's investment program are set forth in the Prospectus under the heading
"Investment Program - Investment Restrictions." Additionally, as a matter of
fundamental policy which may not be changed without a majority vote of
shareholders (as that term is defined in the Prospectus under the heading
"General Information"), no Series will:
(1) buy common stocks or voting securities or invest in
companies for the purpose of exercising control or management; (2) mortgage,
pledge or hypothecate any assets except to secure permitted borrowings and
reverse repurchase agreements and then only in an amount up to 15% of the value
of a Series' total assets at the time of borrowing or entering into a reverse
repurchase agreement; (3) underwrite securities issued by any other person,
except to the extent that the purchase of securities and the later disposition
of such securities in accordance with a Series' investment program may be deemed
an underwriting; (4) invest in real estate (a Series may, however, purchase and
sell securities secured by real estate or interests therein or issued by issuers
which invest in real estate or interests therein); (5) purchase oil, gas or
mineral interests (a Series may, however, purchase and sell the securities of
companies engaged in the exploration, development, production, refining,
transporting and marketing of oil, gas or minerals); (6) purchase or sell
commodities or commodity futures contracts, purchase securities on margin, make
short sales or invest in puts or calls; or (7) acquire for value the securities
of any other investment company, except in connection with a merger,
consolidation, reorganization or acquisition of assets.
The following investment restrictions may be changed by a vote
of the majority of the Board of Directors of the Fund. No Series will: (1)
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) invest in warrants if as a result more than 2% of the value of such
Series net assets would be invested in warrants which are not listed on a
recognized stock exchange, or more than 5% of such Series net assets would be
invested in warrants regardless of whether listed on such exchange; (3) purchase
any securities of unseasoned issuers which have been in operation directly or
through predecessors for less than three years; (4) invest in real estate
limited partnership interests or oil, gas or mineral leases; or (5) purchase or
retain the securities of any issuer if to the knowledge of the Fund any officer
or Director of the Fund, its investment advisor or sub-advisors owns
beneficially more than .5% of the outstanding securities of such issuer and
together they own beneficially more than 5% of the securities of such issuer.
-23-
<PAGE>
PORTFOLIO TRANSACTIONS
ICC and PIMC, for the Tax-Free Series, (the "Advisors") are
responsible for decisions to buy and sell securities for the Fund, broker-dealer
selection and negotiation of commission rates. Since purchases and sales of
portfolio securities by the Fund are usually principal transactions, the Fund
incurs little or no brokerage commissions. Portfolio securities are normally
purchased directly from the issuer or from a market maker for the securities.
The purchase price paid to dealers serving as market makers may include a spread
between the bid and asked prices. The Fund may also purchase securities from
underwriters at prices which include a commission paid by the issuer to the
underwriter. During the fiscal years ended March 31, 1996, March 31, 1995 and
March 31, 1994, the Fund incurred no brokerage commissions.
The Fund does not seek to profit from short-term trading, and
will generally (but not always) hold portfolio securities to maturity. The
Fund's fundamental policies require that investments mature within one year or
less, and the amortized cost method of valuing portfolio securities requires
that the Fund maintain an average weighted portfolio maturity of 90 days or
less. Both policies may result in relatively high portfolio turnover, but since
brokerage commissions are not normally paid on money market instruments, the
high rate of portfolio turnover is not expected to have a material effect on the
Fund's net income or expenses.
The Advisors' primary consideration in effecting a security
transaction is to obtain the best net price and the most favorable execution of
the order. To the extent that the executions and prices offered by more than one
dealer are comparable, the Advisors may, at their discretion, effect
transactions with dealers that furnish statistical, research or other
information or services which are deemed by the Advisors to be beneficial to the
Fund's investment program. Certain research services furnished by dealers may be
useful to the Advisors with clients other than the Fund. Similarly, any research
services received by the Advisors through placement of portfolio transactions of
other clients may be of value to the Advisors in fulfilling their obligations to
the Fund. The Advisors are of the opinion that the material received is
beneficial in supplementing their research and analysis, and, therefore, may
benefit the Fund by improving the quality of their investment advice. The
advisory fee paid by the Fund is not reduced because the Advisors receive such
services. During the fiscal years ended March 31, 1996, March 31, 1995 and March
31, 1994, the Advisors directed no transactions to dealers and paid no related
commissions because of research services provided to the Fund.
The Fund is required to identify any securities of its
"regular brokers or dealers" (as such term is defined in the 1940 Act) which the
Fund has acquired during its most recent fiscal year. As of March 31, 1996, the
Fund held a 5.37% repurchase agreement issued by Goldman Sachs & Co. valued at
$83,000,000 and a 5.33% repurchase agreement issued by Morgan Stanley & Co.
valued at $100,000,000.
The Advisors and their affiliates manage several other
investment accounts, some of which may have objectives similar to that of the
Fund. It is possible that at times, identical securities will be acceptable for
one or more of such investment accounts. However, the position of each account
in the securities of the same issue may vary and the length of time that each
account may choose to hold its investment in the securities of the same issue
may likewise 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
consistent with the investment policies of the Fund and one or more of these
accounts is considered at or about the same time, transactions in such
securities will be allocated in good faith among the Fund and such accounts in a
manner deemed equitable by the Advisors. The Advisors may combine such
transactions, in accordance with applicable laws and regulations, in order to
obtain the best net price and most favorable execution. The allocation and
combination of simultaneous securities purchases on behalf of the Fund's three
series will be made in the same way that such purchases are allocated among or
combined with those of other such investment accounts. Simultaneous transactions
could adversely affect the ability of the Fund to obtain or dispose of the full
amount of a security which it seeks to purchase or sell.
-24-
<PAGE>
Portfolio securities will not be purchased from or sold to or
through any "affiliated person" of the Advisors, as defined in the 1940 Act. In
making decisions with respect to purchase of portfolio securities for the Fund,
the Advisors will not take into consideration whether a dealer or other
financial institution has executed a Shareholder Servicing Agreement with Alex.
Brown.
Provisions of the 1940 Act and rules and regulations
thereunder have been construed to prohibit the Fund's purchasing securities or
instruments from or through, or selling securities or instruments to or through,
any holder of 5% or more of the voting securities of any investment company
managed or advised by the Advisors. The Fund has obtained an order of exemption
from the SEC which permits the Fund to engage in such transactions with a 5%
holder, if the 5% holder is one of the 50 largest U.S. banks measured by
deposits. Purchases from these 5% holders are subject to quarterly review by the
Fund's Board of Directors, including those directors who are not "interested
persons" of the Fund. Additionally, such purchases and sales are subject to the
following conditions:
(1) The Fund will maintain and preserve a written copy of the
internal control procedures for the monitoring of such
transactions, together with a written record of any such
transactions setting forth a description of the security
purchased or sold, the identity of the purchaser or seller,
the terms of the purchase or sale transactions and the
information or materials upon which the determinations to
purchase or sell each security were made;
(2) Each security to be purchased or sold by the Fund will be:
(i) consistent with the Fund's investment policies and
objectives; (ii) consistent with the interests of the Fund's
shareholders; and (iii) comparable in terms of quality, yield,
and maturity to similar securities purchased or sold during a
comparable period of time;
(3) The terms of each transaction will be reasonable and fair
to the Fund's shareholders and will not involve overreaching
on the part of any person; and
(4) Each commission, fee, spread or other remuneration
received by a 5% holder will be reasonable and fair compared
to the commission, fee, spread or other remuneration received
by other brokers or dealers in connection with comparable
transactions involving similar securities purchased or sold
during a comparable period of time and will not exceed the
limitations set forth in Section 17(e)(2) of the 1940 Act.
FINANCIAL STATEMENTS
See next page.
-25-
<PAGE>
ALEX. BROWN CASH RESERVE FUND, INC.
PRIME SERIES
- -------------------------------------------------------------------------------
Statement of Net Assets
March 31, 1996
<TABLE>
<CAPTION>
Rating (a)
----------------- Par
S&P Moody's (000) Value
------ --------- --------- --------------
COMMERCIAL PAPER -- 87.5%(b)
<S> <C> <C> <C> <C>
Automobiles & Trucks -- 4.9%
Ford Motor Credit Corp.
5.50% 4/1/96 ...................... A-1 P-1 $15,000 $ 15,000,000
PACCAR Financial Corp.
5.32% 4/18/96 ..................... A-1+ P-1 11,000 10,972,366
5.30% 4/24/96 ..................... A-1+ P-1 10,000 9,966,139
5.03% 5/16/96 ..................... A-1+ P-1 5,000 4,968,562
5.03% 5/23/96 ..................... A-1+ P-1 11,000 10,920,079
Toyota Motor Credit Corp.
5.31% 4/22/96 ..................... A-1+ P-1 30,000 29,907,075
5.30% 5/2/96 ...................... A-1+ P-1 15,450 15,379,488
5.00% 5/20/96 ..................... A-1+ P-1 15,000 14,897,917
5.00% 5/22/96 ..................... A-1+ P-1 15,000 14,893,750
------------
126,905,376
------------
Beverages -- 1.9%
Anheuser-Busch Companies, Inc.
5.34% 4/18/96 ..................... A-1+ P-1 15,000 14,962,175
4.90% 10/21/96 .................... A-1+ P-1 20,000 19,447,389
4.75% 10/28/96 .................... A-1+ P-1 15,000 14,584,375
------------
48,993,939
------------
Chemicals, General -- 2.1%
E.I. duPont de Nemours
5.31% 4/29/96 ..................... A-1+ P-1 25,000 24,896,750
5.02% 6/17/96 ..................... A-1+ P-1 15,000 14,833,167
5.03% 7/19/96 ..................... A-1+ P-1 5,000 4,923,851
5.50% 8/1/96 ...................... A-1+ P-1 10,000 9,813,611
------------
54,467,379
------------
Chemicals, Specialty -- 1.3%
Air Products & Chemicals
5.48% 4/16/96 .................... A-1 P-1 9,000 8,979,450
5.35% 6/17/96 .................... A-1 P-1 15,000 14,828,354
5.125% 7/11/96 .................... A-1 P-1 9,000 8,870,594
------------
32,678,398
------------
Computer & Office Equipment -- 7.9%
Hewlett-Packard
5.35% 4/18/96 ..................... A-1+ P-1 10,000 9,974,736
5.24% 4/19/96 ..................... A-1+ P-1 10,000 9,973,800
5.22% 4/26/96 ..................... A-1+ P-1 20,500 20,425,687
4.97% 6/19/96 ..................... A-1+ P-1 10,000 9,890,936
4.95% 6/25/96 ..................... A-1+ P-1 15,000 14,824,688
5.04% 7/19/96 ..................... A-1+ P-1 9,750 9,601,215
</TABLE>
-26-
<PAGE>
PRIME SERIES
- -------------------------------------------------------------------------------
Statement of Net Assets -- (continued)
March 31, 1996
<TABLE>
<CAPTION>
Rating (a)
----------------- Par
S&P Moody's (000) Value
------ --------- --------- --------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER -- continued
Computer & Office Equipment -- continued
Pitney Bowes Credit Corp.
5.24% 4/18/96 ..................... A-1+ P-1 $10,000 $ 9,975,256
5.11% 4/30/96 ..................... A-1+ P-1 15,000 14,938,254
5.14% 5/2/96 ...................... A-1+ P-1 10,000 9,955,739
5.02% 10/3/96 ..................... A-1+ P-1 15,000 14,613,042
5.03% 10/3/96 ..................... A-1+ P-1 15,000 14,612,271
5.02% 10/4/96 ..................... A-1+ P-1 20,000 19,481,267
5.04% 10/4/96 ..................... A-1+ P-1 17,000 16,557,320
Xerox Credit Corp.
5.10% 5/8/96 ...................... A-1 P-1 20,000 19,895,167
5.05% 8/29/96 ..................... A-1 P-1 10,000 9,789,583
--------------
204,508,961
--------------
Credit Unions -- 2.5%
Central Corp. Credit
5.39% 4/15/96 ..................... A-1+ P-1 24,225 24,174,222
Mid-States Corporate Federal Credit
Union
5.33% 4/12/96 ..................... A-1+ P-1 18,000 17,970,685
5.33% 4/23/96 ..................... A-1+ P-1 8,000 7,973,942
U.S. Central Credit Union
5.30% 4/17/96 ..................... A-1+ P-1 15,000 14,964,667
--------------
65,083,516
--------------
Defense & Aircraft -- 2.1%
Rockwell International Corp.
5.31% 4/30/96 ..................... A-1+ P-1 55,000 54,764,939
--------------
Electrical & Electronics -- 2.9%
General Electric Company
5.43% 4/4/96 ...................... A-1+ P-1 25,000 24,988,687
5.42% 5/2/96 ...................... A-1+ P-1 25,000 24,883,319
5.07% 5/3/96 ...................... A-1+ P-1 10,000 9,954,933
Motorola Inc.
5.06% 4/25/96 ..................... A-1+ P-1 15,000 14,949,400
--------------
74,776,339
--------------
Electric Utility -- 1.4%
Indianapolis Power & Light
5.17% 4/2/96 ...................... A-1+ P-1 10,700 10,698,463
Northern States Power
5.35% 4/17/96 ..................... A-1+ P-1 25,000 24,940,556
--------------
35,639,019
--------------
</TABLE>
-27-
<PAGE>
PRIME SERIES
- -------------------------------------------------------------------------------
Statement of Net Assets -- (continued)
March 31, 1996
<TABLE>
<CAPTION>
Rating (a)
----------------- Par
S&P Moody's (000) Value
------ --------- --------- --------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER -- continued
Entertainment -- 2.6%
Walt Disney Co. .......................
5.18% 7/15/96 ..................... A-1 P-1 $10,000 $ 9,848,917
5.18% 8/14/96 ..................... A-1 P-1 15,000 14,708,625
5.20% 9/10/96 ..................... A-1 P-1 20,000 19,532,000
5.18% 12/6/96 ..................... A-1 P-1 10,000 9,641,717
5.18% 12/9/96 ..................... A-1 P-1 15,000 14,456,100
--------------
68,187,359
--------------
Finance/Commercial -- 0.4%
CIT Group Holdings Inc.
5.32% 4/8/96 ...................... A-1 P-1 10,000 9,989,656
--------------
Finance/Consumer -- 2.2%
USAA Capital Corp.
5.32% 4/3/96 ...................... A-1+ P-1 7,000 6,997,931
5.12% 4/10/96 ..................... A-1+ P-1 15,000 14,980,800
5.02% 5/20/96 ..................... A-1+ P-1 10,000 9,931,672
5.05% 6/6/96 ...................... A-1+ P-1 8,500 8,421,304
5.05% 6/14/96 ..................... A-1+ P-1 18,006 17,819,088
--------------
58,150,795
--------------
Finance/Diversified -- 0.5%
General Electric Capital Corp.
5.15% 4/4/96 ...................... A-1+ P-1 12,000 11,994,850
--------------
Food -- 6.0%
Campbell Soup Co.
5.34% 6/6/96 ...................... A-1+ P-1 25,000 24,755,250
4.98% 10/4/96 ..................... A-1+ P-1 10,000 9,742,700
Cargill, Inc.
5.35% 4/2/96 ...................... A-1+ P-1 10,000 9,998,514
5.08% 4/30/96 ..................... A-1+ P-1 8,000 7,967,262
5.02% 5/8/96 ...................... A-1+ P-1 10,000 9,948,406
5.02% 5/20/96 ..................... A-1+ P-1 10,000 9,931,672
5.23% 6/17/96 ..................... A-1+ P-1 10,000 9,888,136
5.23% 6/18/96 ..................... A-1+ P-1 20,000 19,773,367
H.J.Heinz
5.37% 4/1/96 ...................... A-1 P-1 10,000 10,000,000
Hershey Foods
5.10% 4/26/96 ..................... A-1+ P-1 20,000 19,929,167
Kellogg Company
5.09% 4/16/96 ..................... A-1+ P-1 4,122 4,113,258
5.25% 6/3/96 ...................... A-1+ P-1 21,000 20,807,062
--------------
156,854,794
--------------
</TABLE>
-28-
<PAGE>
PRIME SERIES
- -------------------------------------------------------------------------------
Statement of Net Assets -- (continued)
March 31, 1996
<TABLE>
<CAPTION>
Rating (a)
----------------- Par
S&P Moody's (000) Value
------ --------- --------- --------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER -- continued
Household Products -- 5.8%
Clorox Company ........................
5.33% 4/8/96 ...................... A-1+ P-1 $20,000 $ 19,979,272
5.30% 4/22/96 ..................... A-1+ P-1 15,000 14,953,625
5.03% 5/28/96 ..................... A-1+ P-1 5,000 4,960,179
Colgate-Palmolive Co.
5.35% 4/4/96 ...................... A-1 P-1 15,000 14,993,313
5.09% 7/12/96 ..................... A-1 P-1 10,000 9,855,783
Procter & Gamble Co.
5.23% 4/12/96 ..................... A-1+ P-1 18,200 18,170,915
5.23% 4/17/96 ..................... A-1+ P-1 15,000 14,965,133
5.07% 5/13/96 ..................... A-1+ P-1 14,000 13,917,190
5.07% 6/11/96 ..................... A-1+ P-1 20,000 19,800,017
5.00% 6/12/96 ..................... A-1+ P-1 9,000 8,910,000
5.07% 6/14/96 ..................... A-1+ P-1 12,000 11,874,940
--------------
152,380,367
--------------
Insurance, Property & Casualty -- 4.3%
A.I. Credit Corp.
5.00% 5/7/96 ...................... A-1+ P-1 15,000 14,925,000
5.00% 5/13/96 ..................... A-1+ P-1 20,000 19,883,333
AIG Funding Inc.
5.30% 4/19/96 ..................... A-1+ P-1 15,000 14,960,250
5.30% 5/20/96 ..................... A-1+ P-1 10,000 9,927,861
5.20% 7/31/96 ..................... A-1+ P-1 15,000 14,737,833
Chubb Capital Corp.
5.55% 4/12/96 ..................... A-1+ P-1 24,200 24,160,473
Marsh & McLennan Companies Inc.
5.15% 9/27/96 ..................... A-1+ P-1 15,000 14,615,896
--------------
113,210,646
--------------
Integrated Oil -- 3.7%
Amoco Co.
5.18% 4/18/96 ..................... A-1+ P-1 17,106 17,064,157
Exxon Imperial U.S. Inc.
5.28% 4/17/96 ..................... A-1+ P-1 25,000 24,941,422
5.30% 4/26/96 ..................... A-1+ P-1 30,000 29,889,583
Shell Oil Co.
5.37% 4/4/96 ...................... A-1+ P-1 25,000 24,988,812
--------------
96,883,974
--------------
Oil Transportation -- 0.6%
Colonial Pipeline
5.25% 4/11/96 ..................... A-1+ P-1 6,600 6,590,375
5.12% 4/12/96 ..................... A-1+ P-1 10,000 9,984,356
--------------
16,574,731
--------------
</TABLE>
-29-
<PAGE>
PRIME SERIES
- -------------------------------------------------------------------------------
Statement of Net Assets -- (continued)
March 31, 1996
<TABLE>
<CAPTION>
Rating (a)
----------------- Par
S&P Moody's (000) Value
------ --------- --------- --------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER -- continued
Paper -- 1.3%
Kimberly-Clark Corp. ..................
5.13% 4/19/96 ..................... A-1+ P-1 $ 5,850 $ 5,834,995
5.30% 5/1/96 ...................... A-1+ P-1 20,000 19,911,667
5.27% 5/7/96 ...................... A-1+ P-1 8,000 7,957,840
--------------
33,704,502
--------------
Pharmaceuticals -- 8.9%
Abbott Laboratories
5.33% 4/25/96 ..................... A-1+ P-1 20,000 19,928,933
Eli Lilly & Co.
5.11% 4/23/96 ..................... A-1+ P-1 15,000 14,953,158
5.30% 5/23/96 ..................... A-1+ P-1 10,000 9,923,444
4.92% 6/17/96 ..................... A-1+ P-1 10,000 9,894,767
5.21% 6/20/96 ..................... A-1+ P-1 15,000 14,826,333
4.95% 8/20/96 ..................... A-1+ P-1 15,000 14,709,187
4.78% 8/22/96 ..................... A-1+ P-1 10,000 9,810,128
Pfizer Inc.
5.15% 4/4/96 ...................... A-1+ P-1 3,000 2,998,713
5.13% 4/17/96 ..................... A-1+ P-1 20,000 19,954,400
Schering-Plough Corp.
5.25% 5/24/96 ..................... A-1+ P-1 20,000 19,845,417
Warner-Lambert Co.
5.25% 6/10/96 ..................... A-1+ P-1 15,000 14,846,875
5.33% 6/12/96 ..................... A-1+ P-1 12,200 12,069,948
5.35% 6/18/96 ..................... A-1+ P-1 25,000 24,710,208
5.03% 7/30/96 ..................... A-1+ P-1 14,500 14,256,883
5.05% 7/30/96 ..................... A-1+ P-1 10,000 9,831,667
4.80% 8/8/96 ...................... A-1+ P-1 10,000 9,828,000
4.87% 9/3/96 ...................... A-1+ P-1 10,000 9,790,319
--------------
232,178,380
--------------
Publishing -- 6.8%
Dun & Bradstreet Corp.
5.30% 5/21/96 ..................... A-1+ P-1 20,000 19,852,778
Gannett Co.
5.22% 4/9/96 ...................... A-1 P-1 30,000 29,965,200
5.30% 4/11/96 ..................... A-1 P-1 26,200 26,161,428
5.27% 4/17/96 ..................... A-1 P-1 25,000 24,941,444
Knight-Ridder Inc.
5.60% 4/2/96 ...................... A-1+ P-1 25,000 24,996,111
5.25% 4/26/96 ..................... A-1+ P-1 10,000 9,963,542
5.07% 5/28/96 ..................... A-1+ P-1 25,000 24,799,312
McGraw-Hill, Inc.
5.50% 4/4/96 ...................... A-1 P-1 7,500 7,496,563
RR Donnelley & Sons
5.25% 4/26/96 ..................... A-1+ P-1 10,000 9,963,542
--------------
178,139,920
--------------
</TABLE>
-30-
<PAGE>
PRIME SERIES
- -------------------------------------------------------------------------------
Statement of Net Assets -- (continued)
March 31, 1996
<TABLE>
<CAPTION>
Rating (a)
------------------ Par
S&P Moody's (000) Value
------ --------- --------- --------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER -- continued
Railroad -- 1.5%
Norfolk Southern Corporation
5.03% 6/7/96 ...................... A-1+ P-1 $12,500 $ 12,382,983
5.23% 6/21/96 ..................... A-1+ P-1 26,364 26,053,762
--------------
38,436,745
--------------
Retail, Specialty -- 2.0%
Toys "R" Us
5.30% 4/26/96 ..................... A-1 P-1 27,000 26,900,625
5.37% 5/6/96 ...................... A-1 P-1 25,000 24,869,479
--------------
51,770,104
--------------
Structured Finance -- 6.5%
CIESCO, L.P.
5.32% 4/11/96 ..................... A-1+ P-1 25,000 24,963,014
5.15% 5/8/96 ...................... A-1+ P-1 40,000 39,788,278
5.07% 5/23/96 ..................... A-1+ P-1 15,000 14,890,150
Corporate Asset Funding Company, Inc.
5.15% 4/4/96 ...................... A-1+ P-1 30,000 29,987,125
5.38% 4/22/96 ..................... A-1+ P-1 20,000 19,937,233
5.15% 5/2/96 ...................... A-1+ P-1 20,000 19,911,306
5.27% 5/23/96 ..................... A-1+ P-1 20,000 19,847,756
--------------
169,324,862
--------------
Telephone -- 7.0%
AT&T
5.50% 4/10/96 ..................... A-1+ P-1 10,000 9,986,250
5.30% 4/30/96 ..................... A-1+ P-1 15,000 14,935,958
5.18% 7/9/96 ...................... A-1+ P-1 15,000 14,786,325
Ameritech Capital Funding Corp.
5.07% 6/6/96 ...................... A-1+ P-1 30,000 29,721,150
5.02% 6/7/96 ...................... A-1+ P-1 20,000 19,813,144
5.20% 12/10/96 .................... A-1+ P-1 15,000 14,451,833
Ameritech Corp.
5.14% 4/12/96 ..................... A-1+ P-1 10,000 9,984,294
BellSouth Capital Fund
5.00% 5/7/96 ...................... A-1+ P-1 15,000 14,925,000
BellSouth Telecommunications
5.16% 4/23/96 ..................... A-1+ P-1 18,300 18,242,294
GTE North Inc.
5.48% 4/9/96 ...................... A-1+ P-1 20,000 19,975,644
Southwestern Bell Telephone Co.
5.32% 6/7/96 ...................... A-1+ P-1 15,000 14,851,483
--------------
181,673,375
--------------
</TABLE>
-31-
<PAGE>
PRIME SERIES
- -------------------------------------------------------------------------------
Statement of Net Assets -- (continued)
March 31, 1996
<TABLE>
<CAPTION>
Rating (a)
------------------ Par
S&P Moody's (000) Value
------ --------- --------- --------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER -- continued
Waste Management -- 0.4%
WMX Technologies
4.78% 11/1/96 ..................... A-1 P-1 $ 10,000 $ 9,715,856
---------------
TOTAL COMMERCIAL PAPER ........... 2,276,988,782
---------------
VARIABLE RATE NOTE -- 1.9%
Coca-Cola Master Note
5.382%(c) 7/22/96 .................. A-1+ P-1 50,000 50,000,000
---------------
FEDERAL HOME LOAN BANK -- 0.6%
FHLB
5.18% 4/24/96 ..................... AAA -- 15,000 14,950,358
---------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 3.1%
FNMA
Discount Note
5.30% 4/16/96 ..................... -- P-1 25,000 24,944,792
5.18% 5/2/96 ...................... -- P-1 15,000 14,933,092
4.95% 9/5/96 ...................... -- P-1 10,000 9,784,125
Note
5.68% 10/7/96 ..................... AAA Aaa 20,000 20,017,657
5.39% 12/4/96 ..................... AAA Aaa 10,000 10,016,832
--------- ---------------
TOTAL FEDERAL NATIONAL MORTGAGE
ASSOCIATION ................... 80,000 79,696,498
--------- ---------------
REPURCHASE AGREEMENTS -- 7.0%(d)
Goldman Sachs & Co.
5.37%(e) 4/1/96 ................... -- -- 83,000 83,000,000
Morgan Stanley & Co.
5.33%(f) 4/1/96 ................... -- -- 100,000 100,000,000
---------------
TOTAL REPURCHASE AGREEMENTS ........................... 183,000,000
---------------
TOTAL INVESTMENTS -- 100.1% ................................... $2,604,635,638(g)
LIABILITIES IN EXCESS OF OTHER ASSETS, NET -- (0.1%) .......... (1,855,863)
---------------
NET ASSETS -- 100.0% .......................................... $2,602,779,775
===============
</TABLE>
-32-
<PAGE>
PRIME SERIES
- -------------------------------------------------------------------------------
Statement of Net Assets -- (continued)
March 31, 1996
Value
-----
Net Asset Value, Offering and Redemption Price Per:
Prime Share
($2,386,681,216 / 2,386,684,392 shares outstanding)............... $1.00
=====
Flag Investors Class A Share
($5,976,831 / 5,976,824 shares outstanding)....................... $1.00
=====
Flag Investors Class B Share
($10,200 / 10,200 shares outstanding)............................. $1.00
=====
Institutional Prime Share
($53,699,315 / 53,699,535 shares outstanding)..................... $1.00
=====
Quality Cash Reserve Prime Share
($156,412,213 / 156,412,393 shares outstanding)................... $1.00
=====
- ------
(a) Ratings assigned by Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Corporation ("S&P") are not covered by the Independent
Accountant's Report.
(b) Most commercial paper is traded on a discount basis. In such cases, the
interest rate shown represents the rate of discount paid or received at
time of purchase by the Fund.
(c) Master note is payable upon demand by the Fund with no more than five days'
notice. Interest rates on master notes are redetermined weekly. Rates shown
are the rates in effect on March 31, 1996.
(d) Collateral on repurchase agreements is taken into possession by the Fund
upon entering into the repurchase agreement. The collateral is marked to
market daily to insure market value as being at least 102 percent of the
resale price of the repurchase agreement.
(e) Dated 3/29/96 to be repurchased on 4/1/96, collateralized by U.S. Treasury
Notes with a market value of $84,660,143.
(f) Dated 3/29/96 to be repurchased on 4/1/96, collateralized by U.S. Treasury
Notes with a market value of $102,042,479.
(g) Aggregate cost for financial reporting and federal tax purposes.
MOODY'S RATINGS:
Aaa Bonds that are judged to be of the best quality.
P-1 Commercial paper bearing this designation is of the best quality.
S&P RATINGS:
AAA These are obligations of the highest quality.
A-1 Commercial paper that has a strong degree of safety regarding timely
payment. Those issues determined to possess very strong safety
characteristics are denoted with a plus (+) sign.
A detailed description of the above ratings can be found in the
Fund's Statement of Additional Information.
See Notes to Financial Statements.
-33-
<PAGE>
ALEX. BROWN CASH RESERVE FUND, INC.
TREASURY SERIES
- -------------------------------------------------------------------------------
Statement of Net Assets
March 31, 1996
<TABLE>
<CAPTION>
Maturity Par
Date (000) Value
-------- ----- -----
<S> <C> <C> <C>
U.S. TREASURY SECURITIES -- 99.5%
U.S. Treasury Bills(a) -- 70.0%
4.900% .................................. 4/4/96 $20,000 $ 19,991,833
5.000% .................................. 4/4/96 20,000 19,991,667
5.035% .................................. 4/11/96 36,000 35,949,650
4.900% .................................. 4/18/96 8,300 8,280,795
4.990% .................................. 4/18/96 12,300 12,271,017
5.000% .................................. 4/18/96 44,700 44,594,458
5.230% .................................. 4/25/96 14,200 14,150,489
4.790% .................................. 5/2/96 15,800 15,734,829
4.940% .................................. 5/2/96 8,600 8,563,417
4.975% .................................. 5/2/96 8,000 7,965,728
4.985% .................................. 5/2/96 10,500 10,454,927
5.045% .................................. 5/2/96 9,000 8,960,901
5.200% .................................. 5/2/96 9,500 9,457,461
5.245% .................................. 5/2/96 8,600 8,561,158
4.840% .................................. 5/9/96 5,000 4,974,456
4.955% .................................. 5/9/96 20,500 20,392,779
4.980% .................................. 5/9/96 10,000 9,947,433
4.985% .................................. 5/9/96 3,000 2,984,214
4.745% .................................. 5/16/96 16,200 16,103,914
4.950% .................................. 5/16/96 20,000 19,876,250
5.000% .................................. 5/16/96 4,000 3,975,000
4.930% .................................. 5/23/96 45,600 45,275,277
4.750% .................................. 5/30/96 7,600 7,540,836
4.755% .................................. 5/30/96 15,000 14,883,106
4.730% .................................. 6/6/96 7,600 7,534,095
4.850% .................................. 6/6/96 21,500 21,308,829
4.880% .................................. 6/6/96 1,500 1,486,580
4.910% .................................. 6/6/96 29,400 29,135,351
4.955% .................................. 6/20/96 6,500 6,428,428
4.950% .................................. 7/5/96 8,500 8,388,969
4.965% .................................. 7/11/96 2,500 2,465,176
4.990% .................................. 7/11/96 3,400 3,352,401
4.980% .................................. 7/25/96 9,500 9,348,871
5.000% .................................. 7/25/96 5,000 4,920,139
5.055% .................................. 7/25/96 38,200 37,583,150
------------
Total U.S. Treasury Bills .................... 502,833,584
------------
</TABLE>
-34-
<PAGE>
TREASURY SERIES
- -------------------------------------------------------------------------------
Statement of Net Assets -- (continued)
March 31, 1996
<TABLE>
<CAPTION>
Maturity Par
Date (000) Value
-------- ----- -----
<S> <C> <C> <C>
U.S. TREASURY SECURITIES -- continued
U.S. Treasury Notes -- 29.5%
5.500% .................................. 4/30/96 $110,000 $ 110,039,830
4.250% .................................. 5/15/96 20,000 19,972,141
7.375% .................................. 5/15/96 31,700 31,784,833
5.875% .................................. 5/31/96 15,000 15,019,026
7.625% .................................. 5/31/96 15,000 15,056,100
7.875% .................................. 7/15/96 20,000 20,147,390
-------------
Total U.S. Treasury Notes .................... 212,019,320
-------------
TOTAL U.S. TREASURY SECURITIES .......... 714,852,904
-------------
TOTAL INVESTMENTS -- 99.5% ........................ 714,852,904(b)
OTHER ASSETS LESS LIABILITIES, NET -- 0.5% ........ 3,784,011
-------------
NET ASSETS -- 100.0% .............................. $ 718,636,915
=============
Net Asset Value, Offering and Redemption Price Per:
Treasury Share
($666,814,158 / 666,762,028 shares outstanding) . $1.00
=====
Institutional Treasury Share
($51,822,757 / 51,813,226 shares outstanding) ... $1.00
======
</TABLE>
- ------
(a) U.S. Treasury bills are traded on a discount basis. In such cases, the
interest rate shown represents the yield at the date of purchase.
(b) Aggregate cost for financial reporting and federal tax purposes.
See Notes to Financial Statements.
-35-
<PAGE>
ALEX. BROWN CASH RESERVE FUND, INC.
TAX-FREE SERIES
- -------------------------------------------------------------------------------
Statement of Net Assets
March 31, 1996
<TABLE>
<CAPTION>
Rating(a) Par
S&P Moody's (000) Value
-------- --------- -------- ------------
<S> <C> <C> <C> <C>
ALABAMA -- 2.7%
Health Care Facility Authority of The City of Huntsville,
Health Care Facilities Revenue Series 1994-B (MBIA
Insurance)
3.30% 4/7/96 (b) ................................... A-1+ -- $ 5,100 $ 5,100,000
Homewood Educational Building Authority (Sanford
University), Series 1988 A (First Alabama Bank LOC)
3.50% 4/7/96 (b) ................................... -- VMIG-1 4,720 4,720,000
Homewood Educational Building Authority (Sanford
University), Series 1988 B (First Alabama Bank LOC)
3.50% 4/7/96 (b) ................................... -- VMIG-1 5,665 5,665,000
------------
15,485,000
------------
ALASKA -- 1.8%
City of Valdez, Marine Terminal Revenue Refunding Bonds
(Arco Transportation Alaska, Inc. Project)
3.30% 6/10/96 (c) .................................. A-1 VMIG-1 10,500 10,500,000
------------
ARIZONA -- 2.4%
Salt River Project, Agricultural Improvement and Power
District
3.35% 8/14/96 (c) .................................. A-1+ P-1 13,698 13,698,000
------------
ARKANSAS -- 1.4%
Arkansas State Development Health Care Authority
Facilities (Sisters of Mercy) (Abm-AMRO Bank N.V. LOC)
3.40% 4/7/96 (b) ................................... A-1+ VMIG-1 8,100 8,100,000
------------
COLORADO -- 7.3%
Colorado Health Facilities Authority, Hospital Revenue,
Adjustable Rate (Sisters of Charity)
3.35% 4/7/96 (b) ................................... A-1+ VMIG-1 6,000 6,000,000
Colorado State Housing Finance Authority, Multi-Family
Housing Bonds -- Winridge Project (SunTrust Bank LOC)
3.40% 4/7/96 (b) ................................... A-1+ -- 7,000 7,000,000
Colorado TRAN
4.50% 6/27/96 (c) .................................. SP-1+ -- 15,000 15,026,465
4.50% 6/27/96 (c) .................................. SP-1+ -- 4,400 4,411,890
</TABLE>
-36-
<PAGE>
TAX-FREE SERIES
- -------------------------------------------------------------------------------
Statement of Net Assets -- (continued)
March 31, 1996
<TABLE>
<CAPTION>
Rating(a) Par
S&P Moody's (000) Value
-------- --------- -------- ------------
<S> <C> <C> <C> <C>
COLORADO -- continued
Moffat County Pollution Control Revenue Bonds, Series
1984 (Tri-State)
3.40% 4/7/96 (b) ................................... A-1+ P-1 $ 9,100 $ 9,100,000
------------
41,538,355
------------
FLORIDA -- 3.1%
Sunshine State Government Financing Authority,
Commercial Paper Notes
3.35% 4/30/96 ...................................... A-1+ -- 3,000 3,000,000
3.45% 8/13/96 (c) .................................. -- -- 8,975 8,975,000
3.40% 8/14/96 (c) .................................. A-1+ -- 5,700 5,700,000
------------
17,675,000
------------
GEORGIA -- 6.0%
Cobb County Housing Authority RB (Post Mill Project)
Series 1995 DN (FNMA LOC)
3.35% 4/7/96 (b) ................................... A-1+ -- 7,000 7,000,000
Dekalb County Housing Authority, Multifamily Clairmont
Crest Project (FNMA LOC)
3.30% 4/7/96 (b) ................................... A-1+ -- 4,000 4,000,000
Georgia Municipal Association, Pooled Bonds
(MBIA Insurance)
3.20% 4/7/96 (b) ................................... A-1+ VMIG-1 12,100 12,100,000
Smyrna Housing Authority RB (Post Valley Project)
Series 1995 DN (FNMA LOC)
3.35% 4/7/96 (b) ................................... A-1+ -- 11,000 11,000,000
------------
34,100,000
------------
IDAHO -- 1.2%
Idaho Health Facility Authority (Holy Cross Health
System)
3.35% 4/7/96 (b) ................................... A-1+ VMIG-1 7,000 7,000,000
------------
ILLINOIS -- 11.5%
Illinois Development Finance Authority PCRB Commonwealth
Edison CO Project, Series 94C (Abm-AMRO Bank N.V. LOC)
3.30% 4/7/96 (b) ................................... A-1+ P-1 15,500 15,500,000
Illinois Education Facility Authority, Museum of Science
and Industry (Northern Trust LOC)
3.40% 4/5/96 (b) ................................... -- VMIG-1 1,300 1,300,000
</TABLE>
-37-
<PAGE>
TAX-FREE SERIES
- -------------------------------------------------------------------------------
Statement of Net Assets -- (continued)
March 31, 1996
<TABLE>
<CAPTION>
Rating(a) Par
S&P Moody's (000) Value
-------- --------- -------- ------------
<S> <C> <C> <C> <C>
ILLINOIS -- continued
Illinois Health Facilities Authority, Gottlieb Health
Resources (Harris Trust LOC)
3.40% 4/7/96 (b) ................................... -- VMIG-1 $ 9,900 $ 9,900,000
Illinois Health Facilities Authority, Revenue Bonds
(Rush-Presbyterian-St. Luke's Medical Center)
3.35% 4/30/96 (c) .................................. A-1+ VMIG-1 3,000 3,000,000
Illinois Health Facilities Authority, Variable Rate
Demand Revenue Bonds, Revolving Fund Pooled Financing
Program (The University of Chicago Project)
3.25% 8/6/96 (c) ................................... A-1+ VMIG-1 11,400 11,400,000
Illinois Health Facility Authority, Carle Foundation
Project (FGIC Insurance)
3.40% 4/7/96 (b) ................................... -- VMIG-1 5,950 5,950,000
Illinois State Revenue Anticipation Certificates
4.50% 5/10/96 (c) .................................. SP-1 MIG-1 11,600 11,608,315
Illinois State Revenue Anticipation Certificates
4.50% 6/10/96 (c) .................................. SP-1+ MIG-1 6,600 6,006,665
Illinois State Toll Highway Authority, Toll Highway
Priority Series B (MBIA Insurance)
3.30% 4/7/96 (b) ................................... A-1+ VMIG-1 1,400 1,400,000
------------
66,064,980
------------
INDIANA -- 5.6%
Indiana Health Facilities Financing Authority, Hospital
Revenue Bonds
3.40% 4/7/96 (b) ................................... A-1+ VMIG-1 5,000 5,000,000
Indiana Health Facility Authority, Hospital Revenue
(Methodist Hospital)
3.40% 4/7/96 (b) ................................... A-1+ VMIG-1 6,900 6,900,000
Indianapolis, Indiana Gas Utility System, Citizens Gas
and Coke Utility
3.45% 8/14/96 (c) .................................. A-1+ P-1 10,000 10,000,000
Petersburg Pollution Control Revenue (Indianapolis
Power and Light) (AMBAC Insurance)
3.30% 4/7/96 (b) ................................... -- VMIG-1 10,000 10,000,000
------------
31,900,000
------------
IOWA -- 2.2%
Council Bluffs, Iowa Pollution Control Revenue (Illinois
Gas and Electric Company)
3.45% 4/7/96 (b) ................................... A-1+ VMIG-1 7,700 7,700,000
Louisa County Pollution Control Revenue, Refunding Bonds
(Rabo Bank Nederland LOC)
3.30% 4/7/96 (c) ................................... A-1+ VMIG-1 5,000 5,000,000
-----------
12,700,000
-----------
</TABLE>
-38-
<PAGE>
TAX-FREE SERIES
- -------------------------------------------------------------------------------
Statement of Net Assets -- (continued)
March 31, 1996
<TABLE>
<CAPTION>
Rating(a) Par
S&P Moody's (000) Value
-------- --------- -------- ------------
<S> <C> <C> <C> <C>
KANSAS -- 0.5%
Burlington Pollution Control Refunding Revenue Bonds
(Kansas City Power & Light Company) (Toronto Dominion
LOC)
3.20% 6/13/96 (c) .................................. A-1+ P-1 $ 3,150 $ 3,150,000
------------
LOUISIANA -- 6.4%
East Baton Rouge Parish (Georgia Pacific Corp.)
Pollution Control Revenue Bonds (Toronto Dominion LOC)
3.30% 4/7/96 (b) ................................... -- P-1 2,700 2,700,000
Louisiana Offshore Terminal Authority, Deepwater Port
Refunding Revenue Bonds (Union Bank of Switzerland LOC)
3.35% 4/7/96 (b) ................................... A-1+ -- 3,300 3,300,000
Louisiana Public Facilities Authority, College and
Equipment Series A (Societe Generale LOC)
3.35% 4/7/96 (b) ................................... A-1+ VMIG-1 10,750 10,750,000
Plaquemines Port, Harbor and Terminal District, Marine
Terminal Facilities Revenue Refunding Bonds
(Electro-Coal Transfer Corporation)
3.45% 5/14/96 (b) .................................. -- P-1 5,000 5,000,000
Plaquemines Port, Harbor and Terminal District, Marine
Terminal Facilities Revenue Refunding Bonds
3.50% 4/1/96 (c) ................................... P-1 -- 15,000 15,000,000
------------
36,750,000
------------
MARYLAND -- 4.5%
Maryland State Community Development Administration,
Department of Housing and Community Development,
Single Family Program First Series RB
3.45% 10/1/96 (c) .................................. VMIG-1 -- 7,500 7,500,000
Maryland State Health & Higher Education Authority
(Daughters of Charity)
3.40% 4/7/96 (b) ................................... VMIG-1 -- 11,000 11,000,000
Montgomery County General Obligations
3.30% 4/1/96 (c) ................................... A-1+ P-1 7,000 7,000,000
------------
25,500,000
------------
MASSACHUSETTS -- 2.0%
Massachusetts State Housing Finance, Multi-Family
Series A
3.25% 4/7/96 (b) ................................... A-1+ -- 11,400 11,400,000
-----------
</TABLE>
-39-
<PAGE>
TAX-FREE SERIES
- -------------------------------------------------------------------------------
Statement of Net Assets -- (continued)
March 31, 1996
<TABLE>
<CAPTION>
Rating(a) Par
S&P Moody's (000) Value
-------- --------- -------- ------------
<S> <C> <C> <C> <C>
MINNESOTA -- 1.5%
City of Rochester, Minnesota, Health Care Facility
(Mayo Medical Center)
3.20% 6/13/96 (c) .................................. A-1+ -- $3,000 $ 3,000,000
Regents of The University of Minnesota, Bonds
3.25% 6/14/96 (c) .................................. A-1+ VMIG-1 3,300 3,300,000
Regents of The University of Minnesota, Commercial Paper
Certificates
3.25% 6/14/96 (c) .................................. A-1+ P-1 2,000 2,000,000
------------
8,300,000
------------
MISSOURI -- 3.8%
Missouri Environmental Improvement, Pollution Control
Revenue, National Rural Utilities Series M
3.40% 4/7/96 (b) ................................... A-1+ VMIG-1 5,800 5,800,000
Missouri Health and Educational Facilities Authority,
Health Facilities Refunding Revenue Bonds (Sisters of
Mercy)
3.40% 4/7/96 (b) ................................... A-1+ VMIG-1 8,000 8,000,000
Missouri Health and Educational Facilities Authority,
Health Facility Revenue (Sisters of Mercy)
3.40% 4/7/96 (b) ................................... A-1+ VMIG-1 8,000 8,000,000
------------
21,800,000
------------
NEW JERSEY -- 0.3% ....................................
Mercer County Improvement Revenue Bonds (Credit
Suisse LOC)
3.00% 4/7/96 (b) ................................... A-1+ MIG-1 1,800 1,800,000
------------
NEW MEXICO -- 0.5%
Albuquerque Health Facility Authority (Sisters of
Charity) (Toronto Dominion LOC)
3.35% 4/7/96 (b) ................................... A-1+ VMIG-1 3,000 3,000,000
------------
NEW YORK -- 0.1%
New York Local Government Assistance Corporation,
Variable Rate Bonds (Societe Generale LOC)
3.15% 4/7/96 (b) ................................... A-1+ VMIG-1 100 100,000
Triborough Bridge and Tunnel Authority (FGIC Insurance)
3.10% 4/7/96 (b) ................................... A-1+ VMIG-1 600 600,000
------------
700,000
------------
</TABLE>
-40-
<PAGE>
TAX-FREE SERIES
- -------------------------------------------------------------------------------
Statement of Net Assets -- (continued)
March 31, 1996
<TABLE>
<CAPTION>
Rating(a) Par
S&P Moody's (000) Value
-------- --------- -------- ------------
<S> <C> <C> <C> <C>
NORTH CAROLINA -- 2.0%
City of Winston-Salem, G.O. Water and Sewer Revenue
3.30% 4/7/96 (b) ................................... A-1+ VMIG-1 $ 2,600 $ 2,600,000
North Carolina Education Facility Agency (Duke
University)
3.25% 4/7/96 (b) ................................... A-1+ VMIG-1 500 500,000
North Carolina Educational Facilities Finance Agency
(Duke University Project) Series 1987 A
3.25% 4/7/96 (b) ................................... A-1+ VMIG-1 3,000 3,000,000
North Carolina Medical Care (Duke University Hospital
Project) Series A
3.25% 4/7/96 (b) ................................... A-1+ VMIG-1 1,000 1,000,000
North Carolina Medical Care Community Hospital
(Moses Cone Memorial Hospital)
3.35% 4/7/96 (b) ................................... A-1+ -- 4,000 4,000,000
------------
11,100,000
------------
OKLAHOMA -- 1.4%
Oklahoma Industries Authority, Hospital Revenue, Medical
Practice Facility (St. Anthony) (Morgan Guaranty LOC)
3.65% 6/3/96 (c) ................................... -- VMIG-1 5,665 5,665,000
Oklahoma Industries Authority, Hospital Revenue, (St.
Anthony Parking Garage) (Morgan Guaranty LOC)
3.65% 6/3/96 (c) ................................... -- VMIG-1 2,425 2,425,000
------------
8,090,000
------------
OREGON -- 0.5%
City of Klamath Falls, Electric Revenue Bonds (Escrowed
in U.S. Treasuries)
4.40% 5/1/96 (c) ................................... SP-1+ -- 3,000 3,000,000
------------
SOUTH CAROLINA -- 1.2%
South Carolina Jobs Economic Development Authority,
Hospital Facilities Revenue Bonds (Wachovia LOC)
3.35% 4/7/96 (b) ................................... A-1+ VMIG-1 6,600 6,600,000
------------
TENNESSEE -- 5.0%
Metropolitan Nashville Airport Authority, Airport
Improvement Revenue Refunding Bonds (FGIC Insurance)
3.35% 4/7/96 (b) ................................... A-1+ VMIG-1 8,900 8,900,000
State of Tennessee GO, BANS Series A
3.50% 4/7/96 (b) ................................... SP-1+ VMIG-1 19,600 19,600,000
------------
28,500,000
------------
</TABLE>
-41-
<PAGE>
TAX-FREE SERIES
- -------------------------------------------------------------------------------
Statement of Net Assets -- (continued)
March 31, 1996
<TABLE>
<CAPTION>
Rating(a) Par
S&P Moody's (000) Value
-------- --------- -------- ------------
<S> <C> <C> <C> <C>
TEXAS -- 17.7%
Austin Utility System, Travis and Williamson Counties
(Swiss Bank LOC)
3.25% 5/10/96 ...................................... A-1+ P-1 $ 6,900 $ 6,900,000
3.25% 6/14/96 (c) .................................. -- -- 3,900 3,900,000
Board of Regents, Texas A & M University
System
3.25% 8/13/96 (c) .................................. A-1+ P-1 7,000 7,000,000
Dallas Area Rapid Trans Sales Tax Revenue Series A
(Credit Suisse LOC)
3.25% 6/14/96 (c) .................................. A-1+ P-1 5,000 5,000,000
Harris County Health Facilities Hospital Readily
Adjustable Revenue Bonds (San Jacinto Methodist
Hospital Project) (Morgan Guaranty LOC)
3.35% 6/1/96 (c) ................................... -- VMIG-1 11,250 11,250,000
Harris County Health Facility Development Corporation
(Texas Children's Hospital)
3.30% 4/7/96 (b) ................................... -- VMIG-1 700 700,000
Harris County Toll Road Series G
3.30% 4/7/96 (b) ................................... A-1+ VMIG-1 8,700 8,700,000
Harris County Toll Road Series H
3.30% 4/7/96 (b) ................................... A-1+ VMIG-1 10,300 10,300,000
Lower Colorado River Authority TECP
3.25% 5/9/96 (c) ................................... A-1+ P-1 9,000 9,000,000
Red River Authority (Southwestern Public Service)
(Union Bank of Switzerland LOC)
3.25% 4/7/96 (b) ................................... A-1+ MIG-1 5,600 5,600,000
State of Texas, Tax and Revenue Anticipation Notes
4.75% 8/30/96 (c) .................................. SP-1+ MIG-1 27,205 27,315,284
Texas Higher Education Authority, Facilities Revenue
Series 85B (FGIC Insurance)
3.35% 4/7/96 (b) ................................... A-1+ VMIG-1 5,250 5,250,000
-------------
100,915,284
-------------
UTAH -- 2.3%
Intermountain Power Agency, Power Supply Revenue and
Refunding Bonds (Swiss Bank LOC)
3.25% 8/12/96 (c) .................................. A-1+ VMIG-1 13,000 13,000,000
-------------
VERMONT -- 0.6%
State of Vermont General Obligation Revenue
Anticipation Notes Series F
3.35% 4/30/96 (c) .................................. A-1+ P-1 3,600 3,600,000
-------------
</TABLE>
-42-
<PAGE>
TAX-FREE SERIES
- -------------------------------------------------------------------------------
Statement of Net Assets -- (continued)
March 31, 1996
<TABLE>
<CAPTION>
Rating(a) Par
S&P Moody's (000) Value
-------- --------- -------- ------------
<S> <C> <C> <C> <C>
WASHINGTON -- 1.0%
Chelan County Public Utility District No. 1 (Chelan
Hydro Consolidated System) Series 1995A DN (MBIA
Insurance)
3.25% 4/7/96 (b) ................................... A-1+ VMIG-1 $ 3,590 $ 3,590,000
Port of Seattle, Washington, Industrial Development
Bonds (Sysco)
3.45% 4/7/96 (b) ................................... A-1 P-1 2,000 2,000,000
-------------
5,590,000
-------------
WISCONSIN -- 3.0%
Pleasant Prairie Village Pollution Control Refunding
Revenue Bonds (Wisconsin Electric Power Company
Project)
3.40% 4/7/96 (b) ................................... A-1+ P-1 10,000 10,000,000
Wisconsin Health and Education Facilities Authority
(Daughters of Charity Health Center)
3.40% 4/7/96 (b) ................................... -- VMIG-1 7,000 7,000,000
-------------
17,000,000
-------------
TOTAL INVESTMENTS --99.5% ................................................... 568,556,619(d)
-------------
OTHER ASSETS IN EXCESS OF LIABILITIES, NET -- 0.5% ........................... 2,950,381
-------------
NET ASSETS -- 100.0% ........................................................ $571,507,000
=============
Net Asset Value, Offering and Redemption Price per
Share ($571,507,000 / 571,593,265 shares outstanding) ...................... $1.00
============= =========== =====
</TABLE>
- ------
(a) Ratings assigned by Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Corporation ("S&P") are not covered by the Independent
Accountant's Report.
(b) Demand Security; payable upon demand by the Fund, usually with no more than
seven calendar days' notice. Interest rates are redeterminded periodically.
Rates shown are the rates in effect on March 31, 1996.
(c) Security has an outstanding call, mandatory put or optional put by the
issuer. Par value and maturity date reflect such call or put.
(d) Aggregate cost for financial reporting and federal tax purposes.
See Notes to Financial Statements.
-43-
<PAGE>
TAX-FREE SERIES
- -------------------------------------------------------------------------------
Statement of Net Assets -- (continued)
March 31, 1996
INVESTMENT ABBREVIATIONS:
BAN Bond Anticipation Notes
GO General Obligation Bonds
IDA Industrial Development Authority
IDR Industrial Development Revenue Bonds
LOC Letter of Credit
PCR Pollution Control Revenue Bonds
RAN Revenue Anticipation Notes
RB Revenue Bonds
TAN Tax Anticipation Notes
TECP Tax-Exempt Commercial Paper
TRAN Tax Revenue Anticipation Notes
INSURANCE ABBREVIATIONS:
AMBAC AMBAC Indemnity Corp.
MBIA Municipal Bond Investors Assurance
FGIC Federal Guaranty Insurance Corporation
MOODY'S MUNICIPAL BOND RATINGS:
Aaa Bonds which are judged to be of the best quality.
Aa Bonds which are judged to be of high quality by all standards.
Issues are sometimes rated with a 1, 2 or 3 which denotes a high,
medium or low ranking within the rating.
MIG-1 Notes bearing this designation are of the best quality.
VMIG-1 Variable rate demand obligations bearing this designation are of
the best quality.
P-1 Commercial paper bearing this designation is of the best quality.
S&P MUNICIPAL BOND RATINGS:
AAA These are obligations of the highest quality.
AA These obligations have the second strongest capacity for payment
of debt service. Those issues determined to possess very strong
safety characteristics are denoted with a plus (+) sign.
SP-1 Notes which have a strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety
characteristics are assigned a plus (+) designation.
A-1 Commercial paper which has a strong degree of safety regarding
timely payment. Those issues determined to possess very strong
safety characteristics are denoted with a plus (+) sign.
A detailed description of the above ratings can be found in the
Fund's Statement of Additional Information.
See Notes to Financial Statements.
-44-
<PAGE>
ALEX. BROWN CASH RESERVE FUND, INC.
- -------------------------------------------------------------------------------
Statement of Operations
For the year ended March 31, 1996
<TABLE>
<CAPTION>
Prime Treasury Tax-Free
Series Series Series
-------------- ------------- -----------
<S> <C> <C> <C>
Investment Income (Note 1):
Interest income ................. $120,275,367 $36,310,501 $20,235,536
-------------- ------------- -----------
Expenses:
Distribution fee (Note 2) ....... 5,575,592 1,549,949 1,345,261
Investment advisory fees (Note 2) . 5,134,900 1,542,437 1,356,239
Transfer agent fees ............. 1,105,948 234,288 154,031
Custodian fees .................. 272,140 153,691 84,589
Accounting fees (Note 2) ........ 150,692 122,841 63,181
Directors' fees ................. 99,134 26,796 35,201
Registration fees ............... 169,236 54,148 81,232
Legal fees ...................... 65,876 25,067 21,107
Printing & postage fees ......... 181,021 77,172 32,758
Other expenses .................. 125,781 60,321 49,266
-------------- ------------- -----------
Total expenses................ 12,880,320 3,846,710 3,222,865
Less: Fees waived (Note 2).... (59,331) -- --
-------------- ------------- -----------
Net expenses .............. 12,820,989 3,846,710 3,222,865
-------------- ------------- -----------
Net investment income ................ 107,454,378 32,463,791 17,012,671
Net realized gain/(loss) from security
transactions ....................... (6,050) 51,785 4,419
-------------- ------------- -----------
Net increase in net assets resulting
from operations .................... $107,448,328 $32,515,576 $17,017,090
============== ============= ===========
</TABLE>
See Notes to Financial Statements.
-45-
<PAGE>
ALEX. BROWN CASH RESERVE FUND, INC.
- -------------------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Prime Series
-------------------------------
March 31, March 31,
1996 1995
--------------- --------------
<S> <C> <C>
Increase/(Decrease) in net assets
Operations:
Net investment income ............................. $ 107,454,378 $ 64,805,363
Net realized gain/(loss) on sales of investments .. (6,050) 355
-------------- ---------------
Net increase in net assets resulting from operations 107,448,328 64,805,718
Distributions to shareholders from:
Net investment income:
Prime, Treasury and Tax-Free Shares, respectively. (99,181,255) (59,535,578)
Institutional Shares ........................... (1,334,079) (635,062)
Flag Investors Class A Shares .................. (402,702) (699,891)
Flag Investors Class B Shares .................. (300) --
Quality Cash Reserve Prime Shares .............. (6,536,042) (3,934,832)
-------------- ---------------
Total distributions ............................ (107,454,378) (64,805,363)
Capital share transactions, net - (Note 3) .......... 1,016,482,516 101,735,438
-------------- ---------------
Total increase/(decrease) in net assets ........... 1,016,476,466 101,735,793
Net assets:
Beginning of year .............................. 1,586,303,309 1,484,567,516
-------------- ---------------
End of year .................................... $2,602,779,775 $1,586,303,309
============== ===============
</TABLE>
See Notes to Financial Statements.
-46-
<PAGE>
<TABLE>
<CAPTION>
Treasury Series Tax-Free Series
- ----------------------------------- ----------------------------------
March 31, March 31, March 31, March 31,
1996 1995 1996 1995
- ------------- ------------- ------------ --------------
<S> <C> <C> <C>
$ 32,463,791 $ 24,429,870 $ 17,012,671 $ 10,545,966
51,785 4,522 4,419 (10,654)
- ------------ ------------ -------------- -------------
32,515,576 24,434,392 17,017,090 10,535,312
(30,565,630) (22,548,414) (17,012,671) (10,545,966)
(1,898,161) (1,881,456) -- --
-- -- -- --
-- -- -- --
-- -- -- --
- ------------ -------------- -------------- --------------
(32,463,791) (24,429,870) (17,012,671) (10,545,966)
192,365,923 (95,202,377) 96,118,352 96,535,651
- ------------ -------------- -------------- --------------
192,417,708 (95,197,855) 96,122,771 96,524,997
526,219,207 621,417,062 475,384,229 378,859,232
- ------------ -------------- -------------- --------------
$718,636,915 $526,219,207 $571,507,000 $475,384,229
============ ============== ============== ==============
</TABLE>
-47-
<PAGE>
PRIME SERIES
- -------------------------------------------------------------------------------
Financial Highlights
(For a share outstanding throughout each year)
Alex. Brown Cash Reserve Prime Shares
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at beginning
of year ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------- -------------- -------------- -------------- --------------
Income from Investment
Operations:
Net investment income .... 0.0524 0.0442 0.0262 0.0295 0.0485
Less Distributions:
Dividends from net investment
income and/or short-term
gains ................. (0.0524) (0.0442) (0.0262) (0.0295) (0.0485)
-------------- -------------- -------------- -------------- --------------
Net asset value at end of
year ................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============== ============== ============== ============== ==============
Total Return:
Based on net asset value per
share ................. 5.36% 4.51% 2.65% 2.99% 4.96%
Ratios to Average Daily Net
Assets:
Expenses ................. 0.60% 0.61% 0.62% 0.63% 0.61%
Net investment income .... 5.21% 4.46% 2.62% 2.95% 4.84%
Supplemental Data:
Net assets at end of year. $2,386,681,216 $1,472,079,739 $1,350,334,979 $1,470,711,552 $1,505,012,086
Number of shares outstanding
at end of year ........ 2,386,684,392 1,472,077,488 1,350,332,916 1,470,709,489 1,505,010,023
</TABLE>
See Notes to Financial Statements.
-48-
<PAGE>
PRIME SERIES
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each year)
Flag Investors Cash Reserve Prime Shares -- Class A
<TABLE>
<CAPTION>
Year ended March 31,
---------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at beginning
of year .................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ ------------ ------------- ------------- ------------
Income from Investment
Operations:
Net investment income ....... 0.0524 0.0442 0.0262 0.0295 0.0485
Less Distributions:
Dividends from net investment
income and/or short-term
gains .................... (0.0524) (0.0442) (0.0262) (0.0295) (0.0485)
------------ ------------ ------------- ------------- ------------
Net asset value at end of
year....................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
=========== ============ ============= ============= ============
Total Return:
Based on net asset value per
share .................... 5.36% 4.51% 2.65% 2.99% 4.96%
Ratios to Average Daily Net
Assets:
Expenses .................... 0.60% 0.61% 0.62% 0.63% 0.61%
Net investment income ....... 5.25% 4.26% 2.62% 2.95% 4.84%
Supplemental Data:
Net assets at end of year.... $5,976,831 $7,726,696 $18,116,648 $10,392,282 $7,350,424
Number of shares outstanding
at end of year ........... 5,976,824 7,726,698 18,116,633 10,392,267 7,350,409
</TABLE>
See Notes to Financial Statements.
-49-
<PAGE>
PRIME SERIES
- -------------------------------------------------------------------------------
Financial Highlights
(for a share outstanding throughout the period)
Flag Investors Cash Reserve Prime Shares -- Class B
April 3, 1995*
through
March 31, 1996
--------------
Per Share Operating
Performance:
Net asset value at beginning
of year ............... $ 1.00
--------
Income from Investment
Operations:
Net investment income .... 0.0361
Less Distributions:
Dividends from net invest-
ment income ........... (0.0361)
--------
Net asset value at end of
year .................. $ 1.00
========
Total Return:
Based on net asset value
per share ............. 3.69%**
Ratios to Average Daily Net
Assets:
Expenses ................. 1.38%**
Net investment income .... 4.30%**
Supplemental Data:
Net assets at end of year . $ 10,200
Number of shares outstand-
ing at end of year .... 10,200
- ------
* Commencement of operations.
** Annualized.
See Notes to Financial Statements.
-50-
<PAGE>
PRIME SERIES
- -------------------------------------------------------------------------------
Financial Highlights
(for a share outstanding throughout the period)
Alex. Brown Cash Reserve Prime Institutional Shares
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of
year............................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------- ------------- ------------- ------------- ------------
Income from Investment Operations:
Net investment income .......... 0.0548 0.0472 0.0294 0.0327 0.0515
Less Distributions:
Dividends from net investment
income and/or short-term
gains ....................... (0.0548) (0.0472) (0.0294) (0.0327) (0.0515)
------------- ------------- ------------- ------------- ------------
Net asset value at end of year . $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============= ============= ============= ============= ============
Total Return:
Based on net asset value per share 5.62% 4.82% 2.98% 3.32% 5.27%
Ratios to Average Daily Net Assets:
Expenses ....................... 0.35% 0.36% 0.30% 0.31% 0.32%
Net investment income .......... 5.32% 4.57% 2.94% 3.24% 5.34%
Supplemental Data:
Net assets at end of year ...... $53,699,315 $11,904,716 $23,437,449 $28,884,078 $21,867,108
Number of shares outstanding at
end of year.................. 53,699,535 11,904,663 23,437,512 28,884,132 21,867,108
</TABLE>
See Notes to Financial Statements.
-51-
<PAGE>
PRIME SERIES
- -------------------------------------------------------------------------------
Financial Highlights
(for a share outstanding throughout the period)
Quality Cash Reserve Prime Shares
<TABLE>
<CAPTION>
Year ended March 31, May 6, 1991*
---------------------------------------------------------------- through
1996 1995 1994 1993 March 31, 1992
-------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at beginning
of year .............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------- ------------- ------------- -------------- -------
Income from Investment
Operations:
Net investment income .... 0.0493 0.0402 0.0218 0.0253 0.0399
Less Distributions:
Dividends from net
investment income and/or
short-term gains ..... (0.0493) (0.0402) (0.0218) (0.0253) (0.0399)
-------------- ------------- ------------- -------------- --------
Net asset value at end of
year ................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============== ============= ============= ============== ========
Total Return:
Based on net asset value
per share ........... 5.04% 4.09% 2.20% 2.53% 4.30%**
Ratios to Average Daily Net
Assets:
Expenses ................ 0.90%(1) 0.96% 1.06% 1.04% 0.96%**
Net investment income ... 4.91%(2) 4.04% 2.18% 2.53% 4.30%**
Supplemental Data:
Net assets at end of year . $156,412,213 $94,592,158 $92,678,440 $101,321,868 $94,887,669
Number of shares
outstanding at end of
year................... 156,412,393 94,591,979 92,678,268 101,321,668 94,887,669
</TABLE>
- ----------
* Commencement of operations.
** Annualized.
1 Ratio of expenses to average daily net assets prior to partial fee waivers
was 0.95% for the year ended March 31, 1996,
2 Ratio of net investment income to average daily net assets prior to partial
fee waivers was 4.86% for the year ended March 31, 1996.
See Notes to Financial Statements.
-52-
<PAGE>
TREASURY SERIES
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each year)
Alex. Brown Cash Reserve Treasury Shares
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------- -------------- -------------- -------------- --------------
Per Share Operating Performance:
<S> <C> <C> <C> <C> <C>
Net asset value at beginning
of year.................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------- -------------- -------------- -------------- --------------
Income from Investment
Operations:
Net investment income ....... 0.0494 0.0411 0.0255 0.0285 0.0477
Less Distributions:
Dividends from net investment
income and/or short-term
gains .................... (0.0494) (0.0411) (0.0255) (0.0285) (0.0477)
-------------- -------------- -------------- -------------- --------------
Net asset value at end of
year........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============== ============== ============== ============== ==============
Total Return:
Based on net asset value per
share........................ 5.05% 4.19% 2.58% 2.89% 4.88%
Ratios to Average Daily Net
Assets:
Expenses .................... 0.58% 0.55%* 0.54%* 0.55%* 0.55%
Net investment income ....... 4.94% 4.09% 2.55% 2.87% 4.76%
Supplemental Data:
Net assets at end of year ... $666,814,158 $512,167,212 $581,724,214 $618,175,839 $725,010,207
Number of shares outstanding
at end of year.............. 666,762,028 512,162,864 581,723,448 618,152,465 725,010,207
</TABLE>
- ------
* Ratio of expenses to average daily net assets prior to partial fee waivers
was 0.56% for the years ended March 31, 1995, 1994, and 1993.
See Notes to Financial Statements.
-53-
<PAGE>
TREASURY SERIES
- --------------------------------------------------------------------------------
Financial Highlights
(For a share outstanding throughout each year)
Alex. Brown Cash Reserve Treasury Institutional Shares
<TABLE>
<CAPTION>
Year ended March 31,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of
year........................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------- ------------- ------------- ------------- -------------
Income from Investment Operations:
Net investment income .......... 0.0523 0.0438 0.0282 0.0314 0.0504
Less Distributions:
Dividends from net investment
income and/or short-term
gains........................ (0.0523) (0.0438) (0.0282) (0.0314) (0.0504)
------------- ------------- ------------- ------------- -------------
Net asset value at end of year.. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============= ============= ============= ============= =============
Total Return:
Based on net asset value per
share......................... 5.36% 4.47% 2.86% 3.19% 5.17%
Ratios to Average Daily Net Assets:
Expenses ....................... 0.33% 0.30%(1) 0.27%(1) 0.26%(1) 0.27%
Net investment income .......... 5.12% 4.15%(2) 2.82%(2) 3.16%(2) 4.90%
Supplemental Data:
Net assets at end of year ...... $51,822,757 $14,051,995 $39,692,848 $60,146,987 $63,834,323
Number of shares outstanding at
end of year ................. 51,813,226 14,046,467 39,688,259 60,140,874 63,834,323
</TABLE>
- ------
(1) Ratio of expenses to average daily net assets prior to
partial fee waivers assumed was 0.31%, 0.29% and 0.27% for
the years ended March 31, 1995, 1994, and 1993, respectively.
(2) Ratio of net investment income to average daily net assets
prior to partial fee waivers assumed was 4.14%, 2.80% and
3.15% for the years ended March 31, 1995, 1994, and 1993,
respectively.
See Notes to Financial Statements.
-54-
<PAGE>
TAX-FREE SERIES
- --------------------------------------------------------------------------------
Financial Highlights
(For a share outstanding throughout each year)
Alex. Brown Cash Reserve Tax-Free Shares
<TABLE>
<CAPTION>
Year ended March 31,
------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at
beginning of year........ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------- -------------- -------------- -------------- --------------
Income from Investment
Operations:
Net investment income .... 0.0318 0.0271 0.0184 0.0213 0.0353
Less Distributions:
Dividends from net
investment income
and/or short-term
gains.................. (0.0318) (0.0271) (0.0184) (0.0213) (0.0353)
-------------- -------------- -------------- -------------- --------------
Net asset value at end
of year ............... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
============== ============== ============== ============== ==============
Total Return:
Based on net asset value
per share.............. 3.23% 2.75% 1.86% 2.15% 3.59%
Ratios to Average Daily Net
Assets:
Expenses ................ 0.60% 0.57% 0.58% 0.60% 0.56%(1)
Net investment income ... 3.16% 2.74% 1.84% 2.13% 3.49%(2)
Supplemental Data:
Net assets at end of year . $571,507,000 $475,384,229 $378,859,232 $315,661,447 $304,987,823
Number of shares
outstanding at end
of year................ 571,593,265 475,474,913 378,939,262 315,700,742 305,008,959
</TABLE>
- ------
(1) Ratio of expenses to average daily net assets prior to partial fees
assumed was 0.57% for the year ended March 31, 1992.
(2) Ratio of net investment income to average daily net assets prior to
partial fees assumed was 3.48% for the year ended March 31, 1992.
-55-
<PAGE>
ALEX. BROWN CASH RESERVE FUND, INC.
- --------------------------------------------------------------------------------
Notes to Financial Statements
March 31, 1996
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
Alex. Brown Cash Reserve Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Fund is organized as a Maryland
corporation consisting of three different portfolios, the Prime Series, the
Treasury Series, and the Tax-Free Series. The Prime Series consists of five
different classes of shares: Alex. Brown Cash Reserve Prime Shares ("Prime
Shares"), Flag Investors Cash Reserve Prime Shares Class A ("Flag Investors
Class A Shares"), Flag Investors Cash Reserve Prime Shares Class B ("Flag
Investors Class B Shares"), Quality Cash Reserve Prime Shares ("Quality Cash
Shares") and Institutional Prime Shares. The Treasury Series offers two
classes of shares: Alex. Brown Cash Reserve Treasury Shares ("Treasury
Shares") and Institutional Treasury Shares. The Tax-Free Series offers only
one class of shares. Matters affecting each class are voted on exclusively by
such shareholders.
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 and
disclosure 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. The following is a
summary of the significant accounting policies followed by the Fund in the
preparation of its financial statements.
A. Security Valuation -- The Fund maintains a dollar-weighted average
maturity of 90 days or less for each portfolio. The securities of each
portfolio are valued on the basis of amortized cost, which approximates
market value. This method values a security at its cost on the date of
purchase, and thereafter, assumes a constant amortization to maturity of
any original issue or other discount or premium.
B. Security Transactions, Investment Income and Distributions --
Securities transactions are accounted for on a trade date basis. Realized
gains or losses on sales, if any, are computed on the basis of specific
identification of the securities sold. Interest income is recorded on an
accrual basis and includes, when applicable, amortization of premiums and
accretion of discounts. Dividends to shareholders are declared daily and
distributions or reinvestments of the dividends are made monthly.
C. Repurchase Agreement -- The Prime Series may agree to purchase money
market instruments subject to the seller's agreement to repurchase them at
an agreed upon date and price. The seller, under a repurchase agreement,
will be required on a daily basis to maintain the value of the securities
subject to the agreement at not less than the repurchase price. The
agreement is conditioned upon the collateral being deposited under the
Federal Reserve book-entry system.
-56-
<PAGE>
Notes to Financial Statements -- (continued)
March 31, 1996
NOTE 1 -- CONCLUDED
D. Federal Income Taxes -- The Fund intends to continue to comply with the
requirements of the Internal Revenue Code necessary to continue 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. Each portfolio is
treated as a separate entity for federal income tax purposes. The Tax-Free
Series has a capital loss carryforward of $87,648 (which may be carried
forward to offset future taxable capital gains, if any) which begins to
expire, if not previously utilized, in 2000.
E. Expenses -- Operating expenses directly attributable to a class of
shares are charged to that class' operations. Expenses of the Fund which
are not directly attributable to a specific class are prorated among the
classes to which the expense relates based on the relative net assets of
each class.
NOTE 2 -- ADVISORY FEES AND TRANSACTIONS WITH OTHER AFFILIATES
The Fund has entered into an investment advisory agreement with Investment
Company Capital Corp. ("ICC"), a subsidiary of Alex. Brown Financial Corp.,
with respect to all Series, and a sub-advisory agreement with PNC
Institutional Management Corporation ("PIMC") with respect to the Tax-Free
Series. Under the terms of the investment advisory agreement, ICC receives a
fee from the Fund, calculated daily and paid monthly, at the following annual
rates based upon the Fund's aggregate average daily net assets: .30% of the
first $500 million, .26% of the next $500 million, .25% of the next $500
million, .24% of the next $1 billion, .23% of the next $1 billion and .22% of
that portion in excess of $3.5 billion. In addition, the Advisor is entitled
to receive an additional fee with respect to the Prime Series, calculated
daily and paid monthly, at the annual rate of .02% of the Prime Series'
average daily net assets as well as an additional fee with respect to the
Tax-Free Series, calculated daily and paid monthly, at the annual rate of
.03% of the Tax-Free Series' average daily net assets. Prior to August 23,
1995, ICC received a fee from the Fund, calculated daily and paid monthly, at
the following annual rates based upon the Fund's aggregate average daily net
assets: .25% of the first $500 million, .21% of the next $500 million, .20%
of the next $500 million and .19% of that portion in excess of $1.5 billion.
As compensation for its subadvisory services, PIMC receives a fee from
ICC, calculated daily and paid monthly, at the following annual rates based
upon the Tax-Free Series' aggregate average daily net assets: .15% of the
first $250 million, .13% of the next $250 million, .11% of the next $250
million, .09% of the next $250 million, .075% of the next $3 billion and .06%
of that portion in excess of $4 billion.
-57-
<PAGE>
Notes to Financial Statements -- (continued)
March 31, 1996
The Fund, pursuant to the sub-advisory agreement with PIMC, has agreed to
reimburse PIMC for certain costs incurred in providing accounting services to
the Tax-Free Series. For the year ended March 31, 1996, the Fund paid PIMC
$723,599 for sub-advisory and accounting services for the Tax-Free Series. No
advisory fees were waived for the year ended March 31, 1996.
ICC may, from time to time, voluntarily waive a portion of its advisory
fee with respect to the Prime, Treasury and Tax-Free Series to preserve or
enhance the performance of each Series as compared to certain industry
benchmarks, and, if ICC elects to so waive a portion of its fee, PIMC has
agreed that it would waive a portion of its fee in the same proportion and
for the same time periods as any ICC waiver. No advisory fees were waived for
the year ended March 31, 1996.
Under the terms of these agreements, ICC and the Fund's distributor will,
if necessary, reimburse the Fund for any fiscal year to the extent that
expenses (exclusive of any interest, taxes, brokerage commissions and
extraordinary expenses) exceed 1% of aggregate average daily net assets each
of the Fund's three Series. The obligation of ICC to reimburse the Fund is
limited to the fees actually received by ICC for such fiscal year.
As compensation for its accounting services, ICC receives from the Prime
and Treasury Series an annual fee, calculated daily and paid monthly, based
on the Fund's average daily net assets. ICC received $150,692 and $122,841
for accounting services for the year ended March 31, 1996 for the Prime and
Treasury Series, respectively.
As compensation for its transfer agent services, ICC receives from the
Fund's three series a per account fee, calculated and paid monthly. ICC
received $1,105,948, $234,288 and $154,031 for transfer agent services for
the year ended March 31, 1996 for Prime, Treasury and Tax-Free Series,
respectively.
The Fund has entered into a distribution agreement with Alex. Brown & Sons
Incorporated ("Alex. Brown"). Under the terms of the distribution agreement,
Alex. Brown receives a fee from the Prime Shares, Flag Investors Class A
Shares, Treasury Shares, and the Tax-Free Series, at the annual rate of .25%
of the aggregate average daily net assets of these classes of shares. Alex.
Brown also receives a fee from the Quality Cash Shares and Flag Investors
Class B Shares at the annual rate of .60% and 1.00%, respectively, of the
aggregate average daily net assets of the class. Alex. Brown voluntarily
waived distribution fees in the amount of $59,331 for the Quality Cash Shares
for the year ended March 31, 1996.
The Fund complex of which the Fund is a part has adopted a retirement plan
for eligible Directors. The actuarially computed pension expense for the year
ended March 31, 1996 was approximately $72,000, $26,000 and $18,000 for the
Prime, Treasury and Tax-Free Series, respectively.
NOTE 3 -- CAPITAL STOCK AND SHARE INFORMATION
The Fund is authorized to issue up to 6,400,000,000 shares of $.001 par
value capital stock (3,550,000,000 Prime Series, 1,500,000,000 Treasury
Series, 1,000,000,000 Tax-Free Series and 350,000,000 not classified).
Changes in shares outstanding during the years ended March 31, 1996 and March
31, 1995 are listed on the following page.
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<PAGE>
Notes to Financial Statements -- (continued)
March 31, 1996
NOTE 3 -- CONCLUDED
March 31, 1996 March 31, 1995
---------------- ----------------
Prime Series:
Sold:
Prime Shares .................. 19,439,463,533 10,195,279,007
Flag Investors Class A Shares . 12,118,053 16,905,684
Flag Investors Class B Shares . 24,535 --
Institutional Prime Shares .... 213,159,539 60,472,629
Quality Cash Shares ........... 1,285,040,597 509,661,769
Issued as reinvestment of dividends:
Prime Shares .................. 93,103,137 57,178,155
Flag Investors Class A Shares . 374,561 666,245
Institutional Prime Shares .... 753,855 40,493
Quality Cash Shares ........... 6,300,386 3,847,996
Redeemed:
Prime Shares .................. (18,617,959,766) (10,130,712,590)
Flag Investors Class A Shares . (14,242,488) (27,961,864)
Flag Investors Class B Shares . (14,335) --
Institutional Prime Shares .... (172,118,522) (72,045,971)
Quality Cash Shares ........... (1,229,520,569) (511,596,054)
---------------- ----------------
Net increase ............. 1,016,482,516 101,735,499
================ ================
Treasury Series:
Sold:
Treasury Shares ............... 4,043,423,430 2,727,755,716
Institutional Treasury Shares . 396,793,576 854,592,222
Issued as reinvestment of dividends:
Treasury Shares ............... 28,890,267 21,562,879
Institutional Treasury Shares . 417,316 8
Redeemed: ........................
Treasury Shares ............... (3,917,714,533) (2,818,879,180)
Institutional Treasury Shares . (359,444,133) (880,234,022)
---------------- ----------------
Net increase/(decrease) .. 192,365,923 (95,202,377)
================ ================
Tax-Free Series:
Sold ............................. 4,817,984,787 3,571,743,009
Issued as reinvestment of dividends 16,116,851 10,051,311
Redeemed ......................... (4,737,983,286) (3,485,258,669)
---------------- ----------------
Net increase ............. 96,118,352 96,535,651
================ ================
NOTE 4 -- NET ASSETS
At March 31, 1996, net assets consisted of:
<TABLE>
<CAPTION>
Prime Treasury Tax-Free
Series Series Series
-------------- -------------- ------------
<S> <C> <C> <C>
Paid-in-capital ......................... $2,602,785,854 $718,571,065 $571,594,648
Undistributed net realized gain/(loss) on
sales of investments ................... (6,079) 65,850 (87,648)
-------------- -------------- ------------
$2,602,779,775 $718,636,915 $571,507,000
============== ============== ============
</TABLE>
-59-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Shareholders and Board of Directors of
Alex. Brown Cash Reserve Fund, Inc.:
We have audited the accompanying statements of net assets of Alex. Brown Cash
Reserve Fund, Inc. (consisting of the Prime, Treasury and Tax-Free Series) as
of March 31, 1996, and the related statement of operations for the year then
ended and the statement of changes in net assets for each of the two years in
the period then ended and the financial highlights for each of the three
years in the 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. The financial highlights for each
of the respective years in the period ended March 31, 1993 were audited by
other auditors whose report dated May 7, 1993, expressed an unqualified
opinion thereon.
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. Our procedures included confirmation of
investments owned as of March 31, 1996 by correspondence with the custodian.
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
each of the respective series comprising the Alex. Brown Cash Reserve Fund,
Inc. as of March 31, 1996, and the results of their operations for the year
then ended and the changes in their net assets for each of the two years in
the period then ended and their financial highlights for each of the three
years in the period then ended, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
May 10, 1996
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