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STATEMENT OF ADDITIONAL INFORMATION
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BT ALEX. BROWN CASH RESERVE FUND, INC.
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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 FROM YOUR BT ALEX. BROWN INCORPORATED
INVESTMENT REPRESENTATIVE OR ANY PARTICIPATING DEALER
OF THE FUND'S SHARES, OR BY WRITING THE FUND AT P.O.
BOX 17250, BALTIMORE, MARYLAND 21203, OR BY CALLING
THE FUND AT (800) 553-8080.
Statement of Additional Information dated August 1, 1997 as supplemented
on September 1, 1997
Relating to Prospectuses dated, August 1, 1997,
as supplemented on September 1, 1997 for:
BT Alex. Brown Cash Reserve Fund, Inc.
(Prime Series, Treasury Series and Tax-Free Series)
Quality Cash Reserve Prime Shares
and Flag Investors Cash Reserve Prime Shares
(Class A and Class B)
Institutional Shares
(Prime Series, Treasury Series and Tax-Free Series)
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TABLE OF CONTENTS
Introduction...................................................................1
General Information About the Fund.............................................1
The Fund and Its Shares.....................................................1
Directors and Officers......................................................3
The Investment Advisor......................................................7
The Sub-Advisor.............................................................9
Distributor................................................................10
Expenses...................................................................13
Transfer Agent, Custodian and Accounting Services..........................14
Sub-Accounting.............................................................15
Principal Holders of Securities............................................16
Semi-Annual Reports........................................................16
Independent Accountants....................................................16
Share Purchases and Redemptions...............................................17
Purchases and Redemptions..................................................17
Net Asset Value Determination..............................................17
Dividends and Taxes...........................................................18
Dividends..................................................................18
Taxes......................................................................19
Current Yield.................................................................22
Investment Program and Restrictions...........................................23
Investment Restrictions....................................................26
Portfolio Transactions........................................................26
Financial Statements..........................................................29
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INTRODUCTION
BT 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 are four separate Prospectuses for the Fund's shares dated
August 1, 1997: one for the BT Alex. Brown Cash Reserve Classes of each Series,
one for the Institutional Classes of each Series, one for the Flag Investors
Cash Reserve Prime Class A and B Shares of the Prime Series and one for the
Quality Cash Reserve Prime Shares Class of the Prime Series. These prospectuses
may be obtained without charge from a BT Alex. Brown Incorporated ("BT Alex.
Brown") investment representative or by writing the Fund, 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 the Fund's
distributor (the "Distributor") 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 BT 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 BT 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
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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 BT Alex. Brown. There
are currently two classes of the Treasury Series, designated as the BT Alex.
Brown Cash Reserve Treasury Shares and the BT Alex. Brown Cash Reserve Treasury
Institutional Shares. There are currently two classes of the Tax-Free Series,
designated as the BT Alex. Brown Cash Reserve Tax-Free Shares and the BT Alex.
Brown Cash Reserve Tax-Free Institutional Shares. The Institutional Shares of
each Series are offered primarily to institutions. The BT Alex. Brown Cash
Reserve Tax-Free Institutional Shares have been offered since June 2, 1997.
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
8 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
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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.
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 One South Street, Baltimore, Maryland 21202.
*RICHARD T. HALE, Director (7/17/45)
Managing Director, BT Alex. Brown Incorporated; Director and President,
Investment Company Capital Corp. (registered investment advisor); Chartered
Financial Analyst.
*TRUMAN T. SEMANS, Director (10/27/27)
Managing Director, BT Alex. Brown Incorporated; Director, Investment Company
Capital Corp. (registered investment advisor); formerly Vice Chairman, Alex.
Brown & Sons Incorporated (now known as BT Alex. Brown Incorporated).
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) and 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.
- ---------------------------
*Messrs. Hale and Semans are "interested persons," as defined in the 1940 Act.
3
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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 health care);
Director, Central Carolina Bank & Trust (banking), Key Funds (registered
investment companies), AMBAC Treasurers Trust (registered investment company)
and DP Mann Holdings (insurance).
REBECCA W. RIMEL, Director (4/10/51)
The Pew Charitable Trusts, One Commerce Square, 2005 Market Street, Suite 1700,
Philadelphia, Pennsylvania 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.
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); Director, Yellow
Corporation (trucking); Formerly, Chairman and Member, National Transportation
Safety Board; Director, National Railroad Passenger Corporation (Amtrak) and
Member, Aviation System Capacity Advisory Committee (Federal Aviation
Administration).
HARRY WOOLF, President (8/12/23)
Institute for Advanced Study, 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
(non-profit research and education); Director, Research America (non-profit
medical research); Formerly, Trustee, Reed College (education); Trustee,
Rockefeller Foundation; and Director, Merrill Lynch Cluster C Funds (registered
investment companies).
JOSEPH A. FINELLI, Treasurer (1/24/57)
Vice President, BT Alex. Brown Incorporated and Vice President, Investment
Company Capital Corp., (registered investment advisor), September 1995-Present;
Formerly, Vice President and Treasurer, The Delaware Group of Funds (registered
investment companies) and Vice President, Delaware Management Company, Inc.
(investments), 1980-1995.
AMY M. OLMERT, Secretary (5/14/63)
Vice President, BT Alex. Brown Incorporated, June, 1997-Present. Formerly,
Senior Manager, Coopers & Lybrand, LLP, September, 1988-June, 1997.
LAURIE D. COLLIDGE, Assistant Secretary (1/1/66)
Asset Management Department, BT Alex. Brown Incorporated, 1991-Present.
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 BT Alex. Brown or its affiliates.
There are currently 13 funds in the Flag Investors/ISI Funds
and BT Alex. Brown Cash Reserve Fund, Inc. fund complex (the "Fund Complex").
Mr. Hale serves as Chairman of four funds and as a director of each of eleven
other funds in the Fund Complex. Mr. Semans serves as Chairman of five funds and
as a director of six other funds in the Fund Complex. Messrs. Cunnane, Kroeger,
Levy and McDonald serve as directors of each fund in the Fund Complex. Ms. Rimel
and Mr. Vogt serve as a director of eleven funds in the Fund Complex. Mr. Woolf
serves as President to six other Funds in the Fund Complex. Ms. Olmert serves as
Secretary, Mr. Finelli serves as Treasurer and Ms. Collidge serves as Assistant
Secretary of each of the funds in the Fund Complex.
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With the exception of the Fund's President, officers of the
Fund receive no direct remuneration in such capacity from the Fund. Officers and
directors of the Fund who are officers or directors of BT Alex. Brown or ICC may
be considered to have received remuneration indirectly. As compensation for
services as President of the Fund, Mr. Woolf receives an annual fee from the
Fund and from all Flag Investors Funds for which he serves as President. 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. In addition, the
Chairman of the Fund Complex's Audit Committee receives an aggregate annual fee
from the Fund Complex. 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, 1997, Non-Interested Directors' fees attributable to
the assets of the Fund totaled $241,532.
The following table shows aggregate compensation payable to
each of the Fund's directors by the Fund and the Fund Complex, respectively, and
pension or retirement benefits accrued as part of Fund expenses in the fiscal
year ended March 31, 1997.
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<TABLE>
<CAPTION>
COMPENSATION TABLE
- ---------------------------------------------------------------------------------------------------------------------------
Name of Person, Aggregate Compensation from Pension or Retirement Total Compensation from the
Position the Fund Payable to Directors Benefits Accrued as Part of Fund and the Fund Complex
for the Fiscal Year Ended Fund Expenses Payable to Directors for the
March 31, 1997 Fiscal Year Ended
March 31, 1997
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
W. James Price (1),(2) $0 $0 $0
Chairman
Richard T. Hale (1) $0 $0 $0
Vice Chairman
Truman T. Semans (1) $0 $0 $0
Director
Charles W. Cole (1),(3) $0 4 $0
Director
James J. Cunnane $27,801(5) 4 $39,000 for service
Director on 12 Boards
John F. Kroeger $34,930(5) 4 $49,000 for service
Director on 12 Boards
Louis E. Levy $27,801(5) 4 $39,000 for service
Director on 12 Boards
Eugene J. McDonald $27,801(5) 4 $39,000 for service
Director on 12 Boards
Rebecca W. Rimel $31,763(5) 4 $39,000 for service
Director on 10 Boards(6)
Carl W. Vogt $32,232(5) 4 $39,000 for service
Director on 9 Boards(6)
Harry Woolf (7) $20,880(5) 4 $29,250 for service
Director on 12 Boards
</TABLE>
(1) A director who is, or may be, an "interested person" as defined in the 1940
Act.
(2) Retired as Director of the Fund effective December 31, 1996.
(3) Retired as Director of the Fund effective September 1, 1997.
(4) 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, 1997 was approximately $47,681.
(5) Of amounts payable to Messrs. Cunnane, Kroeger, Levy, McDonald, Vogt, Woolf
and Ms. Rimel, $27,801, $0, $19,500, $27,801, $32,232, $20,880 and $31,763
was deferred pursuant to a Deferred Compensation Plan.
(6) Ms. Rimel and Mr. Vogt receive proportionately higher compensation from each
fund for which they serve as a Director.
(7) Retired as Director of the Fund effective December 31, 1996 and was
appointed President of the Fund effective September 1, 1997.
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. Mr. Kroeger has qualified but has not received benefits.
The Fund has two Participants, a director who retired effective December 31,
1994 and a director who retired effective December 31, 1996, who have qualified
for the Retirement Plan by serving
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thirteen years and fourteen years, respectively, as directors in the Fund
Complex and each of whom will be paid a quarterly fee of $4,875 by the Fund
Complex for the rest of his life. Another Participant who retired on January 31,
1996 and died on June 2, 1996 was paid fees of $8,090 under the Retirement Plan
in the fiscal year ended March 31, 1996. Such fees are allocated to each fund in
the Fund Complex based upon the relative net assets of such fund to the Fund
Complex.
Set forth in the table below are the estimated annual benefits
payable to a Participant upon retirement assuming various years of service and
payment of a percentage of the fee earned by such Participant in his or her last
year of service, as described above. The approximate credited years of service
at December 31, 1996 are as follows: for Mr. Cunnane, 2 years; for Mr. Kroeger,
14 years; for Mr. Levy, 2 years; for Mr. McDonald, 4 years; for Mr. Vogt, 1
year; and for Ms. Rimel, 1 year.
Estimated Annual Benefits
Years of Service Payable By Fund Complex Upon Retirement
- ---------------- -------------------------------------------
Chairman of Audit
Committee Other Participants
----------------- ------------------
6 years $ 4,900 $ 3,900
7 years $ 9,800 $ 7,800
8 years $14,700 $11,700
9 years $19,600 $15,600
10 years or more $24,500 $19,500
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 and
Vogt and Ms. Rimel have each executed a Deferred Compensation Agreement.
Currently, the deferring directors may select various Flag Investors and BT
Alex. Brown Cash Reserve Funds in which all or part of their deferral account
shall be deemed to be invested. Distributions from the deferring directors'
deferral accounts will be paid in cash, in generally equal quarterly
installments over a period of ten years.
The Investment Advisor
Investment Company Capital Corp. ("ICC"), an indirect
subsidiary of Bankers Trust New York Corporation, acts as the Fund's investment
advisor pursuant to three separate Investment Advisory Agreements dated as of
August 14, 1997, 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
7
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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 PNC
Institutional Management Corporation ("PIMC") as described below.
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 as well as an
additional fee with respect to 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. 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 17, 1997, and
by shareholders of the Prime Series, the Treasury Series and the Tax-Free
Series, respectively, on August 14, 1997.
In the fiscal year ended March 31, 1997, ICC served as the
Fund's investment advisor pursuant to three separate investment advisory
agreements, each dated August 22, 1995 ("1995 Agreements") for the same rate of
compensation and on terms substantially similar to those of the current
Investment Advisory Agreements. For this fiscal year, the aggregate fee paid by
the Fund to ICC was $10,806,028. 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 ("prior Investment Advisory Agreements"). Accordingly, in the
fiscal year ended March 31, 1996, ICC served as the Fund's investment advisor
pursuant to both 1995 and prior Investment Advisory Agreements. For this fiscal
year, the aggregate fee paid by the Fund to ICC was $7,291,008.
For the fiscal year ended March 31, 1995, the aggregate fees
paid by the Fund to ICC (net of voluntary fee waivers of $156,200 for the
Treasury Series) was $4,941,395 pursuant to the prior Investment Advisory
Agreements.
The Advisory Agreements continue in effect from year to year
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
Investment 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, 1997, had
net assets of approximately $5.5 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.")
8
<PAGE>
The Sub-Advisor
PNC Institutional Management Corporation ("PIMC") serves as a
sub-advisor to the Tax-Free Series pursuant to a sub-advisory agreement between
ICC and PIMC, dated as of August 14, 1997 (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
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.
For the fiscal year ended March 31, 1997, PNC provided
sub-advisory services pursuant to an agreement dated as of June 1, 1991 for the
same rates of compensation and on terms substantially similar to the current
Sub-Advisory Agreement. 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 years ended March 31, 1997 and March 31, 1996,
ICC paid PIMC fees of $800,837 and $742,568, respectively. As compensation for
providing sub-advisory services to the Prime Series and the Tax-Free Series,
respectively, for the fiscal year ended March 31, 1995 (with respect to the
Prime Series for the period from April 1, 1994 through October 30, 1994) ICC
paid PIMC a fee of $1,377,476.
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 June 17,
1997. 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.
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Distributor
Effective September 1, 1997, ICC Distributors, Inc. ("ICC
Distributors" or the "Distributor") serves as the distributor for each class of
the Fund's shares pursuant to a Distribution Agreement dated September 1, 1997
(the "Distribution Agreement"). Prior to September 1, 1997, Alex. Brown & Sons
Incorporated ("Alex. Brown") served as the Fund's Distributor pursuant to five
separate distribution agreements: one relating to the Institutional Shares, one
relating to the Tax-Free Series (except the Institutional Shares), 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 (collectively, the "prior Distribution Agreements") The prior
Distribution Agreements contained the same rates of compensation and
substantially the same terms as the current Distribution Agreement.
Pursuant to the Distribution Agreement, ICC Distributors will:
(a) receive orders for the purchase of the Fund's shares, accept or reject
such orders on behalf of the Fund in accordance with the Fund's currently
effective Prospectus and transmit such orders as are accepted to the Fund's
transfer agent as promptly as possible; (b) receive requests for redemption from
holders of the Fund's shares and transmit such redemption requests to the
Fund's transfer agent as promptly as possible; (c) respond to inquiries from the
Fund's shareholders concerning the status of their accounts; and (d) take, 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; (e)
maintain such accounts, books and records as may be required by law or deemed
appropriate by the Board of Directors; and (f) take all actions necessary to
carry into effect the distribution of the Shares. ICC Distributors shall not be
liable to the Fund or its shareholders for any act or omission by ICC
Distributors or any loss sustained by the Fund or the Fund's shareholders except
in the case of ICC Distributors' willful misfeasance, bad faith, gross
negligence or reckless disregard of duty. The Distribution Agreement further
provides that the Fund and ICC Distributors will mutually indemnify each other
for losses relating to the disclosures in the Fund's registration statement.
As compensation for its services, ICC Distributors 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. ICC Distributors receives no compensation with respect to its services
as distributor for the Institutional Shares and none of ICC Distributors'
compensation as distributor of the Fund's shares is allocated to the
Institutional Shares. ICC Distributors 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, ICC Distributors receives 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 under the prior
Distribution Agreements 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, 1997, March 31, 1996, and March 31, 1995, Alex. Brown received from the Fund
aggregate fees of $7,970,174, $6,327,179, and $4,672,018, respectively. As
compensation for distribution services under the prior Distribution Agreements
for the Tax-Free Series (except the Institutional Shares) for the fiscal years
ended March 31, 1997, March 31, 1996, and March 31, 1995, Alex. Brown received
from the Fund fees of $1,479,581, $1,345,261, and $838,211, respectively. As
compensation for distribution services under
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<PAGE>
the prior Distribution Agreements for the Quality Cash Reserve Prime Shares for
the fiscal years ended March 31, 1997, March 31, 1996, and March 31, 1995, Alex.
Brown received from the Fund fees of $986,821, $738,961, and $574,855,
respectively. As compensation for the Class B Shares, Alex. Brown received $307.
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 Fund's distributor. For the period from April 1,
1994 through February 27, 1995 and for the fiscal year ended March 31, 1995,
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 Agreement, ICC Distributors may
pay certain promotional and advertising expenses and, except in the case of the
Institutional Shares, may compensate 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 ICC Distributors to certain
registered securities dealers are paid by ICC Distributors out of fees received
by ICC Distributors from the Fund. Specifically, ICC Distributors may compensate
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. ICC Distributors 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").
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 ICC Distributors, ICC Distributors may make payments to
Shareholder Servicing Agents out of its distribution fee.
The fees payable to Shareholder Servicing Agents under
Shareholder Servicing Agreements will be negotiated by ICC Distributors. ICC
Distributors 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 ICC Distributors' 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 Agreement authorizing payments by ICC
Distributors for advertisements, promotional materials, sales literature and
printing and mailing of prospectuses to other than Fund shareholders and
payments by ICC Distributors and the Fund to Shareholder Servicing Agents may be
deemed to constitute payments by the Fund to support distribution.
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, ICC Distributors 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
11
<PAGE>
administrative decisions or interpretations of such laws as well as changes in
either federal or state statutes or regulations relating to the permissible
activities of banks or their subsidiaries or affiliates, could prevent a bank
from continuing to perform all or a part of its servicing activities. If a bank
were prohibited from so acting, shareholder clients 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.
Pursuant to Rule 12b-1 under the Investment Company Act, investment
companies may pay distribution expenses directly or indirectly , only pursuant
to a plan adopted by the investment company's board of directors and approved by
its shareholders. The Fund has adopted six separate distribution plans: one for
the Flag Investors Cash Reserve Prime Class A Shares; one for the Flag Investors
Cash Reserve Prime Class B Shares; one for the BT Alex. Brown Cash Reserve Prime
Shares; one for the BT Alex. Brown Cash Reserve Treasury Shares; one for the BT
Alex. Brown Cash Reserve Tax-Free Shares; and one for the Quality Cash Reserve
Prime Shares (the "Plans"). Amounts allocated to Shareholder Servicing Agents
may not exceed amounts payable to ICC Distributors under the Plans with respect
to shares held
by or on behalf of customers of such entities.
Prior to September 1, 1997, Alex. Brown was paid distribution
fees pursuant to 12b-1 plans substantially similar to and providing for the same
fees as the Plans. For the fiscal year ended March 31, 1997, the Fund paid
$6,273,272, $1,681,441 and $1,479,581, respectively, to Alex. Brown pursuant to
the 12b-1 plans of the BT Alex. Brown Cash Reserve classes of the 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 $986,821
to Alex. Brown, pursuant to the 12b-1 plan of the Quality Cash Reserve Prime
Shares, and $15,461 and $307 to Alex. Brown, pursuant to the 12b-1 plans of the
Flag Investors Cash Reserve Prime Class A Shares and Flag Investors Cash Reserve
Prime Class B Shares, respectively.
The Distribution Agreement 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 ICC
Distributors, 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 Agreement and Plans were initially approved
by the Fund's Board of Directors on August 4, 1997.
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 ICC
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<PAGE>
Distributors to investment representatives or Shareholder Servicing Agents
without shareholder approval, and all material amendments to the provisions of
any of the Distribution Agreement 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 Agreement, 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, ICC Distributors 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 Plans may be terminated at any time without penalty. The
Fund or ICC Distributors may terminate each of the Distribution Agreement on 60
days' written notice without penalty. The Distribution Agreement terminates
automatically in the event of an "assignment," as defined in the 1940 Act. The
services of ICC Distributors to the Fund as Distributor are not exclusive, and
it is free to render similar services to others.
ICC Distributors 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 Investors Managed
Municipal Fund Shares of Managed Municipal Fund, Inc., Flag Investors
Short-Intermediate Income Fund, Inc. (formerly 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
ICC and the Distributor furnish, without cost to the Fund,
such personnel as are required, subject to applicable banking laws, for the
proper conduct of the Fund's affairs and to carry out their obligations under
the Distribution Agreement, 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. ICC Distributors
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 ICC Distributors or furnished by ICC
Distributors 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.
13
<PAGE>
The Fund pays or causes to be paid all other expenses of the
Fund, including, without limitation: the fees of ICC Distributors 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 ICC
Distributors); 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 ICC Distributors, 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.
Transfer Agent, Custodian and Accounting Services
PNC acts as custodian for the Fund's portfolio securities and
cash. PFPC Inc. ("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, 1997, PNC received
custodian fees of $517,381 (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 $63,954, respectively.
The Board has approved Bankers Trust Company, a subsidiary of Bankers Trust New
York Corporation and an affiliate of the Fund, 130 Liberty Street, New York, New
York 10006 as custodian to the Fund. Currently, it is anticipated that Bankers
Trust Company will provide custody services to the Fund effective September 22,
1997.
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.
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<PAGE>
Prime and Treasury Series
Incremental Annual Accounting
Average Daily Net Assets 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 years ended March 31, 1997, March 31, 1996 and
for the period from November 10, 1995 through March 31, 1995, ICC received fees
of $157,854, $150,692 and $58,826, respectively, for providing accounting
services to the Prime Series. For the fiscal years ended March 31, 1997, March
31, 1996, and March 31, 1995, ICC received fees of $126,264, $122,841, and
$90,083 respectively, for providing accounting services to the Treasury Series.
As compensation for providing transfer agency services, the
Fund pays ICC up to $17.45 per account per year plus reimbursement for
out-of-pocket expenses incurred in connection therewith. For the fiscal year
ended March 31, 1997, such fees totaled $1,686,323 for Prime Series, $242,470
for Treasury Series and $163,383 for Tax-Free Series, respectively.
PFPC may reimburse BT Alex. Brown for certain shareholder
servicing functions performed by BT Alex. Brown.
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
To Fund management's knowledge, Alex. Brown & Sons
Incorporated, P.O. Box 1346, Baltimore, Maryland, 21203, owned of record 7.95%
of the outstanding shares of the Tax-Free Series of the Fund, as of July 23,
1997.*
As of July 23, 1997, 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.
- -----------------------------------------
15
<PAGE>
* To Fund management's knowledge, Alex. Brown & Sons Incorporated owned less
than 1% of any Series of the Fund, as of July 23, 1997.
Semi-Annual 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.
Independent Accountants
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, 1998.
16
<PAGE>
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 all shares of the Treasury Series and
the Tax-Free Series is determined daily as of 11:00 a.m. (Eastern time) and the
net asset value of all shares of the Prime Series is determined 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.
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
17
<PAGE>
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 Prime Series, Treasury
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. Share purchases for the Treasury
Series and the Tax-Free Series effected before 11:00 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. Dividends are 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.
18
<PAGE>
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 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; (ii) 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; and (iii) 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 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 gain from the sale or exchange of a capital asset held for more
than one year 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 eighteen months, mid-term capital gain if the shares are held for more
than twelve months, but not more than eighteen 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.
20
<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
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<PAGE>
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 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. 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, 1997. The Institutional Tax-Free
Shares were not offered in any period ended March 31, 1997.
<TABLE>
<CAPTION>
Series or class Current Yield Effective Yield Taxable-Equivalent Yield***
- --------------- ------------- --------------- ------------------------
<S> <C> <C> <C>
Prime Series* 4.82% 4.87% N/A
Institutional Prime Shares 5.07% 5.13% N/A
Quality Cash Reserve Prime Shares 4.53% 4.57% N/A
Flag Investors Cash Reserve Prime B Shares 4.07% 4.09% N/A
Treasury Series** 4.60% 4.66% N/A
Institutional Treasury Shares 4.85% 4.92% N/A
Tax-Free Series** 2.82% 2.87% 4.09%
Institutional Tax-Free Shares N/A N/A N/A
</TABLE>
- -----------------------
* 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 BT Alex. Brown at (410) 895-5995. 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
22
<PAGE>
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 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
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<PAGE>
Requisite NRSROs1 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
(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 Security2 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.
- -------------------------------
(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.
(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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<PAGE>
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.
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.
25
<PAGE>
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 this Statement of Additional
Information under the heading "General Information About the Fund"), 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 restriction may be changed by a vote
of the majority of the Board of Directors of the Fund. No Series will 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.
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, 1997, March 31, 1996, and
March 31, 1995, 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
26
<PAGE>
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, 1997, March 31, 1996, and
March 31, 1995, 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, 1997, the
Fund held a 6.47% repurchase agreement issued by Goldman Sachs & Co. valued at
$109,100,000 and a 6.25% repurchase agreement issued by Morgan Stanley & Co.
valued at $150,000,000.
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.
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 ICC
Distributors.
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
27
<PAGE>
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.
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<PAGE>
FINANCIAL STATEMENTS
See next page.
29
