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STATEMENT OF ADDITIONAL INFORMATION
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DEUTSCHE BANC 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. THE
AUDITED FINANCIAL STATEMENTS FOR THE FUND ARE INCLUDED IN THE FUND'S ANNUAL
REPORT, WHICH HAS BEEN FILED ELECTRONICALLY WITH THE SECURITIES AND
EXCHANGE COMMISSION AND IS INCORPORATED BY REFERENCE INTO THIS STATEMENT OF
ADDITIONAL INFORMATION. A COPY OF EACH PROSPECTUS AND EACH ANNUAL REPORT
MAY BE OBTAINED WITHOUT CHARGE FROM YOUR SECURITIES DEALER, OR
SHAREHOLDER SERVICING AGENT, OR BY WRITING OR CALLING THE FUND AT
P.O. BOX 17250, BALTIMORE, MARYLAND 21203, (800) 553-8080
Statement of Additional Information dated August 1, 2000
Relating to Prospectuses dated, August 1, 2000 for:
Deutsche Banc Alex. Brown Cash Reserve Fund, Inc.
Cash Reserve Shares
(Prime Series, Treasury Series and Tax-Free Series)
Institutional Shares
(Prime Series, Treasury Series and Tax-Free Series)
Quality Cash Reserve Prime Shares
and
Flag Investors Cash Reserve Prime Shares
(Class A, Class B and Class C)
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TABLE OF CONTENTS
Page
Introduction................................................................ 1
The Fund and Its Shares..................................................... 1
Investment Program.......................................................... 3
Investment Restrictions..................................................... 9
Share Purchases and Redemptions............................................. 10
Dividends and Taxes......................................................... 12
Management of the Fund...................................................... 18
The Investment Advisor...................................................... 24
Distributor................................................................. 26
Portfolio Transactions...................................................... 31
Semi-Annual and Annual Reports.............................................. 33
Independent Accountants..................................................... 33
Legal Matters .............................................................. 34
Transfer Agent, Custodian and Accounting Services........................... 34
Principal Holders of Securities............................................. 35
Current Yield............................................................... 37
Financial Statements........................................................ 38
Appendix A.................................................................. A-1
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INTRODUCTION
Deutsche Banc Alex. Brown Cash Reserve Fund, Inc. (formerly, 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. These Prospectuses may be obtained
without charge from your Participating Dealer or Shareholder Serving Agent or by
writing the Fund, P.O. Box 17250, Baltimore, Maryland 21203. Investors may also
call (800) 553-8080. 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.
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.
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 six classes of the Prime Series, designated as the
Deutsche Banc 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 Flag Investors Cash Reserve Prime Class C Shares, the Deutsche Banc
Alex. Brown Cash Reserve Prime Institutional Shares and the Quality Cash Reserve
Prime Shares. There are currently two classes of the Treasury Series, designated
as the Deutsche Banc Alex. Brown Cash Reserve Treasury Shares and the Deutsche
Banc Alex. Brown Cash Reserve Treasury Institutional Shares. There are currently
two classes of the Tax-Free Series, designated as the Deutsche Banc Alex. Brown
Cash Reserve Tax-Free Shares and the Deutsche Banc Alex. Brown Cash Reserve
Tax-Free Institutional Shares.
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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 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.
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."
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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 or her 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 or her 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 or her 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 or she 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 or
her office. The Fund's Charter also authorizes the purchase of liability
insurance on behalf of the directors and officers.
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 will undertake 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.
INVESTMENT PROGRAM AND RESTRICTIONS
Treasury Series
The Treasury Series may invest in U.S. Treasury obligations consisting
of marketable securities and instruments issued by the U.S. Treasury, including
bills, notes, bonds and other obligations. It is management's intention to have
100% of the Treasury Series' assets invested in such instruments at all times.
In unusual circumstances, up to 10% of the Treasury Series' assets may be
invested in repurchase agreements collateralized by U.S. Treasury obligations.
Such investments will be made only when it is necessary to ensure that the
Series is fully invested while satisfying its liquidity requirements.
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Prime Series
In addition to the U.S. Treasury obligations described above, the Prime
Series may invest in repurchase agreements and obligations issued or guaranteed
as to principal and interest by agencies or instrumentalities of the U.S.
Government. Some of these obligations are backed by the full faith and credit of
the U.S. Government (e.g., the Government National Mortgage Association), others
are supported by the issuing agency's right to borrow from the U.S. Treasury
(e.g., securities of Federal Home Loan Banks) and still others are backed only
by the credit of the instrumentality (e.g., Fannie Mae).
The Prime Series may also invest in a broad range of commercial and
bank obligations including funding agreements that the Fund's investment advisor
(the "Advisor"), under guidelines established by the Board of Directors,
believes present minimal credit risk and that satisfy the criteria for for an
"Eligible Security" as defined in Rule 2a-7 under the 1940 Act as described
below:
The Prime Series may invest in instruments consisting of commercial
paper and variable amount master demand notes. Commercial paper obligations are
short-term, unsecured negotiable promissory notes of U.S. or foreign
corporations that at the time of purchase meet the rating criteria as an
"Eligible Security" as defined in Rule 2a-7 under the 1940 Act as described
below. Investments in foreign commercial paper generally involve risks similar
to those described below relating to obligations of foreign banks or foreign
branches of U.S. banks.
Variable amount master demand notes are unsecured demand notes that
permit investment of fluctuating amounts of money at variable rates of interest
pursuant to arrangements with issuers who meet the quality criteria described
below. The interest rate on a variable amount master demand note is periodically
redetermined according to a prescribed formula. Although there is no secondary
market in master demand notes, the payee may demand payment of the principal
amount of the note on relatively short notice. In the event an issuer of a
variable rate master demand note defaulted on its payment obligation, the Prime
Series might be unable to dispose of the note because of the absence of a
secondary market and could, for this or other reasons, suffer a loss to the
extent of the default. The face maturities of variable rate notes subject to a
demand feature may exceed 397 days in certain circumstances.
The Prime Series may also invest in bank instruments consisting mainly
of certificates of deposit and Euro-time deposits (i) are issued by U.S. and
foreign banks that satisfy applicable quality standards; or (ii) are fully
insured as to principal and interest by the Federal Deposit Insurance
Corporation. For purposes of the Fund's investment policies with respect to bank
obligations, the assets of a bank will be deemed to include the assets of its
domestic and foreign branches. Obligations of foreign branches of U.S. banks and
foreign banks may be general obligations of the parent bank in addition to the
issuing branch or may be limited by the terms of a specific obligation and by
government regulation. If the Advisor, acting under the supervision of the Board
of Directors, deems the instruments to present minimal credit risk, the Prime
Series may invest in obligations of foreign banks or foreign branches of U.S.
banks which may include banks located in the United Kingdom, Grand Cayman
Island, Nassau, Japan and Canada. Investments in these obligations may entail
risks that are different from those of investments in obligations of U.S.
domestic banks because of differences in political, regulatory and economic
systems and conditions. These risks include future political and economic
developments, currency blockage, the possible imposition of withholding taxes on
interest payments, differing reserve requirements, reporting and recordkeeping
requirements and accounting standards, possible seizure or nationalization of
foreign deposits, difficulty or inability of pursuing legal remedies and
obtaining judgments in foreign courts, possible establishment of exchange
controls or the adoption of other foreign governmental restrictions that might
affect adversely the payment of principal and interest on bank obligations.
Foreign branches of U.S. banks and foreign banks may also be subject to less
stringent reserve requirements and to different accounting, auditing, reporting
and recordkeeping standards than those applicable to domestic branches of U.S.
banks.
The Prime Series may invest in deposits, bonds, notes and debentures
and other debt obligations that at the time of purchase have, or are comparable
in priority and security to other securities of such issuer which have,
outstanding short-term obligations meeting the above short-term rating
requirements, or if there are no such short-term ratings, are determined by the
Advisor, acting under the supervision of the Board of Directors, to be of
comparable quality and are rated in the top three highest long-term rating
categories by the NRSROs rating such security.
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Tax-Free Series
The Tax-Free Series may invest in municipal securities consisting of
(i) debt obligations issued by or on behalf of public authorities to obtain
funds to be used for various public purposes (including the construction of a
wide range of public facilities), for refunding outstanding obligations, for
general operating expenses and for lending such funds to other public
institutions and facilities, and (ii) certain types of industrial development
bonds issued by or on behalf of public authorities to obtain funds to provide
for the construction, equipment, repair or improvement of privately operated
facilities ("private activity bonds"); provided that the interest paid on such
debt obligations and private activity bonds, in the opinion of bond counsel, is
exempt from federal income taxes.
The Tax-Free Series invests in high quality municipal securities that
the Advisor believes, under guidelines established by the Board of Directors,
present minimal credit risk and that at the time of purchase are rated within
the two highest credit categories assigned by the recognized rating agencies
(provided that such purchases would be further limited unless the instrument
meets the definition of an "Eligible Security" as defined in Rule 2a-7 under the
1940 Act), including: (1) bonds rated Aaa or Aa by Moody's or AAA or AA by S&P;
(2) municipal commercial paper rated Prime-1 or Prime-2 by Moody's or A-1+, A-1
or A-2 by S&P; (3) municipal notes and floating and variable rate demand
obligations rated SP-1 or higher by S&P or MIG2 or VMIG or higher by Moody's;
and (4) obligations secured by letters of credit providers rated within the two
highest categories by any nationally recognized bank rating agency approved by
the Fund's Board of Directors. The Tax-Free Series may purchase unrated
securities if they are determined by the Advisor, under guidelines established
by the Board of Directors, to be of comparable value to those obligations rated
in the categories described above.
The Tax-Free Series may hold cash reserves pending investment in
municipal securities.
It is a fundamental policy of the Tax-Free Series to have its assets
invested so that at least 80% of the Series' income will be exempt from federal
income taxes, and it is the Tax-Free Series' present intention (but it is not a
fundamental policy) to invest its assets so that 100% of its annual interest
income will be tax-exempt. From time to time, on a temporary basis or for
defensive purposes, however, the Fund may invest up to all of its assets in
taxable short-term investments that meet the criteria for investment for the
Treasury or Prime Series as described above.
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The Tax-Free Series will seek to avoid the purchase of private activity
bonds, the interest on which would be considered to be an item of preference for
purposes of alternative minimum tax liability for individuals under the Internal
Revenue Code of 1986, as amended.
Other Investment Practices
The Fund may enter into the following arrangements with respect to any
Series:
When-issued Securities involving commitments by a Series to purchase
portfolio securities on a "when-issued" basis. When-issued securities are
securities purchased for delivery beyond the normal settlement date at a stated
price and yield. A Series will generally not pay for such securities or start
earning interest on them until they are received. When-issued commitments will
not be used for speculative purposes and will be entered into only with the
intention of actually acquiring the securities.
The Prime Series and the Treasury Series may also enter into the
following arrangements:
Repurchase Agreements under which the Series acquires ownership of an
obligation and the seller agrees, at the time of the sale, to repurchase the
obligation at a mutually agreed upon time and price, thereby determining the
yield during the Series' holding period. Although the underlying collateral for
repurchase agreements may have maturities exceeding 397 days, repurchase
agreements entered into by a Series will not have a stated maturity in excess of
seven days from the date of purchase. A Series may enter into repurchase
agreements with institutions that the Fund's Advisor believes present minimal
credit risk. Default by, or bankruptcy proceedings with respect to the seller
may, however, expose the Series to possible loss because of adverse market
action or delay in connection with the disposition of the underlying
obligations.
The Prime Series may also enter into the following arrangements:
Reverse Repurchase Agreements involving the sale of money market
instruments held by the Prime Series, with an agreement to repurchase the
instruments at an agreed upon price and date. The Prime Series will employ
reverse repurchase agreements only when necessary to meet unanticipated net
redemptions so as to avoid liquidating other money market instruments during
unfavorable market conditions. The Prime Series will utilize reverse repurchase
agreements when the interest income to be earned from portfolio investments that
would otherwise have to be liquidated to meet redemptions is greater than the
interest expense incurred as a result of the reverse repurchase transactions.
Reverse repurchase agreements involve the risk that the market value of
securities retained by the Prime Series in lieu of liquidation may decline below
the repurchase price of the securities the Prime Series is obligated to
repurchase.
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The Prime Series may also invest in securities generally referred to as
asset-backed securities, which directly or indirectly represent a participation
interest in, or are secured by and payable from, a stream of payments generated
by particular assets such as motor vehicle or credit card receivables.
Asset-backed securities may provide periodic payments that consist of interest
an/or principal payments. Consequently, the life of an asset-backed security
varies with the prepayment and loss experience of the underlying assets.
To secure prices deemed advantageous at a particular time, the Prime
Series may purchase securities on a delayed-delivery basis, in which case
delivery of the securities occurs beyond the normal settlement period; payment
for or delivery of the securities would be made prior to the reciprocal delivery
or payment by the other party to the transaction. The Prime Series will enter
into delayed-delivery transactions for the purpose of acquiring securities and
not for the purpose of leverage. Securities purchased on a delayed-delivery
basis may expose the Prime Series to risk because the securities may experience
fluctuations in value prior to their actual delivery. The Prime Series does not
accrue income with respect to a delayed-delivery security prior to its stated
delivery date. Purchasing securities on a delayed-delivery basis can involve the
additional risk that the yield available in the market when the delivery takes
place may be higher than that obtained in the transaction itself. Upon
purchasing a security on a delayed-delivery basis, the Prime Series will
segregate cash or liquid securities in an amount at least equal to the
delayed-delivery commitment.
Each Series may invest in instruments that have certain minimum ratings
of either Moody's or S&P as permitted by the investment objective, policies and
restrictions of each such Series. Investments of commercial paper may be
precluded unless a particular instrument is an "Eligible Security" as defined in
Rule 2a-7 under the 1940 Act. Rule 2a-7 defines "Eligible Security" as follows:
(i) a security with a remaining maturity of 397 days or less that
is rated (or that has been issued by an issuer that is rated
with respect to a class of Short-term debt obligations, or any
security within that class, that is comparable in priority and
security with the security) by the Requisite NRSROs(1) in one
of the two highest rating categories for Short-term debt
obligations (within which there may be sub-categories or
gradations indicating relative standing); or
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(1) "Requisite NRSRO" shall mean (a) any two nationally recognized statistical
rating organizations that have issued a rating with respect to a security or
class of debt obligations of an issuer, or (b) if only one NRSRO has issued a
rating with respect to such security or issuer at the time the Fund purchases or
rolls over the security, that NRSRO. At present the NRSROs are: Standard &
Poor's Ratings Group, Moody's Investors Service, Inc., Fitch and, with respect
to certain types of securities, IBCA Limited and its affiliates, IBCA Inc.
Subcategories or gradations in ratings (such as a "+" or "-") do not count as
rating categories.
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(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 three 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
Security(2) is not an Eligible Security if the security
has a Long-term rating from any NRSRO that is not
within the NRSRO's three highest categories (within
which there may be sub-categories or gradations
indicating relative standing).
See Appendix A following this Statement of Additional Information for a
description of the minimum ratings of Moody's and S&P for instruments in which
each Series may invest.
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(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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INVESTMENT RESTRICTIONS
The investment restrictions applicable to the Fund's investment program
are set forth below. 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) purchase securities of any issuer (other than obligations of
the U.S. Government, its agencies or instrumentalities and any
municipal securities guaranteed by the U.S. Government) if
immediately after such purchase more than 5% of the value of
the Series' assets would be invested in such issuer;
(2) borrow money or issue senior securities, except that (i) any
Series may borrow money for temporary purposes in amounts up
to 10% of the value of such Series' total assets at the time
of borrowing; (ii) the Prime Series may enter into reverse
repurchase agreements in accordance with its investment
program and (iii) any Series may enter into commitments to
purchase securities in accordance with its investment program;
(3) make loans, except that each Series may purchase or hold debt
instruments in accordance with its respective investment
objectives and policies, and may loan portfolio securities and
enter into repurchase agreements;
(4) 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;
(5) 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);
(6) purchase or sell commodities or commodities contracts,
provided that each Series may invest in financial futures and
options on such futures.
The Prime Series may not purchase any commercial paper or variable rate
demand notes that would cause more than 25% of the value of the Series' total
assets at the time of such purchase to be invested in the securities of one or
more issuers conducting their principal business activities in the same
industry.
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The following investment restrictions apply to the Tax-Free Series:
(1) The Tax-Free Series may not purchase any securities (other
than obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities, certificates of deposit and
guarantees of banks) that would cause more than 25% of the
value of the Series' total net assets at the time of such
purchase to be invested in (i) securities of one or more
issuers conducting their principal activities in the same
state; (ii) securities, the interest on which is paid from
revenues of projects with similar characteristics; or (iii)
industrial development bonds the obligers of which are in the
same industry;
(2) The Tax-Free Series will be invested so that at least 80% of
the Series' income will be exempt from federal income taxes.
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.
The following investment restriction, that may be changed by a vote of
the majority of the Board of Directors of the Fund, applies to the Treasury
Series. The Treasury Series will limit investments in U.S. Government
obligations to U.S. Treasury obligations.
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 Buy Shares" 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 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 the
Prime Series is determined daily as of 12:00 noon (Eastern time) each day that
the Custodian and the New York Stock Exchange are open for business.
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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 Advisor 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 it
deems necessary and appropriate, including sales of portfolio instruments prior
to maturity to realize capital gains; withholding of dividends; redemption of
shares in kind; or establishment of a net asset value per share by using
available market quotations.
11
<PAGE>
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, 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, 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.
12
<PAGE>
Taxes
The following is only a summary of certain additional federal income
tax considerations generally affecting the Series and their shareholders that
are not described in the Series' prospectus. No attempt is made to present a
detailed explanation of the tax treatment of the Series or their shareholders,
and the discussion here and in the Series' prospectus is not intended as a
substitute for careful tax planning. Shareholders are urged to consult with
their tax advisors with specific reference to their own tax situation, including
their state and local tax liabilities.
The following general discussion of certain 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.
Qualification as a Regulated Investment Company
Each Series intends to qualify and elect to be treated as a "regulated
investment company" ("RIC") as defined under Subchapter M of the Code.
Accordingly, a Series must, among other things, (a) derive at least 90% of its
gross income each taxable year from dividends, interest, payments with respect
to securities loans, gains from the sale or other disposition of stock,
securities or foreign currencies, and certain other related income, including,
generally, certain gains from options, futures and forward contracts; and (b)
diversify its holdings so that, at the end of each fiscal quarter of a Series'
taxable year, (i) at least 50% of the market value of a Series' total assets is
represented by cash and cash items, United States Government securities,
securities of other RICs, and other securities, with such other securities
limited, in respect to any one issuer, to an amount not greater than 5% of the
value of a Series' total assets or 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities (other than United States Government securities or
securities of other RICs) of any one issuer or two or more issuers that a Series
controls and which are engaged in the same, similar, or related trades or
business.
In addition to the requirements described previously, in order to
qualify as a RIC, a Series must distribute at least 90% of its investment
company taxable income (that generally includes dividends, taxable interest, and
the excess of net short-term capital gains over net long-term capital losses
less operating expenses, but determined without regard to the deduction for
dividends paid) and at least 90% of its net tax-exempt interest income, for each
tax year, if any, to its shareholders. If a Series meets all of the RIC
requirements, it will not be subject to federal income tax on any of its net
investment income or net realized capital gains that it distributes to
shareholders.
13
<PAGE>
The Treasury Series may make investments in securities (such as STRIPS)
that bear an "original issue discount" or "acquisition discount" (collectively,
"OID Securities"). The holder of such securities is deemed to have received
interest income even though no cash payments have been received. Accordingly,
OID Securities may not produce sufficient current cash receipts to match the
amount of distributable net investment income the Series must distribute to
satisfy the Distribution Requirement. In some cases, the Series may have to
borrow money or dispose of other investments in order to make sufficient cash
distributions to satisfy the Distribution Requirement.
Although each Series intends to distribute substantially all of its net
investment income and may distribute its capital gains for any taxable year,
each Series will be subject to federal income taxation to the extent any such
income or gains are not distributed.
If a Series fails to qualify for any taxable year as a RIC, all of its
taxable income will be subject to tax at regular corporate income tax rates
without any deduction for distributions to shareholders and such distributions
generally will be taxable to shareholders as ordinary dividends to the extent of
a Series' current and accumulated earnings and profits. In this event,
distributions generally will be eligible for the dividends-received deduction
for corporate shareholders. The board reserves the right not to maintain the
qualification of a Series as a regulated investment company if it determines
such course of action to be beneficial to shareholders.
Series Distributions
Distributions of investment company taxable income will be taxable to
shareholders as ordinary income, regardless of whether such distributions are
paid in cash or are reinvested in additional Shares, to the extent of a Series'
earnings and profits. Each Series anticipates that it will distribute
substantially all of its investment company taxable income for each taxable
year.
Each Series may either retain or distribute to shareholders its excess
of net long-term capital gains over net short-term capital losses ("net capital
gains"), if any. If such gains are distributed as a capital gains distribution,
they are taxable to shareholders that are individuals at a maximum rate of 20%,
regardless of the length of time the shareholder has held Shares. If any such
gains are retained, a Series will pay federal income tax thereon, and, if a
Series makes an election, the shareholders will include such undistributed gains
in their income, will increase their basis in Series shares by the difference
between the amount of such includable gains and the tax deemed paid by such
shareholder and will be able to claim their share of the tax paid by a Series as
a refundable credit.
If a Series' distributions exceed its taxable income and capital gains
realized during a taxable year, all or a portion of the distributions made in
the same taxable year may be recharacterized as a return of capital to
shareholders. A return of capital distribution will generally not be taxable,
but will reduce each shareholder's cost basis in the Series and result in a
higher reported capital gain or lower reported capital loss when those shares on
which the distribution was received are sold.
Gains and losses on the sale of portfolio securities and unrealized
appreciation or depreciation in the value of these securities may require a
Series to adjust distributions in order to maintain a $1.00 net asset value.
These procedures may result in under-or over-distributions of net investment
income.
Because each of the Series' income is derived primarily from interest
rather than dividends, no portion of a Series' distributions generally will be
eligible for the corporate dividends-received deduction.
14
<PAGE>
Ordinarily, investors should include all dividends as income in the
year of payment. However, dividends declared payable to shareholders of record
in October, November, or December of one year, but paid in January of the
following year, will be deemed for tax purposes to have been received by the
shareholder and paid by the Series in the year in which the dividends were
declared.
Investors should be careful to consider the tax implications of
purchasing Shares just prior to the ex-dividend date of any ordinary income
dividend or capital gains distribution. Those investors will be taxable on the
entire amount of the dividend or distribution received, even though some or all
of the amount distributed may have been realized by the Fund prior to the
investor's purchase.
Each Series will provide a statement annually to shareholders as to the
federal tax status of distributions paid (or deemed to be paid) by the Series
during the year, including the amount of dividends eligible for the corporate
dividends-received deduction.
Sale or Exchange of Series Shares
Redemptions and exchanges of Series' shares are taxable transactions
for federal and state income tax purposes. However, because each Series seeks to
maintain a constant $1.00 per share net asset value, you should not expect to
realize a capital gain or loss upon redemption or exchange of your shares in a
Series. If gain or loss does arise on the sale or exchange of a Share, such gain
or loss will be long-term if the Share has been held for more than twelve months
and otherwise will be short-term. For individuals, long-term capital gains are
currently taxed at a maximum rate of 20% and short-term capital gains are
currently taxed at ordinary income tax rates. However, if a shareholder realizes
a loss on the sale, exchange or redemption of a Share held for six months or
less and has previously received a capital gains distribution with respect to
the Share (or any undistributed net capital gains of a Series with respect to
such Share are included in determining the shareholder's long-term capital
gains), the shareholder must treat the loss as a long-term capital loss to the
extent of the amount of the prior capital gains distribution (or any
undistributed net capital gains of a Series that have been included in
determining such shareholder's long-term capital gains). In addition, any loss
realized on a sale or other disposition of Shares will be disallowed to the
extent an investor repurchases (or enters into a contract or option to
repurchase) Shares within a period of 61 days (beginning 30 days before and
ending 30 days after the disposition of the Shares). This loss disallowance rule
will apply to Shares received through the reinvestment of dividends during the
61-day period.
15
<PAGE>
In certain cases, a Series will be required to withhold and remit to
the Internal Revenue Service 31% of distributions payable to you if you (1) have
failed to provide a correct tax identification number, (2) are subject to backup
withholding by the Internal Revenue Service for failure to properly report
receipt of interest or dividends, or (3) have failed to certify to the Fund that
you are not subject to backup withholding.
Federal Excise Tax; Miscellaneous Considerations;
If a Series fails to distribute in a calendar year at least 98% of its
ordinary income for the 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 October 31 of that year (and any retained amount
from the prior calendar year), the Series will be subject to a nondeductible 4%
Federal excise tax on the undistributed amounts. Each Series intends to make
sufficient distributions to avoid imposition of this tax, or to retain, at most
its net capital gains and pay tax thereon.
A Series may invest in complex securities. These investments may be
subject to numerous special and complex tax rules. These rules could affect
whether gains and losses recognized by a Series are treated as ordinary income
or capital gain, accelerate the recognition of income to a Series and/or defer a
Series' ability to recognize losses. In turn, those rules may affect the amount,
timing or character of the income distributed to you by a Series.
If you are a non-U.S. investor in a Series, you may be subject to U.S.
withholding and estate tax and are encouraged to consult your tax advisor prior
to investing in a Series.
State and Local Taxes
Rules of state and local taxation of dividend and capital gains
distributions from regulated investment companies often differ from the rules
for federal income taxation described above. You are urged to consult your tax
advisor as to the consequences of these and other state and local tax rules
affecting an investment in the Fund. Many states grant tax-free status to
dividends paid to you from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment requirements that must
be met by a Series. Investments in Government National Mortgage Association or
Fannie Mae securities, banker's acceptances, commercial paper and repurchase
agreements collateralized by U.S. government securities do not generally qualify
for such tax-free treatment. The rules on exclusion of this income are different
for corporate shareholders.
16
<PAGE>
Additional Tax Information For The Tax-Free Series
The Tax-Free Series intends to qualify to pay "exempt interest
dividends" to its shareholders by satisfying the Code's requirement that at the
close of each quarter of its taxable year at least 50% of the value of its total
assets consist of obligations the interest on which is exempt from federal
income tax. As long as this and certain other requirements are met, dividends
derived from the Tax-Free Series' net tax-exempt interest income will be "exempt
interest dividends" that are excluded from your gross income for federal income
tax purposes. Exempt interest dividends may, however, have collateral federal
income tax consequences, including alternative minimum tax consequences, as
discussed below.
The percentage of income that constitutes "exempt-interest dividends"
will be determined for each year for the Tax-Free Series and will be applied
uniformly to all dividends declared with respect to the Tax-Free Series during
that year. This percentage may differ from the actual percentage for any
particular day.
Exempt-interest dividends may be subject to the alternative minimum tax
imposed by Section 55 of the Code (the "Alternative Minimum Tax"). The
Alternative Minimum Tax is imposed at a maximum rate of up to 28% in the case of
non-corporate taxpayers and at a maximum rate of 20% in the case of corporate
taxpayers, to the extent it exceeds the taxpayer's regular tax liability. The
Alternative Minimum Tax may be affected by the receipt of exempt-interest
dividends in two circumstances. First, exempt-interest dividends derived from
certain "private activity bonds" issued after August 7, 1986, generally will be
an item of tax preference and therefore potentially subject to the Alternative
Minimum Tax. The Tax-Free Series intends, when possible, to avoid investing in
private activity bonds. Second, in the case of exempt-interest dividends
received by corporate shareholders, all exempt-interest dividends, regardless of
when the bonds from which they are derived were issued or whether they are
derived from private activity bonds, will be included in the corporation's
"adjusted current earnings," as defined in Section 56(g) of the Code, in
calculating the corporation's alternative minimum taxable income for purposes of
determining the Alternative Minimum Tax.
Any interest on indebtedness you incur or continue to purchase or carry
Shares of the Tax-Free Series will not be deductible for federal income tax
purposes. The deduction otherwise allowable to property and casualty insurance
companies for "losses incurred" will be reduced by an amount equal to a portion
of exempt-interest dividends received or accrued during any taxable year.
Foreign corporations engaged in a trade or business in the United States will be
subject to a "branch profits tax" on their "dividend equivalent amount" for the
taxable year, which will include exempt-interest dividends. Certain Subchapter S
corporations may also be subject to taxes on their "passive investment income,"
which could include exempt-interest dividends. Up to 85% of the Social Security
benefits or railroad retirement benefits received by you during any taxable year
will be included in your gross income if your "modified adjusted gross income"
(which includes exempt-interest dividends) plus one-half of the Social Security
benefits or railroad retirement benefits received by you during that taxable
year exceeds the base amount described in Section 86 of the Code.
17
<PAGE>
Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by industrial development bonds or
private activity bonds should consult their tax advisors before purchasing
Shares. "Substantial user" is defined generally as including a "non-exempt
person" who regularly uses in trade or business a part of such a facility.
Current federal law limits the types and volume of bonds qualifying for
the federal income tax exemption of interest, which may have an effect on the
ability of the Tax-Free Series to purchase sufficient amounts of tax-exempt
securities to satisfy the Code's requirements for the payment of exempt interest
dividends.
Issuers of bonds purchased by the Tax-Free Series (or the beneficiary
of such bonds) may have made certain representations or covenants in connection
with the issuance of such bonds to satisfy certain requirements of the Code that
must be satisfied subsequent to the issuance of such bonds. Exempt-interest
dividends derived from such bonds 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 bonds (or the beneficiary of such
bonds) fails to comply with such covenants.
The Series may not be a suitable investment for you if you are a
tax-exempt shareholder or plan because you would not gain any additional benefit
from the receipt of exempt-interest dividends.
MANAGEMENT OF THE FUND
Directors and Officers
The overall business and affairs of the Fund are managed by its Board
of Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, distributor, custodian and transfer
agent.
The Directors and executive officers of the Fund, their respective
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.
18
<PAGE>
*RICHARD T. HALE, Chairman and Director (7/17/45)
Managing Director, Deutsche Asset Management; Director and President,
Investment Company Capital Corp. (registered investment advisor).
Director or President, Deutsche Asset Management Mutual Funds (registered
investment companies). Chartered Financial Analyst. Formerly, Director,
ISI Family of Funds (registered investment companies).
RICHARD R. BURT, Director (2/3/47)
IEP Advisors, LLP, 1275 Pennsylvania Avenue, NW, 10th Floor, Washington,
DC 20004. Chairman, IEP Advisors, Inc.; Chairman of the Board, Weirton
Steel Corporation; Member of the Board, Archer Daniels Midland Company
(agribusiness operations), Hollinger International, Inc. (publishing),
Homestake Mining (mining and exploration), HCL Technologies (information
technology) and Anchor Technologies (gaming software and equipment);
Director, Mitchell Hutchins family of funds (registered investment
companies); and Member, Textron Corporation International Advisory
Council. Formerly, partner, McKinsey & Company (consulting), 1991-1994;
U.S. Chief Negotiator in Strategic Arms Reduction Talks (START) with
former Soviet Union and U.S. Ambassador to the Federal Republic of
Germany, 1985-1989.
JOSEPH R. HARDIMAN, Director (5/27/37)
8 Bowen Mill Road, Baltimore, Maryland 21212. Private Equity Investor and
Capital Markets Consultant; Director, Wit Capital Group (registered
broker-dealer), The Nevis Fund (registered investment company), and ISI
Family of Funds (registered investment companies). Formerly, Director,
Circon Corp. (medical instruments), November 1998 - January 1999.
President and Chief Executive Officer, The National Association of
Securities Dealers, Inc. and The NASDAQ Stock Market, Inc., 1987-1997;
Chief Operating Officer of Alex. Brown & Sons Incorporated (now DB Alex.
Brown LLC), 1985-1987; General Partner, Alex. Brown & Sons Incorporated
(now DB Alex. BrownLLC), 1976-1985.
LOUIS E. LEVY, Director (11/16/32)
26 Farmstead Road, Short Hills, New Jersey 07078. Director,
Kimberly-Clark Corporation (personal consumer products), Household
International (banking and finance) and ISI Family of Funds (registered
investment companies). Formerly, Chairman of the Quality Control Inquiry
Committee, American Institute of Certified Public Accountants, 1992-1998;
Trustee, Merrill Lynch Funds for Institutions, 1991-1993; Adjunct
Professor, Columbia University-Graduate School of Business, 1991-1992;
and Partner, KPMG Peat Marwick, retired 1990.
EUGENE J. MCDONALD, Director (7/14/32)
Duke Management Company, Erwin Square, Suite 1000, 2200 West Main Street,
Durham, North Carolina 27705. President, Duke Management Company
(investments); Executive Vice President, Duke University (education,
research and health care); Executive Vice Chairman and Director, Central
Carolina Bank & Trust (banking) and Director, Victory Funds (registered
investment companies). Formerly, Director AMBAC Treasurers Trust
(registered investment company), DP Mann Holdings (insurance) and ISI
Family of Funds (registered investment companies).
19
<PAGE>
REBECCA W. RIMEL, Director (4/10/51)
The Pew Charitable Trusts, One Commerce Square, 2005 Market Street, Suite
1700, Philadelphia, Pennsylvania 19103-7017. President and Chief
Executive Officer, The Pew Charitable Trusts (charitable foundation);
Director and Executive Vice President, The Glenmede Trust Company
(investment trust and wealth management). Formerly, Executive Director,
The Pew Charitable Trusts and Director, ISI Family of Funds (registered
investment companies).
*TRUMAN T. SEMANS, Director (10/27/26)
Brown Investment Advisory & Trust Company, 19 South Street, Baltimore,
Maryland 21202. Vice Chairman, Brown Investment Advisory & Trust Company
(formerly, Alex. Brown Capital Advisory & Trust Company); and Director
and President of Virginia Hot Springs Inc. (property management).
Formerly, Managing Director and Vice Chairman, Alex. Brown & Sons
Incorporated (now DB Alex. Brown LLC); Director Investment Company
Capital Corp. (registered investment advisor) and Director, ISI Family of
Funds registered investment companies).
ROBERT H. WADSWORTH, Director (1/29/40)
4455 E. Camelback Road, Suite 261 E., Phoenix, Arizona 85018. President,
Investment Company Administration LLC, President, Trustee, Trust for
Investment Managers (registered investment company) and President,
Director, First Fund Distributors, Inc. (registered broker-dealer);
Director, The Germany Fund, Inc., The New Germany Fund Inc., The Central
European Equity Fund, Inc., and Vice President, Professionally Managed
Portfolios and Advisors Series Trust (registered investment companies).
Formerly, President, Guinness Flight Investment Funds, Inc. (registered
investment companies); and President, The Wadsworth Group (registered
investment advisor).
CARL W. VOGT, Esq., President (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), American Science & Engineering
(x-ray detection equipment), and ISI Family of Funds (registered
investment companies). Formerly, Chairman and Member, National
Transportation Safety Board; Director, National Railroad Passenger
Corporation (Amtrak); Member, Aviation System Capacity Advisory Committee
(Federal Aviation Administration); Interim President of Williams College
and Director, Flag Investors Family of Funds (registered investment
companies).
CHARLES A. RIZZO, Treasurer (8/5/57)
Director, Deutsche Asset Management; Formerly Vice President, BT Alex.
Brown Incorporated (now DB Alex. Brown LLC), 1998-1999. and Senior
Manager, Coopers & Lybrand L.L.P. (now PricewaterhouseCoopers LLP),
1993-1998.
20
<PAGE>
AMY M. OLMERT, Secretary (5/14/63)
Director, Deutsche Asset Management; Formerly Vice President, BT Alex.
Brown Incorporated (now DB Alex. Brown LLC), 1997-1999. and Senior
Manager, Coopers & Lybrand, L.L.P. (now PricewaterhouseCoopers LLP),
1988-1997.
DANIEL O. HIRSCH, Assistant Secretary (3/27/54)
Director, Deutsche Asset Management; Formerly Principal, BT Alex. Brown
Incorporated, (now DB Alex. Brown LLC), 1998-1999. and Assistant General
Counsel, United States Securities and Exchange Commission, 1993-1998.
* Messrs. Semans and Hale are directors who are "interested persons," as
defined in the 1940 Act.
Directors and officers of the Fund are also directors and officers of
some or all of the other investment companies managed, administered or advised
by Investment Company Capital Corp. ("ICCC") or its affiliates. There are
currently 23 funds in the Flag Investors Funds and Deutsche Banc Alex. Brown
Cash Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr. Semans serves as
Chairman of five funds and as a Director of 18 other funds in the Fund Complex.
Mr. Hale serves as Chairman of three funds and as Director of 20 funds in the
Fund Complex. Ms. Rimel and Messrs. Burt, Hardiman, Levy, McDonald and Wadsworth
serve as Directors of each of the funds in the Fund Complex. Mr. Vogt serves as
President of 22 funds in the Fund Complex. Mr. Rizzo serves as Treasurer, Ms.
Olmert serves as Secretary, and Mr. Hirsch serves as Assistant Secretary, for
each of the funds in the Fund Complex.
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 Deutsche Asset Management
Americas or ICCC may be considered to have received remuneration indirectly.
Each director who is not an "interested person" of the Fund (as defined in the
1940 Act) (an "Independent Director") and Mr. Vogt, the Fund's President,
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 funds
for which he or she serves. In addition, the Chairmen of the Fund Complex's
Audit and Executive Committees receive an 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, 2000, Independent Directors' fees (including fees paid to the Fund's
President) attributable to the assets of the Fund totaled $204,629.
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, 2000. Prior to September 27, 1999, the Fund Complex consisted of 12
funds and included four funds in the ISI Fund Family.
21
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
----------------------------------------------------------------------------------------------------------------------------
Total Compensation from the Fund
Aggregate Compensation from and the Fund Complex
the Fund Payable to Pension or Retirement Payable to Directors for the
Name of Person, Directors for the Fiscal Benefits Accrued as Part Fiscal Year Ended
Position Year Ended March 31, 2000 of Fund Expenses March 31, 2000
-------------------------------- ----------------------------- --------------------------- ---------------------------------
<S> <C> <C> <C>
Richard T. Hale(1) $0 $0 $0
Chairman
Truman T. Semans(1) $0 $0 $0
Director
James J. Cunnane(5) $11,524(2) (3) $19,500 for service
Director on 12 Boards
Joseph R. Hardiman $23,955 (3) $39,000 for service on 12 Boards
Director
Louis E. Levy $30,097(2) (3) $49,000 for service
Director on 12 Boards
Eugene J. McDonald $30,097(2) (3) $49,000 for service
Director on 12 Boards
Rebecca W. Rimel $23,984(2) (3) $39,000 for service
Director on 12 Boards(4)
Carl W. Vogt, Esq.(6) $23,955(2) (3) $39,000 for service
Director on 12 Boards
Richard R. Burt(7) $12,431(2) (3) $19,500 for service on 8 Boards
Director
Robert H. Wadsworth(7) $12,431(2) (3) $19,500 for service on 8 Boards
Director
</TABLE>
-------------------------
(1) A director who is, or may be, an "interested person" as defined in the 1940
Act.
(2) Of amounts payable to Ms. Rimel and Messrs. Cunnane, Levy, McDonald, Vogt,
Wadsworth and Burt $23,984, $11,524, $4,500, $30,097, $23,955, $12,431 and
$12,431 was deferred pursuant to a Deferred Compensation Plan.
(3) The Fund Complex has adopted two retirement plans, one for eligible
directors and another for the Fund's President, as described below. The
actuarially computed pension expense for the year ended March 31, 2000 was
approximately ($101,872).
(4) Ms. Rimel received (prior to her appointment or election as Director to all
of the funds in the Fund Complex) proportionately higher compensation from
each fund for which she served as Director.
(5) Retired effective October 7, 1999.
(6) Retired as Fund Director effective October 7, 1999. Currently the Fund's
President.
(7) Elected to the Fund's board effective October 7, 1999.
22
<PAGE>
The Fund Complex has adopted a Retirement Plan for Directors who are
not employees of the Fund, the Fund's Administrator or its respective affiliates
(the "Directors' Retirement Plan") and a Retirement Plan for a former Director
serving as the Fund's President (collectively, the "Retirement Plans"). After
completion of six years of service, each participant in the Retirement Plans
will be entitled to receive an annual retirement benefit equal to a percentage
of the fee earned by the participant 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 the participant 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 Plans are unfunded and unvested. The Fund
currently has two participants in the Directors' Retirement Plan, a Director who
retired effective December 31, 1994 and another Director who retired effective
December 31, 1996, each of whom qualified for the Retirement Plan by serving
thirteen years and fourteen years, respectively, as Directors in the Fund
Complex and who will be paid a quarterly fee of $4,875 by the Fund Complex for
the rest of his life. Such fees are allocated to each fund in the Fund Complex
based upon the relative net assets of such fund to the Fund Complex. Mr.
McDonald has qualified for, but has not received, benefits.
Set forth in the table below are the estimated annual benefits payable
to a participant upon retirement assuming various years of service. The
approximate credited years of service at December 31, 1999 are as follows: for
Mr. Levy, 5 years; for Mr. McDonald, 7 years; for Mr. Vogt and Ms. Rimel, 4
years; for Mr. Hardiman, 1 year; and for Messrs. Burt and Wadsworth, 0 years.
<TABLE>
<CAPTION>
Years of Service
Upon Retirement Estimated Annual Benefits Payable By Fund Complex
--------------- -------------------------------------------------
Chairmen of Audit and
Executive Committees Other Participants
-------------------- ------------------
<S> <C> <C>
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
</TABLE>
23
<PAGE>
Any Director and the President of the Fund who receive fees from the
Fund is permitted to defer 50% to 100% of his or her annual compensation
pursuant to a Deferred Compensation Plan. Messrs. Levy, McDonald, Vogt, Burt,
Wadsworth, and Ms. Rimel have each executed a Deferred Compensation Agreement.
Currently, the deferring Directors and the Fund's President may select from
among various Flag Investors funds and the Deutsche Banc Alex. Brown Cash
Reserve Fund, Inc. in which all or part of their deferral account shall be
deemed to be invested. Distributions from the deferring Directors' and the
President's deferral accounts will be paid in cash, in generally equal quarterly
installments over a period of ten years.
Code of Ethics
The Board of Directors of the Fund and the Fund's advisor and
Investment Company Capital Corporation ("ICCC" or the "Advisor"), have adopted
Codes of Ethics pursuant to Rule 17j-1 under the Investment Company Act. The
Codes of Ethics permit access persons to invest in securities that may be
purchased or held by the Fund for their own accounts, but require compliance
with the Codes' preclearance requirements. In addition, the Codes provide for
trading "blackout periods" that prohibit trading by access persons within
periods of trading by the Fund in the same security, subject to certain
exceptions. The Codes also prohibit short term trading profits and personal
investment in initial public offerings. The Codes require prior approval with
respect to purchases of securities in private placements.
These codes of ethics are on public file with, and are
available from, the SEC.
The Company's principal underwriter, ICC Distributors, Inc. is not
required to adopt a Code of Ethics as it meets the exception provided by Rule
17j-1(c)(3) under the 1940 Act.
THE INVESTMENT ADVISOR
The Advisor is an indirect subsidiary of Deutsche Bank AG. Deutsche
Bank is a major global banking institution that is engaged in a wide range of
financial services, including investment management, mutual funds, retail and
commercial banking, investment banking and insurance. Deutsche Asset Management
Americas is an operating unit of Deutsche Bank consisting of ICCC and other
asset management affiliates of Deutsche Bank. ICCC 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, ICCC (a)
supervises and manages the Fund's operations; (b) formulates and implements
continuing programs for the purchases and sales of securities, consistent with
the investment objective and policies of each Series; (c) provides the Fund with
such executive, administrative and clerical services as are deemed advisable by
the Fund's Board of Directors; (d) provides the Fund with, or obtains for it,
adequate office space and all necessary office equipment and services; (e)
obtains and evaluates pertinent information about significant developments and
economic, statistical and financial data, domestic, foreign and otherwise,
whether affecting the economy generally or any Series of the Fund, and whether
concerning the individual issuers whose securities are included in the Fund's
Series or the activities in which they engage, or with respect to securities
which ICCC 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. ICCC may delegate its duties under the Advisory Agreements, and
has delegated certain of such duties to its affiliates.
24
<PAGE>
As compensation for its services for the Fund, ICCC 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: 0.30% of the first $500
million, 0.26% of the next $500 million, 0.25% of the next $500 million, 0.24%
of the next $1 billion, 0.23% of the next $1 billion and 0.22% 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 and the Tax-Free Series,
calculated daily and paid monthly, at the annual rate of 0.02% of the Prime
Series' average daily net assets and 0.03% of the Tax-Free Series' average daily
net assets. ICCC 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.
Advisory fees paid by the Fund to ICCC for the last three fiscal years
were as follows:
--------------------------------------------------------------------------------
For the Fiscal Year Ended March 31
--------------------------------------------------------------------------------
2000 1999 1998
---------------------------------------- ------------------- -------------------
$17,139,470 $14,541,722 $12,511,915
---------------------------------------- ------------------- -------------------
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 Independent Directors by votes cast in person
at a meeting called for such purpose. The Fund or ICCC may terminate any
Advisory Agreement on 60 days' written notice without penalty. The Advisory
Agreements terminate automatically in the event of an "assignment," as defined
in the 1940 Act.
ICCC also serves as the Fund's transfer and dividend disbursing agent
and provides accounting services to each Series. An affiliate of ICCC serves as
custodian to the Fund. (See "Transfer Agent, Custodian and Accounting
Services.")
25
<PAGE>
DISTRIBUTOR
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 (the "Distribution Agreement"). ICC Distributors serves
as the distributor for other funds in the Flag Investors family of funds.
The Distribution Agreement provides that ICC Distributors shall; (i)
use reasonable efforts to sell Shares upon the terms and conditions contained in
the Distribution Agreement and the Fund's then current Prospectus; (ii) use its
best efforts to conform with the requirements of all federal and state laws
relating to the sale of the Shares; (iii) adopt and follow procedures as may be
necessary to comply with the requirements of the National Association of
Securities Dealers, Inc. and any other applicable self-regulatory organization;
(iv) perform its duties under the supervision of and in accordance with the
directives of the Fund's Board of Directors and the Fund's Articles of
Incorporation and By-Laws; and (v) provide the Fund's Board of Directors with a
written report of the amounts expended in connection with the Distribution
Agreement. ICC Distributors shall devote reasonable time and effort to effect
sales of Shares but shall not be obligated to sell any specific number of
Shares. The services of ICC Distributors are not exclusive and ICC Distributors
shall not be liable to the Fund or its shareholders for any error of judgment or
mistake of law, for any losses arising out of any investment, or for any action
or inaction of ICC Distributors in the absence of bad faith, willful misfeasance
or gross negligence in the performance of its duties or obligations under the
Distribution Agreement or by reason of its reckless disregard of its duties and
obligations under the Distribution Agreement. The Distribution Agreement further
provides that the Fund and ICC Distributors will mutually indemnify each other
for losses relating to disclosures in the Fund's registration statement.
The Distribution Agreement may be terminated at any time upon 60 days'
written notice by the Fund, without penalty, by the vote of a majority of the
Fund's Independent Directors or by a vote of a majority of the Fund's
outstanding Shares of the related class (as defined under "Capital Stock") or
upon 60 days' written notice by the Distributor and shall automatically
terminate in the event of an assignment. The Distribution Agreement has an
initial term of one year from the date of effectiveness. It shall continue in
effect thereafter with respect to each class of the Fund provided that it is
approved at least annually by (i) a vote of a majority of the outstanding voting
securities of the related class of the Fund or (ii) a vote of a majority of the
Fund's Board of Directors including a majority of the Independent Directors and,
with respect to each class of the Fund for which there is a plan of
distribution, so long as such plan of distribution is approved at least annually
by the Independent Directors in person at a meeting called for the purpose of
voting on such approval
As compensation for its services, ICC Distributors receives a
distribution fee from the Fund, calculated daily and paid monthly, at the annual
rate of 0.25% of the aggregate average daily net assets of the Deutsche Banc
Alex Brown Cash Reserve Prime, Treasury and Tax-Free Shares and the Flag
Investors Class A Prime Shares. ICC Distributors receives no compensation with
respect to its services as distributor for the Deutsche Banc Alex. Brown Cash
Reserve Prime, Treasury and Tax-Free 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 0.60% of the
average daily net assets of the Quality Cash Reserve Prime Shares and 0.75% of
the average daily net assets of the Flag Investors Cash Reserve Prime Class B
and Class C Shares. In addition, ICC Distributors receives a shareholder
servicing fee, paid monthly, at an annual rate equal to 0.25% of the Flag
Investors Cash Reserve Prime Class B and Class C Shares' average daily net
assets and 0.05% of the Deutsche Banc Alex. Brown Cash Reserve Shares' (Prime
Series, Treasury Series, Tax-Free Series) average daily net assets.
26
<PAGE>
As compensation for providing distribution and shareholder services to
the Fund for the last three fiscal years, the Fund's distributor received fees
in the following amounts:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
For the Fiscal Year Ended March 31
--------------------------------------------------------------------------------------------------------------------
Fee 2000 1999 1998
------------------------------------ --------------------------- -------------------------- ------------------------
<S> <C> <C> <C>
Prime Series 12b-1 Fees $10,902,457 $9,527,563(2) $8,299,915(4)
------------------------------------ --------------------------- -------------------------- ------------------------
Treasury Series 12b-1 Fee $ 1,798,100 $1,964,145(2) $1,700,377(5)
------------------------------------ --------------------------- -------------------------- ------------------------
Tax-Free Series 12b-1 Fee $ 2,877,907 $2,232,564(2) $1,784,579(6)
------------------------------------ --------------------------- -------------------------- ------------------------
Flag Investors Cash Reserve Class
B Shareholder Servicing Fee $ 35,959 $ 4,613(2) $ 750(7)
------------------------------------ --------------------------- -------------------------- ------------------------
Flag Investors Cash Reserve Class
C Shareholder Servicing Fee(1) N/A N/A N/A
------------------------------------ --------------------------- -------------------------- ------------------------
Prime Shares Shareholder Service
Fee $2,106,168 $ 442,438(2,3) N/A
------------------------------------ --------------------------- -------------------------- ------------------------
Treasury Shares Shareholder
Service Fee $ 359,515 $ 99,136(2,3) N/A
------------------------------------ --------------------------- -------------------------- ------------------------
Tax-Free Shares Shareholder
Service Fee $ 575,581 $ 127,363(2,3) N/A
------------------------------------ --------------------------- -------------------------- ------------------------
</TABLE>
27
<PAGE>
(1) Flag Investors Cash Reserve Class C Shares began operations on January 3,
2000.
(2) Received by ICC Distributors.
(3) For the period from January 12, 1999 through March 31, 1999.
(4) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $3,204,626 (net of waivers of $54,321 for the Quality Cash
Reserve Prime Shares Class) and ICC Distributors, the Fund's distributor
effective August 31, 1997, received $5,095,289 (net of waivers of $81,870
for the Quality Cash Reserve Prime Shares Class).
(5) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $655,375 and ICC Distributors, the Fund's distributor
effective August 31, 1997, received $1,045,002.
(6) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $315 and ICC Distributors, the Fund's distributor effective
August 31, 1997, received $435.
(7) Received by Alex. Brown.
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. In addition, the Fund may enter into
Shareholder Servicing Agreements pursuant to which the Advisor or its affiliates
will provide compensation out of its own resources for ongoing shareholder
services. 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").
ICC Distributors may make payments to Shareholder Servicing Agents out
of its distribution fee, 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. 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.
28
<PAGE>
Pursuant to Rule 12b-1 under the 1940 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 seven 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 Flag Investors Cash Reserve Prime
Class C Shares; one for the Deutsche Banc Alex. Brown Cash Reserve Prime Shares;
one for the Deutsche Banc Alex. Brown Cash Reserve Treasury Shares; one for the
Deutsche Banc Alex. Brown Cash Reserve Tax-Free Shares; and one for the Quality
Cash Reserve Prime Shares (the "Plans"). Amounts allocated to Participating
Dealers or 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.
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 Independent
Directors 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.
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 Distributors to Shareholder
Servicing Agents without shareholder approval, and all material amendments to
the provisions 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
Plans, 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 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 securities dealers and financial
institutions who have executed Shareholder Servicing Agreements.
29
<PAGE>
In addition, the Deutsche Banc Alex. Brown Cash Reserve Shares of the
Prime, Treasury and Tax-Free Series have each adopted a Shareholder Service
Plan. This plan compensates Shareholder Servicing Agents for services for which
they are not otherwise being compensated under a dealer or shareholder servicing
agreement entered into pursuant to the Plan for the shares. These plans will
continue in effect from year to year only so long as such continuance is
specifically approved at least annually by the vote of the Fund's Board of
Directors.
Expenses
ICCC and the Distributor furnish, without cost to the Fund, such
personnel as are required, for the proper conduct of the Fund's affairs and to
carry out their obligations under the Distribution Agreement and the Advisory
Agreements. The Advisor maintains, at its own expense and without cost to the
Fund, trading functions in order to carry out its obligation 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.
The Fund pays or causes to be paid all other expenses of the Fund,
including, without limitation: the fees of ICC Distributors and ICCC; 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, or ICCC.
30
<PAGE>
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.
PORTFOLIO TRANSACTIONS
The Advisor is 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, 2000,
March 31, 1999 and March 31, 1998, the Fund incurred no brokerage commissions.
The Fund does not seek to profit from short-term trading, and will
generally (but not always) hold portfolio securities to maturity. The Fund's
fundamental policies require that investments mature within one year or less,
and the amortized cost method of valuing portfolio securities requires that the
Fund maintain an average weighted portfolio maturity of 90 days or less. Both
policies may result in relatively high portfolio turnover, but since brokerage
commissions are not normally paid on money market instruments, the high rate of
portfolio turnover is not expected to have a material effect on the Fund's net
income or expenses.
The Advisor's primary consideration in effecting a security transaction
is to obtain the best net price and the most favorable execution of the order.
To the extent that the executions and prices offered by more than one dealer are
comparable, the Advisor may, at its discretion, effect transactions with dealers
that furnish statistical, research or other information or services which are
deemed by the Advisor to be beneficial to the Fund's investment program. Certain
research services furnished by dealers may be useful to the Advisor with clients
other than the Fund. Similarly, any research services received by the Advisor
through placement of portfolio transactions of other clients may be of value to
the Advisor in fulfilling its obligations to the Fund. The Advisor is of the
opinion that the material received is beneficial in supplementing its research
and analysis, and, therefore, may benefit the Fund by improving the quality of
its investment advice. The advisory fee paid by the Fund is not reduced because
the Advisor receives such services. During the fiscal years ended March 31,
2000, March 31, 1999, and March 31, 1998, the Advisor directed no transactions
to dealers and paid no related commissions because of research services provided
to the Fund.
31
<PAGE>
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, 2000, the Fund did
not hold any securities of its regular broker-dealers.
The Advisor and its 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 Advisor. The Advisor 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 Advisor, as defined in the 1940 Act. In making
decisions with respect to purchase of portfolio securities for the Fund, the
Advisor 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 Advisor. The Fund has obtained an order of exemption from the SEC which
permits the Fund to engage in such transactions with a 5% holder, if the 5%
holder is one of the 50 largest U.S. banks measured by deposits. Purchases from
these 5% holders are subject to quarterly review by the Fund's Board of
Directors, including the Independent Directors. Additionally, such purchases and
sales are subject to the following conditions:
32
<PAGE>
(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.
SEMI-ANNUAL AND ANNUAL REPORTS
The Fund furnishes shareholders with semi-annual and 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
PricewaterhouseCoopers LLP, 250 West Pratt Street, Baltimore, Maryland,
21201, are the independent accountants to the Fund.
33
<PAGE>
LEGAL MATTERS
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
TRANSFER AGENT, CUSTODIAN AND ACCOUNTING SERVICES
Bankers Trust Company ("Bankers Trust") serves as custodian of the
Fund's investments. Bankers Trust receives such compensation from the Fund for
its services as custodian as may be agreed to from time to time by Bankers Trust
and the Fund. For the fiscal year ended March 31, 2000, Bankers Trust was paid
$627,400 as compensation for providing custody services to the Fund. ICCC, the
Fund's investment advisor, provides accounting services for each Series. In
addition, ICCC serves as the Fund's transfer and dividend disbursing agent. ICCC
receives 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 ICCC and the Fund.
As compensation for providing accounting services to each Series of the
Fund, ICCC receives an annual fee, calculated daily and paid monthly as shown
below.
<TABLE>
<CAPTION>
Average Daily Net Assets Incremental Annual Accounting Fee Per Series
------------------------ --------------------------------------------
<S> <C> <C> <C>
$ 0 - $ 10,000,000 $13,000(fixed fee)
$ 10,000,000 - $ 20,000,000 0.100%
$ 20,000,000 - $ 30,000,000 0.080%
$ 30,000,000 - $ 40,000,000 0.060%
$ 40,000,000 - $ 50,000,000 0.050%
$ 50,000,000 - $ 60,000,000 0.040%
$ 60,000,000 - $ 70,000,000 0.030%
$ 70,000,000 - $ 100,000,000 0.020%
$100,000,000 - $ 500,000,000 0.015%
$500,000,000 - $1,000,000,000 0.005%
over $1,000,000,000 0.001%
</TABLE>
In addition, each Series, as appropriate, will reimburse ICCC for the
following out-of-pocket expenses incurred in connection with ICCC's performance
of accounting services for such Series: express delivery, independent pricing
and storage.
For the fiscal year ended March 31, 2000, ICCC received fees of
$176,115 for providing accounting services to the Prime Series, $131,657 for
providing accounting services to the Treasury Series and $142,872 for providing
accounting services to the Tax-Free Series.
As compensation for providing transfer agency services, the Fund pays
ICCC up to $30.60 per account per year plus reimbursement for out-of-pocket
expenses incurred in connection therewith. For the fiscal year ended March 31,
2000, such fees totaled $2,607,854 for the Prime Series, $468,302 for the
Treasury Series and $236,460 for the Tax-Free Series, respectively.
34
<PAGE>
PRINCIPAL HOLDERS OF SECURITIES
To Fund management's knowledge, the following persons owned
beneficially or of record 5% or more of the outstanding shares of a class of the
Fund, as of July 5, 2000.*
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Owned of Beneficially
Name and Address Record Owned Percentage of Ownership
---------------- ------ ----- -----------------------
------------------------------------------------------ --------------- -------------- -----------------------------------
<S> <C>
Alex. Brown & Sons, Inc. o 15.54% of Prime Institutional
A/C 00022271027 Shares
PO Box 1346
Baltimore, MD 21203-1346
------------------------------------------------------ --------------- -------------- -----------------------------------
Alex. Brown & Sons, Inc. o 27.44% of Prime Institutional
A/C 00022271032 Shares
PO Box 1346
Baltimore, MD 21203-1346
------------------------------------------------------ --------------- -------------- -----------------------------------
Alex. Brown & Sons, Inc. o 16.88% of Prime Institutional
A/C 0025010788 Shares
PO Box 1346
Baltimore, MD 21203-1346
------------------------------------------------------ --------------- -------------- -----------------------------------
Alex. Brown & Sons, Inc. o 6.63% of Treasury Institutional
A/C 0020170231 Shares
PO Box 1346
Baltimore, MD 21203-1346
------------------------------------------------------ --------------- -------------- -----------------------------------
Alex. Brown & Sons, Inc. o 5.89% of Treasury Institutional
A/C 0020170011 Shares
PO Box 1346
Baltimore, MD 21203-1346
------------------------------------------------------ --------------- -------------- -----------------------------------
Alex. Brown & Sons, Inc. o 13.97% of Treasury Institutional
A/C 0020170186 Shares
PO Box 1346
Baltimore, MD 21203-1346
------------------------------------------------------ --------------- -------------- -----------------------------------
Alex. Brown & Sons, Inc. o 21.51% of Treasury Institutional
A/C 0025010788 Shares
PO Box 1346
Baltimore, MD 21203-1346
------------------------------------------------------ --------------- -------------- -----------------------------------
Alex. Brown & Sons, Inc. o 6.49% of Tax-Free Institutional
A/C 0022210774 Shares
PO Box 1346
Baltimore, MD 21203-1346
------------------------------------------------------ --------------- -------------- -----------------------------------
Alex. Brown & Sons, Inc. o 35.73% of Tax-Free Institutional
A/C 0024771041PO Box 1346 Shares
Baltimore, MD 21203-1346
------------------------------------------------------ --------------- -------------- -----------------------------------
Alex. Brown & Sons, Inc. o 27.56% of Tax-Free Institutional
A/C 25010788 Shares
PO Box 1346
Baltimore, MD 21203-1346
------------------------------------------------------ --------------- -------------- -----------------------------------
Alex. Brown & Sons, Inc. o 11.02% of Prime Cash Reserve
A/C 00024737656 Shares
PO Box 1346
Baltimore, MD 21203-1346
------------------------------------------------------ --------------- -------------- -----------------------------------
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------ --------------- -------------- -----------------------------------
<S> <C>
Alex. Brown & Sons, Inc. o 6.84% of Prime Quality Cash
A/C 0081930226 Reserve Shares
PO Box 1346
Baltimore, MD 21203-1346
------------------------------------------------------ --------------- -------------- -----------------------------------
CIBC World Markets Corp o 5.19% of Flag Investors Prime
FBO 033-30213-19 Class A Shares
Church Street Station
PO Box 3484
New York, NY 10008-3484
------------------------------------------------------ --------------- -------------- -----------------------------------
CIBC World Markets Corp o 6.64% of Flag Investors Prime
FBO 033-34657-14 Class A Shares
Church Street Station
PO Box 3484
New York, NY 10008-3484
------------------------------------------------------ --------------- -------------- -----------------------------------
Wexford Clearing Services Corp o o 11.50% of Flag Investors Prime
FBO ELIREB, Inc. Account #1307048-3 Class A Shares
Attn: John Kingsburty
440 S Lasalle Street STE 700
Chicago IL 60605-5009
------------------------------------------------------ --------------- -------------- -----------------------------------
Frank Powell Sr TR 5.06 of Flag Investors Prime
U/A 01/01/87 Class B Shares
FTP Inc Retirement Accont
FBP Frank Powell Sr.
PO Box 469
Oil Ridge NJ 08857-0469
------------------------------------------------------ --------------- -------------- -----------------------------------
DB Alex. Brown LLC o 8.50% of Flag Investors Prime
FBO 246-11934-15 Class C Shares
PO Box 1346
Baltimore, MD 21203-1346
------------------------------------------------------ --------------- -------------- -----------------------------------
George N. Vekios o o 19.06% of Flag Investors Prime
Account # 1301052-4 Class C Shares
2312 Hershey Avenue
E Petersburg PA 17520-1535
------------------------------------------------------ --------------- -------------- -----------------------------------
INV Fiduciary Trust Co Custody o o 9.14% of Flag Investors Prime
IRA A/C Robert H. Peters Class C Shares
Account # 1301214-0
9634 E Topaz Drive
Scottsdale AZ 85258-4740
------------------------------------------------------ --------------- -------------- -----------------------------------
Salomon Smith Barney Inc. o 9.84% of Flag Investors Prime
00117009399 Class C Shares
333 West 34th ST - 3rd Floor
New York, New York 10001
------------------------------------------------------ --------------- -------------- -----------------------------------
Salomon Smith Barney Inc. o 8.68% of Flag Investors Prime
00185464492 Class C Shares
333 West 34th ST - 3rd Floor
New York, New York 10001
------------------------------------------------------ --------------- -------------- -----------------------------------
Mesirow Financial Inc. o o 6.74% of Flag Investors Prime
A/C 8847-8240 Class C Shares
Edwin I Josephson IRA
350 N. Clark Street
Chicago, IL 60610-4712
------------------------------------------------------ --------------- -------------- -----------------------------------
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------ --------------- -------------- -----------------------------------
<S> <C>
First Clearing Corporation o o 12.24% of Flag Investors Prime
A/C 1503-1666 Class C Shares
Terrie Bergman
208 Desert View Street
Las Vegas NV 89107-2355
------------------------------------------------------ --------------- -------------- -----------------------------------
Salomon Smith Barney Inc. o 21.35% of Flag Investors Prime
00163083119 Class C Shares
333 West 34th ST - 3rd Floor
New York, New York 10001
------------------------------------------------------ --------------- -------------- -----------------------------------
</TABLE>
As of July 5, 2000 the directors and officers of the Fund owned an
aggregate of less than 1% of the Fund's shares or any class thereof.
* To Fund management's knowledge, DB Alex. Brown, LLC owned less than 1% of any
Series of the Fund, as of July 5, 2000
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, 2000.
<TABLE>
<CAPTION>
Taxable-Equivalent
Series or class Current Yield Effective Yield Yield***
--------------- ------------- --------------- ------------------
<S> <C> <C>
Cash Reserve Prime Series 5.27% 5.51% N/A
Institutional Prime Shares 5.69% 5.85% N/A
Quality Cash Reserve Prime Shares 5.01% 5.13% N/A
Flag Investors Cash Reserve Prime A Shares 5.32% 5.46% N/A
Flag Investors Cash Reserve Prime B Shares 4.50% 4.60% N/A
Flag Investors Cash Reserve Prime C Shares 5.69% 5.86% N/A
Cash Reserve Treasury Shares 5.43% 5.58% N/A
Institutional Treasury Shares 5.78% 5.95% N/A
Cash Reserve Tax-Free Shares 3.12% 3.17% 5.25%
Institutional Tax-Free Shares 3.44% 3.50% 5.79%
</TABLE>
-----------------------
** Assumes a tax rate of 39.6%.
The yield for each Series of the Fund can be obtained by calling your
Participating Dealer or Shareholder Servicing Agent. Quotations of yield on each
Series of the Fund may also appear from time to time in the financial press and
in advertisements.
37
<PAGE>
The current yields quoted will be the net average annualized yield for
an identified period, usually seven consecutive calendar days. Yield for each
Series or class will be computed by assuming that an account was established
with a single share of a Series (the "Single Share Account") on the first day of
the period. To arrive at the quoted yield, the net change in the value of that
Single Share Account for the period (which would include dividends accrued with
respect to the share, and dividends declared on shares purchased with dividends
accrued and paid, if any, but would not include realized gains and losses or
unrealized appreciation or depreciation) will be multiplied by 365 and then
divided by the number of days in the period, with the resulting figure carried
to the nearest hundredth of one percent. The Fund may also furnish a quotation
of effective yield for each Series or class that assumes the reinvestment of
dividends for a 365 day year and a return for the entire year equal to the
average annualized yield for the period, which will be computed by compounding
the unannualized current yield for the period by adding 1 to the unannualized
current yield, raising the sum to a power equal to 365 divided by the number of
days in the period, and then subtracting 1 from the result.
In addition, the Fund may furnish a quotation of the Tax-Free Series'
taxable-equivalent yield, which will be computed by dividing the tax-exempt
portion of such Series' effective yield for a stated consecutive seven day
period by one minus the investor's income tax rate and adding the product to the
portion of the yield for the same consecutive seven day period that is not
tax-exempt. The resulting yield is what the investor would need to earn from a
taxable investment in order to realize an after-tax benefit equal to the
tax-free yield provided by the Tax-Free Series.
Historical yields are 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 any 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.
FINANCIAL STATEMENTS
The financial statements for the Fund for the fiscal year ended March
31, 2000 are incorporated herein by reference to the Fund's Annual Report dated
March 31, 2000.
38
<PAGE>
APPENDIX A
Description of Securities Ratings
Corporate Bond Ratings
Description of S&P's Corporate Bond Ratings:
o AAA - Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely
strong.
o AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
o Plus (+) or Minus (-) - S&P's letter ratings may be modified by the
addition of a plus or a minus sign, which is used to show relative standing
within the major categories, except in the AAA rating category.
Description of Moody's Corporate Bond Ratings:
o Aaa - Bonds rated Aaa are judged to be the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
o Aa - Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present making the long-term risks appear somewhat larger than in
Aaa securities.
o Numerical Modifiers (1, 2, 3) - Moody's applies the numerical modifiers 1,
2 and 3 to each generic rating classification from Aa through Caa. The
modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
Description of Fitch's Corporate Bond Ratings:
o AAA - Bonds rated AAA have the lowest expectation of credit risk. They are
assigned only in case of exceptionally strong capacity for timely payment
of financial commitments. This capacity is unlikely to be adversely
affected by foreseeable events.
o AA - Bonds rated AA have a very low expectation of credit risk. They
indicate very strong capacity for timely payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.
1
<PAGE>
Municipal Bond Ratings
Description of S&P's Municipal Bond Ratings:
o AAA - An obligation rated 'AAA' has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
o AA - An obligation rated 'AA' differs from the highest-rated obligations
only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
o Plus (+) or Minus (-) - S&P's letter ratings may be modified by the
addition of a plus or a minus sign, which is used to show relative standing
within the major rating categories, except in the AAA rating category.
Description of Moody's Municipal Bond Ratings:
o Aaa--Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
o Aa--Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
o Numerical Modifiers (1, 2, 3) - Moody's may apply the numerical modifier in
each generic rating classification from Aa through Caa. The modifier 1
indicates that the security ranks in the higher end of its generic rating
classification; the modifier 2 indicates a mid range ranking; and the
modifier 3 indicates that the security ranks in the lower end of its
generic rating classification.
2
<PAGE>
Municipal Note Ratings
Description of S&P's Municipal Note Ratings:
Municipal notes with maturities of three years or less are usually given note
ratings to distinguish more clearly the credit quality of notes as compared to
bonds.
o SP-1 - Strong capacity to pay principal and interest. An issue determined
to possess a very strong capacity to pay debt service is given a plus (+)
designation.
o SP-2 - Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of
the notes.
Description of Moody's Municipal Note Ratings:
o MIG-1/VMIG-1 - The best quality, enjoying strong protection from
established cash flows of funds for their servicing or from established and
broad-based access to the market for refinancing, or both.
o MIG-2/VMIG-2 - High quality, with ample margins of protection, although not
as large as the preceding group.
Short-Term Ratings
Description of S&P Short-Term Ratings:
o A-1 - The highest ratings category by Standard & Poor's. The obligors
capacity to meet its financial commitment on the obligation is strong.
Within this category, certain obligations are designated with a plus sign
(+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
o A-2 - Somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions thatn obligations in higher rating
categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
Description of Moody's Short-Term Ratings:
o Prime-1 - Have a superior ability for repayment of senior short-term debt
obligations.
o Prime-2 - Have a strong ability for repayment of senior short-term debt
obligations.
Description of Fitch's Short-Term Ratings:
o F1+ - Issues assigned this rating are regarded as having the strongest
capacity for timely payment of financial commitments. The Plus (+) denotes
exceptionally strong credit quality.
o F1 - Issues assigned this rating are regarded as having the strongest
capacity for timely payment of financial commitments.
3
<PAGE>
Description of Thomson Bank Watch Short-Term Ratings:
T-1--The highest category; indicates a very high likelihood that principal and
interest will be paid on a timely basis.
T-2--The second-highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1".
T-3--The lowest investment-grade category; indicates that while the obligation
is more susceptible to adverse developments (both internal and external) than
those with higher ratings, the capacity to service principal and interest in a
timely fashion is considered adequate.
T-4--The lowest rating category; this rating is regarded as non-investment grade
and therefore speculative.
Description of Thomson Bank Watch Long-Term Ratings:
AAA--The highest category; indicates that the ability to repay principal and
interest on a timely basis is extremely high.
AA--The second-highest category; indicates a very strong ability to repay
principal and interest on a timely basis, with limited incremental risk compared
to issues rated in the highest category.
A--The third-highest category; indicates the ability to repay principal and
interest is strong. Issues rated "a" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
BBB--The lowest investment-grade category; indicates an acceptable capacity to
repay principal and interest. Issues rated "BBB" are, however, more vulnerable
to adverse developments (both internal and external) than obligations with
higher ratings.
Non-Investment Grade
(Issues regarded as having speculative characteristics in the likelihood of
timely repayment of principal and interest.)
BB--While not investment grade, the "BB" rating suggests that the likelihood of
default is considerably less than for lower-rated issues. However, there are
significant uncertainties that could affect the ability to adequately service
debt obligations.
B--Issues rated "B" show a higher degree of uncertainty and therefore greater
likelihood of default than higher-rated issues. Adverse development could well
negatively affect the payment of interest and principal on a timely basis.
CCC--Issues rated "CCC" clearly have a high likelihood of default, with little
capacity to address further adverse changes in financial circumstances.
CC--"CC" is applied to issues that are subordinate to other obligations rated
"CCC" and are afforded less protection in the event of bankruptcy or
reorganization.
D--Default
These long-term debt ratings can also be applied to local currency debt. In such
cases the ratings defined above will be preceded by the designation "local
currency".
Ratings in the Long-Term Debt categories may include a plus (+) or Minus (-)
designation, which indicates where within the respective category the issue is
placed.
4
