<PAGE>
As Filed With the Securities and Exchange Commission on April 28, 1997
Registration No. 2-87336
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
POST-EFFECTIVE AMENDMENT NO. 20 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 22 [X]
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
--------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
One South Street
Baltimore, MD 21202
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (410) 727-1700
--------------
Edward J. Veilleux
One South Street
Baltimore, MD 21202
---------------------------------------
(Name and Address of Agent for Service)
Copy to:
Richard W. Grant, Esq.
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103
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It is proposed that this filing will become effective (check appropriate box)
____ immediately upon filing pursuant to paragraph (b)
X on May 1, 1997 pursuant to paragraph (b)
----
____ 60 days after filing pursuant to paragraph (a)(1)
____ 75 days after filing pursuant to paragraph (a)(2)
____ on (date) pursuant to paragraph (a) of Rule 485.
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- -----------------------------------------------------------------------------------------------------------------------------------
Title of Securities Amount Being Proposed Maximum Proposed Maximum Amount of
Being Registered Registered Offering Price Per Unit Aggregate Offering Price(1) Registration Fee
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of
Common Stock 2,698,598 shares $15.01 $ 0
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Registrant has calculated the maximum aggregate offering price pursuant to
Rule 24e-2 under the Investment Company Act of 1940 (the "1940 Act") for
its fiscal year ended December 31, 1996. Registrant had actual aggregate
redemptions of 4,977,150 shares for its fiscal year ended December 31,
1996, has used 2,278,552 of available redemptions for reductions pursuant
to Rule 24f-2(c) under the 1940 Act and has previously used no available
redemptions for reductions pursuant to Rule 24e-2(a) of the 1940 Act during
the current year. Registrant elects to use redemptions in the aggregate
amount of 2,698,598 shares for reductions in its current amendment.
- -------------------------------------------------------------------------------
Registrant has elected to maintain registration of an indefinite number of
shares of Common Stock pursuant to Rule 24f-2 under the Investment Company Act
of 1940. Registrant's Rule 24f-2 Notice for its fiscal year ended December 31,
1996 was filed with the Commission on February 19, 1997.
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<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
April 28, 1997
Cross Reference Sheet
<TABLE>
<CAPTION>
Items Required by Form N-1A
Part A Information Required in Prospectus Registration Statement Heading
- ------ ---------------------------------- ------------------------------
<S> <C> <C>
Item 1. Cover Page Cover Page
Item 2. Synopsis Fee Table
Item 3. Condensed Financial Information Financial Highlights
Item 4. General Description of Registrant Investment Program;
Investment Restrictions;
General Information
Item 5. Management of the Fund Management of the Fund;
Investment Advisor and
Sub Advisor; Distributor;
Custodian; Transfer
Agent and Accounting Services
Item 5A. Management's Discussion of Fund Performance *
Item 6. Capital Stock and Other Securities Cover Page;
Dividends and Taxes;
General Information
Item 7. Purchase of Securities Being Offered How to Invest in
the Fund
Item 8. Redemption or Repurchase How to Redeem Shares
Item 9. Pending Legal Proceedings **
</TABLE>
- ------------------
* Information required by Item 5A with respect to the Fund's Class A Shares
is contained in the Fund's latest Annual Report to Shareholders.
** Omitted since the answer is negative or the item is not applicable.
<PAGE>
<TABLE>
<CAPTION>
Part B Information Required in a Statement
- ------ of Additional Information Registration Statement Heading
------------------------------------ ------------------------------
<S> <C> <C>
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History General Information
and History
Item 13. Investment Objectives and Policies Investment Objectives,
Policies and Risk
Considerations
Item 14. Management of the Fund Management of
the Fund
Item 15. Control Persons and Principal Holders Control Persons and
of Securities Principal Holders of
Securities
Item 16. Investment Advisory and Other Investment Advisory and
Services Other Services;
Custodian, Transfer Agent and
Accounting Services
Item 17. Brokerage Allocation Brokerage
Item 18. Capital Stock and Other Securities Capital Shares;
Semi-Annual Reports
Item 19. Purchase, Redemption and Pricing of Valuation of Shares
Securities Being Offered and Redemption
Item 20. Tax Status Federal Tax Treatment of
Dividends and
Distributions
Item 21. Underwriters Distribution of Fund
Shares
Item 22. Calculation of Performance Data Performance Information
Item 23. Financial Statements Financial Statements
Part C Other Information
- ------ -----------------
Part C contains the information required by the items contained therein under the items set
forth in the form.
</TABLE>
<PAGE>
LOGO
FLAG INVESTORS
TELEPHONE INCOME FUND, INC.
(CLASS A AND CLASS B SHARES)
PROSPECTUS & APPLICATION -- MAY 1, 1997
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THIS MUTUAL FUND (THE "FUND") IS DESIGNED TO PROVIDE CURRENT INCOME AND
LONG-TERM GROWTH OF CAPITAL WITHOUT UNDUE RISK PRIMARILY BY INVESTING IN COMMON
STOCK, SECURITIES CONVERTIBLE THERETO AND DEBT OBLIGATIONS OF COMPANIES IN THE
TELEPHONE INDUSTRY AND IN INCOME-PRODUCING SECURITIES (INCLUDING DEBT
OBLIGATIONS) OF ISSUERS IN THE TELEPHONE OR OTHER INDUSTRIES.
Shares of the Fund are available through your securities dealer or the Fund's
transfer agent. This Prospectus relates to Flag Investors Class A Shares ("Class
A Shares") and Flag Investors Class B Shares ("Class B Shares") of the Fund. The
separate classes provide investors with alternatives as to sales load and Fund
expenses. (See "How to Invest in the Fund.")
This Prospectus sets forth basic information that investors should know about
the Fund prior to investing and should be retained for future reference. A
Statement of Additional Information dated May 1, 1997 has been filed with the
Securities and Exchange Commission (the "SEC") and is hereby incorporated by
reference. It is available upon request and without charge by calling the Fund
at (800) 767-FLAG.
TABLE OF CONTENTS
Fee Table ................................. 1
Financial Highlights ...................... 2
Investment Program ........................ 5
Investment Restrictions ................... 6
How to Invest in the Fund ................. 7
How to Redeem Shares ...................... 10
Telephone Transactions .................... 11
Dividends and Taxes ....................... 12
Management of the Fund .................... 12
Investment Advisor and Sub-Advisor ........ 13
Distributor ............................... 14
Custodian, Transfer Agent and Accounting
Services ................................. 14
Performance Information ................... 14
General Information ....................... 15
Application ............................... A-1
THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
Flag Investors Funds
P.O. Box 515
Baltimore, Maryland 21203
- -----------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -----------------------------------------------------------------------------
<PAGE>
FEE TABLE
- -----------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES:
<TABLE>
<CAPTION>
Class A Class B
Shares Shares
Initial Sales Deferred
Charge Sales Charge
Alternative Alternative
----------------- ----------------
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ............................................ 4.50%* None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) ............................................ None None
Maximum Deferred Sales Charge (as a percentage of original purchase price
or redemption proceeds, whichever is lower) .................................... 0.50%* 4.00%**
ANNUAL FUND OPERATING EXPENSES (as a percentage of average daily net assets):
Management Fees ................................................................. 0.66% 0.66%
12b-1 Fees ...................................................................... 0.25% 0.75%
Other Expenses (including a .25% shareholder servicing fee for Class B Shares) .. 0.23% 0.48%***
------- -------
Total Fund Operating Expenses ................................................... 1.14% 1.89%
======= =======
</TABLE>
- ------
* Purchases of $1 million or more of Class A Shares by persons not otherwise
eligible for sales load waivers are not subject to an initial sales charge;
however, a contingent deferred sales charge of .50% may be imposed upon
redemption. (See "How to Invest in the Fund--Class A Shares.")
** A declining contingent deferred sales charge will be imposed on redemptions
of Class B Shares made within six years of purchase. Class B Shares will
automatically convert to Class A Shares six years after purchase. (See "How
to Invest in the Fund -- Class B Shares.")
*** A portion of the shareholder servicing fee is allocated to member firms of
the National Association of Securities Dealers, Inc. and qualified banks for
services provided and expenses incurred in maintaining shareholder accounts,
responding to shareholder inquiries and providing information on their
investments.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------ -------- --------- --------- ----------
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period:
Class A Shares ........................................... $56 $80 $105 $177
Class B Shares ........................................... $59 $89 $122 $184*
You would pay the following expenses on the same investment,
assuming no redemption: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ----------
Class B Shares ........................................ $19 $59 $102 $184*
</TABLE>
- ------
* Expenses assume that Class B Shares are converted to Class A Shares at the end
of six years. Therefore, the expense figures assume six years of Class B
expenses and four years of Class A expenses.
THE EXPENSES AND EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the foregoing table is to describe the various costs and
expenses that an investor in the Fund will bear directly and indirectly. A
person who purchases shares of either class through a financial institution may
be charged separate fees by that institution. The Expenses and Example for the
Class B Shares appearing in the table above have been restated to reflect
current, rather than historical, expenses.
The rules of the SEC require that the maximum sales charge be reflected in
the above table. However, certain investors may qualify for reduced sales
charges or no sales charge at all. (See "How to Invest in the Fund--Class A
Shares.") Due to the continuous nature of Rule 12b-1 fees, long-term
shareholders of the Fund may pay more than the equivalent of the maximum
front-end sales charges permitted by the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD Rules").
1
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights included in the following tables are a part of the
Fund's financial statements for the periods indicated and have been audited by
Coopers & Lybrand L.L.P., independent accountants. The financial statements and
financial highlights for the year ended December 31, 1996 and the report thereon
of Coopers & Lybrand L.L.P. are included in the Statement of Additional
Information. Additional performance information is contained in the Fund's
Annual Report for the fiscal year ended December 31, 1996, which can be obtained
at no charge by calling the Fund at (800) 767-FLAG.
(FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR)(1)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
-------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of year ................. $ 14.87 $ 12.30 $ 13.70
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ................................ 0.27 0.40 0.41
Net realized and unrealized gain/(loss) on investments 1.67 3.58 (1.27)
---------- ---------- ----------
Total from Investment Operations ..................... 1.94 3.98 (0.86)
---------- ---------- ----------
LESS DISTRIBUTIONS:
Dividends from net investment income and net realized
short-term gains .................................. (0.38) (0.41) (0.44)
Distributions from net realized long-term gains ...... (0.84) (1.00) (0.10)
---------- ---------- ----------
Total distributions .................................. (1.22) (1.41) (0.54)
---------- ---------- ----------
Net asset value at end of year ....................... $ 15.59 $ 14.87 $ 12.30
========== ========== ==========
TOTAL RETURN(4) ........................................ 13.46% 33.44% (6.32)%
RATIOS TO AVERAGE DAILY NET ASSETS:
Expenses ............................................. 1.14% 0.93%(5) 0.92%(5)
Net investment income ................................ 1.74% 2.85%(6) 3.14%(6)
SUPPLEMENTAL DATA:
Net assets at end of year (000) ...................... $505,371 $492,454 $435,805
Portfolio turnover rate .............................. 20% 24% 23%
Average commissions per share ........................ $ 0.07(7) -- --
</TABLE>
- --------------------------------------------------------------------------------
(1) Computed based upon average shares outstanding.
(2) Restated for two-for-one stock split, effected in the form of a stock
dividend to shareholders of record on October 27, 1989.
(3) Investment Company Capital Corp. became Investment Advisor to the Fund on
January 19, 1989.
(4) Total return excludes the effect of sales charge.
(5) Without the waiver of advisory fees, the ratio of expenses to average daily
net assets would have been .99%, .99%, .98%, 1.07%, 1.17%, 1.13% and 1.07%
for the years ended December 31, 1995, 1994, 1993, 1992, 1991, 1990 and
1989, respectively.
(6) Without the waiver of advisory fees, the ratio of net investment income to
average daily net assets would have been 2.79%, 3.07%, 3.06%, 3.66%, 4.13%,
4.32% and 4.28% for the years ended December 31, 1995, 1994, 1993, 1992,
1991, 1990 and 1989, respectively.
(7) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
2
<PAGE>
FINANCIAL HIGHLIGHTS(continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
For the Year Ended December 31,
- -----------------------------------------------------------------------------------------
1993 1992 1991 1990 1989(2)(3) 1988(2) 1987(2)
---------- ---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
$ 12.20 $ 11.28 $ 9.57 $ 10.98 $ 8.24 $ 7.50 $ 7.84
---------- ---------- ---------- ---------- ---------- ---------- ---------
0.42 0.42 0.45 0.46 0.52 0.46 0.43
1.78 0.93 1.74 (1.29) 3.38 0.97 (0.30)
---------- ---------- ---------- ---------- ---------- ---------- ---------
2.20 1.35 2.19 (0.83) 3.90 1.43 0.13
---------- ---------- ---------- ---------- ---------- ---------- ---------
(0.42) (0.42) (0.46) (0.45) (0.52) (0.46) (0.42)
(0.28) (0.01) (0.02) (0.13) (0.64) (0.23) (0.05)
---------- ---------- ---------- ---------- ---------- ---------- ---------
(0.70) (0.43) (0.48) (0.58) (1.16) (0.69) (0.47)
---------- ---------- ---------- ---------- ---------- ---------- ---------
$ 13.70 $ 12.20 $ 11.28 $ 9.57 $ 10.98 $ 8.24 $ 7.50
========== ========== ========== ========== ========== ========== =========
18.12% 12.35% 23.08% (7.55)% 48.86% 19.90% 1.51%
0.92%(5) 0.92%(5) 0.92%(5) 0.92%(5) 0.93%(5) 0.92% 0.88%
3.12%(6) 3.81%(6) 4.38%(6) 4.54%(6) 4.41%(6) 5.35% 5.37%
$469,163 $307,641 $238,571 $177,963 $162,449 $102,483 $94,650
14% 6% 7% 2% 27% 11% 4%
---------- ---------- ---------- ---------- ---------- ---------- ---------
</TABLE>
3
<PAGE>
FINANCIAL HIGHLIGHTS (CONCLUDED)
- -----------------------------------------------------------------------------
(FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD)(1)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
For the Year January 3, 1995(2)
Ended through
December 31, 1996 December 31, 1995
----------------- -------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period ............... $ 14.83 $12.28
--------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ................................ 0.19 0.30
Net realized and unrealized gain on investments ...... 1.63 3.56
--------- --------
Total from Investment Operations ..................... 1.82 3.86
--------- --------
LESS DISTRIBUTIONS:
Dividends from net investment income and net realized
short-term gains .................................. (0.30) (0.31)
Distributions from net realized long-term gains ...... (0.84) (1.00)
--------- --------
Total distributions .................................. (1.14) (1.31)
--------- --------
Net asset value at end of period ..................... $ 15.51 $14.83
========= ========
TOTAL RETURN(3) ........................................ 12.60% 32.42%
RATIOS TO AVERAGE DAILY NET ASSETS:
Expenses ............................................. 1.92% 1.70%(4)(5)
Net investment income ................................ 0.95% 2.13%(4)(6)
SUPPLEMENTAL DATA:
Net assets at end of period (000) .................... $17,661 $7,504
Portfolio turnover rate .............................. 20% 24%
Average commissions per share ........................ $ 0.07(7) --
</TABLE>
- ------
(1) Computed based upon average shares outstanding.
(2) Commencement of operations.
(3) Total return excludes the effect of sales charge.
(4) Annualized.
(5) Without the waiver of advisory fees, the ratio of expenses to average daily
net assets would have been 1.74% (annualized) for the period ended December
31, 1995.
(6) Without the waiver of advisory fees, the ratio of net investment income to
average daily net assets would have been 2.09% (annualized) for the period
ended December 31, 1995.
(7) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
4
<PAGE>
INVESTMENT PROGRAM
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE, POLICIES AND RISK
CONSIDERATIONS
The Fund's investment objective is to seek current income and long-term
growth of capital without undue risk. In seeking this objective, the Fund
invests primarily in common stock, securities convertible thereto and debt
obligations of companies in the telephone industry and in income-producing
securities (including debt obligations) of issuers in the telephone or other
industries. There can be no assurance that the Fund's investment objective will
be met. The Fund's investment objective may be changed only by the affirmative
vote of a majority of the outstanding shares of the Fund. Concentration in the
telephone industry will subject the Fund to the risks associated with that
industry (e.g., regulatory and technological change) and may result in greater
fluctuation in the Fund's net asset value than is experienced in less
concentrated portfolios. In light of the relatively limited number of telephone
companies, the Fund will be non-diversified for purposes of the Investment
Company Act of 1940 (the "Investment Company Act").
The Fund's investment advisors believe that investing in a portfolio of
securities of companies in the telephone industry affords an attractive
opportunity for achieving the Fund's investment objective. The telephone
industry comprises many well-capitalized companies that have demonstrated
stable, profitable growth. Significant technological and regulatory changes have
for some time been stimulating new services while certain unit costs are
declining. Extensive changes in telecommunications law, which became effective
on February 29, 1996, are likely to stimulate further rapid changes in the
telephone industry, as well as the telecommunications industry generally. The
new legislation will allow existing telephone companies, both local and
long-distance, to expand into each other's business as well as into other
telecommunications businesses, but will also permit other telecommunications
firms to enter the telephone business. In addition, the legislation enlarges the
scope of permitted affiliations between traditional telephone companies and
other telecommunications companies. The Fund's investment advisors believe that
because the telephone industry is a focal point in the development of the
information age, both for personal and for data communications, it provides new
opportunities for earnings and dividend growth. At the same time, these
developments pose challenges to companies in the telecommunications industry
with attendant risks.
Under normal market conditions at least 65% of the Fund's total assets will
be invested in common stock, securities convertible thereto and debt obliga-
<PAGE>
tions of companies in the telephone industry and at least 65% of the Fund's
total assets will be invested in income-producing securities (including debt
obligations) of issuers in the telephone or other industries. The Fund may
purchase American Depositary Receipts ("ADRs"), which are U.S. exchange listed
interests in securities of foreign companies. ADRs include American Depositary
Shares and New York Shares and may be "sponsored" or "unsponsored." Sponsored
ADRs are established jointly by a depositary (typically a U.S. financial
institution) and the underlying issuer, whereas unsponsored ADRs may be
established by a depositary without participation by the underlying issuer.
Depending on the circumstances, the Fund may temporarily and for defensive
purposes invest up to 100% of its net assets in money market instruments and in
other income-producing securities.
In general, the Fund will invest in investment grade debt obligations that
are rated, at the time of purchase, BBB or higher by Standard and Poor's Ratings
Group ("S&P") or Baa or higher by Moody's Investors Service, Inc. ("Moody's"),
or, if unrated, determined to be of comparable quality by the Fund's investment
advisors, under criteria approved by the Fund's Board of Directors. Investment
grade securities (securities rated BBB or higher by S&P or Baa or higher by
Moody's) are generally thought to provide the highest credit quality and the
smallest risk of default. Securities rated BBB by S&P or Baa by Moody's have
speculative characteristics. Up to 10% of the Fund's total assets (measured at
the time of the investment) may be invested in lower quality debt obligations
(securities rated BB or lower by S&P or Ba or lower by Moody's and unrated
securities of comparable quality). Securities that were investment grade at the
time of purchase but are subsequently downgraded to BB/Ba or lower will be
included in the 10% category. In the event any security owned by the Fund is
downgraded, the Fund's investment advisors will review the situation and take
appropriate action, but will not be automatically required to sell any such
security. If such a downgrade causes the 10% limit to be exceeded, the Fund will
be precluded from investing further in debt obligations that are below
investment grade. (See "Investments in Non-Investment Grade Securities" below.)
INVESTMENTS IN NON-INVESTMENT GRADE SECURITIES
Lower rated debt obligations, also known as "junk bonds," are considered to
be speculative and involve greater risk of default or price changes due to
changes in the issuer's creditworthiness. Securities in the lowest rating
category that the Fund may purchase (secu-
5
<PAGE>
rities rated C by either S&P or Moody's) may present a particular risk of
default, or may be in default or arrears in the payment of principal and
interest. In addition, C-rated securities may be regarded as having extremely
poor prospects of ever attaining any real investment standing. Yields and market
values of these bonds will fluctuate over time reflecting changing interest
rates and the market's perception of credit quality and the outlook for economic
growth. When economic conditions appear to be deteriorating, lower rated bonds
may decline in value, regardless of prevailing interest rates. Accordingly,
adverse economic developments, including a recession or substantial period of
rising interest rates, may disrupt the high-yield bond market, affecting both
the value and liquidity of such bonds. The market prices of these securities may
fluctuate more than those of higher rated securities, and may decline
significantly in periods of general economic difficulty, which may follow
periods of rising interest rates. An economic downturn could adversely affect
the ability of issuers of such bonds to make payments of principal and interest
to a greater extent than issuers of higher rated bonds might be affected. As of
the date of this Prospectus, the Fund has not invested in securities rated CCC
or below. The ratings categories of S&P and Moody's are described more fully in
the Appendix to the Statement of Additional Information.
The following table provides a summary of ratings assigned by S&P to debt
obligations in the Fund's portfolio. These figures are dollar-weighted averages
of month-end portfolio holdings during the fiscal year ended December 31, 1996,
presented as a percentage of total investments. These percentages are historical
and are not necessarily indicative of the quality of current or future portfolio
holdings, which may vary.
<PAGE>
S&P
Rating Average
--------- ---------
AAA 1.60%
AA 0.00%
A 0.16%
BBB 0.00%
BB 0.92%
B 0.00%
Unrated 0.00%
INVESTMENTS IN REPURCHASE AGREEMENTS
The Fund may agree to purchase U.S. Government securities from creditworthy
financial institutions, such as banks or broker-dealers, subject to the seller's
agreement to repurchase the securities at an established time and price. Default
by or bankruptcy proceedings with respect to the seller may, however, expose the
Fund to possible loss because of adverse market action or delay in connection
with the disposition of the underlying obligations.
OTHER INVESTMENTS
The Fund has the right to lend portfolio securities to recognized
institutional borrowers on a fully collateralized basis. The Fund may also write
covered call options if each such option is traded on a national securities
exchange (and may purchase calls in related closing transactions). To date, the
Fund has not lent portfolio securities. The Fund may also invest in securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as
amended ("Rule 144A Securities") that have been determined to be liquid by the
Fund's advisors under standards approved by the Fund's Board of Directors, and
may invest up to 10% of its net assets in Rule 144A Securities that are illiquid
(see "Investment Restrictions" in the Statement of Additional Information). Rule
144A Securities may become illiquid if qualified institutional buyers are not
interested in acquiring the securities.
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The Fund's investment program is subject to a number of restrictions that
reflect both self-imposed standards and federal and state regulatory
limitations. The following investment restrictions are matters of fundamental
policy and may not be changed without shareholder approval. Accordingly, the
Fund will not:
1) Invest less than 65% of the value of its total assets in the telephone
industry, except as described in this Prospectus (otherwise the Fund will not
concentrate more than 25% of its total assets in securities of issuers in any
industry); or
2) Invest in the securities of any single issuer if, as a result, the Fund would
hold more than 10% of the outstanding voting securities of such issuer.
The Fund is subject to further investment restrictions that are set forth in
the Statement of Additional Information.
6
<PAGE>
HOW TO INVEST IN THE FUND
- --------------------------------------------------------------------------------
Class A Shares and Class B Shares may be purchased from the Fund's
distributor (the "Distributor"), through any securities dealer that is
authorized to distribute the Fund's shares ("Participating Dealers") or through
any financial institution that is authorized to service shareholder accounts
("Shareholder Servicing Agents"). Shares of either class may also be purchased
by completing the Application Form attached to this Prospectus and returning it,
together with payment of the purchase price, to the address shown on the
Application Form. Participating Dealers or Shareholder Servicing Agents and
their investment representatives may receive different levels of compensation
depending on which class of shares they sell.
The Class A and Class B alternatives permit an investor to choose the method
of purchasing shares that is more beneficial given the amount of the purchase,
the length of time the investor expects to hold the shares, and other
circumstances. Investors should consider whether, during the anticipated life of
their investment in the Fund, the combination of sales charge and distribution
fee on Class A Shares is more favorable than the combination of
distribution/service fees and contingent deferred sales charge on Class B
Shares. In almost all cases, investors planning to purchase $100,000 or more of
Fund shares will pay lower aggregate charges and expenses by purchasing Class A
Shares. (See "Fee Table.")
The minimum initial investment in shares of either class is $2,000, except
that the minimum initial investment for shareholders of any other Flag Investors
fund or class is $500 and the minimum initial investment for participants in the
Fund's Automatic Investing Plan is $250. Each subsequent investment must be at
least $100 per class, except that the minimum subsequent investment under the
Fund's Automatic Investing Plan is $250 for quarterly investments and $100 for
monthly investments. (See "Purchases Through Automatic Investing Plan" below.)
There is no minimum investment requirement for qualified retirement plans (i.e.,
401(k) plans or pension and profit sharing plans). IRA accounts are, however,
subject to the $2,000 minimum initial investment requirement. There is no
minimum investment requirement for spousal IRA accounts.
The Fund reserves the right to suspend the sale of shares at any time at the
discretion of the Distributor and the Fund's investment advisors. Orders for
purchases of shares are accepted on any day on which the New York Stock Exchange
is open for business (a "Business Day"). Purchase orders for shares will be
<PAGE>
executed at a per share purchase price equal to the net asset value next
determined after receipt of the purchase order plus any applicable front-end
sales charge (the "Offering Price") on the date such net asset value is
determined (the "Purchase Date"). Purchases made by mail must be accompanied by
payment of the Offering Price. Purchases made through the Distributor or a
Participating Dealer or Shareholder Servicing Agent must be in accordance with
such entity's payment procedures. The Distributor may, in its sole discretion,
refuse to accept any purchase order.
The net asset value per share is determined daily as of the close of the New
York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on each
Business Day. Net asset value per share of a class is calculated by valuing all
assets held by the Fund, deducting all liabilities attributable to that class,
and dividing the resulting amount by the number of then outstanding shares of
the class. For this purpose, portfolio securities are given their market value
where feasible. If a portfolio security is traded on a national exchange or on
an automated dealer quotation system, such as NASDAQ, on the valuation date, the
last quoted sale price is generally used. Options are valued at the last
reported sale price, or if no sales are reported, at the average of the last
reported bid and asked prices. Securities or other assets for which market
quotations are not readily available are valued at their fair value as
determined in good faith under procedures established from time to time and
monitored by the Fund's Board of Directors. Debt obligations with maturities of
60 days or less are valued at amortized cost, which constitutes fair value as
determined by the Fund's Board of Directors. Because of differences in
distribution/service fees between the classes of shares, the net asset value
per share of the classes differs at times.
OFFERING PRICE
Shares may be purchased from the Distributor, Participating Dealers or
Shareholder Servicing Agents at the Offering Price, which for Class A Shares
includes a sales charge that is calculated as a percentage of the Offering
Price, and for Class B Shares is net asset value.
CLASS A SHARES
The sales charge on Class A Shares, which decreases as the amount of purchase
increases, is shown in the following table:
7
<PAGE>
Sales Charge
as Percentage of Dealer
------------------------------ Compensation
Offering Net Amount as Percentage of
Amount of Purchase Price Invested Offering Price
- --------------------------------------------------------------------------------
Less than $ 50,000 ...... 4.50% 4.71% 4.00%
$50,000 - $ 99,999 ...... 3.50% 3.63% 3.00%
$100,000 - $249,999 ..... 2.50% 2.56% 2.00%
$250,000 - $499,999 ..... 2.00% 2.04% 1.50%
$500,000 - $999,999 ..... 1.50% 1.52% 1.25%
$1,000,000 and over ..... None* None* None*
- --------------------------------------------------------------------------------
* Purchases of $1 million or more may be subject to a contingent deferred sales
charge. (See below.) The Distributor may make payments to dealers in the
amount of .50% of the Offering Price.
A shareholder who purchases additional Class A Shares may obtain reduced
sales charges, as set forth in the table above, through a right of accumulation.
In addition, an investor may obtain reduced sales charges as set forth above
through a right of accumulation of purchases of Class A Shares and purchases of
Class A shares of other Flag Investors funds with the same sales charge and
purchases of Class A shares of Flag Investors Short-Intermediate Income Fund,
Inc. (formerly, Flag Investors Intermediate-Term Income Fund, Inc.) and Flag
Investors Maryland Intermediate Tax Free Income Fund, Inc. (the "Intermediate
Funds"). The applicable sales charge will be determined based on the total of
(a) the shareholder's current purchase plus (b) an amount equal to the then-
current net asset value or cost, whichever is higher, of all Class A Shares and
of all Flag Investors shares described above and any Flag Investors Class D
shares held by the shareholder. To obtain the reduced sales charge through a
right of accumulation, the shareholder must provide the Distributor, either
directly or through a Participating Dealer or Shareholder Servicing Agent, as
applicable, with sufficient information to verify that the shareholder has such
a right. The Fund may amend or terminate this right of accumulation at any time
as to subsequent purchases.
The term "purchase" refers to an individual purchase by a single purchaser,
or to concurrent purchases, which will be aggregated, by a purchaser, the
purchaser's spouse and their children under the age of 21 years purchasing
shares for their own account.
An investor may also obtain the reduced sales charges shown above by
executing a written Letter of Intent which states the investor's intention to
invest at least $50,000 within a 13-month period in Class A Shares. Each
purchase of shares under a Letter of Intent will be made at the Offering Price
applicable at the time of such purchase to the full amount indicated on the
Letter of Intent. A Letter of Intent is not a binding obligation upon the
investor to purchase the full amount indicated. The minimum initial investment
under a Letter of Intent is 5% of the full amount. Class A Shares purchased with
the first 5% of the full amount will be held in escrow (while remaining
registered in the name of the investor) to secure payment of the higher
<PAGE>
sales charge applicable to the shares actually purchased if the full amount
indicated is not invested. Such escrowed shares will be involuntarily redeemed
to pay the additional sales charge, if necessary. When the full amount indicated
has been purchased, the escrowed shares will be released. An investor who wishes
to enter into a Letter of Intent in conjunction with an investment in Class A
Shares may do so by completing the appropriate section of the Application Form
attached to this Prospectus.
No sales charge will be payable at the time of purchase on investments of $1
million or more of Class A Shares. However, a contingent deferred sales charge
may be imposed on such investments in the event of a redemption within 24 months
following the purchase, at the rate of .50% on the lesser of the value of the
shares redeemed or the total cost of such shares. No contingent deferred sales
charge will be imposed on purchases of $3 million or more of Class A Shares
redeemed within 24 months of purchase if the Participating Dealer and the
Distributor have entered into an agreement under which the Participating Dealer
agrees to return any payments received on the sale of such shares. In
determining whether a contingent deferred sales charge is payable, and, if so,
the amount of the charge, it is assumed that shares not subject to such charge
are the first redeemed followed by other shares held for the longest period of
time.
The Fund may sell Class A Shares at net asset value (without sales charge) to
the following: (i) banks, bank trust departments, registered investment advisory
companies, financial planners and broker-dealers purchasing Class A Shares on
behalf of their fiduciary and advisory clients, provided such clients have paid
an account management fee for these services (investors may be charged a fee if
they effect transactions in Fund shares through a broker or agent); (ii)
qualified retirement plans; (iii) participants in a Flag Investors fund payroll
savings plan program; (iv) investors who have redeemed Class A Shares, or Class
A shares of any other mutual fund in the Flag Investors family of funds with the
same sales charges, or who have redeemed Class A shares of the Intermediate
Funds that they had held for at least 24 months prior to redemption, in an
amount that is not more than the total redemption proceeds, provided that the
purchase is within 90 days after the redemption; and (v) current or retired
Directors of the Fund and directors and employees (and their immediate families)
of the Distributor, Participating Dealers and their respective affiliates.
Class A Shares may also be purchased through a Systematic Purchase Plan. An
investor who wishes to take advantage of such a plan should contact the
Distributor or a Participating Dealer or Shareholder Servicing Agent.
8
<PAGE>
CLASS B SHARES
No sales charge will be payable at the time of purchase of Class B Shares.
However, a contingent deferred sales charge will be imposed on certain Class B
Shares redeemed within six years of purchase. The charge is assessed on an
amount equal to the lesser of the then-current market value of the Class B
Shares redeemed or the total cost of such shares. In addition, no charge is
assessed on redemptions of Class B Shares derived from reinvestment of dividends
or capital gains distributions.
In determining whether the contingent deferred sales charge is applicable to
a redemption, the calculation is made in the manner that results in the lowest
possible rate. Therefore, it is assumed that the redemption is first of any
Class B Shares in the shareholder's account that represent reinvested dividends
and distributions and second of Class B Shares held the longest during the
six-year period. The amount of the contingent deferred sales charge, if any,
will vary depending on the number of years from the time of payment for the
purchase of Class B Shares until the redemption of such shares (the "holding
period"). For purposes of determining this holding period, all payments during a
month are aggregated and deemed to have been made on the first day of the month.
The following table sets forth the rates of the contingent deferred sales
charge.
Contingent Deferred Sales Charge
Year Since Purchase (as a percentage of the dollar
Payment was Made amount subject to charge)
- --------------------------------------------------------------------------------
First................................................ 4.0%
Second............................................... 4.0%
Third................................................ 3.0%
Fourth............................................... 3.0%
Fifth................................................ 2.0%
Sixth................................................ 1.0%
Thereafter........................................... None*
- --------------------------------------------------------------------------------
* As described more fully below, Class B Shares automatically convert to Class A
Shares six years after the beginning of the calendar month in which the
purchase order is accepted.
Waiver of Contingent Deferred Sales Charge. The contingent deferred sales
charge will be waived on the redemption of Class B Shares (i) following the
death or initial determination of disability (as defined in the Internal Revenue
Code of 1986, as amended) of a shareholder; or (ii) to the extent that the
redemption represents a minimum required distribution from an individual
retirement account or other retirement plan to a shareholder who has attained
the age of 70 1/2 . The waiver with respect to (i) above is only applicable in
cases where the shareholder account is registered (a) in the name of an
individual person, (b) as a joint tenancy with rights of survivorship, (c) as
community property or (d) in the name of a minor child under the
<PAGE>
Uniform Gifts or Uniform Transfers to Minors Act. A shareholder, or his or her
representative, must notify the Fund's transfer agent (the "Transfer Agent")
prior to the time of redemption if such circumstances exist and the shareholder
is eligible for this waiver. For information on the imposition and waiver of the
contingent deferred sales charge, contact the Transfer Agent.
Automatic Conversion to Class A Shares. Six years after the beginning of the
calendar month in which the purchase order for Class B Shares is accepted, such
Class B Shares will automatically convert to Class A Shares and will no longer
be subject to the higher distribution and service fees. Such conversion will be
on the basis of the relative net asset values of the two classes, without the
imposition of any sales load, fee or other charge. The conversion is not a
taxable event to the shareholder.
For purposes of conversion to Class A Shares, shares received as dividends
and other distributions paid on Class B Shares in the shareholder's account will
be considered to be held in a separate sub-account. Each time any Class B Shares
in the shareholder's account (other than those in the sub-account) convert to
Class A Shares, an equal pro rata portion of the Class B Shares in the
sub-account will also convert to Class A Shares.
Class B Shares may also be purchased through a Systematic Purchase Plan. An
investor who wishes to take advantage of such a plan should contact the
Distributor or a Participating Dealer or Shareholder Servicing Agent.
PURCHASES BY EXCHANGE
As permitted pursuant to any rule, regulation or order promulgated by the
SEC, shareholders of other Flag Investors funds may exchange their shares of
those funds for an equal dollar amount of Fund shares of the same class that
have the same sales load structure. Shares issued pursuant to this offer will
not be subject to the sales charges described above or any other charge. In
addition, shareholders of Class A shares of the Intermediate Funds may exchange
into Class A Shares upon payment of the difference in sales charges, as
applicable, except that the exchange will be made at net asset value if the
shares of such funds have been held for more than 24 months. Shareholders of
Flag Investors Cash Reserve Prime Class A Shares may exchange into Class A
Shares upon payment of the difference in sales charges, as applicable, or into
Class B Shares at net asset value, subject thereafter to any applicable
contingent deferred sales charge.
When a shareholder acquires Fund shares through an exchange from another fund
in the Flag
9
<PAGE>
Investors family of funds, the Fund will combine the period for which the
original shares were held prior to the exchange with the holding period of the
shares acquired in the exchange for purposes of determining what, if any,
contingent deferred sales charge is applicable upon a redemption of any such
shares.
The net asset value of shares purchased and redeemed in an exchange request
received on a Business Day will be determined on the same day, provided that the
exchange request is received prior to 4:00 p.m. (Eastern Time) or the close of
the New York Stock Exchange, whichever is earlier. Exchange requests received
after 4:00 p.m. (Eastern Time) will be effected on the next Business Day.
Shareholders of any mutual fund not affiliated with the Fund who have paid a
sales charge, may exchange shares of such fund for an equal dollar amount of
Class A Shares by submitting to the Distributor or a Participating Dealer the
proceeds of the redemption of such shares, together with evidence of the payment
of a sales charge and the source of such proceeds. Class A Shares issued
pursuant to this offer will not be subject to the sales charge described above
or any other charge.
The exchange privilege with respect to other Flag Investors funds may also be
exercised by telephone. (See "Telephone Transactions" below.)
The Fund may modify or terminate this offer of exchange at any time on 60
days' prior written notice to shareholders.
PURCHASES THROUGH AUTOMATIC INVESTING PLAN
Shareholders may purchase either Class A Shares or Class B Shares regularly
by means of an Automatic Investing Plan with a pre-authorized check drawn on
<PAGE>
their checking accounts. Under this plan, the shareholder may elect to have a
specified amount invested monthly or quarterly in either Class A Shares or Class
B Shares. The amount specified will be withdrawn from the shareholder's checking
account using the pre-authorized check and will be invested in the class of
shares selected by the shareholder at the applicable Offering Price determined
on the date the amount is available for investment. Participation in the
Automatic Investing Plan may be discontinued either by the Fund or the
shareholder upon 30 days' prior written notice to the other party. A shareholder
who wishes to enroll in the Automatic Investing Plan or who wishes to obtain
additional purchase information may do so by completing the appropriate section
of the Application Form attached to this Prospectus.
PURCHASES THROUGH DIVIDEND REINVESTMENT
Shareholders may elect to have their distributions (capital gains and/or
dividend income) paid by check or reinvested in additional Fund shares of the
same class. Unless the shareholder elects otherwise, all income dividends and
net capital gains distributions will be reinvested in additional Fund shares of
the same class at net asset value (without a sales charge). Shareholders may
elect to terminate automatic reinvestment by giving written notice to the
Transfer Agent (at the address listed on page 16 of this Prospectus), either
directly or through any Participating Dealer or Shareholder Servicing Agent, at
least five days before the next date on which dividends or distributions will be
paid.
Alternately, shareholders may have their distributions invested in shares of
other funds in the Flag Investors family of funds. Shareholders who are
interested in this option should call the Transfer Agent for additional
information.
HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
Shareholders may redeem all or part of their investment on any Business Day
by transmitting a redemption order through the Distributor, a Participating
Dealer, a Shareholder Servicing Agent or by regular or express mail to the
Transfer Agent. Shareholders may also redeem shares of either class by telephone
(in amounts up to $50,000). (See "Telephone Transactions" below.) A redemption
order is effected at the net asset value per share (reduced by any applicable
contingent deferred sales charge) next determined after receipt of the order
(or, if stock certificates have been issued for the shares to be redeemed, after
the tender of the stock certificates for redemption). Redemption orders received
after 4:00 p.m. (Eastern Time) or the close of the New York Stock Exchange,
whichever is earlier, will be effected at the net asset value next determined on
the following Business Day. Payment for redeemed shares will be made by check
and will be mailed within seven days after receipt of a duly authorized
telephone redemption request or of a redemption order fully completed and, as
applicable, accompanied by the following documents:
1) A letter of instructions, specifying the shareholder's account number with a
Participating Dealer, if applicable, and the number of shares or dollar
amount to be redeemed, signed by all owners of the shares in the exact names
in which their account is maintained;
10
<PAGE>
2) For redemptions in excess of $50,000, a guarantee of the signature of each
registered owner by a member of the Federal Deposit Insurance Corporation, a
trust company, broker, dealer, credit union (if authorized under state law),
securities exchange or association, clearing agency or savings association;
3) If shares are held in certificate form, stock certificates either properly
endorsed or accompanied by a duly executed stock power for shares to be
redeemed; and
4) Any additional documents required for redemption by corporations,
partnerships, trusts or fiduciaries.
Dividends payable up to the date of redemption of shares will be paid on the
next dividend payable date. If all of the shares in a shareholder's account have
been redeemed on a dividend payable date, the dividend will be remitted by check
to the shareholder.
The Fund has the power, under its Articles of Incorporation, to redeem
shareholder accounts amounting to less than $500 upon 60 days' notice.
<PAGE>
Shares will not be redeemed involuntarily as a result of a decline in account
value due to a decline in net asset value alone.
SYSTEMATIC WITHDRAWAL PLAN
Shareholders who hold Class A Shares or Class B Shares having a value of
$10,000 or more may arrange to have a portion of their shares redeemed monthly
or quarterly under the Fund's Systematic Withdrawal Plan. Such payments are
drawn from income dividends, and to the extent necessary, from share redemptions
(which would be a return of principal and, if reflecting a gain, would be
taxable). If redemptions continue, a shareholder's account may eventually be
exhausted. Because share purchases include a sales charge that will not be
recovered at the time of redemption, a shareholder should not have a withdrawal
plan in effect at the same time he is making recurring purchases of shares. In
addition, Class B Shares may be subject to a contingent deferred sales charge
upon redemption. (See "How to Invest in the Fund -- Class B Shares.") A
shareholder who wishes to participate in the Fund's Systematic Withdrawal Plan
may do so by completing the appropriate section of the Application Form attached
to this Prospectus.
TELEPHONE TRANSACTIONS
- --------------------------------------------------------------------------------
Shareholders may exercise the exchange privilege with respect to other Flag
Investors funds, or redeem shares of either class in amounts up to $50,000, by
notifying the Transfer Agent by telephone on any Business Day between the hours
of 8:30 a.m. and 5:30 p.m. (Eastern Time) or by regular or express mail at its
address listed on page 16 of this Prospectus. Telephone transaction privileges
are automatic. Shareholders may specifically request that no telephone
redemptions or exchanges be accepted for their accounts. This election may be
made on the Application Form or at any time thereafter by completing and
returning appropriate documentation supplied by the Transfer Agent.
A telephone exchange or redemption placed by 4:00 p.m. (Eastern Time) or the
close of the New York Stock Exchange, whichever is earlier, is effective that
day. Telephone orders placed after 4:00 p.m. (Eastern Time) will be effected at
the net asset value (less any applicable contingent deferred sales charge on
redemptions) as next determined on the following Business Day.
The Fund and the Transfer Agent will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These procedures
include requiring the investor to provide certain personal identification
information at the time an account is opened and prior to effecting each
transaction requested by telephone. In addition, all telephone transaction
requests will be recorded and investors may be required to provide additional
telecopied instructions of such transaction requests. If these procedures are
employed, neither the Fund nor the Transfer Agent will be responsible for any
loss, liability, cost or expense for following instructions received by
telephone that either of them reasonably believes to be genuine. During periods
of extreme economic or market changes, shareholders may experience difficulty in
effecting telephone transactions. In such event, requests should be made by
regular or express mail. Shares held in certificate form may not be exchanged or
redeemed by telephone. (See "How to Invest in the Fund -- Purchases by Exchange"
and "How to Redeem Shares.")
11
<PAGE>
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute to shareholders substantially all of its
taxable net investment income in the form of quarterly dividends. The Fund will
attempt to pay dividends that are consistent in amount with its taxable net
investment company income and reserves the right, with the approval of the
Directors, to pay dividends that constitute a return of capital which could
cause a decrease in a shareholder's tax basis in shares. The Fund normally will
distribute to shareholders any net capital gains on an annual basis.
TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial,
or administrative action. No attempt has been made to present a detailed
explanation of the federal, state or local income tax treatment of the Fund or
the shareholders, and the discussion here is not intended as a substitute for
careful tax planning. Accordingly, shareholders are advised to consult their tax
advisors regarding specific questions as to federal, state and local income
taxes. The Statement of Additional Information sets forth further information
concerning taxes.
The Fund has been and expects to continue to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended. As long as the Fund qualifies for this tax treatment, it will be
relieved of federal income tax on amounts distributed to shareholders, but
shareholders,
<PAGE>
unless otherwise exempt, generally will be subject to income tax on the amounts
so distributed, regardless of whether such distributions are paid in cash or
reinvested in additional shares.
Distributions from the Fund out of net capital gains (the excess of net
long-term capital gains over net short-term capital losses), if any, will be
taxed to shareholders as long-term capital gains regardless of the length of
time a shareholder has held the shares. All other income distributions will be
taxed to shareholders as ordinary income. Corporate shareholders may be entitled
to the dividends received deduction on a portion of dividends received from the
Fund. Shareholders will be advised annually as to the tax status of all
distributions.
Ordinarily, shareholders will include all dividends declared by the Fund in
income in the year of payment. However, dividends declared payable to
shareholders of record in December of one year, but paid in January of the
following year, will be deemed for tax purposes to have been received by the
shareholders and paid by the Fund on December 31 of the year in which the
dividends were declared.
The Fund intends to make sufficient distributions of its ordinary income and
capital gain net income prior to the end of each calendar year to avoid
liability for federal excise tax.
The sale, exchange or redemption of Fund shares is a taxable event for the
shareholder.
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
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, sub-advisor, distributor, custodian and
transfer agent. A majority of the Directors are not affiliated with the Fund's
advisors or the Distributor.
The Fund's Directors and officers are as follows:
Truman T. Semans Chairman Bruce E. Behrens President
Richard T. Hale Director J. Dorsey Brown, III Executive Vice President
Charles W. Cole, Jr. Director Liam D. Burke Executive Vice President
James J. Cunnane Director Hobart C. Buppert, II Vice President
John F. Kroeger Director Lee S. Owen Vice President
Louis E. Levy Director Edward J. Veilleux Vice President
Eugene J. McDonald Director Gary V. Fearnow Vice President
Rebecca W. Rimel Director Scott J. Liotta Vice President
Carl W. Vogt Director and Secretary
Joseph A. Finelli Treasurer
Laurie D. Collidge Assistant Secretary
12
<PAGE>
INVESTMENT ADVISOR AND SUB-ADVISOR
- --------------------------------------------------------------------------------
Investment Company Capital Corp. ("ICC" or the "Advisor") is the Fund's
investment advisor and Alex. Brown Investment Management ("ABIM" or the "Sub-
Advisor") is the Fund's sub-advisor. ICC is also the investment advisor to other
mutual funds in the Flag Investors family of funds and Alex. Brown Cash Reserve
Fund, Inc., which funds had approximately $5.2 billion of net assets as of
December 31, 1996. ABIM is a registered investment advisor with approximately
$5.6 billion under management as of December 31, 1996.
Pursuant to the terms of the Investment Advisory Agreement, ICC supervises
and manages all of the Fund's operations. Under the Investment Advisory and
Sub-Advisory Agreements, ICC delegates to ABIM certain of its duties, provided
that ICC continues to supervise the performance of ABIM and report thereon to
the Fund's Board of Directors. Pursuant to the terms of the Sub-Advisory
Agreement, ABIM is responsible for decisions to buy and sell securities for the
Fund, for broker-dealer selection, and for negotiation of commission rates under
standards established and periodically reviewed by the Board of Directors. The
Board has established procedures under which ABIM may allocate transactions to
the Distributor, provided that compensation to the Distributor on each
transaction is reasonable and fair compared to the commission, fee or other
remuneration received or to be received by other broker-dealers in connection
with comparable transactions involving similar securities during a comparable
period of time. In addition, consistent with NASD Rules, and subject to seeking
the most favorable price and execution available and such other policies as the
Board may determine, ABIM may consider services in connection with the sale of
shares as a factor in the selection of broker-dealers to execute portfolio
transactions for the Fund.
As compensation for providing investment advisory services to the Fund for
the fiscal year ended December 31, 1996, ICC received a fee equal to .66% of the
Fund's average daily net assets and from such fee paid ABIM a sub-advisory fee
equal to .45% of the Fund's average daily net assets. ICC may from time to time
voluntarily waive a portion of its fee to improve performance.
ICC is an indirect subsidiary of Alex. Brown Incorporated. Buppert, Behrens &
Owen, Inc., a company organized and owned by three employees of ABIM, owns a 49%
limited partnership interest and a
<PAGE>
1% general partnership interest in ABIM. The Distributor owns a 1% general
partnership interest in ABIM and Alex. Brown Incorporated owns the remaining 49%
limited partnership interest.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. (See "Custodian, Transfer Agent and
Accounting Services.")
PORTFOLIO MANAGERS
Messrs. Bruce E. Behrens, the Fund's President, and Liam D. Burke, an
Executive Vice President of the Fund, share primary responsibility for managing
the Fund's assets. From the Fund's inception through April 30, 1997, Mr. Behrens
shared that responsibility with Hobart C. Buppert, II, who remains a Vice
President of the Fund.
Bruce E. Behrens -- 29 Years' Investment Experience
Mr. Behrens has been a Vice President and a Principal of ABIM since 1981.
Prior to joining ABIM, Mr. Behrens was a Senior Vice President and Principal of
Corbyn Associates from 1978 to 1981 and a Vice President at Investment
Counselors of Maryland from 1972 to 1978. Prior thereto, he was a Security
Analyst at Citibank from 1968 to 1972. Mr. Behrens received his B.A. from
Denison University in 1966 and an M.B.A. from the University of Michigan in
1968. He is a member and past President of the Baltimore Security Analysts
Society and a member of the Financial Analysts Federation.
Liam D. Burke -- 8 Years' Investment Experience
Mr. Burke joined ABIM in 1994 with primary responsibility as a
telecommunications analyst for the Fund. Prior to joining ABIM, Mr. Burke worked
as a telecommunications industry analyst at a regional broker-dealer, Ferris,
Baker, Watts, Inc., from 1992 to 1994 and as managing director of Frey & Co., a
Baltimore-based private investment bank, from 1989 to 1992. Mr. Burke began his
professional career at AT&T and spent eight years in positions that included
operations, regional staff management and national account sales. He is a
graduate of Georgetown University and received his MBA from The George
Washington University.
13
<PAGE>
DISTRIBUTOR
- --------------------------------------------------------------------------------
Alex. Brown & Sons Incorporated ("Alex. Brown" or the "Distributor") acts as
distributor of the Fund's shares. Alex. Brown is an investment banking firm
which offers a broad range of investment services to individual, institutional,
corporate and municipal clients. It is a wholly-owned subsidiary of Alex. Brown
Incorporated which has engaged directly and through subsidiaries and affiliates
in the investment business since 1800. Alex. Brown is a member of the New York
Stock Exchange and other leading securities exchanges. Headquartered in
Baltimore, Maryland, Alex. Brown has offices throughout the United States and,
through subsidiaries, maintains offices in London, England, Geneva, Switzerland
and Tokyo, Japan.
The Fund has adopted two separate Distribution Agreements and related Plans
of Distribution, one with respect to the Class A Shares and one with respect to
the Class B Shares (the "Plans") pursuant to Rule 12b-1 under the Investment
Company Act. In addition, the Fund may enter into agreements with certain
financial institutions, such as banks, to provide shareholder services, pursuant
to which Alex. Brown will allocate up to all of its distribution fee as
compensation for such services. Such financial institutions may impose separate
fees in connection with these services and investors should review this
Prospectus in conjunction with any such institution's fee schedule.
As compensation for providing distribution services for the Class A Shares
for the fiscal year ended
<PAGE>
December 31, 1996, Alex. Brown received a fee equal to .25% of the average daily
net assets of the Class A Shares.
As compensation for providing distribution and shareholder services for the
Class B Shares for the fiscal year ended December 31, 1996, Alex. Brown received
a distribution fee equal to .75% of the Class B Shares' average daily net assets
and a shareholder servicing fee equal to .25% of the Class B Shares' average
daily net assets. The distribution fee is used to compensate Alex. Brown for its
services and expenses in distributing the Class B Shares. The shareholder
servicing fee is used to compensate Alex. Brown, Participating Dealers and
Shareholder Servicing Agents for services provided and expenses incurred in
maintaining shareholder accounts, responding to shareholder inquiries and
providing information on their investments.
Payments under the Plans are made as described above regardless of Alex.
Brown's actual cost of providing distribution services and may be used to pay
Alex. Brown's overhead expenses. If the cost of providing distribution services
to the Fund is less than the payments received, the unexpended portion may be
retained as profit by Alex. Brown. Alex. Brown will from time to time and from
its own resources pay or allow additional discounts or promotional incentives in
the form of cash or other compensation (including merchandise or travel) to
Participating Dealers.
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
- --------------------------------------------------------------------------------
Investment Company Capital Corp. is the Fund's transfer and dividend
disbursing agent and provides accounting services to the Fund. As compensation
for providing accounting services to the Fund for the fiscal year ended December
31, 1996, ICC received a fee equal to .02% of the Fund's average daily net
assets. (See the Statement of Additional Information.) PNC Bank, National
Association, a national banking association, acts as custodian of the Fund's
assets.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, the Fund may advertise its performance, including
comparisons to other mutual funds with similar investment objectives and to
stock or other relevant indices. All such advertisements will show the average
annual total return, net of the Fund's maximum sales charge imposed on Class A
Shares or including the contingent deferred sales charge imposed on Class B
Shares redeemed at the end of the specified period covered by the total return
figure, over one-, five- and ten-year periods or, if such periods have not yet
elapsed, shorter periods corresponding to the life of the Fund. Such total
return quotations will be computed by finding the average annual compounded
rates of return over such periods that would equate an assumed initial
investment of $1,000 to the ending redeemable value, net of the maximum sales
charge and other fees, according to the required standardized calculation. The
standardized calculation is required by the SEC to provide consistency and
comparability in investment company advertising and is not equivalent to a yield
calculation. If the Fund compares its performance to other funds or to relevant
indices, the Fund's performance will be stated in the same terms in which such
comparative data and indices are stated, which is
14
<PAGE>
normally total return rather than yield. For these purposes, the performance of
the Fund, as well as the performance of such investment companies or indices,
may not reflect sales charges, which, if reflected, would reduce performance
results.
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar,
Inc., independent services that monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Lehman Brothers Government
Corporate Bond Index, the Consumer Price Index, the return on 90-day U.S.
Treasury bills, the Standard & Poor's 500 Stock Index and the Dow Jones
Industrial Average. The Fund may also use total return performance data as
reported in the following national financial and industry publications that
monitor the performance of mutual funds: Money Magazine, Forbes, Business Week,
Barrons, Investor's Daily, IBC/Donoghue's Money Fund Report and The Wall Street
Journal.
Performance will fluctuate, and any statement of performance should not be
considered as representative of the future performance of the Fund. Performance
is generally a function of the type and quality of instruments held by the Fund,
operating expenses and market conditions. Any fees charged by banks with respect
to customer accounts through which Fund shares may be purchased, although not
included in calculations of performance, will reduce performance results.
GENERAL INFORMATION
- --------------------------------------------------------------------------------
CAPITAL SHARES
The Fund is an open-end non-diversified management investment company. The
Fund reorganized as a Maryland corporation on January 19, 1989 and is
authorized to issue 70 million shares of capital stock, with a par value of
$.001 per share. Shares of the Fund have equal rights with respect to voting.
Voting rights are not cumulative, so the holders of more than 50% of the
outstanding shares voting together for election of Directors may elect all the
members of the Board of Directors of the Fund. In the event of liquidation or
dissolution of the Fund, each share would be entitled to its portion of the
Fund's assets after all debts and expenses have been paid. The fiscal year-end
of the Fund is December 31.
The Board of Directors is authorized to establish additional "series" of
shares of capital stock, each of which would evidence interests in a separate
portfolio of securities, and separate classes of each series of the Fund. The
shares offered by this Prospectus have been designated: "Flag Investors
Telephone Income Fund Class A Shares" and "Flag Investors Telephone Income Fund
Class B Shares." The Board has no present intention of establishing any
additional series of the Fund but the Fund does have another class of shares in
addition to the shares offered hereby, "Flag Investors Telephone Income Fund
Class D Shares," which are not currently being offered. Different classes of the
Fund may be offered to certain investors and holders of such shares may be
entitled to certain exchange privileges not offered to Class A or Class B
Shares. All classes of
<PAGE>
the Fund share a common investment objective, portfolio of investments and
advisory fee, but to the extent the classes have different distribution/service
fees or sales load structures, performance may differ.
ANNUAL MEETINGS
Unless required under applicable Maryland law, the Fund does not expect to
hold annual meetings of shareholders. Shareholders of the Fund retain the right,
under certain circumstances, to request that a meeting of shareholders be held
for the purpose of considering the removal of a Director from office, and if
such a request is made, the Fund will assist with shareholder communications in
connection with the meeting.
REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of investments
held in the Fund's portfolio and financial statements. The annual financial
statements are audited by the Fund's independent accountants, Coopers & Lybrand
L.L.P.
SHAREHOLDER INQUIRIES
Shareholders with inquiries concerning their shares should contact the Fund
at (800) 767-FLAG, the Transfer Agent at (800) 553-8080, or a Participating
Dealer or Shareholder Servicing Agent, as appropriate.
15
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
NEW ACCOUNT APPLICATION
- -----------------------------------------------------------------------------------------------------------------------------------
Make check payable to "Flag Investors Telephone Income FOR ASSISTANCE IN COMPLETING THIS APPLICATION PLEASE CALL: 1-800-553-8080
Fund, Inc." and mail with this Application to: MONDAY THROUGH FRIDAY, 8:30 A.M. TO 5:30 P.M. (EASTERN TIME).
Alex. Brown & Sons Incorporated/Flag Investors Funds
P.O. Box 419663 TO OPEN AN IRA ACCOUNT, PLEASE CALL 1-800-767-3524 FOR AN IRA INFORMATION
Kansas City, MO 64141-6663 KIT.
Attn: Flag Investors Telephone Income Fund, Inc.
I wish to purchase the following class of shares of the Fund, in the amount indicated below. (Please check the applicable box and
indicate amount of purchase)
[ ] CLASS A SHARES (4.5% maximum initial sales charge) in the amount of $____________________
[ ] CLASS B SHARES (4.0% maximum contingent deferred sales charge) in the amount of $_______________________
THE MINIMUM INITIAL PURCHASE FOR EACH CLASS OF SHARES IS $2,000, EXCEPT THAT THE MINIMUM INITIAL PURCHASE FOR SHAREHOLDERS OF ANY
OTHER FLAG INVESTORS FUND OR CLASS IS $500 AND THE MINIMUM INITIAL PURCHASE FOR PARTICIPANTS IN THE FUND'S AUTOMATIC INVESTING PLAN
IS $250 PER CLASS. The Fund reserves the right not to accept checks for more than $50,000 that are not certified or bank checks.
----------------------------------------
YOUR ACCOUNT REGISTRATION (PLEASE PRINT)
----------------------------------------
Existing Account No., if any: ________________________
INDIVIDUAL OR JOINT TENANT GIFTS TO MINORS
- ----------------------------------------------------------------- -----------------------------------------------------------
First Name Initial Last Name Custodian's Name (only one allowed by law)
- ----------------------------------------------------------------- -----------------------------------------------------------
Social Security Number Minor's Name (only one)
- ----------------------------------------------------------------- -----------------------------------------------------------
Joint Tenant Initial Last Name Social Security Number of Minor
under the__________________Uniform Gifts to Minors Act
State of Residence
CORPORATIONS, TRUSTS, PARTNERSHIPS, ETC. MAILING ADDRESS
- ----------------------------------------------------------------- -----------------------------------------------------------
Name of Corporation, Trust or Partnership Street
- ------------------------------- ---------------------- -----------------------------------------------------------
Tax ID Number Date of Trust City State Zip
( )
- ----------------------------------------------------------------- -----------------------------------------------------------
Name of Trustees (If to be included in the Registration) Daytime Phone
- -----------------------------------------------------------------
For the Benefit of
--------------------------------------------------
LETTER OF INTENT -- CLASS A SHARES ONLY (OPTIONAL)
--------------------------------------------------
[ ] I agree to the Letter of Intent and Escrow Agreement set forth in the accompanying prospectus. Although I am not obligated to do
so, I intend to invest over a 13-month period in Class A Shares, as shown below, in an aggregate amount at least equal to:
[ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $500,000 [ ] $1,000,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
-------------------------------------------------------
RIGHT OF ACCUMULATION -- CLASS A SHARES ONLY (OPTIONAL)
-------------------------------------------------------
List the Account numbers of other Flag Investors Funds (except Class B shares) that you or your immediate family already own that
qualify for reduced sales charges.
Fund Name Account No. Owner's Name Relationship
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
--------------------
DISTRIBUTION OPTIONS
--------------------
Please check the appropriate boxes. If none of the options are selected, all distributions will be reinvested in additional shares
of the same class of the Fund at no sales charge.
INCOME DIVIDENDS CAPITAL GAINS
[ ] Reinvested in additional shares [ ] Reinvested in additional shares
[ ] Paid in Cash [ ] Paid in Cash
Call (800) 553-8080 for information about reinvesting your dividends in other funds in the Flag Investors Family of Funds.
A-1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
-----------------------------------
AUTOMATIC INVESTING PLAN (OPTIONAL)
-----------------------------------
[ ] I authorize you as Agent for the Automatic Investing Plan to automatically invest $____________ in Class A Shares or $__________
in Class B Shares for me, on a monthly or quarterly basis, on or about the 20th of each month or if quarterly, the 20th of January,
April, July and October, and to draw a bank draft in payment of the investment against my checking account. (Bank drafts may be
drawn on commercial banks only.)
MINIMUM INITIAL INVESTMENT: $250 PER CLASS
SUBSEQUENT INVESTMENTS (CHECK ONE): [ ] Monthly ($100 MINIMUM PER CLASS) [ ] Quarterly ($250 MINIMUM PER CLASS)
-----------------------------
PLEASE ATTACH A VOIDED CHECK.
-----------------------------
- ------------------------------------------------------- ----------------------------------------------------------------------
Bank Name Depositor's Signature Date
- ------------------------------------------------------- ----------------------------------------------------------------------
Existing Flag Investors Fund Account No., if any Depositor's Signature Date
(if joint acct., both must sign)
-------------------------------------
SYSTEMATIC WITHDRAWAL PLAN (OPTIONAL)
-------------------------------------
[ ] Beginning the month of ________ , 19____ please send me checks on a monthly or quarterly basis, as indicated below, in the
amount of (complete as applicable) $_______from Class A Shares and/or $________ from Class B Shares that I own, payable to the
account registration address as shown above. (Participation requires minimum account value of $10,000 per class.)
FREQUENCY (CHECK ONE): [ ] Monthly [ ] Quarterly (January, April, July and October)
----------------------
TELEPHONE TRANSACTIONS
----------------------
I UNDERSTAND THAT I WILL AUTOMATICALLY HAVE TELEPHONE REDEMPTION PRIVILEGES (FOR AMOUNTS UP TO $50,000) AND TELEPHONE EXCHANGE
PRIVILEGES (WITH RESPECT TO OTHER FLAG INVESTORS FUNDS) UNLESS I MARK ONE OR BOTH OF THE BOXES BELOW:
NO, I/WE DO NOT WANT: [ ] Telephone redemption privileges [ ] Telephone exchange privileges
Redemptions effected by telephone will be mailed to the address of record. If you would prefer redemptions mailed to a
pre-designated bank account, please provide the following information:
Bank: Bank Account No.:
---------------------------------------- ---------------------------------------------------------
Address: Bank Account Name:
----------------------------------------- ---------------------------------------------------------
-----------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
------------------------------------
SIGNATURE AND TAXPAYER CERTIFICATION
------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
[The Following Text Appears in a Box]
THE FUND MAY BE REQUIRED TO WITHHOLD AND REMIT TO THE U.S. TREASURY 31% OF ANY TAXABLE DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND
REDEMPTION PROCEEDS PAID TO ANY INDIVIDUAL OR CERTAIN OTHER NON-CORPORATE SHAREHOLDERS WHO FAIL TO PROVIDE THE INFORMATION AND/OR
CERTIFICATIONS REQUIRED BELOW. THIS BACKUP WITHHOLDING IS NOT AN ADDITIONAL TAX, AND ANY AMOUNTS WITHHELD MAY BE CREDITED AGAINST
THE SHAREHOLDER'S ULTIMATE U.S. TAX LIABILITY.
BY SIGNING THIS APPLICATION, I HEREBY CERTIFY UNDER PENALTIES OF PERJURY THAT THE INFORMATION ON THIS APPLICATION IS COMPLETE AND
CORRECT AND THAT AS REQUIRED BY FEDERAL LAW: (PLEASE CHECK APPLICABLE BOXES)
[ ] U.S. CITIZEN/TAXPAYER:
[ ] I CERTIFY THAT (1) THE NUMBER SHOWN ABOVE ON THIS FORM IS THE CORRECT SOCIAL SECURITY NUMBER OR TAX ID NUMBER AND (2) I AM
NOT SUBJECT TO ANY BACKUP WITHHOLDING EITHER BECAUSE (A) I AM EXEMPT FROM BACKUP WITHHOLDING, OR (B) I HAVE NOT BEEN
NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I AM SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO REPORT
ALL INTEREST OR DIVIDENDS, OR (C) THE IRS HAS NOTIFIED ME THAT I AM NO LONGER SUBJECT TO BACKUP WITHHOLDING.
[ ] IF NO TAX ID NUMBER OR SOCIAL SECURITY NUMBER HAS BEEN PROVIDED ABOVE, I HAVE APPLIED, OR INTEND TO APPLY, TO THE IRS OR
THE SOCIAL SECURITY ADMINISTRATION FOR A TAX ID NUMBER OR A SOCIAL SECURITY NUMBER, AND I UNDERSTAND THAT IF I DO NOT
PROVIDE EITHER NUMBER TO THE TRANSFER AGENT WITHIN 60 DAYS OF THE DATE OF THIS APPLICATION OR IF I FAIL TO FURNISH MY
CORRECT SOCIAL SECURITY NUMBER OR TAX ID NUMBER, I MAY BE SUBJECT TO A PENALTY AND A 31% BACKUP WITHHOLDING ON DISTRIBUTIONS
AND REDEMPTION PROCEEDS. (PLEASE PROVIDE EITHER NUMBER ON IRS FORM W-9. YOU MAY REQUEST SUCH FORM BY CALLING THE TRANSFER
AGENT AT 800-553-8080).
[ ] NON-U.S. CITIZEN/TAXPAYER: INDICATED COUNTRY OF RESIDENCE FOR TAX PURPOSES: _______________________________________________
UNDER PENALTIES OF PERJURY, I CERTIFY THAT I AM NOT A U.S. CITIZEN OR RESIDENT AND I AM AN EXEMPT FOREIGN PERSON AS DEFINED
BY THE INTERNAL REVENUE SERVICE.
[End of Box]
- -----------------------------------------------------------------------------------------------------------------------------------
I have received a copy of the Fund's prospectus dated May 1, 1997. I acknowledge that the telephone redemption and exchange
privileges are automatic and will be effected as described in the Fund's current prospectus (see "Telephone Transactions"). I also
acknowledge that I may bear the risk of loss in the event of fraudulent use of such privileges. If I do not want telephone
redemption or exchange privileges, I have so indicated on this Application.
- -----------------------------------------------------------------------------------------------------------------------------------
[The Following Text Appears in a Box]
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED
TO AVOID BACKUP WITHHOLDING.
[End of Box]
- -----------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------- -------------------------------------------------------------------------
Signature Date Signature (if joint acct., both must sign) Date
- --------------------
FOR DEALER USE ONLY
- --------------------
Dealer's Name: _________________________________________ Dealer Code:________________________________________________________
Dealer's Address:_________________________________________ Branch Code:________________________________________________________
_________________________________________
Representative: _________________________________________ Rep. No.: ________________________________________________________
A-2
</TABLE>
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
(Class A and Class B Shares)
Investment Advisor
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
Sub-Advisor Distributor
ALEX. BROWN INVESTMENT MANAGEMENT ALEX. BROWN & SONS INCORPORATED
One South Street One South Street
Baltimore, Maryland 21202 Baltimore, Maryland 21202
1-800-767-FLAG
Transfer Agent Independent Accountants
INVESTMENT COMPANY CAPITAL CORP. COOPERS & LYBRAND L.L.P.
One South Street 2400 Eleven Penn Center
Baltimore, Maryland 21202 Philadelphia, Pennsylvania 19103
1-800-553-8080
Custodian Fund Counsel
PNC BANK, NATIONAL ASSOCIATION MORGAN, LEWIS & BOCKIUS LLP
Airport Business Park 2000 One Logan Square
200 Stevens Drive Philadelphia, Pennsylvania 19103
Lester, Pennsylvania 19113
16
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
(Class A and Class B Shares)
One South Street
Baltimore, Maryland 21202
--------------------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A
PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH A
PROSPECTUS, WHICH MAY BE OBTAINED FROM ANY
PARTICIPATING DEALER OR SHAREHOLDER SERVICING AGENT
OR BY WRITING OR CALLING ALEX. BROWN & SONS
INCORPORATED, ONE SOUTH STREET, BALTIMORE, MARYLAND
21202, (800) 767-FLAG.
Statement of Additional Information Dated: May 1, 1997
Relating to the Prospectus Dated: May 1, 1997
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
Page
----
1. General Information and History......................................................... 1
2. Investment Objective and Policies....................................................... 2
3. Valuation of Shares and Redemption...................................................... 7
4. Federal Tax Treatment of Dividends and Distributions.................................... 8
5. Management of the Fund.................................................................. 11
6. Investment Advisory and other Services.................................................. 16
7. Distribution of Fund Shares............................................................. 18
8. Brokerage............................................................................... 21
9. Capital Stock........................................................................... 22
10. Semi-Annual Reports..................................................................... 23
11. Custodian, Transfer Agent and Accounting Services....................................... 23
12. Independent Accountants................................................................. 24
13. Performance Information................................................................. 24
14. Control Persons and Principal Holders of Securities..................................... 26
15. Financial Statements ................................................................... 26
Appendix................................................................................ A-1
</TABLE>
<PAGE>
1. GENERAL INFORMATION AND HISTORY
Flag Investors Telephone Income Fund, Inc. (the "Fund") is an
open-end management investment company that was originally designed to provide
both convenience and professional investment management to shareholders of the
former American Telephone and Telegraph Company ("AT&T") after AT&T's
divestiture and reorganization in January 1984.
Under the rules and regulations of the Securities and Exchange
Commission (the "SEC"), all mutual funds are required to furnish prospective
investors with certain information concerning the activities of the company
being considered for investment. The Fund currently offers two classes of
shares: Flag Investors Telephone Income Fund Class A Shares and Flag Investors
Telephone Income Fund Class B Shares. As used herein, the "Fund" refers to Flag
Investors Telephone Income Fund, Inc. and specific references to either class of
the Fund's shares will be made using the name of such class. Important
information concerning the Fund is included in the Fund's Prospectus which may
be obtained without charge from the Fund's distributor or from Participating
Dealers that offer shares of the respective classes of the Fund ("Shares") to
prospective investors. Prospectuses may also be obtained from Shareholder
Servicing Agents. Some of the information required to be in this Statement of
Additional Information is also included in the Fund's current Prospectus. To
avoid unnecessary repetition, references are made to related sections of the
Prospectus. In addition, the Prospectus and this Statement of Additional
Information omit certain information about the Fund and its business that is
contained in the Registration Statement for the Fund and its Shares filed with
the SEC. Copies of the Registration Statement as filed, including such omitted
items, may be obtained from the SEC by paying the charges prescribed under its
rules and regulations.
The Fund was organized as a Maryland corporation on October
18, 1983. Shares of the Fund were sold by the Distributor and other
broker-dealers in an offering that commenced on December 7, 1983. On January 18,
1984, the Fund effected a tax-free exchange of five of its Shares for each share
of AT&T common stock that had previously been transmitted to the Fund by
exchanging shareholders. The Fund collected the distributed shares of the
regional telephone companies created by AT&T's divestiture and undertook an
investment program consistent with the Fund's investment objectives. (See
Prospectus - "Investment Program"). On May 20, 1985, the Fund reorganized as a
Massachusetts business trust and on January 19, 1989, it reorganized as a
Maryland corporation pursuant to an Agreement and Plan of Reorganization and
Liquidation approved by shareholders on December 6, 1988.
For the period from April 6, 1993 through November 18, 1994,
the Fund offered another class of shares: Flag Investors Telephone Income Fund
Class D Shares, which were known at the time as Flag Investors Telephone Income
Fund Class B Shares and were reclassified as Flag Investors Telephone Income
Fund Class D Shares on November 18, 1994. Shares of that class are not currently
being offered although shares remain outstanding. The Fund commenced offering
the Flag Investors Telephone Income Fund Class B Shares on January 3, 1995.
Under a license agreement dated January 19, 1989 between the
Fund and Alex. Brown Incorporated, Alex. Brown Incorporated licenses to the Fund
the "Flag Investors" name and logo but retains rights to that name and logo,
including the right to permit other investment companies to use them.
<PAGE>
2. INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to seek current income and
long-term growth of capital without undue risk. In seeking this objective, the
Fund invests primarily in common stock, securities convertible thereto and debt
obligations of companies in the telephone industry and in income-producing
securities (including debt obligations) of issuers in the telephone or other
industries. The Fund's investment advisor (the "Advisor") and sub-advisor (the
"Sub-Advisor"), collectively, (the "Advisors"), believe that investing in a
portfolio of securities of companies in the telephone industry affords an
attractive opportunity for achieving this investment objective. There can be no
assurance, however, that the Fund's investment objective will be achieved.
Morningstar Mutual Fund Advisory Service ("Morningstar") assigned the Fund their
"5" Best in Category rating among the ten funds in the communications funds
category for the three-year period ended March 31, 1997. As of March 31, 1997,
Morningstar assigned the Fund a weighted overall risk-adjusted rating of four
stars based on the three-, five- and ten-year ratings (see explanation below).
The Fund's ratings for separate periods within its investment category of
domestic equity funds, were two stars among 1,919 funds for three years,
three stars among 1,076 funds for five years and five stars among 601 funds
for ten years.
The Morningstar risk-adjusted rating is expressed on a scale
of 1 to 5 stars. The star rating is neither a predictive measure nor a
"buy/sell" recommendation. It is a purely descriptive representation of how well
a fund has balanced risk and return in the past. If the fund scores in the top
10% of its investment category, it receives 5 stars (Highest), if it falls in
the next 22.5%, it receives 4 stars (Above Average); if it falls in the middle
35%, it receives 3 stars (Neutral or Average); if it falls in the next 22.5%, it
receives two stars (Below Average); and if it falls in the bottom 10%, it
receives 1 star (Lowest). The star ratings are recalculated monthly. The Fund's
overall risk-adjusted star rating is a weighted average of the Fund's three-,
five-, and 10-year histories, relative to other funds in its broad investment
category (i.e, equity). The three time periods are combined as a weighted
average. The 10-year rating accounts for 50% of the overall rating, the
five-year figure for 30%, and the three-year period 20%.
Depending on the circumstances, the Fund may temporarily and
for defensive purposes, invest up to 100% of its net assets in money market
instruments and in other income-producing securities. The Fund may also enter
into repurchase agreements, may loan portfolio securities, and may write covered
call options. In general, the Fund will invest in investment grade debt
obligations that are rated, at the time of purchase, BBB or higher by Standard &
Poor's Ratings Group ("S&P") or Baa or higher by Moody's Investors Service, Inc.
("Moody's"). Up to 10% of the Fund's assets may be invested in lower quality
debt obligations (securities rated BB or lower by S&P or Ba or lower by
Moody's). (See "Below Investment Grade Securities" below.) The ratings
categories of S&P and Moody's are described more fully in Appendix A.
Below Investment Grade Securities
The Fund may purchase debt obligations that carry ratings
lower than those assigned to investment grade bonds by Moody's or S&P, or that
are unrated if such bonds, in the Advisors' judgment, meet the quality criteria
established by the Board of Directors. These bonds are generally known as "junk
bonds." These securities may trade at substantial discounts from their face
values. Accordingly, if the Fund is successful in meeting its objectives,
investors may receive a total return consisting not only of income dividends
but, to a lesser extent, capital gain distributions. Appendix A to this
Statement of Additional Information sets forth a description of the S&P and
Moody's rating categories, which indicate the rating agency's opinion as to the
probability
-2-
<PAGE>
of timely payment of interest and principal. These ratings range in descending
order of quality from AAA to D (though the Fund will not purchase securities
rated, at the time of purchase below C), in the case of S&P, and from Aaa to C,
in the case of Moody's. Generally, securities that are rated lower than BBB by
S&P or Baa by Moody's are described as below investment grade. Securities rated
lower than investment grade may be of a predominantly speculative character and
their future cannot be considered well-assured. The issuer's ability to make
timely payments of principal and interest may be subject to material
contingencies. Securities in the lowest rating categories may be unable to make
timely interest or principal payments and may be in default and in arrears in
interest and principal payments.
The following summarizes the Moody's and S&P definitions for
speculative grade debt obligations in which the Fund may invest. Bonds that are
rated Ba by Moody's are judged to have speculative elements; their future cannot
be considered well-assured; and protection of interest and principal payments
may be very moderate, and thereby not well safeguarded during both good and bad
times over the future. Uncertainty of position characterizes bonds in this
class. Bonds rated B generally lack characteristics of the desirable investment
and the assurance of interest and principal payments or of maintenance of other
terms of the contract over any long period of time may be small. Caa-rated bonds
are of poor standing and may be in default or may have elements of danger with
respect to principal or interest. Bonds rated Ca represent obligations which are
speculative in a high degree and are often in default or have other marked
shortcomings. Bonds rated C are the lowest rated class of bonds and can be
regarded as having extremely poor prospects of ever attaining any real
investment standing. In the case of S&P, BB-rated bonds have less near-term
vulnerability to default than other speculative issues but face major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
that could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BBB- rating. B-rated bonds have a
greater vulnerability to default than BB-rated bonds but currently have the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating. CCC-rated bonds have a currently identifiable vulnerability to default
and are dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, they are not likely to have
the capacity to pay interest and repay principal. The CCC-rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating. The rating CC typically is applied to debt subordinated
to senior debt that is assigned an actual or implied CCC rating. The rating C
typically is applied to debt subordinated to senior debt that is assigned an
actual or implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy petition has been filed, but debt service payments
are continued. The rating CI is reserved for income bonds on which no interest
is being paid.
Ratings of S&P and Moody's represent their opinions of the
quality of bonds and other debt securities they undertake to rate at the time of
issuance. However, these ratings are not absolute standards of quality and may
not reflect changes in an issuer's creditworthiness. Accordingly, the Advisors
do not rely exclusively on ratings issued by S&P or Moody's in selecting
portfolio securities but supplement such ratings with independent and ongoing
review of credit quality. In addition, the total return the Fund may earn from
investments in high-yield securities will be significantly affected not only by
credit quality but by fluctuations in the markets in which such securities are
traded. Accordingly, selection and supervision by the Advisors of investments in
lower rated securities involves continuous analysis of individual issuers,
general business conditions, activities in the high-yield bond market and other
factors. The analysis of issuers may include, among other things, historic and
current financial conditions, strength of management,
-3-
<PAGE>
responsiveness to business conditions, credit standing and current and
anticipated results of operations. Analysis of general business conditions and
other factors may include anticipated changes in economic activity in interest
rates, the availability of new investment opportunities and the economic outlook
for specific industries.
Investing in higher yield, lower rated bonds entails
substantially greater risk than investing in investment grade bonds, including
not only credit risk, but potentially greater market volatility and lower
liquidity. Yields and market values of high-yield bonds will fluctuate over
time, reflecting not only changing interest rates but the bond market's
perception of credit quality and the outlook for economic growth. When economic
conditions appear to be deteriorating, lower rated bonds may decline in value
due to heightened concern over credit quality, regardless of prevailing interest
rates. In adverse economic conditions, the liquidity of the secondary market for
junk bonds may be significantly reduced. In addition, adverse economic
developments could disrupt the high-yield market, affecting both price and
liquidity, and could also affect the ability of issuers to repay principal and
interest, thereby leading to a default rate higher than has been the case
historically. Even under normal conditions, the market for junk bonds may be
less liquid than the market for investment grade corporate bonds. There are
fewer securities dealers in the high-yield market and purchasers of high-yield
bonds are concentrated among a smaller group of securities dealers and
institutional investors. In periods of reduced market liquidity, the market for
junk bonds may become more volatile and there may be significant disparities in
the prices quoted for high-yield securities by various dealers. Under conditions
of increased volatility and reduced liquidity, it would become more difficult
for the Fund to value its portfolio securities accurately because there might be
less reliable, objective data available.
Finally, prices for high-yield bonds may be affected by
legislative and regulatory developments. For example, from time to time,
Congress has considered legislation to restrict or eliminate the corporate tax
deduction for interest payments or to regulate corporate restructurings such as
takeovers, mergers or leveraged buyouts. Such legislation may significantly
depress the prices of outstanding high-yield bonds.
Repurchase Agreements
The Fund may enter into repurchase agreements with domestic
banks or broker-dealers deemed to be creditworthy by the Advisors, under
guidelines approved by the Board of Directors. A repurchase agreement is a
short-term investment in which the purchaser (i.e., the Fund) acquires ownership
of a debt security and the seller agrees to repurchase the obligation at a
future time and set price, usually not more than seven days from the date of
purchase, thereby determining the yield during the purchaser's holding period.
The value of underlying securities will be at least equal at all times to the
total amount of the repurchase obligation, including the interest factor. The
Fund makes payment for such securities only upon physical delivery or evidence
of book entry transfer to the account of a custodian, sub-custodian, or bank
acting as agent. The underlying securities, which in the case of the Fund are
securities of the U.S. Government only, may have maturity dates exceeding one
year. The Fund does not bear the risk of a decline in value of the underlying
securities unless the seller defaults under its repurchase obligation. In the
event of a bankruptcy or other default of a seller of a repurchase agreement,
the Fund could experience both delays in liquidating the underlying securities
and loss including: (a) possible decline in the value of the underlying security
during the period during which the Fund seeks to enforce its rights thereto, (b)
possible subnormal levels of income and lack of access to income during this
period, and (c) expenses of enforcing its rights.
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<PAGE>
Lending of Portfolio Securities
The Fund may lend portfolio securities to Board-approved
brokers or dealers in corporate or government securities, banks or other
recognized institutional borrowers of securities, provided that the borrower
maintains cash or equivalent collateral or a letter of credit in the Fund's
favor of not less than 100% of the market value of the securities loaned by
marking to market daily. While the portfolio securities are on loan, the Fund
receives from the borrower an amount equal to any dividend or interest paid on
such securities. The Fund may invest the cash collateral to generate additional
income or it may by agreement with the borrower receive interest income from the
borrower. Either the Fund or the borrower may terminate the loan at any time.
The Fund may pay reasonable administrative and custodial fees in connection with
a loan and may agree to pay a portion of interest generated on the Fund's
investment of the cash or equivalent collateral to the borrower or placing
broker. The Fund has no current intention of lending more than 5% of its
portfolio securities.
Covered Call Options
In an attempt to earn additional income, and as a means of
protecting the Fund's assets against market declines, the Fund may, to a limited
extent, write covered call option contracts on certain of its securities and
purchase call options for the purpose of terminating its outstanding obligations
with respect to securities upon which call option contracts have been written.
When the Fund writes a call option on securities that it owns,
it gives the purchaser of the option the right to buy the securities at the
price specified in the option (the "Exercise Price") at any time prior to the
expiration of the option. In the strategy to be employed by the Fund, the
Exercise Price, plus the option premium paid by the purchaser, is almost always
greater than the market price of the underlying security at the time the option
is written. If any option is exercised, the Fund will realize the long-term or
short-term gain or loss from the sale of the underlying security and the
proceeds of the sale will be increased by the net premium originally received.
By writing a covered option, the Fund may forego, in exchange for the net
premium, the opportunity to profit from an increase in value of the underlying
security above the Exercise Price. Thus, options will be written when the
Advisors believe the security should be held for the long term but expect no
appreciation or only moderate appreciation within the option period. The Fund
also may write covered options on securities that have a current value above the
original purchase price but which, if then sold, would not normally qualify for
a long-term capital gains treatment. Such activities will normally take place
during periods when market volatility is expected to be high.
Only call options that are traded on a national securities
exchange will be written. Call options are issued by the Options Clearing
Corporation, which also serves as the clearing house for transactions with
respect to options. The price of a call option is paid to the writer without
refund on expiration or exercise, and no portion of the price is retained by The
Options Clearing Corporation or the exchanges listed above. Writers and
purchasers of options pay the transaction costs, which may include commissions
charged or incurred in connection with such option transactions.
The Fund may write options contracts on its securities up to
an amount not in excess of 20% of the value of its net assets at the time such
options are written. The Fund will not sell the securities against which options
have been written (uncover the options) until after the option period has
expired, the option has been exercised or a closing purchase has been executed.
-5-
<PAGE>
Call options may be purchased by the Fund, but only to
terminate an obligation as a writer of a call option. This is accomplished by
making a closing purchase transaction, that is, the purchase of a call option on
the same security with the same Exercise Price and expiration date as specified
in the call option that had been written previously. A closing purchase
transaction with respect to calls traded on a national securities exchange has
the effect of extinguishing the obligation of a writer. Although the cost to the
Fund of such a transaction may be greater than the net premium received by the
Fund upon writing the original option, the Directors believe that it is
appropriate for the Fund to have the ability to make closing purchase
transactions in order to prevent its portfolio securities from being purchased
pursuant to the exercise of a call. The Advisors may also permit the call option
to be exercised. A profit or loss from a closing purchase transaction will be
realized depending on whether the amount paid to purchase a call to close a
position is less or more than the amount received from writing the call. A
profit or loss from an option exercised will be realized depending upon whether
the cost of the stock sold through the exercise, minus the premium received on
the option, is less or more than the proceeds of the exercise.
Investment Restrictions
The Fund's investment program is subject to a number of
investment restrictions which reflect self-imposed standards as well as federal
and state regulatory limitations. The investment restrictions recited below are
in addition to those described in the Fund's Prospectus, and are matters of
fundamental policy and may not be changed without the affirmative vote of a
majority of outstanding shares. The percentage limitations contained in these
restrictions apply at the time of purchase of securities. Accordingly, the Fund
will not:
1. Borrow money, except as a temporary measure for
extraordinary or emergency purposes and then only from banks and in an amount
not exceeding 10% of the value of the total assets of the Fund at the time of
such borrowing, provided that, while borrowings by the Fund equaling 5% or more
of the Fund's total assets are outstanding, the Fund will not purchase
securities for investment;
2. Invest in real estate or mortgages on real estate;
3. Purchase or sell commodities or commodities contracts;
4. Act as an underwriter of securities within the meaning of
the U.S. federal securities laws except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities;
5. Issue senior securities;
6. Make loans, except that the Fund may purchase or hold debt
instruments in accordance with its investment objectives and policies, and may
loan portfolio securities and enter into repurchase agreements as described in
this Registration Statement;
7. Effect short sales of securities;
8. Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of transactions);
-6-
<PAGE>
9. Purchase participations or other interests in oil, gas or
other mineral exploration or development programs; or
10. Invest more than 10% of the value of its net assets in
illiquid securities (as defined under federal and state securities laws),
including repurchase agreements with remaining maturities in excess of seven
days.
The following investment restriction may be changed by a vote
of the majority of the Board of Directors. The Fund will not:
1. Invest in shares of any other investment company registered
under the Investment Company Act of 1940, except as permitted by federal law.
3. VALUATION OF SHARES AND REDEMPTION
Valuation of Shares
The net asset value per Share is determined daily as of the
close of the New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern
Time) each day on which the New York Stock Exchange is open for business (a
"Business Day"). The New York Stock Exchange is open for business on all
weekdays except for the following holidays: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Redemption
The Fund may suspend the right of redemption or postpone the
date of payment during any period when (a) trading on the New York Stock
Exchange is restricted 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 exists as determined by the SEC so that valuation of the net assets of
the Fund is not reasonably practicable.
Under normal circumstances, the Fund will redeem Shares by
check as described in the Prospectus. However, if the Board of Directors
determines that it would be in the best interests of the remaining shareholders
of the Fund to make payment of the redemption price in whole or in part by a
distribution in kind of readily marketable securities from the portfolio of the
Fund in lieu of cash, in conformity with applicable rules of the SEC, the Fund
will make such distributions in kind. If Shares are redeemed in kind, the
redeeming shareholder will incur brokerage costs in later converting the assets
into cash. The method of valuing portfolio securities is described under
"Valuation of Shares," and such valuation will be made as of the same time the
redemption price is determined. The Fund, however, has elected to be governed by
Rule 18f-1 under the Investment Company Act of 1940, as amended (the "1940 Act")
pursuant to which the Fund is obligated to redeem Shares solely in cash up to
the lesser of $250,000 or 1% of the net asset value of the Fund during any
90-day period for any one shareholder.
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<PAGE>
4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following 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.
The following is only a summary of certain additional federal
income tax considerations generally affecting the Fund and its shareholders that
are not described in the Fund's Prospectus. No attempt is made to present a
detailed explanation of the tax treatment of the Fund or its shareholders, and
the discussion here and in the Fund's Prospectus is not intended as a substitute
for careful tax planning.
Qualification as a Regulated Investment Company
The Fund has elected to be, and intends to be, taxed as a
regulated investment company ("RIC") under Subchapter M of the Code. In order to
qualify as a RIC for any taxable year, the Fund must generally derive at least
90% of its gross income from dividends, interest, certain payments with respect
to securities loans, and gains from the sale or other disposition of stock,
securities, or foreign currencies and other income (including, but not limited
to, gains from options, futures or forward contracts) derived with respect to
its business of investing in stocks, securities or currencies (the "Income
Requirement"). In addition, the Fund generally must derive less than 30% of its
gross income from gains on the sale or other disposition of certain investments
held for less than three months, including stock or securities (as defined in
Section 2(a)(36) of the 1940 Act); foreign currencies (or options, futures, or
forward contracts on foreign currencies) that are not directly related to the
Fund's principal business of investing in stock or securities (or options and
futures with respect to stocks or securities); and options, futures or forward
contracts (other than options, futures, or forward contracts on foreign
currencies) (the "Short-Short Gain Test").
To the extent that the Fund is able and chooses to identify
and designate offsetting positions (e.g., options that the Fund has written and
the securities covered by such options) as "hedges," increases and decreases in
the value of such positions will be netted for the purposes of determining
whether the Short-Short Gain Test has been satisfied. The Short-Short Gain Test
will not prevent the Fund from disposing of investments at a loss, since the
recognition of a loss before the expiration of the three-month holding period is
disregarded.
In addition, at the close of each quarter of the Fund's
taxable year, at least 50% of the value of its total assets must consist of cash
and cash items, U.S. government securities, securities of other RICs, and
securities of other issuers (as to which the Fund has not invested more than 5%
of the value of its total assets in securities of any such issuer and as to
which the Fund does not hold more than 10% of the outstanding voting securities
of any such issuer), and no more than 25% of the value of its total assets may
be invested in the securities of any one issuer (other than U.S. government
securities and securities of other RICs), or in two or more issuers that the
Fund controls and that are engaged in the same, similar or related trades or
businesses (the "Asset Diversification Test"). The Fund will not lose its status
as a RIC if it fails to meet the Asset Diversification Test solely as a result
of a fluctuation in value of portfolio assets not attributable to a purchase.
The Fund may curtail its investments in certain securities where the application
thereto of the Asset Diversification Test is uncertain.
-8-
<PAGE>
Under Subchapter M, the Fund is exempt from federal income tax
on its net investment income and capital gains that it distributes to
shareholders, provided that it distributes at least 90% of its investment
company taxable income (net investment income and the excess of net short term
capital gains over net long term capital losses) for the year (the "Distribution
Requirement") and complies with the other requirements of the Code described
above. The Distribution Requirement for any year may be waived if a RIC
establishes to the satisfaction of the Internal Revenue Service that it is
unable to satisfy the Distribution Requirement by reason of distributions
previously made for the purpose of avoiding liability for federal excise tax.
Although the Fund intends to distribute substantially all of
its net investment income and capital gains for any taxable year, the Fund will
be subject to federal income taxation to the extent any such income or gains are
not distributed.
If for any taxable year, the Fund does not qualify as a
regulated investment company, all of its taxable income will be subject to tax
at regular corporate income tax rates without any deduction for distributions to
shareholders, and all such distributions generally will be taxable to
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the 70% dividends received deduction for corporate shareholders.
Fund 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.
The Fund may either retain or distribute to shareholders its
excess of net long-term capital gains over net short-term capital losses ("net
capital gain") for each taxable year. If such gains are distributed as a capital
gains distribution, they are taxable to shareholders as long-term capital gains,
regardless of the length of time the shareholder has held the Shares, whether or
not such gains were recognized by the Fund prior to the date on which a
shareholder acquired Fund Shares and whether or not the distribution was paid in
cash or reinvested in Shares. In the unlikely event the Fund elects to retain
its net capital gains, it is expected that the Fund will elect to have
shareholders treated as having received a distribution of such gains, with the
result that shareholders will be required to report such gains on their returns
as long-term capital gains, will receive a tax credit for their allocable share
of capital gains tax paid by the Fund on the gains, and will increase the tax
basis for their Shares by an amount equal to 65% of such gains.
Generally, gain or loss on the sale or exchange of a Share
will be a capital gain or loss which will be long-term if the Share has been
held for more than one year and otherwise will be short-term. However, a
shareholder who 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 has included in income any
undistributed net capital gains of the Fund with respect to such Share) 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 the
Fund with respect to such Share that have been included in the shareholder's
income). 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.
-9-
<PAGE>
Investors purchasing Shares just prior to an ordinary income
dividend or capital gains distribution will be taxable on the entire amount of
the dividend or distribution received, even though the net asset value per Share
on the date of such purchase may have reflected the amount of such forthcoming
dividend or distribution.
In the case of corporate shareholders, Fund distributions
(other than capital gains distributions) generally qualify for the 70% dividends
received deduction to the extent of the gross amount of certain qualifying
dividends received by the Fund for the year. Generally, a dividend will be
treated as a qualifying dividend if it has been received from a domestic
corporation. For purposes of the alternative minimum tax and the environmental
tax, corporate shareholders generally will be required to take the full amount
of any dividend received from the Fund into account in determining their
adjusted current earnings for purposes of computing "alternative minimum taxable
income."
The Fund will be required in certain cases to withhold and
remit to the United States Treasury 31% of distributions payable to any
shareholder who (1) has provided either an incorrect taxpayer identification
number or no number at all, (2) is subject to backup withholding by the Service
for failure to properly report the receipt of interest or dividend income, or
(3) has failed to certify to the Fund that such shareholder is not subject to
backup withholding.
The Fund will provide a statement annually to shareholders as
to the federal income tax status of distributions paid (or deemed to be paid) by
the Fund during the year.
Federal Excise Tax; Miscellaneous Considerations
The Code imposes a nondeductible 4% federal excise tax on RICs
that do not distribute in each calendar year an amount equal to 98% of their
ordinary income for the calendar year plus 98% of their capital gain net income
(the excess of long- and short-term capital gain over long- and short-term
capital loss) for the one-year period ending on October 31 of such calendar
year. The excise tax is imposed on the undistributed part of this required
distribution. In addition, the balance of such income must be distributed during
the next calendar year to avoid liability for the excise tax in that year. For
the foregoing purposes, an investment company is treated as having distributed
any amount on which it is subject to income tax for any taxable year ending in
such calendar year.
The Fund intends to make sufficient distributions of its
ordinary income and capital gain net income prior to the end of each calendar
year to avoid liability for excise tax. In certain circumstances the Fund may be
required to liquidate portfolio investments in order to make sufficient
distributions to avoid excise tax liability.
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. Shareholders are urged to
consult their tax advisors as to the consequences of these and other state and
local tax rules affecting investment in the Fund.
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<PAGE>
5. MANAGEMENT OF THE FUND
Directors and Officers
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.
*TRUMAN T. SEMANS, Chairman (10/27/27)
Managing Director, Alex. Brown & Sons Incorporated; Director,
Investment Company Capital Corp. (registered investment advisor);
Formerly, Vice Chairman, Alex. Brown Incorporated.
*CHARLES W. COLE, JR., Director (11/11/35)+
Vice Chairman, Alex. Brown Capital Advisory & Trust Company (registered
investment advisor); Chairman, Investment Company Capital Corp.
(registered investment advisor); Director, Provident Bankshares
Corporation and Provident Bank of Maryland; Formerly, President and
Chief Executive Officer, Chief Administrative Officer and Director,
First Maryland Bancorp, The First National Bank of Maryland and First
Omni Bank; Director, York Bank and Trust Company.
*RICHARD T. HALE, Director (7/17/45)
Managing Director, Alex. Brown & Sons Incorporated; Director and
President, Investment Company Capital Corp. (registered investment
advisor); Chartered Financial Analyst.
JAMES J. CUNNANE, Director (3/11/38)
CBC Capital, 264 Carlyle Lake Drive, St. Louis, Missouri 63141.
Managing Director, CBC Capital (merchant banking), 1993-Present;
Formerly, Senior Vice President and Chief Financial Officer, General
Dynamics Corporation (defense), 1989-1993 and Director, The Arch Fund
(registered investment company).
JOHN F. KROEGER, Director (8/11/24)
37 Pippins Way, Morristown, New Jersey 07960. Director/Trustee, AIM
Funds (registered investment companies); Formerly, Consultant, Wendell
& Stockel Associates, Inc. (consulting firm) and General Manager, Shell
Oil Company.
LOUIS E. LEVY, Director (11/16/32)
26 Farmstead Road, Short Hills, New Jersey 07078. Director,
Kimberly-Clark Corporation (personal consumer products) and Household
International (banking and finance); Chairman of the Quality Control
Inquiry Committee, American Institute of Certified Public Accountants;
Formerly, Trustee, Merrill Lynch Funds for Institutions, 1991-1993;
Adjunct Professor, Columbia University-Graduate School of Business,
1991-1992; Partner, KPMG Peat Marwick, retired 1990.
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); Director, Central
-11-
<PAGE>
Carolina Bank & Trust (banking), Key Funds (registered investment
companies), and AMBAC Treasurers Trust (registered investment company).
REBECCA W. RIMEL, Director (4/10/51)
The Pew Charitable Trusts, One Commerce Square, 2005 Market Street,
Suite 1700, Philadelphia, PA 19103-7017; President and Chief Executive
Officer, The Pew Charitable Trusts; Director and Executive Vice
President, The Glenmede Trust Company; Formerly, Executive Director,
The Pew Charitable Trusts.
CARL W. VOGT, Director (4/20/36)
Fulbright & Jaworski L.L.P., 801 Pennsylvania Avenue, N.W., Washington,
D.C. 20004-2604. Senior Partner, Fulbright & Jaworski L.L.P. (law);
Director, Yellow Corporation (trucking); Formerly, Chairman and Member,
National Transportation Safety Board; Director, National Railroad
Passenger Corporation (Amtrak) and Member, Aviation System Capacity
Advisory Committee (Federal Aviation Administration).
BRUCE E. BEHRENS, President (4/20/44)
Vice President and Portfolio Manager, Alex. Brown Investment Management
(registered investment advisor); Vice President and Treasurer, Buppert,
Behrens & Owen, Inc. (investments), 1987-Present.
J. DORSEY BROWN, III, Executive Vice President (8/26/39)
Managing Director, Alex. Brown & Sons Incorporated; Currently, Chief
Executive Officer and formerly, General Partner, Alex. Brown Investment
Management (registered investment advisor).
LIAM D. BURKE, Executive Vice President (12/27/55)
Telecommunications Analyst, Alex. Brown Investment Management, October
1994-Present; Formerly, Telecommunications Analyst, Ferris, Baker
Watts, Inc. (brokerage firm), May 1992-October 1994 and Managing
Director, Frey and Co. (investment banking), October 1989-May 1992.
HOBART C. BUPPERT, II, Vice President (8/1/46)
Vice President and Portfolio Manager, Alex. Brown Investment Management
(registered investment advisor), 1984-Present; President, Buppert,
Behrens & Owen, Inc. (investments), 1987-Present.
LEE S. OWEN, Vice President (10/27/47)
Vice President and Portfolio Manager, Alex. Brown Investment Management
(registered investment advisor); Vice President and Secretary, Buppert,
Behrens & Owen, Inc. (investments), 1987-Present.
EDWARD J. VEILLEUX, Vice President (8/26/43)
Principal, Alex. Brown & Sons Incorporated; Vice President, Armata
Financial Corp. (registered broker-dealer); Executive Vice President,
Investment Company Capital Corp. (registered investment advisor).
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<PAGE>
GARY V. FEARNOW, Vice President (12/6/44)
Managing Director, Alex. Brown & Sons Incorporated and Manager, Private
Client Marketing, Alex. Brown & Sons Incorporated.
SCOTT J. LIOTTA, Vice President and Secretary (3/18/65)+
Manager, Fund Administration, Alex. Brown & Sons Incorporated, July
1996-Present; Formerly, Manager and Foreign Markets Specialist, Putnam
Investments Inc. (registered investment companies), April 1994-July
1996; Supervisor, Brown Brothers Harriman & Co. (domestic and global
custody), August 1991-April 1994.
JOSEPH A. FINELLI, Treasurer (1/24/57)
Vice President, Alex. Brown & Sons Incorporated and Vice President,
Investment Company Capital Corp. (registered investment advisor),
September 1995-Present; Formerly, Vice President and Treasurer, The
Delaware Group of Funds (registered investment companies) and Vice
President, Delaware Management Company, Inc. (investments), 1980-August
1995.
LAURIE D. COLLIDGE, Assistant Secretary (1/1/66)
Asset Management Department, Alex. Brown & Sons Incorporated.
- -------------------
* Messrs. Semans, Cole and Hale are directors who are "interested persons,"
as defined in the 1940 Act.
+ Mr. Liotta is Mr. Cole's son-in-law.
Directors and officers of the Fund are also directors and
officers of some or all of the other investment companies managed, administered,
advised or distributed by the Distributor or its affiliates. There are currently
twelve funds in the Flag Investors/ISI Funds and Alex. Brown Cash Reserve Fund,
Inc. fund complex (the "Fund Complex"). Mr. Cole serves as Chairman of one fund
and as a Director of seven other funds in the Fund Complex. Mr. Hale serves as
Chairman of three funds, as President and Director of one fund and as a Director
of each of the other funds in the Fund Complex. Mr. Semans serves as Chairman of
five funds and as a Director of five other funds in the Fund Complex. Messrs.
Cunnane, Kroeger, Levy and McDonald serve as Directors of each fund in the Fund
Complex. Ms. Rimel serves as a Director of ten funds in the Fund Complex. Mr.
Vogt serves as a Director of nine funds in the Fund Complex. Mr. Behrens serves
as President of one fund and Vice President of two funds in the Fund Complex.
Mr. Brown serves as Executive Vice President of three funds in the Fund Complex.
Mr. Buppert serves as President of one fund and Vice President of two funds in
the Fund Complex and Mr. Owen serves as President of one fund and Vice President
of two funds in the Fund Complex. Mr. Fearnow serves as Vice President of ten
funds in the Fund Complex. Mr. Veilleux serves as Executive Vice President of
one fund and as Vice President of eleven funds in the Fund Complex. Mr. Burke
serves as Executive Vice President of one fund in the Fund Complex. Mr. Liotta
serves as Vice President and Secretary, Mr. Finelli serves as Treasurer and Ms.
Collidge serves as Assistant Secretary, respectively, of each of the funds in
the Fund Complex.
Some of the Directors of the Fund are customers of, and have
had normal brokerage transactions with, the Distributor in the ordinary course
of business. All such transactions were made on substantially the same terms as
those prevailing at the time for comparable transactions with unrelated persons.
Additional transactions may be expected to take place in the future.
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<PAGE>
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 the Distributor or Alex. Brown Incorporated may be considered to
have received remuneration indirectly. As compensation for his or her services
as director, each Director who is not an "interested person" of the Fund (as
defined in the 1940 Act) (a "Non-Interested Director") 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 each
fund in the Fund Complex for which he or she serves. In addition, the Chairman
of the Fund Complex's Audit Committee receives an aggregate annual fee from the
Fund Complex. Payment of such fees and expenses is allocated among all such
funds described above in direct proportion to their relative net assets. For the
fiscal year ended December 31, 1996, Non-Interested Directors' fees attributable
to the assets of the Fund totaled $36,330. 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 December 31, 1996.
<TABLE>
<CAPTION>
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COMPENSATION TABLE
Name of Person, Position Aggregate Compensation Pension or Retirement Total Compensation
From the Fund in the Benefits Accrued As From the Fund
Fiscal Year Ended Part of Fund Expenses and Fund Complex
December 31, 1996 Payable to Directors
in the Fiscal Year
Ended December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
W. James Price, Chairman (1, 2) $0 $0 $0
Charles W. Cole, Jr., Director (1, 3) $0 $0 $0
Richard T. Hale, Director (1, 3) $0 $0 $0
Truman T. Semans, Director (1, 4) $0 $0 $0
James J. Cunnane, Director $3,813 (5) (6) $39,000 for service on 12
Boards in the Fund Complex
N. Bruce Hannay, Director (7) $320 (5) (6) $3,321 for service on 12
Boards in the Fund Complex
John F. Kroeger, Director $4,790 (5) (6) $49,000 for service on 12
Boards in the Fund Complex
Louis E. Levy, Director $3,813 (5) (6) $39,000 for service on 12
Boards in the Fund Complex
Eugene J. McDonald, Director $3,813 (5) (6) $39,000 for service on 12
Boards in the Fund Complex
Rebecca W. Rimel, Director (3) $3,441 (5) (6) $39,000 for service on 6 (8)
Boards in the Fund Complex
Carl W. Vogt, Director (3) $4,576 (5) (6) $39,000 for service on 5 (8)
Boards in the Fund Complex
Harry Woolf, Director $3,813 (5) (6) $39,000 for service on 12
Boards in the Fund Complex
</TABLE>
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-14-
<PAGE>
(1) A Director who is an "interested person" as defined in the Investment
Company Act.
(2) Retired, effective December 31, 1996.
(3) Messrs. Hale, Cole and Vogt and Ms. Rimel were elected to the Board at a
special meeting of Directors held on April 10, 1996.
(4) Mr. Semans was elected Chairman of the Board, effective January 1, 1997.
(5) Of amounts payable to Messrs. Cunnane, Hannay, Kroeger, Levy, McDonald,
Vogt and Woolf, and to Ms. Rimel, $3,813, $0, $0, $0, $3,813, $4,576,
$3,813 and $3,441, respectively, was deferred pursuant to a deferred
compensation plan.
(6) The Fund Complex has adopted a Retirement Plan for eligible Directors, as
described below. The actuarially computed pension expense for the Fund for
the year ended December 31, 1996 was approximately $19,997.
(7) Retired, effective January 31, 1996 and is now deceased.
(8) Ms. Rimel and Mr. Vogt receive proportionately higher compensation from
each fund for which they serve as a Director.
The Fund Complex has adopted a Retirement Plan (the "Retirement
Plan") for Directors who are not employees of the Fund, the Advisors or their
respective affiliates (the "Participants"). After completion of six years of
service, each Participant will be entitled to receive an annual retirement
benefit equal to a percentage of the fee earned by 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 Plan is
unfunded and unvested. Mr. Kroeger has qualified but has not received benefits.
The Fund has two Participants, a Director who retired effective December 31,
1994, and a Director who retired effective December 31, 1996, who have qualified
for the Retirement Plan by serving thirteen and fourteen years, respectively, as
Directors in the Fund Complex and each of whom will be paid a quarterly fee of
$4,875 by the Fund Complex for the rest of his life. Another participant, who
retired on January 31, 1996 and died on June 2, 1996, was paid fees of $8,090 by
the Fund Complex under the Retirement Plan in the fiscal year ended December 31,
1996. Such fees are allocated to each fund in the Fund Complex based upon the
relative net assets of such fund to the Fund Complex.
Set forth in the table below are the estimated annual benefits
payable to a Participant upon retirement assuming various years of service and
payment of a percentage of the fee earned by such Participant in his or her last
year of service, as described above. The approximate credited years of service
at December 31, 1996 are as follows: for Mr. Cunnane, 2 years; for Mr. Kroeger,
14 years; for Mr. Levy, 2 years; for Mr. McDonald, 4 years; for Ms. Rimel, 1
year and for Mr. Vogt, 1 year.
<TABLE>
<CAPTION>
Years of Service Estimated Annual Benefits Payable By Fund Complex Upon Retirement
Chairman of Audit Committee Other Participants
<C> <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>
Any Director who receives fees from the Fund is permitted to
defer a minimum of 50%, or up to all, of his or her annual compensation pursuant
to a Deferred Compensation Plan. Messrs. Cunnane, Levy, McDonald and Vogt and
Ms. Rimel have each executed a Deferred Compensation Agreement. Currently, the
deferring Directors may select various Flag Investors and Alex. Brown Funds in
which all or part of their deferral account shall be deemed to be invested.
Distributions from
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<PAGE>
the deferring Directors' 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 has adopted a Code of Ethics
pursuant to Rule 17j-1 under the Investment Company Act. The Code of Ethics
applies to the personal investing activities of all the directors and officers
of the Fund, as well as to designated officers, directors and employees of the
Advisors and the Distributor. As described below, the Code of Ethics imposes
additional restrictions on the Advisors' investment personnel, including the
portfolio managers and employees who execute or help execute a portfolio
manager's decisions or who obtain contemporaneous information regarding the
purchase or sale of a security by the Fund.
The Code of Ethics requires that covered employees of the
Advisors, certain directors or officers of the Distributor, and all Fund
Directors who are "interested persons" preclear personal securities investments
(with certain exceptions, such as non-volitional purchases or purchases that are
part of an automatic dividend reinvestment plan). The preclearance requirement
and associated procedures are designed to identify any substantive prohibition
or limitation applicable to the proposed investment. The substantive
restrictions applicable to investment personnel include a ban on acquiring any
securities in an initial public offering, a prohibition from profiting on
short-term trading in securities and special preclearance of the acquisition of
securities in private placements. Furthermore, the Code of Ethics provides for
trading "blackout periods" that prohibit trading by investment personnel and
certain other employees within periods of trading by the Fund in the same
security. Officers, directors and employees of the Advisors and the Distributor
may comply with codes instituted by those entities so long as they contain
similar requirements and restrictions.
6. INVESTMENT ADVISORY AND OTHER SERVICES
On April 10, 1996, the shareholders of the Fund approved an
Investment Advisory Agreement between the Fund and Investment Company Capital
Corp. ("ICC" or the "Advisor") and a Sub-Advisory Agreement among the Fund, ICC
and Alex. Brown Investment Management ("ABIM" or the "Sub-Advisor"), both of
which contracts are described in greater detail below. ICC, is a wholly-owned
subsidiary of Alex. Brown Financial Corporation and an indirect subsidiary of
Alex. Brown Incorporated. ICC also serves as the investment advisor and ABIM
serves as the sub-advisor to other funds in the Flag Investors family of funds.
Buppert, Behrens & Owens, Inc., a company organized and owned by three employees
of ABIM, owns a 49% limited partnership interest and a 1% general partnership
interest in ABIM. The Distributor holds a 1% general partnership interest in
ABIM and Alex. Brown Incorporated owns the remaining 49% limited partnership
interest.
Under the Investment Advisory Agreement, ICC obtains and
evaluates economic, statistical and financial information to formulate and
implement investment policies for the Fund. ICC has delegated this
responsibility to ABIM. Any investment program undertaken by ICC or ABIM will at
all times be subject to policies and control of the Fund's Board of Directors.
ICC will provide the Fund with office space for managing its affairs, with the
services of required executive personnel and with certain clerical and
bookkeeping services and facilities. These services are provided by ICC without
reimbursement by the Fund for any costs. Neither ICC nor ABIM shall be liable to
the Fund or its shareholders for any act or omission by ICC or ABIM or any
losses sustained by the Fund or its shareholders except in the case of willful
misfeasance, bad faith, gross negligence, or reckless disregard of duty. The
services of ICC and ABIM to the Fund are not exclusive and ICC and ABIM are free
to render similar services to others.
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<PAGE>
As compensation for its services, ICC is entitled to receive a
fee from the Fund, calculated daily and paid monthly, at the following annual
rates based upon the Fund's average daily net assets: 0.85% of the first $100
million, 0.75% of the next $100 million, 0.70% of the next $100 million, 0.65%
of the next $200 million, 0.58% of the next $500 million, 0.53% of the next $500
million and 0.50% of that portion exceeding $1.5 billion. Prior to April 11,
1995, the annual rates based upon the Fund's average daily net assets were:
0.65% of the first $100 million, 0.55% of the next $100 million, 0.50% of the
next $100 million and 0.45% of that portion in excess of $300 million. As
compensation for its services, ABIM is entitled to receive a fee from ICC,
payable from its advisory fee, calculated daily and paid monthly, at the
following annual rates based upon the Fund's average daily net assets: 0.60% of
the first $100 million, 0.55% of the next $100 million, 0.50% of the next $100
million, 0.45% of the next $200 million, 0.40% of the next $500 million, 0.37%
of the next $500 million and 0.35% of that portion in excess of $1.5 billion.
Each of the Investment Advisory Agreement and the Sub-Advisory
Agreement has an initial term of two years and will continue in effect from year
to year thereafter if such continuance is specifically approved at least
annually by the Fund's Board of Directors, including a majority of the Non-
Interested Directors who have no direct or indirect financial interest in such
agreements, by votes cast in person at a meeting called for such purpose, and by
a vote of a majority of the outstanding Shares. The Fund or ICC may terminate
the Investment Advisory Agreement on sixty days' written notice without penalty.
The Investment Advisory Agreement will terminate automatically in the event of
assignment. The Sub-Advisory Agreement has similar termination provisions. Prior
to April 10, 1996, ICC served as the Fund's investment advisor and ABIM served
as the Fund's sub-advisor pursuant to agreements approved by shareholders on
December 6, 1988.
Advisory fees paid by the Fund to ICC and sub-advisory fees paid
by ICC to ABIM for the last three fiscal years were as follows:
Year Ended December 31,
-----------------------------------------------------
Fees Paid to: 1996 1995 1994
ICC $ 3,562,609 $ 2,297,474* $ 2,244,515*
ABIM $ 2,430,407 $ 1,541,505 $ 1,533,375
--------------
* Net of fee waivers. Absent such fee waivers for the fiscal years ended
December 31, 1995 and December 31, 1994, the Class A Shares' Total
Operating Expenses would have been .99% and .99%, respectively, of its
average daily net assets. Absent fee waivers for the period from January
3, 1995 (commencement of operation) through December 31, 1995, the Class
B Shares' Total Operating Expenses would have been 1.74% of its average
daily net assets. Absent fee waivers, for the years ended December 31,
1995 and December 31, 1994, the Class D Shares' Total Operating Expenses
would have been 1.34% and 1.34%, respectively, of its average daily net
assets. Such voluntary fee waivers were discontinued on October 6, 1995.
ICC also serves as the Fund's transfer and dividend disbursing
agent and provides accounting services to the Fund. See "Custodian, Transfer
Agent and Accounting Services."
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<PAGE>
7. DISTRIBUTION OF FUND SHARES
The Distribution Agreements provide that Alex. Brown and Sons
Incorporated ("Alex. Brown" or the "Distributor") has the exclusive right to
distribute the related class of Flag Investors Telephone Income Fund Shares
either directly or through other broker-dealers and further provide that Alex.
Brown will: (a) solicit and receive orders for the purchase of Shares, (b)
accept or reject such orders on behalf of the Fund in accordance with the Fund's
currently effective prospectus and transmit such orders as are accepted to the
Fund's transfer agent as promptly as possible, (c) receive requests for
redemptions and transmit such redemption requests to the Fund's transfer agent
as promptly as possible, and (d) respond to inquiries from shareholders
concerning the status of their accounts and the operations of the Fund. Alex.
Brown has not undertaken to sell any specific number of Shares. The Distribution
Agreements further provide that, in connection with the distribution of Shares,
Alex. Brown will be responsible for all of the promotional expenses. The
services provided by Alex. Brown to the Fund are not exclusive, and Alex. Brown
is free to provide similar services to others. Alex. Brown shall not be liable
to the Fund or its shareholders for any act or omission by Alex. Brown or any
losses sustained by the Fund or its shareholders except in the case of willful
misfeasance, bad faith, gross negligence or reckless disregard of duty.
Alex. Brown and certain broker-dealers ("Participating
Dealers") have entered into Sub-Distribution Agreements under which such
broker-dealers have agreed to process investor purchase and redemption orders
and respond to inquiries from Fund shareholders concerning the status of their
accounts and the operations of the Fund.
As compensation for providing distribution services as described
above, the Fund will pay Alex. Brown for the Flag Investors Class A Shares, an
annual fee, paid monthly equal to .25% of the average daily net assets of the
Class A Shares. As compensation for providing distribution services as described
above for the Flag Investors Class B Shares, the Fund will pay Alex. Brown, an
annual fee, paid monthly, equal to .75% of the average daily net assets of the
Class B Shares. With respect to the Class A Shares, Alex. Brown expects to
allocate most of its annual distribution fee to its investment representatives
and up to all of its fee to Participating Dealers. With respect to the Class B
Shares, Alex. Brown expects to retain the entire distribution fee as
reimbursement for front-end payments to its investment representatives and to
Participating Dealers.
In addition, with respect to the Class B Shares, the Fund will
pay Alex. Brown a shareholder servicing fee at an annual rate of .25% of the
average daily net assets of the Class B Shares. (See the Prospectus.) Alex.
Brown expects to allocate most of its shareholder servicing fee to its
investment representatives or to Participating Dealers.
-18-
<PAGE>
As compensation for providing distribution and shareholder
services to the Fund for the last three fiscal years, Alex. Brown received
aggregate commissions and fees in the following amounts:
Year Ended December 31
- -------------------------------------------------------------------------------
Class 1996 1995 1994
- ----- ---- ---- ----
Class A 12b-1 Fee $1,251,568 $1,153,794 $1,155,931
Class B 12b-1 Fee $98,828 $26,347* --
Class B Shareholder $32,943 $8,783* --
Servicing Fee
Class D 12b-1 Fee ** $176,582 $189,406 $185,856
Total Fees $1,559,921 $1,378,330 $1,341,787
* For the period from January 3, 1995 (commencement of operations) through
December 31, 1995.
** For the period April 6, 1993 through November 18, 1994 the Fund offered
the Flag Investors Telephone Income Fund Class D Shares (which were known
at such time as the Flag Investors Telephone Income Fund Class B Shares.)
Some Class D Shares remain outstanding.
Pursuant to Rule 12b-1 under the 1940 Act, which provides that
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 a Plan of Distribution for
each of its classes of Shares (the "Plans"). Under the Plans, the Fund pays a
fee to Alex. Brown for distribution and other shareholder servicing assistance
as set forth in the Distribution Agreements, and Alex. Brown is authorized to
make payments out of its fees to its investment representatives and to
participating broker-dealers. Each Distribution Agreement has an initial term of
two years. The Distribution Agreements and the Plans encompassed therein will
remain in effect from year to year thereafter as specifically approved (a) at
least annually by the Fund's Board of Directors and (b) by the affirmative vote
of a majority of the Non-Interested Directors, by votes cast in person at a
meeting called for such purpose. The Distribution Agreements including the Plans
and forms of Sub-Distribution Agreements, were most recently approved by the
Fund's Board of Directors, including a majority of the Non-Interested Directors,
on September 30, 1996.
In approving the Plans, the Directors concluded, in the exercise
of reasonable business judgment, that there was a reasonable likelihood that the
Plans would benefit the Fund and its shareholders. The Plans will be renewed
only if the Directors make a similar determination in each subsequent year. The
Plans may not be amended to increase materially the fee to be paid pursuant to
the Distribution Agreements without the approval of the shareholders of the
Fund. The Plans may be terminated at any time and the Distribution Agreements
may be terminated at any time upon sixty days' notice, in either case without
penalty, by the vote of a majority of the Fund's Non-Interested Directors or by
a vote of a majority of the outstanding class of Shares (as defined under
"Capital Stock"). Any Sub-Distribution Agreement may be terminated in the same
manner at any time. The Distribution Agreements and any Sub-Distribution
Agreements shall automatically terminate in the event of assignment.
During the continuance of the Plans, the Fund's Board of
Directors will be provided for their review, at least quarterly, a written
report concerning the payments made under the Plans to Alex. Brown pursuant to
the Distribution Agreements and to broker-dealers pursuant to Sub-Distribution
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<PAGE>
Agreements. Such reports shall be made by the persons authorized to make such
payments. In addition, during the continuance of the Plans, the selection and
nomination of the Fund's Non-Interested Directors shall be committed to the
discretion of the Non-Interested Directors then in office.
In addition, the Fund may enter into Shareholder Servicing
Agreements with certain financial institutions, such as banks, to act as
Shareholder Servicing Agents, pursuant to which Alex. Brown will allocate a
portion of its distribution fee as compensation for such financial institutions'
ongoing shareholder services. Although banking laws and regulations prohibit
banks from distributing shares of open-end investment companies such as the
Fund, according to interpretations by various bank regulatory authorities,
financial institutions are not prohibited from acting in other capacities for
investment companies, such as the shareholder servicing capacities described
above. Should future legislative, judicial or administrative action prohibit or
restrict the activities of the Shareholder Servicing Agents in connection with
the Shareholder Servicing Agreements, the Fund may be required to alter
materially or discontinue its arrangements with the Shareholder Servicing
Agents. Such financial institutions may impose separate fees in connection with
these services and investors should review the Prospectus and this Statement of
Additional Information in conjunction with any such institution's fee schedule.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein, and banks and financial
institutions may be required to register as dealers pursuant to state law.
If either Plan is terminated in accordance with its terms, the
obligation of the Fund to make payments to Alex. Brown pursuant to the Plan will
cease and the Fund will not be required to make any payments past the date the
related Distribution Agreement terminates. In return for payments received
pursuant to the Plans in the fiscal years ended December 31, 1996, December 31,
1995 and December 31, 1994, Alex. Brown paid the distribution related expenses
of the related classes including one or more of the following: printing and
mailing of prospectuses to other than current shareholders; compensation to
dealers and sales personnel; and interest, carrying, or other financing charges.
In the fiscal years ended December 31, 1996, December 31, 1995
and December 31, 1994, Alex. Brown received sales commissions on the Class A
Shares of $717,441, $146,261 and $812,666 and from such amounts retained
$255,062, $73,667 and $260,734 for each such year, respectively. In the fiscal
year ended December 31, 1996 and the period from January 3, 1995 through
December 31, 1995, Alex. Brown received contingent deferred sales loads on the
Class B Shares of $377,125 and $78,146 and retained all of this amount.
Except as described elsewhere, the Fund pays or causes to be
paid all continuing expenses of the Fund, including, without limitation:
investment advisory and distribution fees; the charges and expenses of any
registrar, any custodian or depository appointed by the Fund for the safekeeping
of cash, portfolio securities and other property, and any 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 of certificates
representing Shares; 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 and statements of additional
information of the Fund and supplements thereto to the Fund's shareholders; all
expenses of shareholders' and Directors' meetings and of preparing, printing and
mailing proxy statements and reports to shareholders; fees and travel expenses
of Directors and Director members of any advisory board or committee; all
expenses incident to the payment of any dividend, distribution,
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<PAGE>
withdrawal or redemption, whether in Shares or in cash; charges and expenses of
any outside service used for pricing of the Shares; fees and expenses of legal
counsel, including counsel to the Non-Interested Directors, and of independent
certified public 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 that 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 operation unless otherwise explicitly assumed by Alex.
Brown, ICC or ABIM.
8. BROKERAGE
ABIM is responsible for decisions to buy and sell securities for
the Fund, for the broker-dealer selection and for negotiation of commission
rates, subject to the supervision of ICC. Purchases and sales of securities on a
securities exchange are effected through broker-dealers who charge a commission
for their services. Brokerage commissions are subject to negotiation between
ABIM and the broker-dealers. ABIM may direct purchase and sale orders to any
broker-dealer, including, to the extent and in the manner permitted by
applicable law, Alex. Brown.
In over-the-counter transactions, orders are placed directly with
a principal market maker and such purchases normally include a mark up over the
bid to the broker-dealer based on the spread between the bid and asked price for
the security. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter. On occasion,
certain money market instruments may be purchased directly from an issuer
without payment of a commission or concession. The Fund will not deal with Alex.
Brown in any transaction in which Alex. Brown acts as a principal, nor will the
Fund buy or sell over-the-counter securities with Alex. Brown acting as market
maker.
If Alex. Brown is participating in an underwriting or selling
group, the Fund may not buy portfolio securities from the group except in
accordance with rules of the SEC. The Fund believes that the limitation will not
affect its ability to carry out its present investment objective.
ABIM's primary consideration in effecting securities
transactions is to obtain best price and execution of orders on an overall
basis. As described below, however, ABIM may, in its discretion, effect
transactions with dealers that furnish statistical, research or other
information or services that are deemed by ABIM to be beneficial to the Fund's
investment program. Certain research services furnished by broker-dealers may be
useful to ABIM with clients other than the Fund. Similarly, any research
services received by ABIM through placement of portfolio transactions of other
clients may be of value to ABIM in fulfilling its obligations to the Fund. No
specific value can be determined for research and statistical services furnished
without cost to ABIM by a broker-dealer. ABIM is of the opinion that because the
material must be analyzed and reviewed by its staff, its receipt does not tend
to reduce expenses, but may be beneficial in supplementing ABIM's research and
analysis. Therefore, it may tend to benefit the Fund by improving ABIM's
investment advice. ABIM's policy is to pay a broker-dealer higher commissions
for particular transactions than might be charged if a different broker-dealer
had been chosen when, in ABIM's opinion, this policy furthers the overall
objective of obtaining best price and execution. Subject to periodic review by
the Fund's Board of Directors, ABIM is also authorized to pay broker-dealers
other than Alex. Brown higher commissions on brokerage transactions for the Fund
in order to secure research and investment services described above. The
allocation of orders among broker-dealers and the commission rates paid by the
Fund will be reviewed periodically by the Board.
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<PAGE>
Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions, on an agency basis,
through Alex. Brown. At the time of such authorization the Board adopted certain
policies and procedures incorporating the standards of Rule 17e-1 under the 1940
Act which requires that the commissions paid Alex. Brown must be "reasonable and
fair compared to the commission, fee or other remuneration received or to be
received by other brokers in connection with comparable transactions involving
similar securities during a comparable period of time." Rule 17e-1 also contains
requirements for the review of such transactions by the Board of Directors and
requires ICC and ABIM to furnish reports and to maintain records in connection
with such reviews. The Distribution Agreement between Alex. Brown and the Fund
does not provide for any reduction in the distribution fee to be received by
Alex. Brown from the Fund as a result of profits resulting from brokerage
commissions on transactions of the Fund effected through Alex. Brown.
ABIM manages other investment accounts. It is possible that, at
times, identical securities will be acceptable for the Fund and one or more of
such other accounts; however, the position of each account in the securities of
the same issuer may vary and the length of time that each account may choose to
hold its investment in such securities 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 or one or more of these accounts is considered at or about the same time,
transactions in such securities will be allocated among the accounts in a manner
deemed equitable by ABIM. ABIM may combine such transactions, in accordance with
applicable laws and regulations, in order to obtain the best net price and most
favorable execution. Such simultaneous transactions, however, could adversely
affect the ability of the Fund to obtain or dispose of the full amount of a
security that it seeks to purchase or sell.
During the fiscal years ended December 31, 1996, December 31,
1995 and December 31, 1994, Alex. Brown directed $191,851,754, $288,166,553 and
$208,696,174, respectively, of transactions to broker-dealers and paid $396,046,
$386,539 and $254,895, respectively, to broker-dealers in related commissions
because of research services provided. In the fiscal years ended December 31,
1996, December 31, 1995 and December 31, 1994, the Fund paid Alex. Brown
brokerage commissions in the aggregate amount of $7,000, $0 and $7,000, which
represented 1.9%, 0.0% and 2.7% of the Fund's aggregate brokerage commissions
for the periods and which were paid on transactions that represented 2.9%, 0.0%
and 1.8%, respectively, of the aggregate dollar amount of transactions that
incurred commissions paid by the Fund during the respective periods. The Fund is
required to identify any securities of its "regular brokers or dealers" (as such
term is defined in the Investment Company Act) that the Fund has acquired during
its most recent fiscal year. As of December 31, 1996, the Fund held a 6.0%
repurchase agreement issued by Goldman Sachs & Co. valued at $5,410,000. Goldman
Sachs & Co. is a "regular broker or dealer" of the Fund.
9. CAPITAL STOCK
Under the Fund's Articles of Incorporation, the Fund has 70
million authorized Shares of common stock, with a par value of $.001 per share.
The Board of Directors may increase or decrease the number of authorized Shares
without shareholder approval. On October 11, 1989, the Fund declared a two for
one stock dividend payable to shareholders of record on October 27, 1989.
The Fund's Articles of Incorporation provide for the
establishment of separate series and separate classes of Shares by the Directors
at any time. The Fund currently has one Series and the Board has designated
three classes of Shares: Flag Investors Telephone Income Fund Class A Shares,
Flag Investors Telephone Fund Class B Shares and Flag Investors Telephone Income
Fund Class D Shares. The Flag Investors Telephone Income Fund Class D Shares are
not currently being offered. In the event separate series are established, all
Shares of the Fund, regardless of series or
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<PAGE>
class, would have equal rights with respect to voting, except that with respect
to any matter affecting the rights of the holders of a particular series or
class, the holders of each series or class would vote separately. In general,
each such series would be managed separately and shareholders of each series
would have an undivided interest in the net assets of that series. For tax
purposes, the series would be treated as separate entities. Generally, each
class of Shares issued by a particular series would be identical to every other
class and expenses of the Fund (other than 12b-1 fees and any applicable
services fees) are prorated between all classes of a series based upon the
relative net assets of each class. Any matters affecting any class exclusively
will be voted on by the holders of such class.
Shareholders of the Fund do not have cumulative voting rights,
and therefore the holders of more than 50% of the outstanding Shares voting
together for election of Directors may elect all 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. There are no preemptive,
conversion or exchange rights applicable to any of the Shares. The issued and
outstanding Shares are fully paid and non-assessable. In the event of
liquidation or dissolution of the Fund, each Share is entitled to its portion of
the Fund's assets (or the assets allocated to a separate series of shares if
there is more than one series) after all debts and expenses have been paid.
As used in this Statement of Additional Information, the term
"majority of the outstanding shares" means the vote of the lesser of (i) 67% or
more of the shares present at a meeting, if the holders of more than 50% of the
outstanding shares are present or represented by proxy, or (ii) more than 50% of
the outstanding shares.
10. SEMI-ANNUAL REPORTS
The Fund furnishes shareholders with semi-annual reports
containing information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The annual
financial statements are audited by the Fund's independent accountants.
11. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
PNC Bank, National Association ("PNC Bank") has been retained to
act as custodian of the Fund's investments. PNC Bank receives such compensation
from the Fund for its services as Custodian as may be agreed to from time to
time by PNC Bank and the Fund. Investment Company Capital Corp. has been
retained to act as transfer and dividend disbursing agent. As compensation for
providing these services, the Fund pays ICC up to $10.12 per account per year,
plus reimbursement for out-of-pocket expenses incurred in connection therewith.
For the fiscal year ended December 31, 1996, such fees totalled $623,604.
ICC also provides certain accounting services to the Fund under a
Master Services Agreement effective January 1, 1994, between the Fund and ICC.
As compensation for these services, ICC receives an annual fee, calculated daily
and paid monthly as shown below.
Average Net Assets Incremental Accounting Services Fee
------------------ -----------------------------------
$ 0 - $ 10,000,000 $13,000(fixed fee)
$ 10,000,000 - $ 20,000,000 .100%
$ 20,000,000 - $ 30,000,000 .080%
$ 30,000,000 - $ 40,000,000 .060%
-23-
<PAGE>
$ 40,000,000 - $ 50,000,000 .050%
$ 50,000,000 - $ 60,000,000 .040%
$ 60,000,000 - $ 70,000,000 .030%
$ 70,000,000 - $ 100,000,000 .020%
$100,000,000 - $ 500,000,000 .015%
$500,000,000 - $1,000,000,000 .005%
over $1,000,000,000 .001%
In addition, the Fund will reimburse ICC for certain
out-of-pocket expenses incurred in connection with ICC's provision of accounting
services under the Master Services Agreement.
As compensation for providing accounting services for the
fiscal year ended December 31, 1996, ICC received fees of $117,160.
12. INDEPENDENT ACCOUNTANTS
The annual financial statements of the Fund are audited by Coopers &
Lybrand L.L.P. whose report thereon appears elsewhere herein, and have been
included herein in reliance upon the report of such firm of accountants given on
their authority as experts in accounting and auditing.
13. PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the Fund to
that of other open-end diversified management investment companies and to stock
or other relevant indices in advertisements or in certain reports to
shareholders, performance will be stated in terms of total return rather than in
terms of yield. The total return quotations, under the rules of the SEC, must be
calculated according to the following formula:
n
P(l + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the end of the 1-, 5-,
or 10-year periods (or fractional portion thereof) of a
hypothetical $1,000 payment made at the beginning of the
1-, 5- or 10-year periods.
Under the foregoing formula, the time periods used in
advertising will be based on rolling calendar quarters, updated to the last day
of the most recent quarter prior to submission of the advertising for
publication, and will cover one-, five-, and ten-year periods or a shorter
period dating from the effectiveness of the Fund's registration statement or the
date the Fund (or a class or series) commenced operations (provided such date is
subsequent to the date the registration statement became effective). In
calculating the ending redeemable value for the Class A Shares, the maximum
sales load (4.5%) is deducted from the initial $1,000 payment and all dividends
and distributions by
-24-
<PAGE>
the Fund are assumed to have been reinvested at net asset value as described in
the Prospectus on the reinvestment dates during the period. In calculating the
performance of the Class B Shares, the applicable contingent deferred sales
charge (4.0% for the one year period, 2.0% for the five year period and no sales
charge thereafter) is deducted from the ending redeemable value and all
dividends and distributions by the Fund are assumed to have been reinvested at
net asset value as described in the prospectus on the reinvestment dates during
the period. "T" in the formula above is calculated by finding the average annual
compounded rate of return over the period that would equate an assumed initial
payment of $1,000 to the ending redeemable value. Any sales loads that might in
the future be made applicable at the time to reinvestments would be included as
would any recurring account charges that might be imposed by the Fund.
Calculated according to SEC rules, the ending redeemable value and
average annual total return of a hypothetical $1,000 payment for the periods
ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
One-Year Period Ended Five-Year Period Ended Ten-Year Period Ended
December 31, 1996 December 31, 1996 December 31, 1996
------------------- ------------------- -------------------
Ending Average Ending Average Ending Average
Redeemable Annual Total Redeemable Annual Total Redeemable Annual Total
Class Value Return Value Return Value Return
- ----- ----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C>
Class A $1,083.50 8.35% 1,798.78$ 12.46% 3,708.39$ 14.00%
January 18, 1984+
Class B $1,095.74 9.57% N/A N/A N/A N/A
January 3, 1995+
Class D $1,105.74 10.57% N/A N/A N/A N/A
April 6, 1993+
[BROKEN TABLE]
Inception Through
December 31, 1996
------------------
Ending Average
Redeemable Annual Total
Value Return
----- ------
Class A * *
January 18, 1984+
Class B $1,450.99 20.52%
January 3, 1995+
Class D $1,490.03 11.21%
April 6, 1993+
</TABLE>
+ Inception Date.
* Not required since more than ten years have elapsed since inception.
The Fund may also from time to time include in such advertising
total return figures that are not calculated according to the formula set forth
above in order to compare more accurately the Fund's performance with other
measures of investment return. For example, in comparing the Fund's total return
with data published by Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc. or Morningstar Inc., or with the performance of the Lehman
Brothers Government Corporate Bond Index, the Consumer Price Index, the return
on 90-day U.S. Treasury bills, the Standard and Poor's 500 Stock Index or the
Dow Industrial Average, the Fund calculates its aggregate and average annual
total return for the specified periods of time by assuming the investment of
$10,000 in Shares and assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. For this alternative
computation, the Fund assumes that the $10,000 invested in Shares is net of all
sales charges. The Fund will, however, disclose the maximum sales charges and
will also disclose that the performance data do not reflect sales charges and
that inclusion of sales charges would reduce the performance quoted. Such
alternative total return information will be given no greater prominence in such
advertising than the information prescribed under SEC rules, and all
advertisements containing performance data will include a legend disclosing that
such performance data represent past performance and that the investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
-25-
<PAGE>
The Fund's annual portfolio turnover rate (the lesser of the value
of the purchases or sales for the year divided by the average monthly market
value of the portfolio during the year, excluding U.S. Government and short-term
securities) may vary from year to year, as well as within a year, depending on
market conditions. The Fund's portfolio turnover rates in fiscal year 1996 was
20% and in fiscal year 1995 was 24%.
14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
To Fund management's knowledge, the following persons held
beneficially or of record 5% or more of the Fund's outstanding shares, as of
April 15, 1997:
Alex. Brown & Sons Incorporated 26.2%*
One South Street
Baltimore, Maryland
----------
* As of such date, Alex. Brown owned beneficially less
than 1% of such Shares.
As of April 15, 1997, the Directors and officers as a group owned
less than 1% of the Fund's total outstanding shares.
15. FINANCIAL STATEMENTS
See next page.
-26-
<PAGE>
ALEX BROWN TELEPHONE INCOME FUND
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Statement of Net Assets December 31, 1996
Market Value
Shares Security (Note 1)
- ------------------------------------------------------------------------------
TELEPHONE INDUSTRY--90.3%
Common Stock--90.3%
220,408 AirTouch Communications Inc.* $ 5,565,302
600,000 America Online, Inc. 19,950,000
394,000 Ameritech Corporation 23,886,250
224,224 AT&T Corporation 9,753,744
370,000 BCE Inc. 17,667,500
497,608 Bell Atlantic Corporation 32,220,118
223,464 BellSouth Corporation 9,022,359
366,428 BlackBox Corporation* 15,115,155
290,000 BroadBand Technologies Inc.* 4,277,500
115,000 CellStar Corporation* 2,070,000
595,800 Cincinnati Bell Inc. 36,716,175
200,000 DSC Communications Corporation* 3,575,000
25,000 Excel Communications Inc.* 525,000
1,022,400 Frontier Corporation 23,131,800
214,700 General Instrument Corporation* 4,642,888
823,320 GTE Corporation 37,461,060
496,841 LCI International Inc. 10,682,081
181,235 Lucent Technologies Inc. 8,382,119
440,000 MFS Communications Co. Inc.* 23,980,000
405,000 Mobile Telecommunication 3,442,500
340,000 Motorola Inc. 20,867,500
200,000 NEXTEL Communications Inc.--Class A* 2,612,500
250,000 Octel Communications Corporation* 4,375,000
435,347 Orbital Sciences Corporation* 7,509,736
1,373,808 Pacific Telesis Group 50,487,444
130,000 Preferred Networks Inc.* 845,000
140,000 QUALCOMM Inc.* 5,582,500
969,106 SBC Communications Inc. 50,151,235
690,000 Southern New England
Telecommunications Corporation 26,823,750
128,000 Telefonica de Espana SA ADR 8,864,000
500,000 Telefonos de Mexico SA ADR--Series L 16,500,000
148,000 U.S. Robotics Corporation* 10,656,000
------------
Total Common Stock
(Cost $327,639,322) 497,341,216
------------
27
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- ------------------------------------------------------------------------------
Statement of Net Assets (concluded) December 31, 1996
Shares/ Market Value
Par (000) Security (Note 1)
- ------------------------------------------------------------------------------
NON-TELEPHONE INDUSTRY--8.5%
Common Stock--7.6%
626,900 Alexander Haagen Properties, Inc. $ 9,246,775
367,774 Conseco Inc. 23,445,593
67,700 Meditrust Corporation 2,708,000
100,000 Nationwide Health Properties, Inc. 2,425,000
122,128 Simon DeBartolo Group, Inc. 3,785,968
------------
Total Common Stock
(Cost $18,040,909) 41,611,336
------------
Corporate Bond--0.9%
$ 5,000 HMH Properties, 9.5%, 5/15/05
(Cost $4,910,351) 5,225,000
------------
Total Non-Telephone Industry
(Cost $22,951,260) 46,836,336
------------
REPURCHASE AGREEMENT--1.0%
5,410 Goldman Sachs & Co., 6.00%
Dated 12/31/96, to be repurchased on
1/2/97, collateralized by U.S. Treasury
Notes with a market value of $5,518,672.
(Cost $5,410,000) 5,410,000
------------
Total Investments in Securities--99.8%
(Cost $356,000,582)** 549,587,552
------------
Other Assets in Excess of Liabilities, Net--0.2% 1,016,790
------------
Net Assets--100.0% $550,604,342
============
28
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Net Asset Value Per:
Class A Share
($505,371,023 / 32,421,696 shares outstanding) $15.59(dagger)
=======
Class B Share
($17,660,516 / 1,138,610 shares outstanding) $15.51(double daggers)
=======
Class D Share
($27,572,803 / 1,768,618 shares outstanding) $15.59(triple daggers)
=======
Maximum Offering Price Per:
Class A Share
($15.59 / .955) $16.32
=======
Class B Share $15.51
=======
Class D Share
($15.59 / .985) $15.83
=======
- ---------------
* Non-income producing security.
** Aggregate cost for federal tax purposes was $352,513,493.
(dagger) Redemption value is $15.59.
(double daggers) Redemption value is $14.89 following 4.00% maximum contingent
deferred sales charge.
(triple daggers) Redemption value is $15.43 following 1.00% maximum contingent
deferred sales charge.
See Notes to Financial Statements.
29
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- -------------------------------------------------------------------------------
Statement of Operations
For the
Year Ended
Dec. 31,
- ------------------------------------------------------------------------------
1996
Investment Income (Note 1):
Dividends $14,802,988
Interest 971,287
Less: Foreign taxes withheld (148,592)
-----------
Total income 15,625,683
-----------
Expenses:
Investment advisory fee (Note 2) 3,562,609
Distribution fee (Note 2) 1,559,921
Transfer agent fee (Note 2) 623,604
Printing and postage 191,642
Accounting fee (Note 2) 117,160
Legal 105,286
Custodian fees 67,181
Miscellaneous 55,576
Audit 49,511
Director's fees 36,330
Insurance 17,258
Registration fees 16,940
-----------
Total expenses 6,403,018
-----------
Net investment income 9,222,665
-----------
Realized and unrealized gain on investments:
Net realized gain from security transactions 44,618,521
Change in unrealized appreciation or
depreciation of investments 13,950,633
-----------
Net gain on investments 58,569,154
-----------
Net increase in net assets resulting from operations $67,791,819
===========
See Notes to Financial Statements.
30
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Year Ended Dec. 31,
- --------------------------------------------------------------------------------
1996 1995
Increase in Net Assets:
Operations:
Net investment income $ 9,222,665 $ 14,026,672
Net realized gain from security transactions 44,618,521 35,372,071
Change in unrealized appreciation or
depreciation of investments 13,950,633 93,655,306
------------ ------------
Net increase in net assets resulting
from operations 67,791,819 143,054,049
------------ ------------
Distributions to Shareholders from:
Net investment income:
Class A Shares (8,654,688) (13,188,618)
Class B Shares (157,647) (71,352)
Class D Shares (410,330) (766,702)
Net realized short-term gains:
Class A Shares (3,437,642) (594,281)
Class B Shares (118,740) (6,947)
Class D Shares (187,069) (39,689)
Net realized long-term gains:
Class A Shares (26,060,648) (31,183,490)
Class B Shares (896,656) (411,017)
Class D Shares (1,420,532) (2,033,414)
------------ ------------
Total distributions (41,343,952) (48,295,510)
------------ ------------
Capital Share Transactions (Note 3):
Proceeds from sale of shares 36,388,229 35,420,420
Value of shares issued in reinvestment
of dividends 33,751,356 40,313,196
Cost of shares repurchased (77,258,035) (106,718,217)
------------ ------------
Decrease in net assets derived from
capital share transactions (7,118,450) (30,984,601)
------------ ------------
Total increase in net assets 19,329,417 63,773,938
Net Assets:
Beginning of year 531,274,925 467,500,987
------------ ------------
End of year $550,604,342 $ 531,274,925
------------ ------------
See Notes to Financial Statements.
31
<PAGE>
<TABLE>
<CAPTION>
FLAG INVESTORS TELEPHONE INCOME FUND
- -------------------------------------------------------------------------------
Financial Highlights -- Class A Shares
(For a share outstanding throughout each year)(1)
For the Year Ended
Dec. 31, For the Year Ended Dec. 31,
- ------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of year $ 14.87 $ 12.30 $ 13.70 $ 12.20 $ 11.28
------- ------- ------- ------- -------
Income from Investment Operations:
Net investment income 0.27 0.40 0.41 0.42 0.42
Net realized and unrealized gain/(loss)
on investments 1.67 3.58 (1.27) 1.78 0.93
------- ------- ------- ------- -------
Total from Investment Operations 1.94 3.98 (0.86) 2.20 1.35
------- ------- ------- ------- -------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.38) (0.41) (0.44) (0.42) (0.42)
Distributions from net realized
long-term gains (0.84) (1.00) (0.10) (0.28) (0.01)
------- ------- ------- ------- -------
Total distributions (1.22) (1.41) (0.54) (0.70) (0.43)
------- ------- ------- ------- -------
Net asset value at end of year $ 15.59 $ 14.87 $ 12.30 $ 13.70 $ 12.20
======= ======= ======= ======= =======
Total Return(2) 13.46% 33.44% (6.32)% 18.12% 12.35%
Ratios to Average Daily Net Assets:
Expenses(3) 1.14% 0.93% 0.92% 0.92% 0.92%
Net investment income(4) 1.74% 2.85% 3.14% 3.12% 3.81%
Supplemental Data:
Net assets at end of year (000) $505,371 $492,454 $435,805 $469,163 $307,641
Portfolio turnover rate 20% 24% 23% 14% 6%
Average commissions per share $ 0.07(5) -- -- -- --
</TABLE>
- -----------------
(1) Computed based upon average shares outstanding.
(2) Total return excludes the effect of sales charge.
(3) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 0.99%, 0.99%, 0.98% and 1.07% for
the years ended December 31, 1995, 1994, 1993 and 1992, respectively.
(4) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 2.79%, 3.07%, 3.06% and
3.66% for the years ended December 31, 1995, 1994, 1993 and 1992,
respectively.
(5) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
See Notes to Financial Statements.
32
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Financial Highlights -- Class B Shares
(For a share outstanding throughout each period)(1)
For the Period
For the Year Jan. 3, 1995(2)
Ended through
Dec. 31, Dec. 31,
- --------------------------------------------------------------------------------
1996 1995
Per Share Operating Performance:
Net asset value at beginning of period $ 14.83 $12.28
------- ------
Income from Investment Operations:
Net investment income 0.19 0.30
Net realized and unrealized gain
on investments 1.63 3.56
------- ------
Total from Investment Operations 1.82 3.86
------- ------
Less Distributions:
Distributions from net investment
income and net realized
short-term gains (0.30) (0.31)
Distributions from net realized
long-term gains (0.84) (1.00)
------- ------
Total distributions (1.14) (1.31)
------- ------
Net asset value at end of period $ 15.51 $14.83
======= ======
Total Return(3) 12.60% 32.42%
Ratios to Average Daily Net Assets:
Expenses(4) 1.92% 1.70%(6)
Net investment income(5) 0.95% 2.13%(6)
Supplemental Data:
Net assets at end of period (000) $17,661 $7,504
Portfolio turnover rate 20% 24%
Average commissions per share $ 0.07(7) --
- -----------------
(1) Computed based upon average shares outstanding.
(2) Commencement of operations.
(3) Total return excludes the effect of sales charge.
(4) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 1.74% (annualized) for the period
ended December 31, 1995.
(5) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 2.09% (annualized) for
the period ended December 31, 1995.
(6) Annualized.
(7) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
See Notes to Financial Statements.
33
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Financial Highlights -- Class D Shares
(For a share outstanding throughout each period)(1)
For the Period
Apr. 6, 1993(2)
through
For the Year Ended Dec. 31, Dec. 31,
- --------------------------------------------------------------------------------------
<S> <C>
1996 1995 1994 1993
Per Share Operating Performance:
Net asset value at beginning of period $ 14.87 $ 12.30 $ 13.67 $ 13.21
------- ------- ------- -------
Income from Investment Operations:
Net investment income 0.22 0.34 0.37 0.25
Net realized and unrealized gain/(loss)
on investments 1.67 3.58 (1.20) 0.80
------- ------- ------- -------
Total from Investment Operations 1.89 3.92 (0.83) 1.05
------- ------- ------- -------
Less Distributions:
Distributions from net investment
income and net realized
short-term gains (0.33) (0.35) (0.42) (0.31)
Distributions in excess of net
investment income -- -- (0.02) --
Distributions from net realized
long-term gains (0.84) (1.00) (0.10) (0.28)
------- ------- ------- -------
Total distributions (1.17) (1.35) (0.54) (0.59)
------- ------- ------- -------
Net asset value at end of period $ 15.59 $ 14.87 $ 12.30 $ 13.67
======= ======= ======= =======
Total Return(3) 13.00% 32.91% (6.13)% 8.01%
Ratios to Average Daily Net Assets:
Expenses(4) 1.49% 1.28% 1.27% 1.27%(6)
Net investment income(5) 1.40% 2.50% 2.81% 2.73%(6)
Supplemental Data:
Net assets at end of period (000) $27,573 $31,317 $31,696 $23,481
Portfolio turnover rate 20% 24% 23% 14%
Average commissions per share $ 0.07(7) -- -- --
</TABLE>
- ----------------
(1) Computed based upon average shares outstanding.
(2) Commencement of operations.
(3) Total return excludes the effect of sales charge.
(4) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 1.34%, 1.34% and 1.31% for the
years ended December 31, 1995, 1994 and the period ended December 31, 1993,
respectively.
(5) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 2.44%, 2.74% and 1.98%
for the years ended December 31, 1995, 1994 and the period ended December
31, 1993, respectively.
(6) Annualized.
(7) Disclosure is required for fiscal years beginning after September 1, 1995.
Represents average commission rate per share charged to the Fund on
purchases and sales of investments during the period.
See Notes to Financial Statements.
34
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- -------------------------------------------------------------------------------
Notes to Financial Statements
NOTE 1--Significant Accounting Policies
Flag Investors Telephone Income Fund, Inc. ("the Fund") is organized as a
Maryland corporation and commenced operations on January 18, 1984 (the exchange
date) when investors received five shares of the Fund in a tax-free exchange for
each share of American Telephone & Telegraph Company (AT&T), with rights to the
divested Bell regional operating companies attached. The Fund is registered
under the Investment Company Act of 1940, as amended, as an open-end, management
investment company. On April 6, 1993, the Fund began offering Class D Shares.
The Class A and Class D Shares each have different sales charges and
distribution fees. As of November 18, 1994, Class D Shares were no longer
available for sale; however, existing shareholders may reinvest their dividends.
On January 3, 1995, the Fund began offering Class B Shares, which have no
initial sales charge but are subject to a contingent deferred sales charge on
certain shares redeemed within six years of purchase.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
accounting policies are as follows:
A. Security Valuation--Portfolio securities that are primarily traded on a
recognized U.S. securities exchange are valued on the basis of their
last sale price. In the event that there are no sales or the security is
not listed, it is valued at the average between the last reported bid
and asked prices or at the fair value as determined by the Investment
Advisor under procedures established and monitored by the Board of
Directors. Short-term obligations with maturities of 60 days or less are
valued at amortized cost.
B. Repurchase Agreements--The Fund may agree to enter into tri-party
repurchase agreements. Securities held as collateral for tri-party
repurchase agreements are maintained by the broker's custodial bank in a
segregated account until maturity of the repurchase agreement. The
agreement ensures that the market value of the collateral, including
accrued interest thereon, is sufficient in the event of default. If the
counterparty defaults and the value of the collateral declines or if the
35
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- -------------------------------------------------------------------------------
NOTE 1--concluded
counterparty enters into an insolvency proceeding, realization of the
collateral by the Fund may be delayed or limited.
C. Federal Income Tax -- No provision is made for federal income taxes as
it is the Fund's intention to continue to qualify as a regulated
investment company and to make requisite distributions to shareholders
that will be sufficient to relieve it from all or substantially all
federal income and excise taxes. The Fund's policy is to distribute to
shareholders substantially all of its taxable net investment income and
net realized capital gains, if any.
Distributions are determined in accordance with income tax regulations,
which may differ from generally accepted accounting principles.
Accordingly, periodic reclassifications are made within the Fund's
capital accounts to reflect income and gains available for distribution
under income tax regulations.
D. Other -- Security transactions are accounted for on the trade date, and
the cost of investments sold is determined by use of the specific
identification method for both financial reporting and income tax
purposes. Cost for financial reporting purposes includes the value of
the securities received in the exchange. For income tax purposes, the
tax cost is the basis of the AT&T shares in the hands of the exchanging
AT&T shareholders at the date of exchange. Interest income is recorded
on an accrual basis. Dividend income is recorded on the ex-dividend
date.
NOTE 2--Investment Advisory Fees, Transactions with Affiliates and Other Fees
Investment Company Capital Corp. ("ICC"), a subsidiary of Alex. Brown
Financial Corp., is the Fund's investment advisor and Alex. Brown Investment
Management ("ABIM") is the Fund's sub-advisor. As compensation for its advisory
services, ICC receives from the Fund an annual fee, calculated daily and paid
monthly, at the following annual rates based upon the Fund's average daily net
assets: 0.85% of the first $100 million, 0.75% of the next $100 million, 0.70%
of the next $100 million, 0.65% of the next $200 million, 0.58% of the next $500
million, 0.53% of the next $500 million and 0.50% of that portion in excess of
$1.5 billion. Prior to April 11, 1996, the annual rates based upon the Fund's
average daily net assets were: 0.65% of the first $100 million, 0.55% of the
next $100 million, 0.50% of the next $100 million and 0.45% of that portion in
excess of $300 million.
36
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 2--concluded
As compensation for its sub-advisory services, ABIM receives a fee from
ICC, payable from its advisory fee, calculated daily and paid monthly, at the
following annual rates based upon the Fund's average daily net assets: 0.60% of
the first $100 million, 0.55% of the next $100 million, 0.50% of the next $100
million, 0.45% of the next $200 million, 0.40% of the next $500 million, 0.37%
of the next $500 million and 0.35% of that portion in excess of $1.5 billion.
As compensation for its accounting services, ICC receives from the Fund an
annual fee, calculated daily and paid monthly, based upon the Fund's average
daily net assets. ICC received $117,160 for accounting services for the year
ended December 31, 1996.
As compensation for its transfer agent services, ICC receives from the Fund
a per account fee, calculated and paid monthly. ICC received $623,604 for
transfer agent services for the year ended December 31, 1996.
As compensation for providing distribution services, Alex. Brown & Sons
Incorporated ("Alex. Brown") receives from the Fund an annual fee, calculated
daily and paid monthly, at an annual rate equal to 0.25% of the Fund's average
daily net assets of Class A Shares, 1.00% (includes 0.25% shareholder servicing
fee) of the average daily net assets of Class B Shares and 0.60% of the average
daily net assets of Class D Shares. For the year ended December 31, 1996,
distribution fees aggregated $1,559,921 of which $1,251,568, $131,771 and
$176,582 were attributable to Class A Shares, Class B Shares and Class D Shares,
respectively. Alex. Brown received $7,000 of commissions on security
transactions from the Fund for the year ended December 31, 1996.
The Fund complex of which the Fund is a part has adopted a retirement plan
for eligible Directors. The actuarially computed pension expense allocated to
the Fund for the period January 1, 1996 through December 31, 1996 was
approximately $19,997, and the accrued liability was approximately $68,940.
NOTE 3--Capital Share Transactions
The Fund is authorized to issue up to 70 million shares of $.001 par value
capital stock (60 million Class A Shares, 5 million Class B Shares, 3 million
Class D Shares and 2 million undesignated). Transactions in shares of the Fund
are listed on the following pages.
37
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
NOTE 3--continued
Class A Shares
-------------------------------
For the For the
Year Ended Year Ended
Dec. 31, 1996 Dec. 31, 1995
-------------- --------------
Shares sold 1,730,953 2,145,785
Shares issued to shareholders on
reinvestment of dividends 2,022,300 2,674,624
Shares redeemed (4,451,593) (7,132,553)
-------------- --------------
Net decrease in shares outstanding (698,340) (2,312,144)
============== ==============
Proceeds from sale of shares $ 26,738,906 $ 28,720,184
Value of reinvested dividends 30,812,547 37,305,866
Cost of shares redeemed (69,090,064) (97,427,131)
-------------- --------------
Net decrease from capital share transactions $(11,538,611) $(31,401,081)
============== ==============
Class B Shares
-------------------------------
For the Period
For the Jan. 3, 1995*
Year Ended through
Dec. 31, 1996 Dec. 31, 1995
-------------- --------------
Shares sold 628,129 489,011
Shares issued to shareholders on
reinvestment of dividends 73,229 32,826
Shares redeemed (68,656) (15,929)
-------------- --------------
Net increase in shares outstanding 632,702 505,908
============== ==============
Proceeds from sale of shares $ 9,649,323 $6,700,236
Value of reinvested dividends 1,109,830 458,760
Cost of shares redeemed (1,071,919) (229,177)
-------------- --------------
Net increase from capital share transactions $ 9,687,234 $6,929,819
============== ==============
- --------------
*Commencement of operations.
38
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- -------------------------------------------------------------------------------
Notes to Financial Statements (concluded)
NOTE 3--concluded
Class D Shares
-------------------------------
For the For the
Year Ended Year Ended
Dec. 31, 1996 Dec. 31, 1995
-------------- --------------
Shares sold -- --
Shares issued to shareholders on
reinvestment of dividends 120,074 183,832
Shares redeemed (456,901) (655,092)
-------------- --------------
Net decrease in shares outstanding (336,827) (471,260)
============== ==============
Proceeds from sale of shares $ -- $ --
Value of reinvested dividends 1,828,979 2,548,570
Cost of shares redeemed (7,096,052) (9,061,909)
-------------- --------------
Net decrease from capital share transactions $(5,267,073) $(6,513,339)
============== ==============
NOTE 4--Investment Transactions
Purchases and sales of investment securities, other than short-term and
U.S. government obligations, aggregated $105,864,301 and $146,174,704,
respectively, for the year ended December 31, 1996. There were no purchases or
sales of U.S. government obligations for the period.
On December 31, 1996, net unrealized appreciation for all securities in
which there was an excess of value over tax cost was $197,074,059, of which
$210,460,413 related to appreciated securities and $13,386,354 related to
depreciated securities.
NOTE 5--Net Assets
On December 31, 1996, net assets consisted of:
Paid-in capital:
Class A Shares $302,803,079
Class B Shares 16,617,054
Class D Shares 23,659,797
Accumulated net realized gain from securities transactions 13,937,442
Unrealized appreciation of investments 193,586,970
------------
$550,604,342
============
39
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Report of Independent Accountants
To the Shareholders and Directors of
Flag Investors Telephone Income Fund, Inc.
We have audited the accompanying statement of net assets of Flag Investors
Telephone Income Fund, Inc. as of December 31, 1996 and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the financial highlights for
each of the respective periods presented. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
December 31, 1996 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Flag Investors Telephone Income Fund, Inc. as of December 31, 1996, the results
of its operations for the year then ended, the changes in its net assets and its
financial highlights for each of the respective periods in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
February 4, 1997
40
<PAGE>
APPENDIX A
CORPORATE BOND RATINGS
Standard & Poor's Bond Ratings
AAA -- The highest rating assigned by Standard & Poor's. Capacity
to pay interest and repay principal is extremely strong.
AA -- Very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A -- Strong capacity to pay interest and repay principal although
it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC and C -- Regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest degree
of speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
CI -- Reserved for income bonds on which no interest is being
paid.
D -- In payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Moody's Bond Ratings
Aaa -- Judged to be of the best quality. Carries the smallest
degree of investment risk and generally referred to as "gilt edge." Interest
payments are protected by a large or 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.
Aa -- Judged to be of high quality by all standards. Together
with the Aaa group, comprise what are generally known as high grade bonds. Rated
lower than the Aaa bonds because margins of protection may not be as large as in
the case of Aaa securities, or the 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.
A -- Possess many favorable investment attributes and considered
upper medium grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment some time in the future.
A-1
<PAGE>
Baa -- Considered as medium grade obligations, that is, neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba -- Judged to have speculative elements; future cannot be
considered as well-assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
B -- Generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or maintenance of other terms of
the contract over any long period of time may be small.
Caa -- Of poor standing. May be in default or there may be
present elements of danger with respect to principal or interest.
Ca -- Represent obligations that are speculative in a high
degree. Often in default or have other marked shortcomings.
C -- The lowest rated class of bonds. Can be regarded as having
extremely poor prospects of ever attaining any real investment standing.
A-2
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
List all financial statements and exhibits filed as part of
the Registration Statement.
(a) Financial statements:
(1) Included in Parts A and B of the
Registration Statement:
- Financial Highlights for the fiscal years
ended December 31, 1985 through December 31,
1996
- Statement of Net Assets as of December 31,
1996
- Statement of Operations for the fiscal year
ended December 31, 1996
- Statement of Changes in Net Assets for the
fiscal years ended December 31, 1996 and
December 31, 1995
- Notes to the Financial Statements
- Report of Independent Accountants
(2) All required financial statements are
included in Parts A and B hereof. All other
financial statements and schedules are
inapplicable.
(b) Exhibits:
(1) (a) Articles of Incorporation;(3)
(b) Articles Supplementary, as filed with
the Maryland Department of Assessments
and Taxation on September 13, 1990;(3)
(c) Articles Supplementary, as filed with
the Maryland Department of Assessments
and Taxation on December 27, 1993;(3)
(d) Articles Supplementary, as filed with
the Maryland Department of Assessments
and Taxation on November 18, 1994;(3)
(2) By-Laws, as amended through December 18,
1996;(1)
(3) None;
(4) (a) Specimen Security with respect to Flag
Investors Telephone Income Fund Class A
Shares;(2)
(b) Specimen Security with respect to the
Flag Investors Telephone Income Fund
Class D Shares;(2)
(c) Specimen Security with respect to Flag
Investors Telephone Income Fund Class B
Shares;(2)
<PAGE>
(5) (a) Amended Investment Advisory Agreement
between Registrant and Investment
Company Capital Corp;(1)
(b) Amended Sub-Advisory Agreement among
Registrant, Investment Company Capital
Corp. and Alex. Brown Investment
Management;(1)
(c) Investment Advisory Agreement between
Registrant and Flag Investors Management
Corp (now known as Investment Company
Capital Corp.);(3)
(d) Sub-Advisory Agreement among Registrant,
Flag Investors Management Corp. (now
known as Investment Company Capital
Corp.) and Alex. Brown Investment
Management;(3)
(6) (a) Distribution Agreement between
Registrant and Alex. Brown & Sons
Incorporated;(3)
(b) Form of Sub-Distribution Agreement
between Alex. Brown & Sons Incorporated
and Participating Broker-Dealers;(1)
(c) Form of Shareholder Servicing Agreement
between Registrant and Shareholder
Servicing Agents;(3)
(d) Distribution Agreement between
Registrant and Alex. Brown & Sons
Incorporated with respect to the Flag
Investors Telephone Income Fund Class D
Shares;(3)
(e) Distribution Agreement between
Registrant and Alex. Brown & Sons
Incorporated with respect to the Flag
Investors Telephone Income Fund Class B
Shares;(1)
(7) None;
(8) (a) Custodian Agreement between Registrant
and Provident National Bank as in effect
from January 19, 1989;(3)
(b) Master Services Agreement between
Registrant and Investment Company
Capital Corp. with Appendices for the
provision of Accounting and Transfer
Agency Services;(3)
(9) Group Purchase Plan Application;(3)
(10) Opinion of counsel;(3)
(11) (a) Consent of Coopers & Lybrand L.L.P.;(1)
(b) Consents to being named as Director;(3)
(12) None;
(13) Subscription Agreement re: initial $100,000
capital;(3)
(14) None;
(15) (a) Distribution Plan;(3)
-2-
<PAGE>
(b) Distribution Plan with respect to the
Flag Investors Telephone Income Fund
Class D Shares;(3)
(c) Distribution Plan with respect to the
Flag Investors Telephone Income Fund
Class B Shares;(3)
(16) Schedule of Computation of Performance
Quotations (unaudited);(3)
(18) (a) Rule 18f-3 Plan;(3)
(b) Rule 18f-3 Plan, as amended through
March 26, 1997;(1)
(24) Powers of Attorney;(1)
(27) Financial Data Schedule.(1)
- ------------------
(1) Filed herewith.
(2) Incorporated by reference to Post-Effective Amendment No. 17 to
Registrant's Registration Statement on Form N-1A (Registration No.
2-87336), filed with the Securities and Exchange Commission on October
28, 1994.
(3) Incorporated by reference to Post-Effective Amendment No. 19 to
Registrant's Registration Statement on Form N-1A (Registration No.
2-87336), filed with the Securities and Exchange Commission via EDGAR on
February 8, 1996.
Item 25. Persons Controlled by or under Common Control with Registrant.
Furnish a list or diagram of all persons directly or
indirectly controlled by or under common control with the Registrant and as to
each such person indicate (1) if a company, the state or other sovereign power
under the laws of which it is organized, and (2) the percentage of voting
securities owned or other basis of control by the person, if any, immediately
controlling it.
None.
Item 26. Number of Holders of Securities.
State in substantially the tabular form indicated, as of a
specified date within 90 days prior to the date of filing, the number of record
holders of each class of securities of the Registrant.
-3-
<PAGE>
The following information is given as of April 15, 1997:
Title of Class Number of Record Holders
Shares of Common Stock
Class A 23,633
Class B 1,510
Class D 2,023
Item 27. Indemnification.
State the general effect of any contract, arrangements or
statute under which any director, officer, underwriter or affiliated person of
the Registrant is insured or indemnified in any manner against any liability
which may be incurred in such capacity, other than insurance provided by any
director, officer, affiliated person or underwriter for their own protection.
Sections 1, 2, 3 and 4 of Article VIII of Registrant's
Articles of Incorporation, included as Exhibit 1 to this Registration Statement
and incorporated herein by reference, provide as follows:
Section 1. To the fullest extent that limitations on the
liability of directors and officers are permitted by the
Maryland General Corporation Law, no director or officer of
the Corporation shall have any liability to the Corporation or
its stockholders for damages. This limitation on liability
applies to events occurring at the time a person serves as a
director or officer of the Corporation whether or not such
person is a director or officer at the time of any proceeding
in which liability is asserted.
Section 2. The Corporation shall indemnify and advance
expenses to its currently acting and its former directors to
the fullest extent that indemnification of directors is
permitted by the Maryland General Corporation Law. The
Corporation shall indemnify and advance expenses to its
officers to the same extent as its directors and to such
further extent as is consistent with law. The Board of
Directors of the Corporation may make further provision for
indemnification of directors, officers, employees and agents
in the By-Laws of the Corporation or by resolution or
agreement to the fullest extent permitted by the Maryland
General Corporation law.
Section 3. No provision of this Article VIII shall be
effective to protect or purport to protect any director or
officer of the Corporation against any liability to the
Corporation or its security holders to which he would
otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
Section 4. References to the Maryland General Corporation Law
in this Article VIII are to such law as from time to time
amended. No further amendment to the Charter of the
Corporation shall decrease, but may expand, any right of any
person under this Article VIII based on any event, omission or
proceeding prior to such amendment.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event of a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a
-4-
<PAGE>
director, officer or controlling person in connection with the
securities being registered) the Registrant will, unless in
the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Advisor.
Describe any other business, profession, vocation or
employment of a substantial nature in which the investment
advisor of the Registrant, and each director, officer or
partner of any such investment advisor, is or has been, at any
time during the past two fiscal years, engaged for his own
account or in the capacity of director, officer, employee,
partner or trustee.
During the last two fiscal years, no director or officer of
Investment Company Capital Corp., the Registrant's investment
advisor, and no partner of Alex. Brown Investment Management,
the Registrant's sub-advisor, has engaged in any other
business, profession, vocation or employment of a substantial
nature other than that of the business of investment
management and, through affiliates, investment banking.
Item 29. Principal Underwriters.
(a) Alex. Brown & Sons Incorporated acts as distributor for Alex.
Brown Cash Reserve Fund, Inc., Flag Investors International
Fund, Inc., Flag Investors Emerging Growth Fund, Inc., Flag
Investors Total Return U.S. Treasury Fund Shares of Total
Return U.S. Treasury Fund, Inc., Flag Investors Managed
Municipal Fund Shares of Managed Municipal Fund, Inc., Flag
Investors Short-Intermediate Income Fund, Inc. (formerly known
as Flag Investors Intermediate-Term Income Fund, Inc.), Flag
Investors Value Builder Fund, Inc., Flag Investors Maryland
Intermediate Tax Free Income Fund, Inc., Flag Investors Real
Estate Securities Fund, Inc. and Flag Investors Equity
Partners Fund, Inc., all registered open-end management
investment companies.
<TABLE>
<CAPTION>
(b) Position and
Offices Position and
Name and Principal with Principal Offices with
Business Address* Underwriter Registrant
------------------ --------------- -------------
<S> <C> <C>
Alvin B. Krongard Chief Executive None
Officer, Director
and Chairman
Benjamin Howell Griswold, IV Director None
Mayo A. Shattuck III President, Director None
Beverly L. Wright Chief Financial Officer None
and Treasurer
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Robert F. Price Secretary and General None
Counsel
</TABLE>
- ---------------------
* One South Street
Baltimore, MD 21202
(c) Not Applicable.
Item 30. Location of Accounts and Records.
With respect to each account, book or other document required
to be maintained by Section 31(a) of the 1940 Act [15 U.S.C. 80a-30(a)] and the
Rules [17 CFR 270.31a-1 to 31a-3] promulgated thereunder, furnish the names and
address of each person maintaining physical possession of each such account,
book or other document.
Investment Company Capital Corp., Registrant's investment
advisor, transfer agent and dividend disbursing agent, One South
Street, Baltimore, Maryland 21202, maintains physical possession of
each such account, book or other document of the Fund, except for
those maintained by the Registrant's custodian, PNC Bank, Airport
Business Park, 200 Stevens Drive, Lester, Pennsylvania 19113.
Item 31. Management Services.
Furnish a summary of the substantive provisions of any
management-related service contract not discussed in Part A or Part B of this
Form (because the contract was not believed to be of interest to a purchaser of
securities of the Registrant) under which services are provided to the
Registrant, indicating the parties to the contract, the total dollars paid and
by whom, for the last three fiscal years.
See Exhibit 8.
Item 32. Undertakings.
Furnish the following undertakings in substantially the
following form in all initial Registration Statements filed under the 1933 Act:
(a) Not Applicable.
(b) Not Applicable.
(c) A copy of the Registrant's latest Annual Report to
Shareholders is available upon request, without charge by contacting Registrant
at (800) 767-3524.
-6-
<PAGE>
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940 the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this amendment to the Registration Statement to be signed on
its behalf by the undersigned thereto duly authorized in the City of Baltimore,
in the State of Maryland, on the 28th day of April, 1997.
FLAG INVESTORS TELEPHONE
INCOME FUND, INC.
By: /s/ Bruce E. Behrens
-------------------------
Bruce E. Behrens,
President
Pursuant to the requirements of the Securities Act of 1933,
this amendment to the Registration Statement has been signed below by the
following persons in the capacities on the date(s) indicated:
* Director April 28, 1997
- -------------------------- --------------
Truman T. Semans Date
* Director April 28, 1997
- -------------------------- --------------
Charles W. Cole, Jr. Date
* Director April 28, 1997
- -------------------------- --------------
James J. Cunnane Date
* Director April 28, 1997
- -------------------------- --------------
Richard T. Hale Date
* Director April 28, 1997
- -------------------------- --------------
John F. Kroeger Date
* Director April 28, 1997
- -------------------------- --------------
Louis E. Levy Date
* Director April 28, 1997
- -------------------------- --------------
Eugene J. McDonald Date
* Director April 28, 1997
- -------------------------- --------------
Rebecca W. Rimel Date
* Director April 28, 1997
- -------------------------- --------------
Carl W. Vogt Date
/s/ Bruce E. Behrens President April 28, 1997
- -------------------------- --------------
Bruce E. Behrens Date
/s/ Joseph A. Finelli Chief Financial April 28, 1997
- -------------------------- and Accounting --------------
Joseph A. Finelli Officer Date
*By: /s/ Scott J. Liotta
---------------------
Scott J. Liotta
Attorney-In-Fact
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
EDGAR
Exhibit
Number Description
------- -----------
<S> <C> <C> <C>
(1) (a) Articles of Incorporation.(3)
(1) (b) Articles Supplementary, as filed with the Maryland Department of Assessments and
Taxation on September 13, 1990.(3)
(1) (c) Articles Supplementary, as filed with the Maryland Department of Assessments and
Taxation on December 27, 1993.(3)
(1) (d) Articles Supplementary, as filed with the Maryland Department of Assessments and
Taxation on November 18, 1994.(3)
EX-99.B (2) By-Laws, as amended through December 18, 1996.(1)
(3) None.
(4) (a) Specimen Security with respect to Flag Investors Telephone Income Fund Class A Shares.(2)
(4) (b) Specimen Security with respect to the Flag Investors Telephone Income Fund Class D
Shares.(2)
(4) (c) Specimen Security with respect to the Flag Investors Telephone Income Fund Class B
Shares.(2)
EX-99.B (5) (a) Amended Investment Advisory Agreement between Registrant and Investment Company
Capital Corp.(1)
EX-99.B (5) (b) Amended Sub-Advisory Agreement among Registrant, Investment Company Capital Corp.
and Alex. Brown Investment Management.(1)
(5) (c) Investment Advisory Agreement between Registrant and Flag Investor's Management
Corp. (now known as Investment Company Capital Corp.).(3)
(5) (d) Sub-Advisory Agreement among Registrant, Flag Investors Management Corp. (now
known as Investment Company Capital Corp.) and Alex. Brown Investment Management.(3)
(6) (a) Distribution Agreement between Registrant and Alex. Brown & Sons Incorporated.(3)
EX-99.B (6) (b) Form of Sub-Distribution Agreement between Alex. Brown & Sons Incorporated and
Participating Broker-Dealers.(1)
(6) (c) Form of Shareholder Servicing Agreement between Registrant and Shareholder Servicing
Agents.(3)
(6) (d) Distribution Agreement between Registrant and Alex. Brown & Sons Incorporated with
respect to the Flag Investors Telephone Income Fund Class D Shares.(3)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
EX-99.B (6) (e) Distribution Agreement between Registrant and Alex. Brown & Sons Incorporated with
respect to the Flag Investors Telephone Income Fund Class B Shares.(1)
(7) None.
(8) (a) Custodian Agreement between Registrant and Provident National Bank as in effect from
January 19, 1989.(3)
(8) (b) Master Services Agreement between Registrant and Investment Company Capital Corp.,
with Appendices for the provision of Accounting and Transfer Agency Services.(3)
(9) Group Purchase Plan Application.(3)
(10) Opinion of Counsel.(3)
EX-99.B (11) (a) Consent of Coopers & Lybrand L.L.P.(1)
(11) (b) Consents to being named as Director.(3)
(12) None.
(13) Subscription Agreement re: initial $100,000 capital.(3)
(14) None.
(15) (a) Distribution Plan.(3)
(15) (b) Distribution Plan with respect to the Flag Investors Telephone Income Fund Class D
Shares.(3)
(15) (c) Distribution Plan with respect to the Flag Investors Telephone Income Fund Class B
Shares.(3)
(16) Schedule of Computation of Performance Quotations (unaudited).(3)
(18) (a) Rule 18f-3 Plan.(3)
EX-99.B (b) Rule 18f-3 Plan, as amended through March 26, 1997.(1)
EX-99.B (24) Powers of Attorney.(1)
EX-(27) Financial Data Schedule.(1)
</TABLE>
- -------------------------
(1) Filed herewith.
(2) Incorporated by reference to Post-Effective Amendment No. 17 to
Registrant's Registration Statement on Form N-1A (Registration No.
2-87336), filed with the Securities and Exchange Commission on October
28, 1994.
(3) Incorporated by reference to Post-Effective Amendment No. 19 to
Registrant's Registration Statement on Form N-1A (Registration No.
2-87336), filed with the Securities and Exchange Commission via EDGAR on
February 8, 1996.
-2-
<PAGE>
EX-99.B(2)
As Amended Through
December 18, 1996
BY-LAWS
OF
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
ARTICLE I
Offices
Section 1. Principal Office. The principal office of the Corporation
shall be in the City of Baltimore, State of Maryland.
Section 2. Principal Executive Office. The principal executive office
of the Corporation shall be in the City of Baltimore, State of Maryland.
Section 3. Other Offices. The Corporation may have such other offices
in such places as the Board of Directors may from time to time determine.
ARTICLE II
Meetings of Stockholders
Section 1. Stockholder Meetings. The Corporation may, but shall not be
required to, hold a regular meeting of stockholders in any year in which the
Corporation is not required, under the Investment Company Act of 1940, as
amended (the "1940 Act"), to submit for stockholder approval (i) the election of
directors), (ii) any contract with an investment adviser or principal
underwriter (as such terms are defined in the 1940 Act) that the Corporation
enters into or any renewal or amendment thereof, or (iii) the selection of the
Corporation's independent public accountants. If stockholder approval is
required for any of the purposes in (i) through (iii) above, the regular meeting
shall be held, at which stockholders shall vote on the proposal necessitating
such meeting and shall transact any other business as may properly be brought
before the meeting. Regular meetings of stockholders, if any, shall be held on
such day during the month of June and at such time as shall be designated by the
Board of Directors and stated in the notice of the meeting.
Section 2. Special Meetings. Special meetings of the stockholders,
unless otherwise provided by law or by the Charter or the Corporation may be
called for any purpose or purposes by a majority of the Board of Directors or
the President, and shall be called by the
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President or Secretary on the written request of the stockholders as provided by
the Maryland General Corporation Law. Such request shall state the purpose or
purposes of the proposed meeting and the matters proposed to be acted on at it;
provided, however, that unless requested by stockholders entitled to cast a
majority of all the votes entitled to be cast at the meeting, a special meeting
need not be called to consider any matter which is substantially the same as a
matter voted on at any special meeting of the stockholders held during the
preceding twelve (12) months.
Section 3. Place of Meetings. The regular meeting, if any, and any
special meeting of the stockholders shall be held at such place within the
United States as the Board of Directors may from time to time determine.
Section 4. Notice of Meetings; Waiver of Notice; Shareholder List. (a)
Notice of the place, date and time of the holding of each regular and special
meeting of the stockholders and the purpose or purposes of the meeting shall be
given personally or by mail, not less than ten nor more than ninety days before
the date of such meeting, to each stockholder entitled to vote at such meeting
and to each other stockholder entitled to notice of the meeting. Notice by mail
shall be deemed to be duly given when deposited in the United States mail
addressed to the stockholder at his address as it appears on the records of the
Corporation, with postage thereon prepaid. The notice of every meeting of
stockholders may be accompanied by a form of proxy approved by the Board of
Directors in favor of such actions or persons as the Board of Directors may
select.
(b) Notice of any meeting of stockholders shall be deemed
waived by any stockholder who shall attend such meeting in person or by proxy,
or who shall, either before or after the meeting, submit a signed waiver of
notice which is filed with the records of the meeting. A meeting of stockholders
convened on the date for which it was called may be adjourned from time to time
without further notice to a date not more than 120 days after the original
record date.
(c) At least five (5) days prior to each meeting of
stockholders, the officer or agent having charge of the share transfer books of
the Corporation shall make a complete list of stockholders entitled to vote at
such meeting, in alphabetical order with the address of and the number of shares
held by each stockholder.
Section 5. Organization. At each meeting of the stockholders, the
Chairman of the Board (if one has been designated by the Board), or in his
absence or inability to act, the President, or in the absence or inability to
act of the Chairman of the Board and the President, a Vice President, or in the
absence or the inability to act of the Chairman of the Board, the President and
all the Vice Presidents, a chairman chosen by the stockholders shall act as
chairman of the meeting. The Secretary, or in his absence or inability to act,
any person appointed by the chairman of the meeting, shall act as secretary of
the meeting and keep the minutes thereof.
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Section 6. Voting. (a) Except as otherwise provided by statute or the
Charter of the Corporation, each holder of record of shares of stock of the
Corporation having voting power shall be entitled at each meeting of the
stockholders to one vote for every share of such stock standing in his name on
the record of stockholders of the Corporation as of the record date determined
pursuant to Section 5 of Article VI hereof or if such record date shall not have
been so fixed, then at the later of (i) the close of business on the day on
which notice of the meeting is mailed or (ii) the thirtieth (30) day before the
meeting. In all elections for directors, each share of stock may be voted for as
many individuals as there are directors to be elected and for whose election the
share is entitled to be voted.
(b) Each stockholder entitled to vote at any meeting of
stockholders may authorize another person or persons to act for him by a proxy
signed by such stockholder or his attorney-in-fact. No proxy shall be valid
after the expiration of eleven months from the date thereof, unless otherwise
provided in the proxy. Every proxy shall be revocable at the pleasure of the
stockholder executing it, except in those cases where such proxy states that it
is irrevocable and where an irrevocable proxy is permitted by law. Except as
otherwise provided by statute, the Charter or the Corporation or these By-Laws,
any corporate action to be taken by vote of the stockholders shall be authorized
by a majority of the total votes cast at a meeting of stockholders at which a
quorum is present by the holders of shares present in person or represented by
proxy and entitled to vote on such action, except that a plurality of all the
votes cast at a meeting at which a quorum is present is sufficient to elect a
director.
(c) If a vote shall be taken on any question other than the
election of directors, which shall be by written ballot, then unless required by
statute or these By-Laws, or determined by the chairman of the meeting to be
advisable, any such vote need not be by ballot. On a vote by ballot, each ballot
shall be signed by the stockholder voting, or by his proxy, if there be such
proxy, and shall state the number of shares voted.
Section 7. Inspectors. The Board may, in advance of any meeting of
stockholders, appoint one or more inspectors to act at such meeting or any
adjournment thereof. If the inspectors shall not be so appointed or if any of
them shall fail to appear or act, the chairman of the meeting may, and on the
request of any stockholder entitled to vote at the meeting shall, appoint
inspectors. Each inspector, before entering upon the discharge of his duties,
shall take and sign an oath to execute faithfully the duties of inspector at
such meeting with strict impartiality and according to the best of his ability.
The inspectors shall determine the number of shares outstanding and the voting
power of each, the number of shares represented at the meeting, the existence of
a quorum, the validity and effect of proxies, and shall receive votes, ballots
or consents, hear and determine all challenges and questions arising in
connection with the right to vote, count and tabulate all votes, ballots or
consents, determine the result, and do such acts as are proper to conduct the
election or vote with fairness to all stockholders. On request of the chairman
of the meeting or any stockholder entitled to vote at it, the inspectors shall
make a report in writing of any challenge, request or matter determined by them
and shall
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execute a certificate of any fact found by them. No director or candidate for
the office of director shall act as inspector of an election of directors.
Inspectors need not be stockholders.
Section 8. Consent of Stockholders in Lieu of Meeting. Except as
otherwise provided by statute any action required to be taken at any regular or
special meeting of stockholders, or any action which may be taken at any annual
or special meeting of stockholders, may be taken without a meeting, without
prior notice and without a vote, if the following are filed with the records of
stockholders' meetings: (i) a unanimous written consent which sets forth the
action and is signed by each stockholder entitled to vote on the matter and (ii)
a written waiver of any right to dissent signed by each stockholder entitled to
notice of the meeting but not entitled to vote at it.
ARTICLE III
Board of Directors
Section 1. General Powers. Except as otherwise provided in the Charter
of the Corporation, the business and affairs of the Corporation shall be managed
under the direction of the Board of Directors. All powers of the Corporation may
be exercised by or under authority of the Board of Directors except as conferred
on or reserved to the stockholders by law or by the Charter of the Corporation
or these By-Laws.
Section 2. Number of Directors. The number of directors shall be fixed
from time to time by resolution of the Board of Directors adopted by a majority
of the Directors then in office; provided, however, that the number of directors
shall in no event be less than three (except for any period during which shares
of the corporation are held by fewer than three shareholders) nor more than
fifteen. Any vacancy created by an increase in directors may be filled in
accordance with Section 6 of this Article III. No reduction in the number of
directors shall have the effect of removing any director from office prior to
the expiration of his term unless such director is specifically removed pursuant
to Section 5 of this Article III at the time of such decrease. Directors need
not be stockholders.
Section 3. Election and Term of Directors. Directors shall be elected
by plurality vote of a quorum cast by written ballot at the regular meeting of
stockholders, if any, or at a special meeting held for that purpose. The term of
office of each director shall be from the time of his election and qualification
and until his successor shall have been elected and shall have qualified, or
until his death, or until he shall have resigned, or have been removed as
hereinafter provided in these By-Laws, or as otherwise provided by statute or
the Charter of the Corporation.
Section 4. Resignation. A Director of the Corporation may resign at any
time by giving written notice of his resignation to the Board or the Chairman of
the Board or the
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President or the Secretary. Any such resignation shall take effect at the time
specified therein or, if the time when it shall become effective shall not be
specified therein, immediately upon its receipt; and, unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective.
Section 5. Removal of Directors. Any Director of the Corporation may be
removed by the stockholders by a vote of a majority of the votes entitled to be
cast for the election of directors.
Section 6. Vacancies. The stockholders may elect a successor to fill a
vacancy on the Board of Directors which results from the removal of a Director.
A majority of the remaining Directors, whether or not sufficient to constitute a
quorum, may fill a vacancy on the Board of Directors which results from any
cause except an increase in the number of directors, and a majority of the
entire Board of Directors may fill a vacancy which results from an increase in
the number of Directors; provided however, that no vacancies shall be filled by
action of the remaining Directors, if after the filling of said vacancy or
vacancies, fewer than two-thirds of the Directors then holding office shall have
been elected by the stockholders of the Corporation. In the event that at any
time there is a vacancy in any office of a Director which vacancy may not be
filled by the remaining Directors, a special meeting of the stockholders shall
be held as promptly as possible and in any event within sixty days, for the
purpose of filling said vacancy or vacancies. A director elected by the Board of
Directors of the Corporation to fill a vacancy serves until the next annual
meeting of stockholders and until his successor is elected and qualifies. A
Director elected by the stockholders of the Corporation to fill a vacancy which
results from the removal of a director serves for the balance of the term of the
removed director.
Section 7. Regular Meetings. Regular meetings of the Board may be held
with notice at such times and places as may be determined by the Board of
Directors.
Section 8. Special Meetings. Special meetings of the Board may be
called by the Chairman of the Board, the President, or by a majority of the
directors either in writing or by vote at a meeting, and may be held at any
place in or out of the State of Maryland as the Board may from time to time
determine.
Section 9. Notice of Special Meetings. Notice of each special meeting
of the Board shall be given by the Secretary as hereinafter provided, in which
notice shall be stated the time and place of the meeting. Notice of each such
meeting shall be delivered to each director, either personally or by telephone,
telegraph, cable or wireless, at least twenty-four hours before the time at
which such meeting is to be held, or by first-class mail, postage prepaid, or by
commercial delivery services addressed to him at his residence or usual place of
business, at least three days before the day on which such meeting is to be
held.
Section 10. Waiver of Notice of Special Meetings. Notice of any special
meeting need not be given to any Director who shall, either before or after the
meeting, sign a written
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waiver of notice which is filed with the records of the meeting or who shall
attend such meeting. Except as otherwise specifically required by these By-Laws,
a notice or waiver of notice of any meeting need not state the purposes of such
meeting.
Section 11. Quorum and Voting. One-third, but not fewer than three
members, of the members of the entire Board shall be present in person at any
meeting of the Board in order to constitute a quorum for the transaction of
business at such meeting, and except as otherwise expressly required by statute,
the Charter of the Corporation, these By-Laws, the 1940 Act or other applicable
statute, the act of a majority of the directors present at any meeting at which
a quorum is present shall be the act of the Board; provided, however, that the
approval of any contract with an investment adviser or principal underwriter, as
such terms are defined in the 1940 Act, which the Corporation enters into or any
renewal or amendment thereof, the approval of the fidelity bond required by the
1940 Act, and the selection of the Corporation's independent public accountants
shall each require the affirmative vote of a majority of the Directors who are
not interested persons, as defined in the 1940 Act, of the Corporation. In the
absence of a quorum at any meeting of the Board, a majority of the Directors
present thereat may adjourn the meeting from time to time, but not for a period
greater than thirty (30) days at any one time, to another time and place until a
quorum shall attend. Notice of the time and place of any adjourned meeting shall
be given to the Directors who were not present at the time of the adjournment
and, unless such time and place were announced at the meeting at which the
adjournment was taken, to the other Directors. At any adjourned meeting at which
a quorum is present, any business may be transacted which might have been
transacted at the meeting as originally called.
Section 12. Chairman. The Board of Directors may at any time appoint
one of its members as Chairman of the Board, who shall serve at the pleasure of
the Board and who shall perform and execute such duties and powers as may be
conferred upon or assigned to him by the Board or these By-Laws, but who shall
not by reason of performing and executing these duties and powers be deemed an
officer or employee of the Corporation.
Section 13. Organization. At every meeting of the Board of Directors,
the Chairman of the Board, if one has been selected and is present, shall
preside. In the absence or inability of the Chairman of the Board to preside at
a meeting, the President, or, in his absence or inability to act, another
director chosen by a majority of the directors present, shall act as chairman of
the meeting and preside at it. The Secretary (or, in his absence or inability to
act, any person appointed by the Chairman) shall act as secretary of the meeting
and keep the minutes thereof.
Section 14. Written Consent of Directors in Lieu of a Meeting. Any
action required or permitted to be taken at any meeting of the Board of
Directors or of any committee thereof may be taken without a meeting if all
members of the Board or committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of the
proceedings of the Board or committee.
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Section 15. Meeting by Conference Telephone. Members of the Board of
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time.
Section 16. Compensation. Any Director, whether or not he is a salaried
officer, employee or agent of the Corporation, may be compensated for his
services as director or as a member of a committee, or as Chairman of the Board
or chairman of a committee, and in addition may be reimbursed for transportation
and other expenses, all in such manner and amounts as the directors may from
time to time determine.
Section 17. Investment Policies. It shall be the duty of the Board of
Directors to ensure that the purchase, sale, retention and disposal of portfolio
securities and the other investment practices of the Corporation are at all
times consistent with the investment policies and restrictions with respect to
securities investments and otherwise of the Corporation, as recited in the
current Prospectus of the Corporation filed from time to time with the
Securities and Exchange Commission and as required by the 1940 Act. The Board,
however, may delegate the duty of management of the assets and the
administration of its day-to-day operations to an individual or corporate
management company or investment adviser pursuant to a written contract or
contracts which have obtained the requisite approvals, including the requisite
approvals of renewals thereof, of the Board of Directors or the stockholders of
the Corporation in accordance with the provisions of the 1940 Act.
ARTICLE IV
Committees
Section 1. Committees of the Board. The Board may, by resolution
adopted by a majority of the entire Board, designate an Executive Committee,
Compensation Committee, Audit Committee and Nomination Committee, each of which
shall consist of two or more of the directors of the Corporation, which
committee shall have and may exercise all the powers and authority of the Board
with respect to all matters other than as set forth in Section 3 of this Article
IV.
Section 2. Other Committees of the Board. The Board of Directors may
from time to time, by resolution adopted by a majority of the whole Board,
designate one or more other committees of the Board, each such committee to
consist of two or more directors and to have such powers and duties as the Board
of Directors may, by resolution, prescribe.
Section 3. Limitation of Committee Powers. No committee of the Board
shall have power or authority to:
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(a) recommend to stockholders any action requiring
authorization of stockholders pursuant to statute or the Charter;
(b) approve or terminate any contract with an investment
adviser or principal underwriter, as such terms are defined in the 1940 Act, or
take any other action required to be taken by the Board of Directors by the 1940
Act;
(c) amend or repeal these By-Laws or adopt new By-Laws;
(d) declare dividends or other distributions or issue capital
stock of the Corporation; and
(e) approve any merger or share exchange which does not require
stockholder approval.
Section 4. General. One-third, but not less than two members, of the
members of any committee shall be present in person at any meeting of such
committee in order to constitute a quorum for the transaction of business at
such meeting, and the act of a majority present shall be the act of such
committee. The Board may designate a chairman of any committee and such chairman
or any two members of any committee may fix the time and place of its meetings
unless the Board shall otherwise provide. In the absence of disqualification of
any member or any committee, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any such absent or disqualified member. The Board
shall have the power at any time to change the membership of any committee, to
fill all vacancies, to designate alternate members, to replace any absent or
disqualified member, or to dissolve any such committee.
All committees shall keep written minutes of their proceedings and
shall report such minutes to the Board. All such proceedings shall be subject to
revision or alteration by the Board; provided, however, that third parties shall
not be prejudiced by such revision or alteration.
ARTICLE V
Officers, Agents and Employees
Section 1. Number and Qualifications. The officers of the Corporation
shall be a President, a Secretary and a Treasurer, each of whom shall be elected
by the Board of Directors. The Board of Directors may elect or appoint one or
more Vice Presidents and may also appoint such other officers, agents and
employees as it may deem necessary or proper. Any two or more offices may be
held by the same person, except the offices of President and Vice President, but
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no officer shall execute, acknowledge or verify any instrument in more than one
capacity. The Board may from time to time elect or appoint, or delegate to the
President the power to appoint, such other officers (including one or more
Assistant Vice Presidents, one or more Assistant Treasurers and one or more
Assistant Secretaries) and such agents, as may be necessary or desirable for the
business of the Corporation. Such other officers and agents shall have such
duties and shall hold their offices for such terms as may be prescribed by the
Board or by the appointing authority.
Section 2. Resignations. Any officer of the Corporation may resign at
any time by giving written notice of his resignation to the Board, the Chairman
of the Board, the President or the Secretary. Any such resignation shall take
effect at the time specified therein or, if the time when it shall become
effective shall not be specified therein, immediately upon its receipt; and,
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
Section 3. Removal of Officer, Agent or Employee. Any officer, agent or
employee of the Corporation may be removed by the Board of Directors with or
without cause at any time, and the Board may delegate such power of removal as
to agents and employees not elected or appointed by the Board of Directors. Such
removal shall be without prejudice to such person's contract rights, if any, but
the appointment of any person as an officer, agent or employee of the
Corporation shall not of itself create contract rights.
Section 4. Vacancies. A vacancy in any office, whether arising from
death, resignation, removal or any other cause, may be filled for the unexpired
portion of the term of the office which shall be vacant, in the manner
prescribed in these By-Laws for the regular election or appointment to such
office.
Section 5. Compensation. The compensation of the officers of the
Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any committee or to any officer in respect of other officers under
his control. No officer shall be precluded from receiving such compensation by
reason of the fact that he is also a director of the Corporation.
Section 6. Bonds or other Security. If required by the Board, any
officer, agent or employee of the Corporation shall give a bond or other
security for the faithful performance of his duties, in such amount and with
such surety or sureties as the Board may require.
Section 7. President. The President shall be the chief executive
officer of the Corporation. In the absence of the Chairman of the Board (or if
there be none), he shall preside at all meetings of the stockholders and of the
Board of Directors. He shall have, subject to the control of the Board of
Directors, general charge of the business and affairs of the Corporation. He may
employ and discharge employees and agents of the Corporation, except such as
shall be appointed by the Board, and he may delegate these powers.
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Section 8. The Vice Presidents. In the absence or disability of the
President, or when so directed by the President, any Vice President designated
by the Board of Directors may perform any or all of the duties of the President,
and, when so acting, shall have all the powers of, and be subject to all the
restrictions upon, the President; provided, however, that no Vice President
shall act as a member of or as chairman of any committee of which the President
is a member or chairman by designation of ex-officio, except when designated by
the Board. Each Vice President shall perform such other duties as from time to
time may be conferred upon or assigned to him by the Board or the President.
Section 9. Treasurer. The Treasurer shall:
(a) have charge and custody of, and be responsible for, all the
funds and securities of the Corporation, except those which the Corporation has
placed in the custody of a bank or trust company or member of a national
securities exchange (as that term is defined in the Securities Exchange Act of
1934) pursuant to a written agreement designating such bank or trust company or
member of a national securities exchange as custodian of the property of the
Corporation;
(b) keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation;
(c) cause all moneys and other valuables to be deposited to the
credit of the Corporation;
(d) receive, and give receipts for, moneys due and payable to
the Corporation from any source whatsoever;
(e) disburse the funds of the Corporation and supervise the
investment of its funds as ordered or authorized by the Board, taking proper
vouchers therefor; and
(f) in general, perform all the duties incident to the office
of Treasurer and such other duties as from time to time may be assigned to him
by the Board or the President.
Section 10. Assistant Treasurers. In the absence or disability of the
Treasurer, or when so directed by the Treasurer, any Assistant Treasurer may
perform any or all of the duties of the Treasurer, and, when so acting, shall
have all the powers of, and be subject to all the restrictions upon, the
Treasurer. Each Assistant Treasurer shall perform all such other duties as from
time to time may be conferred upon or assigned to him by the Board of Directors,
the President or the Treasurer.
Section 11. Secretary. The Secretary shall:
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(a) keep or cause to be kept in one or more books provided for
the purpose, the minutes of all meetings of the Board, the committees of the
Board and the stockholders;
(b) see that all notices are duly given in accordance with the
provisions of these By-Laws and as required by law;
(c) be custodian of the records and the seal of the Corporation
and affix and attest the seal to all stock certificates of the Corporation
(unless the seal of the Corporation on such certificates shall be a facsimile,
as hereinafter provided) and affix and attest the seal to all other documents to
be executed on behalf of the Corporation under its seal;
(d) see that the books, reports, statements, certificates and
other documents and records required by law to be kept and filed are properly
kept and filed; and
(e) in general, perform all the duties incident to the office
of Secretary and such other duties as from time to time may be assigned to him
by the Board or the President.
Section 12. Assistant Secretaries. In the absence or disability of the
Secretary, or when so directed by the Secretary, any Assistant Secretary may
perform any or all of the duties of the Secretary, and, when so acting, shall
have all the powers of, and be subject to all restrictions upon, the Secretary.
Each Assistant Secretary shall perform such other duties as from time to time
may be conferred upon or assigned to him by the Board of Directors, the
President or the Secretary.
Section 13. Delegation of Duties. In case of the absence of any officer
of the Corporation, or for any other reason that the Board may deem sufficient,
the Board may confer for the time being the powers or duties, or any of them, of
such officer upon any other officer or upon any Director.
ARTICLE VI
Capital Stock
Section 1. Stock Certificates. Each holder of stock of the Corporation
shall be entitled upon request to have a certificate or certificates, in such
form as shall be approved by the Board, representing the number of shares of
stock of the Corporation owned by him, provided, however, that certificates for
fractional shares will not be delivered in any case. The certificates
representing shares of stock shall be signed by the President, a Vice President,
or the Chairman of the Board, and countersigned by the Secretary or an Assistant
Secretary or the Treasurer or an Assistant Treasurer and sealed with the seal of
the Corporation. Any or all of the signatures or the seal on the certificate may
be a facsimile. In case any officer, transfer agent or registrar who
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has signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate shall be issued, it may be issued by the Corporation with the same
effect as if such officer, transfer agent or registrar were still in office at
the date of issue.
Section 2. Rights of Inspection. There shall be kept at the principal
executive office, which shall be available for inspection during usual business
hours in accordance with the General Laws of the State of Maryland, the
following corporate documents: (a) By-Laws, (b) minutes of proceedings of the
stockholders, (c) annual statements of affairs, and (d) voting trust agreements,
if any. One or more persons who together are and for at least six months have
been stockholders of record of at least five percent of the outstanding stock of
any class may inspect and copy during usual business hours the Corporation's
books of account and stock ledger in accordance with the General Laws of the
State of Maryland.
Section 3. Transfer of Shares. Transfers of shares of stock of the
Corporation shall be made on the stock records of the Corporation at the
direction of the person named on the Corporation's books or named in the
certificate or certificates for such shares (if issued) only by the registered
holder thereof, or by his attorney authorized by power of attorney duly executed
and filed with the Secretary or with a transfer agent or transfer clerk, and on
surrender of the certificate or certificates, if issued, for such shares
properly endorsed or accompanied by a duly executed stock transfer power and the
payment of all taxes thereon. Except as otherwise provided by law, the
Corporation shall be entitled to recognize the exclusive right of a person in
whose name any share or shares stand on the record of stockholders as the owner
of such share or shares for all purposes, including, without limitation, the
rights to receive dividends or other distributions, and to vote as such owner,
and the Corporation shall not be bound to recognize any equitable or legal claim
to or interest in any such share or shares on the part of any other person.
Section 4. Transfer Agents and Registrars. The Corporation may have one
or more Transfer Agents and one or more Registrars of its stock, whose
respective duties the Board of Directors may, from time to time, define. No
certificate of stock shall be valid until countersigned by a Transfer Agent, if
the Corporation shall have a Transfer Agent or until registered by a Registrar,
if the Corporation shall have a Registrar. The duties of Transfer Agent and
Registrar may be combined.
Section 5. Record Date and Closing of Transfer Books. The Board of
Directors may set a record date for the purpose of making any proper
determination with respect to stockholders, including which stockholders are
entitled to notice of a meeting, vote at a meeting (or any adjournment thereof),
receive a dividend, or be allotted or exercise other rights. The record date may
not be more than ninety (90) days before the date on which the action requiring
the determination will be taken; and, in the case of a meeting of stockholders,
the record date shall be at least ten (10) days before the date of the meeting.
The Board of Directors shall not close the books of the Corporation against
transfers of shares during the whole or any part of such period.
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Section 6. Regulations. The Board may make such additional rules and
regulations, not inconsistent with these By-Laws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation.
Section 7. Lost, Stolen, Destroyed or Mutilated Certificates. The
holder of any certificate representing shares of stock of the Corporation shall
immediately notify the Corporation of any loss, theft, destruction or mutilation
of such certificate, and the Corporation may issue a new certificate of stock in
the place of any certificate theretofore issued by it which the owner thereof
shall allege to have been lost, stolen or destroyed or which shall have been
mutilated, and the Board may, in its discretion, require such owner or his legal
representatives to give to the Corporation a bond in such sum, limited or
unlimited, and in such form and with such surety or sureties, as the Board in
its absolute discretion shall determine, to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss or
destruction of any such certificate, or issuance of a new certificate. Anything
herein to the contrary notwithstanding, the Board, in its absolute discretion,
may refuse to issue any such new certificate, except pursuant to legal
proceedings under the laws of the State of Maryland.
Section 8. Stock Ledgers. The Corporation shall not be required to keep
original or duplicate stock ledgers at its principal office in the City of
Baltimore, Maryland, but stock ledgers shall be kept at the office(s) of the
Transfer Agent(s) of the Corporation's capital stock.
ARTICLE VII
Seal
The Board of Directors shall provide a suitable seal, bearing the name
of the Corporation, which shall be in the charge of the secretary. The Board of
Directors may authorize one or more duplicate seals and provide for the custody
thereof. If the corporation is required to place its corporate seal on a
document, it is sufficient to meet any requirement of any law, rule, or
regulation relating to a corporate seal to place the word "Seal" adjacent to the
signature of the person authorized to sign the document on behalf of the
Corporation.
ARTICLE VIII
Fiscal Year
Unless otherwise determined by the Board, the fiscal year of the
Corporation shall end on the last day of December in each year.
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ARTICLE IX
Depositories and Custodians
Section 1. Depositories. The funds of the Corporation shall be
deposited with such banks or other depositories as the Board of Directors of the
Corporation may from time to time determine.
Section 2. Custodians. All securities and other investments shall be
deposited in the safekeeping of such banks or other companies as the Board of
Directors of the Corporation may from time to time determine. Every arrangement
entered into with any bank or other company for the safekeeping of the
securities and investments of the Corporation shall contain provisions complying
with the 1940 Act, and the general rules and regulations thereunder.
ARTICLE X
Execution of Instruments
Section 1. Checks, Notes, Drafts, etc. Checks, notes, drafts,
acceptances, bills of exchange and other orders or obligations for the payment
of money shall be signed by such officer or officers or person or persons as the
Board of Directors by resolution shall from time to time designate.
Section 2. Sale or Transfer of Securities. Money market instruments,
bonds or other securities at any time owned by the Corporation may be held on
behalf of the Corporation or sold, transferred or otherwise disposed of subject
to any limits imposed by these By-Laws, and pursuant to authorization by the
Board and, when so authorized to be held on behalf of the Corporation or sold,
transferred or otherwise disposed of, may be transferred from the name of the
Corporation by the signature of the President or a Vice President or the
Treasurer or pursuant to any procedure approved by the Board of Directors,
subject to applicable law.
ARTICLE XI
Independent Public Accountants
The firm of independent public accountants which shall sign or certify
the financial statements of the Corporation which are filed with the Securities
and Exchange
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Commission shall be selected annually by the Board of Directors and ratified by
the Board of Directors or the stockholders in accordance with the provisions of
the 1940 Act.
ARTICLE XII
Annual Statements
The books of account of the Corporation shall be examined by an
independent firm of public accountants at the close of each annual period of the
Corporation and at such other times as may be directed by the Board. A report to
the stockholders based upon each such examination shall be mailed to each
stockholder of the Corporation of record on such date with respect to each
report as may be determined by the Board, at his address as the same appears on
the books of the Corporation. Such annual statement shall also be placed on file
at the Corporation's principal office in the State of Maryland. Each such report
shall show the assets and liabilities of the Corporation as of the close of the
annual or semi-annual period covered by the report and the securities in which
the funds of the Corporation were then invested. Such report shall also show the
Corporation's income and expenses for the period from the end of the
Corporation's preceding fiscal year to the close of the annual or semi-annual
period covered by the report and any other information required by the 1940 Act,
and shall set forth such other matters as the Board or such firm of independent
public accountants shall determine.
ARTICLE XIII
Indemnification of Directors and Officers
Section 1. Indemnification. The Corporation shall indemnify its
directors to the fullest extent that indemnification of directors is permitted
by the Maryland General Corporation Law. The Corporation shall indemnify its
officers to the same extent as its Directors and to such further extent as is
consistent with law. The Corporation shall indemnify its Directors and officers
who while serving as Directors or officers also serve at the request of the
Corporation as a director, officer, partner, trustee, employee, agent or
fiduciary of another corporation, partnership, joint venture, trust, other
enterprise or employee benefit plan to the fullest extent consistent with law.
This Article XIII shall not protect any such person against any liability to the
Corporation or any shareholder thereof to which such person would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
Section 2. Advances. Any current or former director or officer of the
Corporation claiming indemnification within the scope of this Article XIII shall
be entitled to advances from
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the Corporation for payment of the reasonable expenses incurred by him in
connection with proceedings to which he is a party in the manner and to the full
extent permissible under the Maryland General Corporation Law, the Securities
Act of 1933 (the "1933 Act") and the 1940 Act, as such statutes are now or
hereafter in force.
Section 3. Procedure. On the request of any current or former director
or officer requesting indemnification or an advance under this Article XIII, the
Board of Directors shall determine, or cause to be determined, in a manner
consistent with the Maryland General Corporation Law, the 1933 Act and the 1940
Act, as such statutes are now or hereafter in force, whether the standards
required by this Article XIII have been met.
Section 4. Other Rights. The indemnification provided by this Article
XIII shall not be deemed exclusive of any other right, in respect of
indemnification or otherwise, to which those seeking such indemnification may be
entitled under any insurance or other agreement, vote of shareholders or
disinterested directors or otherwise, both as to action by a Director or officer
of the Corporation in his official capacity and as to action by such person in
another capacity while holding such office or position, and shall continue as to
a person who has ceased to be a director or officer and shall inure to the
benefit of the heirs, executors and administrators of such a person.
Section 5. Maryland Law. References to the Maryland General Corporation
Law in this Article XIII are to such law as from time to time amended.
ARTICLE XIV
Amendments
These By-Laws or any of them may be amended, altered or repealed at any
annual meeting of the stockholders or at any special meeting of the stockholders
at which a quorum is present or represented, provided that notice of the
proposed amendment, alteration or repeal be contained in the notice of such
special meeting. These By-Laws may also be amended, altered or repealed by the
affirmative vote of a majority of the Board of Directors at any regular or
special meeting of the Board of Directors.
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EX-99.B(5)(a)
FLAG INVESTORS TELEPH0NE INCOME FUND, INC.
AMENDED INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made as of the 10th day of April, 1996 by
and between FLAG INVESTORS TELEPHONE INCOME FUND, INC., a Maryland corporation
(the "Fund"), and INVESTMENT COMPANY CAPITAL CORP., a Maryland corporation (the
"Advisor").
WHEREAS, 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
WHEREAS, the Advisor is registered as an investment advisor
under the Investment Advisers Act of 1940, as amended, and engages in the
business of acting as an investment advisor; and
WHEREAS, the Fund and the Advisor desire to enter an agreement
to provide investment advisory and administrative services for the Fund on the
terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt whereof is
hereby acknowledged, the parties hereto agree as follows:
1. Appointment of Investment Advisor. The Fund hereby appoints
the Advisor to act as the Fund's investment advisor. The Advisor shall manage
the Fund's affairs and shall supervise all aspects of the Fund's operations
(except as otherwise set forth herein), including the investment and
reinvestment of the cash, securities or other properties comprising the Fund's
assets, subject at all times to the policies and control of the Fund's Board of
Directors. The Advisor shall give the Fund the benefit of its best judgment,
efforts and facilities in rendering its services as Advisor.
2. Delivery of Documents. The Fund has furnished the Advisor
with copies properly certified or authenticated of each of the following:
(a) The Fund's Articles of Incorporation, filed with
the Secretary of State of the State of Maryland on November 4, 1988 and
all amendments thereto (such Articles of Incorporation, as presently in
effect and as they shall from time to time be amended, are herein
called the "Articles of Incorporation");
<PAGE>
(b) The Fund's By-Laws and all amendments thereto
(such By-Laws, as presently in effect and as they shall from time to
time be amended, are herein called the "By-Laws");
(c) Resolutions of the Fund's Board of Directors and
shareholders authorizing the appointment of the Advisor and approving
this Agreement;
(d) The Fund's Notification of Registration Filed
Pursuant to Section 8(a) of the Investment Company Act of 1940 on Form
N-8A under the 1940 Act as filed with the Securities and Exchange
Commission (the "SEC") on October 21, 1983;
(e) The Fund's Registration Statement on Form N-1
under the Securities Act of 1933, as amended (the "1933 Act") (File No.
2-87336) and under the 1940 Act as filed with the SEC on October 21,
1983 relating to the shares of the Fund, and all amendments thereto;
and
(f) The Fund's most recent prospectus (such
prospectus, as presently in effect and all amendments and supplements
thereto are herein called "Prospectus").
The Fund will furnish the Advisor from time to time with
copies, properly certified or authenticated, of all amendments or supplements to
the foregoing, if any, and all documents, notices and reports filed with the
SEC.
3. DUTIES OF INVESTMENT. In carrying out its obligations
under Section I hereof, the Advisor shall:
(a) supervise and manage all aspects of the Fund's
operations, except for distribution services;
(b) formulate and implement continuing programs for
the purchases and sales of securities, consistent with the investment
objective and policies of the Fund;
(c) provide the Fund with such executive,
administrative and clerical services as are deemed advisable by the
Fund's Board of Directors;
(d) provide the Fund with, or obtain for it, adequate
office space and all necessary office equipment and services, including
telephone service, utilities, stationery, supplies and similar items
for the Fund's principal office;
(e) obtain and evaluate pertinent information about
significant developments and economic, statistical and financial data,
domestic, foreign or otherwise, whether affecting the economy generally
or the Fund, and whether concerning the individual issuers whose
securities are included in the Fund's portfolio or the activities in
which they engage, or with respect to securities which the Advisor
considers desirable for inclusion in the Fund's portfolio;
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(f) determine which issuers and securities shall be
represented in the Fund's portfolio and regularly report thereon to the
Fund's Board of Directors;
(g) take all actions necessary to carry into effect
the Fund's purchase and sale programs;
(h) supervise the operations of the Fund's transfer
and dividend disbursing agent;
(i) provide 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) arrange, but 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.
4. Broker-Dealer Relationships. In the event that the Advisor
is responsible for decisions to buy and sell securities for the Fund,
broker-dealer selection, and negotiation of its brokerage commission rates, the
Advisor's primary consideration in effecting a security transaction will be
execution at the most favorable price. In performing this function the Advisor
shall comply with applicable policies established by the Board of Directors and
shall provide the Board of Directors with such reports as the Board of Directors
may require in order to monitor the Fund's portfolio transaction activities. In
certain instances the Advisor may make purchases of underwritten issues at
prices which include underwriting fees. In selecting a broker-dealer to execute
each particular transaction, the Advisor will take the following into
consideration: the best net price available; the reliability, integrity and
financial condition of the broker-dealer; the size of and difficulty in
executing the order; and the value of the expected contribution of the
broker-dealer to the investment performance of the Fund on a continuing basis.
Accordingly, the price to the Fund in any transaction may be less favorable than
that available from another broker-dealer if the difference is reasonably
justified by other aspects of the portfolio execution, services offered. Subject
to such policies as the Board of Directors may determine, the Advisor shall not
be deemed to have acted unlawfully or to have breached any duty created by this
Agreement or otherwise solely by reason of its having caused the Fund to pay a
broker-dealer that provides brokerage and research services to the Advisor an
amount of commission for effecting a portfolio investment transaction in excess
of the amount of commission another broker-dealer would have charged for
effecting that transaction, if the Advisor determines in good faith that such
amount of commission was reasonable in relation to the value of the brokerage
and research services provided by such broker-dealer, viewed in terms of either
that particular transaction or the Advisor's overall responsibilities with
respect to the Fund. The Advisor is further authorized to allocate the orders
placed by it on behalf of the Fund to such broker-dealers who also provide
research or statistical material or other services to the Fund or the Advisor.
Such allocation shall be in such amounts and proportions as the Advisor shall
determine and the Advisor will report on said allocation regularly to the Board
of Directors of the Fund, indicating the broker-dealers to whom such allocations
have been made and the basis therefor.
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<PAGE>
Consistent with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc., and subject to seeking the most
favorable price and execution available and such other policies as the Directors
may determine, the Advisor may consider services in connection with the sale of
shares of the Fund as a factor in the selection of broker-dealers to execute
portfolio transactions for the Fund.
Subject to the policies established by the Board of Directors
in compliance with applicable law, the Advisor may direct Alex. Brown & Sons
Incorporated ("Alex. Brown") to execute portfolio transactions for the Fund on
an agency basis. The commissions paid to Alex. Brown must be, as required by
Rule 17e-1 under the 1940 Act, "reasonable and fair compared to the commission,
fee or other remuneration received or to be received by other brokers in
connection with comparable transactions involving similar securities during a
comparable period of time." If the purchase or sale of securities consistent
with the investment policies of the Fund or one or more other account of the
Advisor is considered at or about the same time, transactions in such securities
will be allocated among the accounts in a manner deemed equitable by the
Advisor. Alex. Brown and 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 Fund will not deal with the Advisor or Alex. Brown in any
transaction in which the Advisor or Alex. Brown acts as a principal with respect
to any part of the Fund's order. If Alex. Brown is participating in an
underwriting or selling group, the Fund may not buy portfolio securities from
the group except in accordance with policies established by the Board of
Directors in compliance with rules of the SEC.
5. Control by Board of Directors. Any management or
supervisory activities undertaken by the Advisor pursuant to this Agreement, as
well as any other activities undertaken by the Advisor on behalf of the Fund
pursuant thereto, shall at all times be subject to any applicable directives of
the Board of Directors of the Fund.
6. Compliance with Applicable Requirements. In carrying out
its obligations under this Agreement, the Advisor shall at all times conform to:
(a) all applicable provisions of the 1940 Act and any
rules and regulations adopted thereunder;
(b) the provisions of the Registration Statement of
the Fund under the 1933 Act and the 1940 Act;
(c) the provisions of the Articles of Incorporation;
(d) the provisions of the By-Laws; and
(e) any other applicable provisions of state and
federal law.
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<PAGE>
7. Expenses. The expenses connected with the Fund shall be
allocable between the Fund and the Advisor as follows:
(a) The Advisor shall furnish, at its expense and
without cost to the Fund, the services of and one or more officers of
the Fund, to the extent that such officers may be required by the Fund
for the proper conduct of its affairs.
(b) The Fund assumes and shall pay or cause to be
paid all other expenses of the Fund, including, without limitation:
payments to the Fund's distributor under the Fund's plan of
distribution; 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 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 of 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 and statements of
additional information of the Fund and supplements thereto to the
Fund's shareholders; 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; charges and
expenses of legal counsel, including counsel to the Directors of the
Fund who are not interested persons (as defined in the 1940 Act) of the
Fund and of independent certified public 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 operation unless otherwise explicitly provided
herein.
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<PAGE>
8. DELEGATION OF RESPONSIBILITIES.
(a) Subject to the approval of the Board of Directors
and shareholders of the Fund, the Advisor may delegate to a sub-advisor
certain of its duties enumerated in Section 2 hereof, provided that the
Advisor shall continue to supervise the performance of any such
sub-advisor and shall report regularly thereon to the Fund's Board of
Directors. The Advisor shall not be responsible for any such
sub-advisor's performance under a sub-advisory agreement.
(b) The Advisor may, but shall not be under any duty
to, perform services on behalf of the Fund which are not required by
this Agreement upon the request of the Fund's Board of Directors. Such
services will be performed on behalf of the Fund and the Advisor's
charge in rendering such services may be billed monthly to the Fund,
subject to examination by the Fund's independent certified public
accountants. Payment or assumption by the Advisor of any Fund expense
that the Advisor is not required to pay or assume under this Agreement
shall not relieve the Advisor of any of its obligations to the Fund nor
obligate the Advisor to pay or assume any similar Fund expenses on any
subsequent occasions.
9. COMPENSATION. For the services to be rendered and the
expenses assumed by the Advisor, the Fund shall pay to the Advisor monthly
compensation equal to the sum of the amounts determined by applying the
following annual rates to the Fund's average daily net assets: .85% of the first
$100 million of the Fund's average daily net assets, .75% of the next $100
million of the Fund's average daily net assets, .70% of the next $100 million of
the Fund's average daily net assets, .65% of the next $200 million of the Fund's
average daily net assets, .58% of the next $500 million of the Fund's average
daily net assets, .53% of the next $500 million of the Fund's average daily net
assets, and .50% of that portion of the Fund's average daily net assets in
excess of $1.5 billion.
Except as hereinafter set forth, compensation under this
Agreement shall be calculated and accrued daily and the amounts of the daily
accruals shall be paid monthly. If this Agreement becomes effective subsequent
to the first day of a month or shall terminate before the last day of a month,
compensation for that part of the month this Agreement is in effect shall be
prorated in a manner consistent with the calculation of the fees as set forth
above. Subject to the provisions of Section 10 hereof, payment of the Advisor's
compensation for the preceding month shall be made as promptly as possible after
completion of the computations contemplated by Section 10 hereof.
10. EXPENSE LIMITATION. In the event the operating expenses of
the Fund, including all investment advisory and administrative fees, for any
fiscal year ending on a date on which this Agreement is in effect, exceed the
expense limitations applicable to the Fund imposed by the securities laws or
regulations thereunder of any state in which the Fund's shares are qualified for
sale, as such limitations may be raised or lowered from time to time, the
Advisor shall reduce its investment advisory fee to the extent of its share of
such excess expenses and, if required pursuant to any such laws or regulations,
will reimburse the Fund for its share of annual operating expenses in excess of
any expense limitation that may be applicable; provided, however, there shall be
excluded from such expenses the amounts of any interest, taxes, brokerage
commissions and extraordinary
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<PAGE>
expenses (including, but not limited to, legal claims and liabilities and
litigation costs and any indemnification related thereto) paid or payable by the
Fund. Such reduction, if any, shall be computed and accrued daily, shall be
settled on a monthly basis and shall be based upon the expense limitation
applicable to the Fund.
11. NON-EXCLUSIVITY. The services of the Advisor to the Fund
are not to be deemed to be exclusive, and the Advisor shall be free to render
investment advisory or other services to others (including other investment
companies) and to engage in other activities, so long as its services under this
Agreement are not impaired thereby. It is understood and agreed that officers or
directors of the Advisor may serve as officers or Directors of the Fund, and
that officers or Directors of the Fund may serve as officers or directors of the
Advisor to the extent permitted by law; and that the officers and directors of
the Advisor are not prohibited from engaging in any other business activity or
from rendering services to any other person, or from serving as partners,
officers, trustees or directors of any other firm, trust or corporation,
including other investment companies.
12. TERM. This Agreement shall become effective at 12:01 a.m.
on the date hereof and shall continue in force and effect, subject to Section 14
hereof, for two years from the date hereof.
13. RENEWAL. Following the expiration of its initial two-year
term, this Agreement shall continue in force and effect from year to year,
provided that such continuance is specifically approved at least annually:
(a) (i) by the Fund's Board of Directors or (ii) by
the vote of a majority of the outstanding voting securities of the Fund
(as defined in Section 2(a)(42) of the 1940 Act); and
(b) by the affirmative vote of a majority of the
Directors who are not parties to this Agreement or "interested persons"
of a party to this Agreement (other than as Directors of the Fund) by
votes cast in person at a meeting specifically called for such purpose.
14. TERMINATION. This Agreement may be terminated, without the
payment of any penalty, by the Fund upon a vote of the Fund's Board of Directors
or a vote of a majority of the Fund's outstanding voting securities (as defined
in Section 2(a)(42) of the 1940 Act) or by the Advisor, upon sixty (60) days'
written notice to the other party. The notice provided for herein may be waived
by either party. This Agreement shall automatically terminate in the event of
its assignment (as defined in Section 2(a)(4) of the 1940 Act).
15. LIABILITY OF ADVISOR. In the performance of its duties
hereunder, the Advisor shall be obligated to exercise care and diligence and to
act in good faith and to use its best efforts within reasonable limits to ensure
the accuracy of all services performed under this Agreement, but the Advisor
shall not be liable for any act or omission which does not constitute willful
misfeasance, bad faith or gross negligence on the part of the Advisor or its
officers, directors or employees, or reckless disregard by the Advisor of its
duties under this Agreement.
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<PAGE>
16. NOTICES. Any notices under this Agreement shall be in
writing, addressed and delivered or mailed postage paid to the other party at
such address as such other party may designate for the receipt of such notice.
Until further notice to the other party, it is agreed that the address of the
Fund and the Advisor for this purpose shall be 135 East Baltimore Street,
Baltimore, Maryland 21202.
17. QUESTIONS OF INTERPRETATION. Any question of
interpretation of any term or provision of this Agreement having a counterpart
in or otherwise derived from a term or provision of the 1940 Act shall be
resolved by reference to such term or provision of the 1940 Act and to
interpretations thereof, if any, by the United States Courts or in the absence
of any controlling decision of any such court, by rules, regulations or orders
of the SEC issued pursuant to the 1940 Act. In addition, where the effect of a
requirement of the 1940 Act reflected in any provision of this Agreement is
revised by rule, regulation or order of the SEC, such provision shall be deemed
to incorporate the effect of such rule, regulation or order. Otherwise the
provisions of this Agreement shall be interpreted in accordance with the laws of
Maryland.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in duplicate by their respective officers on the day
and year first above written.
Attest: FLAG INVESTORS TELEPHONE
INCOME FUND, INC.
/s/ Laurie D. DePrine By:/s/ Edward J. Veilleux
- ---------------------------- ----------------------------
Asst. Secretary Vice President
Attest: INVESTMENT COMPANY CAPITAL
CORP.
/s/ Laurie D. DePrine By:/s/ Edward J. Veilleux
- ------------------------------ ----------------------------
Asst. Secretary
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<PAGE>
EX-99.B(5)(b)
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
AMENDED SUB-ADVISORY AGREEMENT
THIS AGREEMENT is made as of the 10th day of April, 1996 by
and among FLAG INVESTORS TELEPHONE INCOME FUND, INC., a Maryland corporation
(the "Fund"), INVESTMENT COMPANY CAPITAL CORP., a Maryland corporation (the
"Advisor"), and ALEX. BROWN INVESTMENT MANAGEMENT, a Maryland limited
partnership (the "Sub-Advisor").
WHEREAS, the Advisor is the investment advisor to the Fund,
which is an open-end, diversified management investment company registered under
the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Fund and the Advisor wish to retain the
Sub-Advisor for purposes of rendering advisory services to the Fund and the
Advisor in connection with the Advisor's responsibilities to the Fund on the
terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt whereof is
hereby acknowledged, the parties hereto agree as follows:
1. Appointment of Sub-Advisor. The Fund hereby appoints the
Sub- Advisor to act as the Fund's Sub-Advisor under the supervision of the
Fund's Board of Directors and the Advisor, and the Sub-Advisor hereby accepts
such appointment, all subject to the terms and conditions contained herein.
2. Delivery of Documents. The Fund has furnished the
Sub-Advisor with copies properly certified or authenticated of each of the
following:
(a) The Fund's Articles of Incorporation, filed with
the Secretary of State of the State of Maryland on November 4, 1988 and
all amendments thereto (such Articles of Incorporation, as presently in
effect and as they shall from time to time be amended, are herein
called the "Articles of Incorporation");
(b) The Fund's By-Laws and all amendments thereto
(such By-Laws, as presently in effect and as they shall from time to
time be amended, are herein called the "By-Laws");
(c) Resolutions of the Fund's Board of Directors and
shareholders authorizing the appointment of the Sub-Advisor and
approving this Agreement;
<PAGE>
(d) The Fund's Notification of Registration filed
pursuant to Section 8(a) of the Investment Company Act of 1940 on Form
N-8A under the 1940 Act as filed with the Securities and Exchange
Commission (the "SEC") on October 21, 1983;
(e) The Fund's Registration Statement on Form N-1
under the Securities Act of 1933, as amended (the "1933 Act") (File No.
2-87336) and under the 1940 Act as filed with the SEC on October 21,
1983 relating to the shares of the Fund, and all amendments thereto;
and
(f) The Fund's most recent prospectus (such
prospectus, as presently in effect and all amendments and supplements
thereto are herein called "Prospectus").
The Fund will furnish the Sub-Advisor from time to time with
copies, properly certified or authenticated, of all amendments or supplements to
the foregoing, if any, and all documents, notices and reports filed with the
SEC.
3. Duties of Sub-Advisor. In carrying out its obligations
under Section I hereof, the Sub-Advisor shall:
(a) provide the Fund with such executive,
administrative and clerical services as are deemed advisable by the
Fund's Board of Directors;
(b) determine which issuers and securities shall be
represented in the Fund's portfolio and regularly report thereon to the
Fund's Board of Directors;
(c) formulate and implement continuing programs for
the purchases and sales of the securities of such issuers and regularly
report thereon to the Fund's Board of Directors;
(d) take, on behalf of the Fund, all actions which
appear to the Fund necessary to carry into effect such purchase and
sale programs as aforesaid, including the placing of orders for the
purchase and sale of securities of the Fund; and
(e) obtain and evaluate pertinent information about
significant developments and economic, statistical and financial data,
domestic, foreign or otherwise, whether affecting the economy generally
or the Fund, and whether concerning the individual issuers whose
securities are included in the Fund's portfolio or the activities in
which they engage, or with respect to securities which the Advisor
considers desirable for inclusion in the Fund's portfolio.
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<PAGE>
4. Broker-Dealer Relationships. In circumstances when the
Sub-Advisor is responsible for decisions to buy and sell securities for the
Fund, broker-dealer selection, and negotiation of its brokerage commission
rates, the Sub-Advisor's primary consideration in effecting a security
transaction will be execution of orders at the most favorable price on an
overall basis. In performing this function the Sub-Advisor shall comply with
applicable policies established by the Board of Directors and shall provide the
Board of Directors with such reports as the Board of Directors may require in
order to monitor the Fund's portfolio transaction activities. In selecting a
broker-dealer to execute each particular transaction, the Sub-Advisor will take
the following into consideration: the best net price available; the reliability,
integrity and financial condition of the broker-dealer; the size of and
difficulty in executing the order; and the value of the expected contribution of
the broker-dealer to the investment performance of the Fund on a continuing
basis. Accordingly, the price to the Fund in any transaction may be less
favorable than that available from another broker-dealer if the difference is
reasonably justified by other aspects of the portfolio execution services
offered. Subject to such policies as the Board of Directors may determine, the
Sub-Advisor shall not be deemed to have acted unlawfully or to have breached any
duty created by this Agreement or otherwise solely by reason of its having
caused the Fund to pay a broker-dealer that provides brokerage and research
services to the Sub-Advisor an amount of commission for effecting a portfolio
investment transaction in excess of the amount of commission another
broker-dealer would have charged for effecting that transaction, if the
Sub-Advisor determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker-dealer, viewed in terms of either that particular
transaction or the Sub-Advisor's overall responsibilities with respect to the
Fund. The Sub-Advisor is further authorized to allocate the orders placed by it
on behalf of the Fund to such broker-dealers who also provide research or
statistical material or other services to the Fund or the Sub-Advisor. Such
allocation shall be in such amounts and proportions as the Sub-Advisor shall
determine and the Sub-Advisor will report on said allocation regularly to the
Board of Directors of the Fund, indicating the brokers to whom such allocations
have been made and the basis therefor.
Consistent with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc., and subject to seeking the most
favorable price and execution available and such other policies as the Directors
may determine, the Sub-Advisor may consider services in connection with the sale
of shares of the Fund as a factor in the selection of broker-dealers to execute
portfolio transactions for the Fund.
Subject to the policies established by the Board of Directors
in compliance with applicable law, the Advisor may direct Alex. Brown & Sons
Incorporated ("Alex. Brown") to execute portfolio transactions for the Fund on
an agency basis. The commissions paid to Alex. Brown must be, as required by
Rule 17e-1 under the 1940 Act, "reasonable and fair compared to the commission,
fee or other remuneration received or to be received by other brokers in
connection with comparable transactions involving similar securities during a
comparable period of time." If the purchase or sale of securities consistent
with the investment policies of the Fund or one or more other accounts of the
Sub-Advisor is considered at or about the same time, transactions in such
securities will be allocated among the accounts in a manner deemed equitable by
the Sub-Advisor. Alex. Brown and the Sub-Advisor may combine such transactions,
in
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<PAGE>
accordance with applicable laws and regulations, in order to obtain the best net
price and most favorable execution.
The Fund will not deal with the Sub-Advisor or Alex. Brown in
any transaction in which the Sub-Advisor or Alex. Brown acts as a principal with
respect to any part of the Fund's order. If Alex. Brown is participating in an
underwriting or selling group, the Fund may not buy portfolio securities from
the group except in accordance with policies established by the Board of
Directors in compliance with rules of the SEC.
5. Control by Fund's Board of Directors. Any recommendations
concerning the Fund's investment program for the Fund proposed by the
Sub-Advisor to the Fund and the Advisor pursuant to this Agreement, as well as
any other activities undertaken by the Sub-Advisor on behalf of the Fund
pursuant hereto, shall at all times be subject to any applicable directives of
the Board of Directors of the Fund.
6. Compliance with Applicable Requirements. In carrying out
its obligations under this Agreement, the Sub-Advisor shall at all times conform
to:
(a) all applicable provisions of the 1940 Act and any
rules and regulations adopted thereunder, as amended;
(b) the provisions of the Registration Statement of
the Fund under the 1933 Act and the 1940 Act;
(c) the provisions of the Articles of Incorporation;
(d) the provision of the By-Laws; and
(e) any other applicable provisions of state and
federal law.
7. Expenses. The expenses connected with the Fund shall be
allocable between the Fund, the Sub-Advisor and the Advisor as follows:
(a) The Sub-Advisor shall furnish, at its expense and
without cost to the Fund, the services of the President and certain
Vice Presidents of the Fund, to the extent that such officers may be
required by the Fund for the proper conduct of its affairs.
(b) The Sub-Advisor shall maintain, at its expense
and without cost to the Fund, a trading function in order to carry out
its obligations under Section 3 hereof to place orders for the purchase
and sale of portfolio securities for the Fund.
(c) The Fund assumes and shall pay or cause to be
paid all other expenses of the Fund, including, without limitation:
payments to the Advisor under the Investment Advisory Agreement between
the Fund and the Advisor, payments to the Fund's distributor under the
Fund's plan of distribution; the charges and expenses of any
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<PAGE>
registrar, any custodian or depository appointed by the Fund for the
safekeeping of its cash, portfolio securities and other property, and
any 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 of 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 and statements of additional information of the Fund and
supplements thereto to the Fund's shareholders; 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; charges and expenses of legal counsel, including counsel
to the Directors of the Fund who are not "interested persons" (as
defined in the 1940 Act) of the Fund and of independent certified
public 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
operation unless otherwise explicitly provided herein.
8. Compensation. For the services to be rendered hereunder by
the Sub-Advisor, the Advisor shall pay to the Sub-Advisor monthly compensation
equal to the sum of the amounts determined by applying the following annual
rates to the Fund's average daily net assets: .60% of the first $100 million of
the Fund's average daily net assets, .55% of the next $100 million of the Fund's
average daily net assets, .50% of the next $100 million of the Fund's average
daily net assets, .45% of the next $200 million of the Fund's average daily net
assets, .40% of the next $500 million of the Fund's average daily net assets,
.37% of the next $500 million of the Fund's average daily net assets, and .35%
of that portion of the Fund's average daily net assets in excess of $1.5
billion. Except as hereinafter set forth, compensation under this Agreement
shall be calculated and accrued daily and the amounts of the daily accruals paid
monthly. If this Agreement becomes effective subsequent to the first day of a
month or shall terminate before the last day of a month, compensation for that
part of the month this Agreement is in effect shall be prorated in a manner
consistent with the calculations of the fees as set forth above. Subject to the
provisions of Section 10 hereof, payment of the Sub-Advisor's compensation for
the preceding month shall be made as promptly as possible after completion of
the computations contemplated in Section 10 hereof.
9. Delegation of Responsibilities. The Sub-Advisor may, but
shall not be under any duty to, perform services on behalf of the Fund which are
not required by this
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<PAGE>
Agreement upon the request of the Fund's Board of Directors. Such services will
be performed on behalf of the Fund and the Sub-Advisor's charges in rendering
such services will be billed monthly to the Fund, subject to examination by the
Fund's independent certified public accountants. Payment or assumption by the
Sub-Advisor of any Fund expense that the Sub-Advisor is not required to pay or
assume under this Agreement shall not relieve the Sub-Advisor of any of its
obligations to the Fund nor obligate the Sub-Advisor to pay or assume any
similar Fund expenses on any subsequent occasions.
10. Expense Limitation. If, for any fiscal year of the Fund,
the amount of the fee which the Advisor would otherwise receive from the Fund
pursuant to the Investment Advisory Agreement between the Fund and the Advisor
is reduced pursuant to the expense limitation provisions of the Investment
Advisory Agreement, the fee which the Sub-Advisor would otherwise receive from
the Advisor pursuant to Section 8 of this Agreement shall also be reduced
proportionately. For example, if the Advisor's fee from the Fund is reduced by
1/3, the Sub-Advisor's fee from the Advisor will also be reduced by 1/3. Such
reduction shall be deducted from the monthly fee otherwise payable to the
Sub-Advisor by the Advisor and, if such amount should exceed such monthly fee,
the Sub-Advisor agrees to repay the Advisor such amount of its fee previously
received with respect to such fiscal year as may be required to make up the
deficiency no later than the last day of the following month. In no event will
the Sub-Advisor be required to reimburse the Advisor for any amount in excess of
the fee it receives pursuant to this Agreement during the fiscal year of the
Fund in which the reimbursement is required.
11. Term. This Agreement shall become effective at 12:01 a.m.
on the date hereof and shall remain in force and effect, subject to Section 13
hereof, for two years from the date hereof.
12. Renewal. Following the expiration of its initial two-year
term, this Agreement shall continue in force and effect from year to year,
provided that such continuance is specifically approved at least annually:
(a) (i) by the Fund's Board of Directors or (ii) by
the vote of a majority of the outstanding voting securities of the Fund
(as defined in Section 2(a)(42) of the 1940 Act); and
(b) by the affirmative vote of a majority of the
Directors who are not parties to this Agreement or "interested persons"
of a party to this Agreement (other than as Directors of the Fund) by
votes cast in person at a meeting specifically called for such purpose.
13. Termination. This Agreement may be terminated at any time,
without the payment of any penalty, by vote of the Fund's Board of Directors or
by vote of a majority of the outstanding voting securities of the Fund (as
defined in Section 2(a)(42) of the 1940 Act), on sixty (60) days' written notice
to the Advisor and the Sub-Advisor. This Agreement may be terminated at any
time, without the payment of any penalty, by the Sub-Advisor on sixty (60) days'
written notice to the Fund and the Advisor. The notice provided for herein may
be waived
-6-
<PAGE>
by any person to whom such notice is required. This Agreement shall
automatically terminate in the event of its assignment (as defined in Section
2(a)(4) of the 1940 Act).
14. Non-Exclusivity. The services of the Sub-Advisor to the
Advisor and the Fund are not to be deemed to be exclusive, and the Sub-Advisor
shall be free to render investment advisory or other services to others
(including other investment companies) and to engage in other activities, so
long as its services under this Agreement are not impaired thereby. It is
understood and agreed that partners of the Sub-Advisor may serve as officers or
Directors of the Fund, and that officers or Directors of the Fund may serve as
officers or partners of the Sub-Advisor to the extent permitted by law; and that
the partners of the Sub-Advisor are not prohibited from engaging in any other
business activity or from rendering services to any other person, or from
serving as partners, officers or directors of any other firm or corporation,
including other investment companies.
15. Liability of Sub-Advisor. In the performance of its duties
hereunder, the Sub-Advisor shall be obligated to exercise care and diligence and
to act in good faith and to use its best efforts within reasonable limits to
ensure the accuracy of all services performed under this Agreement, but the
Sub-Advisor shall not be liable for any act or omission which does not
constitute willful misfeasance, bad faith or gross negligence on the part of the
Sub-Advisor or its officers, directors or employees, or reckless disregard by
the Sub-Advisor of its duties under this Agreement.
16. Notices. Any notices under this Agreement shall be in
writing, addressed and delivered or mailed postage paid to the other party at
such address as such other party may designate for the receipt of such notice.
Until further notice to the other party, it is agreed that the address of the
Sub-Advisor, of the Advisor and of the Fund for this purpose shall be 135 East
Baltimore Street, Baltimore, Maryland 21202.
17. Questions of Interpretation. Any question of
interpretation of any term or provision of this Agreement having a counterpart
in or otherwise derived from a term or provision of the 1940 Act shall be
resolved by reference to such term or provision of the 1940 Act and to
interpretations thereof, if any, by the United States Courts or in the absence
of any controlling decision of any such court, by rules, regulations or orders
of the SEC issued pursuant to said Act. In addition, where the effect of a
requirement of the 1940 Act reflected in any provision of this Agreement is
revised by rule, regulation or order of the SEC, such provision shall be deemed
to incorporate the effect of such rule, regulation or order. Otherwise the
provisions of this Agreement shall be interpreted in accordance with the laws of
Maryland.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in duplicate by their respective officers on the day and year first above
written.
Attest: FLAG INVESTORS TELEPHONE
INCOME FUND, INC.
/s/ Laurie D. DePrine By: /s/ Edward J. Veilleux
- --------------------- ----------------------
Vice President
Attest: INVESTMENT COMPANY CAPITAL CORP.
/s/ Laurie D. DePrine By: /s/ Edward J. Veilleux
- --------------------- ----------------------
Attest: ALEX. BROWN INVESTMENT
MANAGEMENT
By Alex. Brown & Sons
Incorporated, Its General
Partner
/s/ Laurie D. DePrine By: /s/ J. Dorsey Brown, III
- --------------------- ------------------------
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<PAGE>
EX-99.B(6)(b)
FLAG INVESTORS FAMILY OF FUNDS
One South Street
Baltimore, Maryland 21202
FORM OF
SUB-DISTRIBUTION AGREEMENT
_____________________, 19__
Gentlemen:
Alex. Brown & Sons Incorporated ("Alex. Brown"), a Maryland
corporation, serves as distributor (the "Distributor") of the Flag Investors
Funds (collectively, the "Funds", individually a "Fund"). The Funds are open-end
investment companies registered under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). The Funds offer their shares ("Shares")
to the public in accordance with the terms and conditions contained in the
Prospectus of each Fund. The term "Prospectus" used herein refers to the
prospectus on file with the Securities and Exchange Commission which is part of
the registration statement of each Fund under the Securities Act of 1933 (the
"Securities Act"). In connection with the foregoing you may serve as a
participating dealer (and, therefore, accept orders for the purchase or
redemption of Shares, respond to shareholder inquiries and perform other related
functions) on the following terms and conditions:
1. Participating Dealer. You are hereby designated a Participating
Dealer and as such are authorized (i) to accept orders for the purchase of
Shares and to transmit to the Funds such orders and the payment made therefore,
(ii) to accept orders for the redemption of Shares and to transmit to the Funds
such orders and all additional material, including any certificates for Shares,
as may be required to complete the redemption and (iii) to assist shareholders
with the foregoing and other matters relating to their investments in each Fund,
in each case subject to the terms and conditions set forth in the Prospectus of
each Fund. You are to review each Share purchase or redemption order submitted
through you or with your assistance for completeness and accuracy. You further
agree to undertake from time to time certain shareholder servicing activities
for customers of yours who have purchased Shares and who use your facilities to
communicate with the Funds or to effect redemptions or additional purchases of
Shares.
<PAGE>
2. Limitation of Authority. No person is authorized to make any
representations concerning the Funds or the Shares except those contained in the
Prospectus of each Fund and in such printed information as the Distributor may
subsequently prepare. No person is authorized to distribute any sales material
relating to any Fund without the prior written approval of the Distributor.
3. Compensation. As compensation for such services, you will look
solely to the Distributor, and you acknowledge that the Funds shall have no
direct responsibility for any compensation. In addition to any sales charge
payable to you by your customer pursuant to a Prospectus, the Distributor will
pay you no less often than annually a shareholder processing and service fee (as
we may determine from time to time in writing) computed as a percentage of the
average daily net assets maintained with each Fund during the preceding period
by shareholders who purchase their shares through you or with your assistance,
provided that said assets are at least $250,000 for each Fund for which you are
to be compensated, and provided that in all cases your name is transmitted with
each shareholder's purchase order.
4. Prospectus and Reports. You agree to comply with the provisions
contained in the Securities Act governing the distribution of prospectuses to
persons to whom you offer Shares. You further agree to deliver, upon our
request, copies of any amended Prospectus of the relevant Fund to purchasers
whose Shares you are holding as record owner and to deliver to such persons
copies of the annual and interim reports and proxy solicitation materials of the
Funds. We agree to furnish to you as many copies of each Prospectus, annual and
interim reports and proxy solicitation materials as you may reasonably request.
5. Qualification to Act. You represent that you are a member in good
standing of the National Association of Securities Dealers, Inc. (the "NASD").
Your expulsion or suspension from the NASD will automatically terminate this
Agreement on the effective date of such expulsion or suspension. You agree that
you will not offer Shares to persons in any jurisdiction in which you may not
lawfully make such offer due to the fact that you have not registered under, or
are not exempt from, the applicable registration or licensing requirements of
such jurisdiction. You agree that in performing the services under this
Agreement, you at all times will comply with the NASD's Conduct Rules,
including, without limitation, the provisions of Rule 2830. You agree that you
will not combine customer orders to reach breakpoints in commissions for any
purposes whatsoever unless authorized by the then current Prospectus in respect
of Shares of a particular class or by us in writing. You also agree that you
will place orders immediately upon their receipt and will not withhold any order
so as to profit therefrom. In determining the amount payable to you hereunder,
we reserve the right to exclude any sales which we reasonably determine are not
made in accordance with the terms of the Prospectus and provisions of the
Agreement.
<PAGE>
6. Blue Sky. The Funds have registered an indefinite number of Shares
under the Securities Act. The Funds intend to register or qualify in certain
states where registration or qualification is required. We will inform you as to
the states or other jurisdictions in which we believe the Shares have been
qualified for sale under, or are exempt from the requirements of, the respective
securities laws of such states. You agree that you will offer Shares to your
customers only in those states where such Shares have been registered,
qualified, or an exemption is available. We assume no responsibility or
obligation as to your right to sell Shares in any jurisdiction. We will file
with the Department of State in New York a State Notice and a Further State
Notice with respect to the Shares, if necessary.
7. Authority of Fund. Each of the Funds shall have full authority to
take such action as it deems advisable in respect of all matters pertaining to
the offering of its Shares, including the right not to accept any order for the
purchase of Shares.
8. Record Keeping. You will (i) maintain all records required by law to
be kept by you relating to transactions in Shares and, upon request by any Fund,
promptly make such of these records available to the Fund as the Fund may
reasonably request in connection with its operations and (ii) promptly notify
the Fund if you experience any difficulty in maintaining the records described
in the foregoing clauses in an accurate and complete manner.
9. Liability. The Distributor shall be under no liability to you except
for lack of good faith and for obligations expressly assumed by it hereunder. In
carrying out your obligations, you agree to act in good faith and without
negligence. Nothing contained in this Agreement is intended to operate as a
waiver by the Distributor or you of compliance with any provision of the
Investment Company Act, the Securities Act, the Securities Exchange Act of 1934,
as amended, or the rules and regulations promulgated by the Securities and
Exchange Commission thereunder.
10. Termination. This Agreement may be terminated by either party,
without penalty, upon ten days' notice to the other party and shall
automatically terminate in the event of its assignment (as defined in the
Investment Company Act). This Agreement may also be terminated at any time for
any particular Fund without penalty by the vote of a majority of the members of
the Board of Directors or Trustees of such Fund who are not "interested persons"
(as defined in the Investment Company Act) and who have no direct or indirect
financial interest in the operation of the Distribution Agreement between such
Fund and the Distributor or by the vote of a majority of the outstanding voting
securities of the Fund.
11. Communications. All communications to us should be sent to the
above address. Any notice to you shall be duly given if mailed or telegraphed to
you at the address specified by you below.
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us one copy of this agreement.
ALEX. BROWN & SONS INCORPORATED
-------------------------------
(Authorized Signature)
Confirmed and accepted:
Firm Name: ________________________
By: _______________________________
Address: __________________________
Date:______________________________
<PAGE>
EX-99.B(6)(e)
New Class B Shares
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
FLAG INVESTORS CLASS B SHARES
DISTRIBUTION AGREEMENT
AGREEMENT, made as of the 30th day of December, 1994, by and between
FLAG INVESTORS TELEPHONE INCOME FUND, INC., a Maryland corporation (the "Fund"),
and ALEX. BROWN & SONS INCORPORATED, a Maryland corporation ("Alex. Brown").
W I T N E S S E T H
WHEREAS, 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
WHEREAS, the Fund wishes to appoint Alex. Brown as the exclusive
distributor of the class of shares of the Fund known as the Flag Investors Class
B Shares (the "Shares") and Alex. Brown wishes to become the distributor of the
Shares; and
WHEREAS, the compensation to Alex. Brown hereunder and the payments
contemplated by paragraph 9 constitute the financing of activities intended to
result in the sale of Shares, and this Agreement is entered into pursuant to a
"written plan" pursuant to Rule 12b-1 under the Act (the "Plan") allowing the
Fund to make such payments.
NOW, THEREFORE, in consideration of the premises herein and of other
good and valuable consideration the receipt whereof is hereby acknowledged, the
parties hereto agree as follows:
1. Appointment. The Fund appoints Alex. Brown as Distributor for the
Shares for the period and on the terms set forth in this Agreement. The Fund may
from time to time issue separate series or classes of its shares of common
stock, or classify and reclassify shares of such series as classes, and the
appointment effected hereby shall constitute appointment for the distribution of
such additional series and classes unless the parties shall otherwise agree in
writing. Alex. Brown accepts such appointment and agrees to render the services
herein set forth, for the compensation herein provided.
2. Delivery of Documents. The Fund has furnished Alex. Brown with
copies properly certified or authenticated, of each of the following:
(a) The Fund's Articles of Incorporation, filed with the Secretary
of State of Maryland on November 4, 1988 and all amendments thereto (the
"Articles of Incorporation");
(b) The Fund's By-Laws and all amendments thereto (such By-Laws, as
presently in effect and as they shall from time to time be amended, are herein
called the "By-Laws");
(c) Resolutions of the Fund's Board of Directors and shareholders
authorizing the appointment of Alex. Brown as the Fund's Distributor of the
Shares and approving this Agreement;
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<PAGE>
(d) The Fund's Notification of Registration filed pursuant to
Section 8(a) of the 1940 Act on Form N-8A under the 1940 Act, as filed with the
Securities and Exchange Commission (the "SEC") on October 21, 1983;
(e) The Fund's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended (the "1933 Act") (File No. 2-87336) and under
the 1940 Act as filed with the SEC on October 21, 1983 relating to the Shares of
the Fund, and all amendments thereto; and
(f) The Fund's most recent prospectus for the Shares (such
prospectus and all amendments and supplements thereto are herein called
"Prospectus").
The Fund will furnish Alex. Brown from time to time with copies,
properly certified or authenticated, of all amendments or supplements to the
foregoing, if any, and all documents, notices and reports filed with the SEC.
3. Duties as Distributor. Alex. Brown shall give the Fund the benefit
of its best judgment, efforts and facilities in rendering its services as
Distributor of the Shares. Alex. Brown shall:
(a) respond to inquiries from the Fund's shareholders concerning the
status of their accounts with the Fund;
(b) take, on behalf of the Fund, all actions deemed necessary to
carry into effect the distribution of the Shares;
(c) provide the Board of Directors of the Fund with quarterly
reports as required by Rule 12b-1 under the 1940 Act.
4. Distribution of Shares. Alex. Brown shall be the exclusive
distributor of the Shares. It is mutually understood and agreed that Alex. Brown
does not undertake to sell all or any specific portion of the Shares. The Fund
shall not sell any of the Shares except through Alex. Brown and securities
dealers who have valid Sub-Distribution Agreements with Alex. Brown.
Notwithstanding the provisions of the foregoing sentence, the Fund may issue its
Shares at their net asset value to any shareholder of the Fund purchasing such
Shares with dividends or other cash distributions received from the Fund
pursuant to an offer made to all shareholders.
5. Control by Board of Directors. Any distribution activities
undertaken by Alex. Brown pursuant to this Agreement, as well as any other
activities undertaken by Alex. Brown on behalf of the Fund pursuant hereto,
shall at all times be subject to any directives of the Board of Directors of the
Fund. The Board of Directors may agree, on behalf of the Fund, to amendments to
this Agreement, provided that the Fund must obtain prior approval of the
shareholders of the Fund to any amendment which would result in a material
increase in the amount expended by the Fund.
6. Compliance with Applicable Requirements. In carrying out its
obligations under this Agreement, Alex. Brown shall at all times conform to:
(a) all applicable provisions of the 1940 Act and any rules and
regulations adopted thereunder as amended;
(b) the provisions of the Registration Statement of the Fund under
the 1933 Act and the 1940 Act and any amendments and supplements thereto;
(c) the provisions of the Articles of Incorporation of the Fund and
any amendments thereto;
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<PAGE>
(d) the provisions of the By-Laws of the Fund;
(e) the rules and regulations of the National Association of
Securities Dealers, Inc. ("NASD") and all other self-regulatory organizations
applicable to the sale of investment company shares; and
(f) any other applicable provisions of Federal and State law.
7. Expenses. The expenses connected with the Fund shall be allocable
between the Fund and Alex. Brown as follows:
(a) Alex. Brown shall furnish, at its expense and without cost to
the Fund, the services of personnel to the extent that such services are
required to carry out their obligations under this Agreement;
(b) Alex. Brown shall bear the expenses of any promotional or sales
literature used by Alex. Brown or furnished by Alex. Brown to purchasers or
dealers in connection with the public offering of the Shares, the expenses of
advertising in connection with such public offering and all legal expenses in
connection with the foregoing;
(c) the Fund assumes and shall pay or cause to be paid all other
expenses of the Fund, including, without limitation: the fees of the Fund's
investment advisor; the charges and expenses of any registrar, custodian or
depositary appointed by the Fund for the safekeeping of its cash, portfolio
securities and other property, and any stock 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
corporate fees payable by the Fund to Federal, State or other governmental
agencies; the cost and expense of engraving or printing of stock certificates
representing Shares; all costs and expenses in connection with maintenance of
registration of the Fund and the Shares with the SEC and various states and
other jurisdictions (including filing fees and legal fees and disbursements of
counsel) except as provided in subparagraph (a) above, the expenses of printing,
including typesetting, and distributing prospectuses of the Fund and supplements
thereto to the Fund's shareholders; 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 who are not "interested
persons" of the Fund (as defined in the 1940 Act) or 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 Shares; charges and
expenses of legal counsel, including counsel to the Directors who are not
"interested persons" of the Fund (as defined in the 1940 Act), 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 operation unless otherwise explicitly provided herein.
8. Delegation of Responsibilities. Alex. Brown may, but shall be under
no duty to, perform services on behalf of the Fund which are not required by
this Agreement upon the request of the Fund's Board of Directors. Such services
will be performed on behalf of the Fund and Alex. Brown's charge in rendering
such services may be billed monthly to the Fund, subject to examination by the
Fund's independent accountants. Payment or assumption by Alex. Brown of any Fund
expense that Alex. Brown is not required to pay or assume under this Agreement
shall not relieve Alex. Brown of any of its obligations to the Fund or obligate
Alex. Brown to pay or assume any similar Fund expense on any subsequent
occasions.
9. Compensation. For the services to be rendered and the expenses
assumed by Alex. Brown, the Fund shall pay to Alex. Brown, compensation at the
annual rate of .75% of the average daily net assets of the shares of the Fund.
Except as hereinafter set forth, continuing compensation under this Agreement
shall be calculated and accrued daily and the amounts of the daily accruals
shall be paid monthly. If this Agreement becomes effective
-3-
<PAGE>
subsequent to the first day of a month or shall terminate before the last day of
a month compensation for that part of the month this Agreement is in effect
shall be prorated in a manner consistent with the calculations of the fees as
set forth above. Payment of Alex. Brown's compensation for the preceding month
shall be made as promptly as possible.
10. Service Fee. The Fund shall pay Alex. Brown a service fee (as such
term is defined in the NASD Rules of Fair Practice) equal to .25% of the average
daily net assets of the Shares of the Fund. Such fee shall be calculated and
accrued daily and the amounts of the daily accruals shall be paid monthly in the
manner described in paragraph 9 above.
11. Compensation for Servicing Shareholder Accounts. The Fund
acknowledges that Alex. Brown may compensate its investment representatives for
opening accounts, processing investor letters of transmittals and applications
and withdrawal 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 the
Fund shareholders.
12. Sub-Distribution Agreements. Alex. Brown may enter into
Sub-Distribution Agreements (the "Sub-Distribution Agreements") with any
securities dealer who is registered under the Securities Exchange Act of 1934
and a member in good standing of the NASD, who may wish to act as a
Participating Dealer in connection with the proposed offering. All
Sub-Distribution Agreements shall be in substantially the form of the agreement
attached hereto as Exhibit "A". For processing Fund shareholders' redemption
orders, responding to the inquiries from Fund shareholders concerning the status
of their accounts and the operations of the Fund and communicating with the
Fund, its transfer agent and Alex. Brown, Alex. Brown may pay each such
Participating Dealer an amount not to exceed that portion of the compensation
paid to Alex. Brown hereunder that is attributable to accounts of Fund
shareholders who are customers of such Participating Dealer.
13. Non-Exclusivity. The services of Alex. Brown to the Fund are not to
be deemed exclusive and Alex. Brown shall be free to render distribution or
other services to others (including other investment companies) and to engage in
other activities. It is understood and agreed that directors, officers or
employees of Alex. Brown may serve as directors or officers of the Fund, and
that directors or officers of the Fund may serve as directors, officers and
employees of Alex. Brown to the extent permitted by law; and that directors,
officers and employees of Alex. Brown are not prohibited from engaging in any
other business activity or from rendering services to any other person, or from
serving as partners, directors or officers of any other firm or corporation,
including other investment companies.
14. Term and Approval. This Agreement shall become effective at the
close of business on the date hereof and shall remain in force and effect for an
initial term of two years and from year to year thereafter, provided that such
continuance is specifically approved at least annually:
(a) (i) by the Fund's Board of Directors or (ii) by the vote of a
majority of the outstanding voting securities (as defined in the 1940 Act), and
(b) by the affirmative vote of a majority of the Directors who are
not "interested persons" of the Fund (as defined in the 1940 Act) and do not
have a financial interest in the operation of this Agreement, by votes cast in
person at a meeting specifically called for such purpose.
15. Termination. This Agreement may be terminated at any time, on sixty
(60) days' written notice to the other party without the payment of any penalty,
(i) by vote of the Fund's Board of Directors, (ii) by vote of a majority of the
directors who are not "interested persons" of the Fund (as defined in the 1940
Act) and do not have a financial interest in the operation of this Agreement,
(iii) by vote of a majority of the Fund's outstanding voting securities (as
defined in the 1940 Act) or (iv) by Alex. Brown. The notice provided for herein
may be waived by each party. This Agreement shall automatically terminate in the
event of its assignment (as the term is defined in the 1940 Act).
-4-
<PAGE>
16. Liability. In the performance of its duties hereunder, Alex. Brown
shall be obligated to exercise care and diligence and to act in good faith and
to use its best efforts within reasonable limits in performing all services
provided for under this Agreement, but shall not be liable for any act or
omission which does not constitute willful misfeasance, bad faith or gross
negligence on the part of Alex. Brown or reckless disregard by Alex. Brown of
its duties under this Agreement.
17. Notices. Any notices under this Agreement shall be in writing,
addressed and delivered or mailed postage paid to the other party at such
address as such other party may designate for the receipt of such notice. Until
further notice to the other parties, it is agreed that the address of both Alex.
Brown and the Fund for this purpose shall be 135 East Baltimore Street,
Baltimore, Maryland 21202.
18. Questions of Interpretation. Any question of interpretation of any
term or provision of this Agreement having a counterpart in or otherwise derived
from a term or provision of the 1940 Act shall be resolved by reference to such
term or provision of the 1940 Act and to interpretations thereof, if any, by the
United States courts or in the absence of any controlling decision of any such
court, by rules, regulations or orders of the SEC issued pursuant to the 1940
Act. In addition, where the effect of a requirement of the 1940 Act reflected in
any provision of this Agreement is revised by rule, regulation or order of the
SEC, such provision shall be deemed to incorporate the effect of such rule,
regulation or order. Otherwise the provisions of this Agreement shall be
interpreted in accordance with the laws of Maryland.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their respective officers as of the day and year first
above written.
[SEAL] FLAG INVESTORS TELEPHONE INCOME
FUND, INC.
Attest: /s/ Brian C. Nelson By /s/ Edward J. Veilleux
--------------------- ----------------------
Title:
[SEAL] ALEX. BROWN & SONS INCORPORATED
Attest: /s/ Brian C. Nelson By /s/ Richard T. Hale
------------------- -------------------
Title:
-5-
<PAGE>
Exhibit A
FLAG INVESTORS FAMILY OF FUNDS - CLASS B SHARES
135 East Baltimore Street
Baltimore, Maryland 21202
FORM OF
SUB-DISTRIBUTION AGREEMENT
_____________________, 19__
Gentlemen:
Alex. Brown & Sons Incorporated ("Alex. Brown"), a Maryland
corporation, serves as distributor (the "Distributor") of the Flag Investors
Funds - Class B Shares (collectively, the "Funds", individually a "Fund"). The
Funds are open-end investment companies registered under the Investment Company
Act of 1940, as amended (the "Investment Company Act"). The Funds offer their
Flag Investors Class B Shares ("Shares") to the public in accordance with the
terms and conditions contained in the Prospectus of each Fund. The term
"Prospectus" used herein refers to the prospectus on file with the Securities
and Exchange Commission which is part of the registration statement of each Fund
under the Securities Act of 1933 (the "Securities Act"). In connection with the
foregoing you may serve as a participating dealer (and, therefore, accept orders
for the purchase or redemption of Shares, respond to shareholder inquiries and
perform other related functions) on the following terms and conditions:
1. Participating Dealer. You are hereby designated a Participating
Dealer and as such are authorized (i) to accept orders for the purchase of
Shares and to transmit to the Funds such orders and the payment made therefore,
(ii) to accept orders for the redemption of Shares and to transmit to the Funds
such orders and all additional material, including any certificates for Shares,
as may be required to complete the redemption and (iii) to assist shareholders
with the foregoing and other matters relating to their investments in each Fund,
in each case subject to the terms and conditions set forth in the Prospectus of
each Fund. You are to review each Share purchase or redemption order submitted
through you or with your assistance for completeness and accuracy. You further
agree to undertake from time to time certain shareholder servicing activities
for customers of yours who have purchased Shares and who use your facilities to
communicate with the Funds or to effect redemptions or additional purchases of
Shares.
2. Limitation of Authority. No person is authorized to make any
representations concerning the Funds or the Shares except those contained in the
Prospectus of each Fund and in such printed information as the Distributor may
subsequently prepare. No person is authorized to distribute any sales material
relating to any Fund without the prior written approval of the Distributor.
3. Compensation. As compensation for such services, you will look
solely to the Distributor, and you acknowledge that the Funds shall have no
direct responsibility for any compensation. In addition to any sales charge
payable to you by your customer pursuant to a Prospectus, the Distributor will
pay you no less often than annually a shareholder processing and service fee (as
we may determine from time to time in writing) computed as a percentage of the
average daily net assets maintained with each Fund during the preceding period
by shareholders who purchase their shares through you or with your assistance,
provided that
-1-
<PAGE>
said assets are at least $250,000 for each Fund for which you are to be
compensated, and provided that in all cases your name is transmitted with each
shareholder's purchase order.
4. Prospectus and Reports. You agree to comply with the provisions
contained in the Securities Act governing the distribution of prospectuses to
persons to whom you offer Shares. You further agree to deliver, upon our
request, copies of any amended Prospectus of the relevant Fund to purchasers
whose Shares you are holding as record owner and to deliver to such persons
copies of the annual and interim reports and proxy solicitation materials of the
Funds. We agree to furnish to you as many copies of each Prospectus, annual and
interim reports and proxy solicitation materials as you may reasonably request.
5. Qualification to Act. You represent that you are a member in good
standing of the National Association of Securities Dealers, Inc. (the "NASD").
Your expulsion or suspension from the NASD will automatically terminate this
Agreement on the effective date of such expulsion or suspension. You agree that
you will not offer Shares to persons in any jurisdiction in which you may not
lawfully make such offer due to the fact that you have not registered under, or
are not exempt from, the applicable registration or licensing requirements of
such jurisdiction. You agree that in performing the services under this
Agreement, you at all times will comply with the Rules of Fair Practice of the
NASD, including, without limitation, the provisions of Section 26 of such Rules.
You agree that you will not combine customer orders to reach breakpoints in
commissions for any purposes whatsoever unless authorized by the then current
Prospectus in respect of Shares of a particular class or by us in writing. You
also agree that you will place orders immediately upon their receipt and will
not withhold any order so as to profit therefrom. In determining the amount
payable to you hereunder, we reserve the right to exclude any sales which we
reasonably determine are not made in accordance with the terms of the Prospectus
and provisions of the Agreement.
6. Blue Sky. The Funds have registered an indefinite number of Shares
under the Securities Act. The Funds intend to register or qualify in certain
states where registration or qualification is required. We will inform you as to
the states or other jurisdictions in which we believe the Shares have been
qualified for sale under, or are exempt from the requirements of, the respective
securities laws of such states. You agree that you will offer Shares to your
customers only in those states where such Shares have been registered,
qualified, or an exemption is available. We assume no responsibility or
obligation as to your right to sell Shares in any jurisdiction. We will file
with the Department of State in New York a State Notice and a Further State
Notice with respect to the Shares, if necessary.
7. Authority of Fund. Each of the Funds shall have full authority to
take such action as it deems advisable in respect of all matters pertaining to
the offering of its Shares, including the right not to accept any order for the
purchase of Shares.
8. Record Keeping. You will (i) maintain all records required by law to
be kept by you relating to transactions in Shares and, upon request by any Fund,
promptly make such of these records available to the Fund as the Fund may
reasonably request in connection with its operations and (ii) promptly notify
the Fund if you experience any difficulty in maintaining the records described
in the foregoing clauses in an accurate and complete manner.
9. Liability. The Distributor shall be under no liability to you except
for lack of good faith and for obligations expressly assumed by them hereunder.
In carrying out your obligations, you agree to act in good faith and without
negligence. Nothing contained in this Agreement is intended to operate as a
waiver by the Distributor or you of compliance with any provision of the
Investment Company Act, the Securities Act, the Securities Exchange Act of 1934,
as amended, or the rules and regulations promulgated by the Securities and
Exchange Commission thereunder.
10. Termination. This Agreement may be terminated by either party,
without penalty, upon ten days' notice to the other party and shall
automatically terminate in the event of its assignment (as defined
-2-
<PAGE>
in the Investment Company Act). This Agreement may also be terminated at any
time for any particular Fund without penalty by the vote of a majority of the
members of the Board of Directors or Trustees of such Fund who are not
"interested persons" (as defined in the Investment Company Act) and who have no
direct or indirect financial interest in the operation of the Distribution
Agreement between such Fund and the Distributor or by the vote of a majority of
the outstanding voting securities of the Fund.
11. Communications. All communications to us should be sent to the
above address. Any notice to you shall be duly given if mailed or telegraphed to
you at the address specified by you below.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us one copy of this agreement.
ALEX. BROWN & SONS INCORPORATED
-----------------------------------
(Authorized Signature)
Confirmed and accepted:
Firm Name: ________________________
By: _______________________________
Address: __________________________
Date:______________________________
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<PAGE>
EX-99.B(11)
CONSENT OF INDEPENDENT ACCOUNTANTS
Flag Investors Telephone Income Fund, Inc.
We hereby consent to the inclusion of our report dated February 4, 1997 on our
audit of the financial statements and financial highlights of Flag Investors
Telephone Income Fund, Inc. in the Statement of Additional Information with
respect to this Post-Effective Amendment No. 20 to the Registration Statement
(No. 2-87336) on Form N-1A under the Securities Act of 1933 and the Investment
Company Act of 1940, respectively, of Flag Investors Telephone Income Fund, Inc.
We also consent to the reference to our Firm under the headings "Financial
Highlights" and "General Information" in the Prospectus and "Independent
Accountants" in the Statement of Additional Information.
/s/ Coopers & Lybrand L.L.P.
- ----------------------------
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
April 24, 1997
<PAGE>
EX-99.B(18)(b)
Flag Investors Telephone Income Fund, Inc.
Rule 18f-3 Multiple Class Plan
for
Flag Investors Class A, Flag Investors Class B
and Flag Investors Class D Shares
Adopted December 13, 1995
Amended through March 26, 1997
I. Introduction.
A. Authority. This Rule 18f-3 Multiple Class Plan (the "Plan") has been
adopted by the Board of Directors (the "Board") of Flag Investors Telephone
Income Fund, Inc. (the "Fund"), including a majority of the Directors of the
Fund who are not "interested persons" of the Fund (the "Independent Directors")
pursuant to Rule 18f-3 under the Investment Company Act of 1940, as amended (the
"1940 Act"),
B. History. The Fund is entitled to rely on an exemptive order dated
December 30, 1994, which amended and supplemented prior multi-class exemptive
orders dated August 27, 1985 and February 27, 1987, respectively, (Inv. Co. Act
Releases Nos. IC-20813, IC-14695 and IC-15592, respectively) (collectively, the
"Order"). On December 13, 1995, the Fund elected to rely on Rule 18f-3 rather
than the Order, as permitted by Rule 18f-3 subject to certain conditions, and
created a multiple class distribution arrangement for three classes of shares of
the common stock of the Fund's one existing series (the "Series"). The multiple
class distribution arrangement will be effective on the date of effectiveness of
the post-effective amendment to the Fund's registration statement that
incorporates the arrangement. The multi-class distribution arrangement will
apply to all existing (Flag Investors Class A (formerly known as the Flag
Investors Shares), Flag Investors Class B and Flag Investors Class D) and future
classes of Fund shares. The Flag Investors Class A Shares have been offered
since the Fund's inception on January 18, 1984, the Flag Investors Class B
Shares have been offered since January 3, 1995 and the Flag Investors Class D
Shares are no longer being offered, though shares remain outstanding.
C. Adoption of Plan; Amendment of Plan; and Periodic Review. Pursuant
to Rule 18f-3, the Fund is required to create a written plan specifying all of
the differences among the Fund's classes, including shareholder services,
distribution arrangements, expense allocations, and any related conversion
features or exchange options. The Board has created the Plan to meet this
requirement. The Board, including a majority of the Independent Directors, must
periodically review the Plan for its continued appropriateness, and must approve
any material amendment of the Plan as it relates to any class of any Series
covered by the Plan. For each additional class of shares approved by the Fund's
Board of Directors after the date hereof, the appropriate officers of the Fund
will attest the resolutions approving such class as an exhibit hereto. Before
any material
<PAGE>
amendment of the Plan, the Fund is required to obtain a finding by a majority of
the Board, and a majority of the Independent Directors, that the Plan as
proposed to be amended, including the expense allocations, is in the best
interests of each class individually and the Fund as a whole.
II. Attributes of Share Classes
A. The rights of each existing class of the Fund are not being changed
hereby, and the rights, obligations and features of each of the classes of the
Fund shall be as set forth in the Fund's Articles of Incorporation and Bylaws,
as each such document is amended or restated to date, the resolutions that are
adopted with respect to the classes of the Fund and that are adopted pursuant to
the Plan to date, and related materials of the Board, as set forth in Exhibit A
hereto.
B. With respect to any class of shares of a Series, the following
requirements shall apply. Each share of a particular Series shall represent an
equal pro rata interest in the Series and shall have identical voting, dividend,
liquidation and other rights, preferences, powers, restrictions, limitations,
qualifications, designations and terms and conditions, except that (i) each
class shall have a different class designation (e.g., Class A, Class B, Class C,
etc.); (ii) each class of shares shall separately bear any distribution expenses
in connection with the plan adopted pursuant to Rule 12b-1 under the 1940 Act (a
"Rule 12b-1 Plan"), if any, for such class (and any other costs relating to
obtaining shareholder approval of the Rule 12b-1 Plan for such class, or an
amendment of such plan) and shall separately bear any expenses associated with
any non-Rule 12b-1 Plan service payments ("service fees") that are made under
any servicing agreement, if any, entered into with respect to that class; (iii)
holders of the shares of the class shall have exclusive voting rights regarding
the Rule 12b-1 Plan relating to such class (e.g., the adoption, amendment or
termination of a Rule 12b-1 Plan), regarding the servicing agreements relating
to such class and regarding any matter submitted to shareholders in which the
interests of that class differ from the interests of any other class; (iv) each
new class of shares may bear, to the extent consistent with rulings and other
published statements of position by the Internal Revenue Service, the expenses
of the Fund's operation that are directly attributable to such class ("Class
Expenses")(1); and (v) each class may have conversion features unique to such
class, permitting conversion of shares of such class to shares of another class,
subject to the requirements set forth in Rule 18f-3.
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(1) Class Expenses are limited to any or all of the following: (i) transfer
agent fees identified as being attributable to a specific class of shares, (ii)
stationery, printing, postage, and delivery expenses related to preparing and
distributing materials such as shareholder reports, prospectuses, and proxy
statements to current shareholders of a specific class, (iii) Blue Sky
registration fees incurred by a class of shares, (iv) SEC registration fees
incurred by a class of shares, (v) expenses of administrative personnel and
services as required to support the shareholders of a specific class, (vi)
directors' fees or expenses incurred as a result of issues relating solely to a
class of shares, (vii) account expenses relating solely to a class of shares,
(viii) auditors' fees, litigation expenses, and legal fees and expenses relating
solely to a class of shares, and (ix) expenses incurred in connection with
shareholder meetings as a result of issues relating solely to a class of shares.
<PAGE>
III. Expense Allocations
Expenses of each class created after the date hereof must be allocated
as follows: (i) distribution and shareholder servicing payments associated with
any Rule 12b-1 Plan or servicing agreement, if any, relating to each respective
class of shares (including any costs relating to implementing such plans or any
amendment thereto) will be borne exclusively by that class; (ii) any incremental
transfer agency fees relating to a particular class will be borne exclusively by
that class; and (iii) Class Expenses relating to a particular class will be
borne exclusively by that class.
The methodology and procedures for calculating the net asset value and
dividends and distributions of the various classes of shares of the Fund and the
proper allocation of income and expenses among the various classes of shares of
the Fund are required to comply with the Fund's internal control structure
pursuant to applicable auditing standards, including Statement on Auditing
Standards No. 55, and to be reviewed as part of the independent accountants'
review of such internal control structure. The independent accountants' report
on the Fund's system of internal controls required by Form N-SAR, Item 77B, is
not required to refer expressly to the procedures for calculating the classes'
net asset values.
<PAGE>
EXHIBIT A
Exhibits to Registrant's 18f-3 Plan
1. Articles of Incorporation filed as Exhibit (1)(a) to Post-Effective Amendment
No. 19 to Registrant's Registration Statement on Form N-1A (File No. 2-87336),
filed with the Securities and Exchange Commission via EDGAR (Accession No.
0000950116-96-000068) on February 8, 1996 is herein incorporated by reference.
2. Articles Supplementary filed as Exhibit (1)(d) to Post-Effective Amendment
No. 19 to Registrant's Registration Statement on Form N-1A (File No. 2-87336),
filed with the Securities and Exchange Commission via EDGAR (Accession No.
0000950116-96-000068) on February 8, 1996 is herein incorporated by reference.
3. By-Laws as amended through December 18, 1996 filed as Exhibit (2) to this
Registration Statement on Form N-1A (File No. 2-87336) are herein incorporated
by reference.
4. Distribution Agreement between Registrants and Alex. Brown & Sons
Incorporated with respect to Class A Shares filed as Exhibit (6)(a) to
Post-Effective Amendment No. 19 to Registrant's Registration Statement on Form
N-1A (File No. 2-87336), filed with the Securities and Exchange Commission via
EDGAR (Accession No. 0000950116-96-000068) on February 8, 1996 is herein
incorporated by reference.
5. Distribution Agreement between Registrant and Alex. Brown & Sons Incorporated
with respect to Class D Shares filed as Exhibit (6)(e) to Post-Effective
Amendment No. 19 to Registrant's Registration Statement on Form N-1A (File No.
2-87336), filed with the Securities and Exchange Commission via EDGAR (Accession
No. 0000950116-96-000068) on February 8, 1996 is herein incorporated by
reference.
6. Distribution Agreement between Registrant and Alex. Brown & Sons Incorporated
with respect to Class B Shares filed as Exhibit (6)(e) to this Registration
Statement on Form N-1A (File No. 2-87336) is herein incorporated by reference.
7. Distribution Plan with respect to Class A Shares filed as Exhibit (15)(a) to
Post-Effective Amendment No. 19 to Registrant's Registration Statement on Form
N-1A (File No. 2-87336), filed with the Securities and Exchange Commission via
EDGAR (Accession No. 0000950116-96-000068) on February 8, 1996 is herein
incorporated by reference.
8. Distribution Plan with respect to Class D Shares filed as Exhibit (15)(b) to
Post-Effective Amendment No. 19 to Registrant's Registration Statement on Form
N-1A (File No. 2-87336), filed with the Securities and Exchange Commission via
EDGAR (Accession No. 0000950116-96-000068) on February 8, 1996 is herein
incorporated by reference.
9. Distribution Plan with respect to Class B Shares filed as Exhibit (15)(c) to
Post-Effective Amendment No. 19 to Registrant's Registration Statement on Form
N-1A (File No. 2-87336),
<PAGE>
filed with the Securities and Exchange Commission via EDGAR (Accession No.
0000950116-96-000068) on February 8, 1996 is herein incorporated by reference.
10. Form of Sub-Distribution Agreement between Alex. Brown & Sons Incorporated
and Participating Dealers filed as Exhibit (6)(b) to this Registration Statement
on Form N-1A (File No. 2-87336) is herein incorporated by reference.
11. Prospectus filed as part of this Registration Statement on Form N-1A (File
No. 2-87336) is herein incorporated by reference, as amended from time to time.
<PAGE>
BOARD APPROVALS
Approved: December 7, 1988
Approval of Distribution Agreement, Plan of Distribution, and Form of
Sub-Distribution Agreement
RESOLVED, that the proposed Distribution Agreement, between the Fund
and Alex. Brown & Sons Incorporated for distribution of the Fund's shares be,
and the same hereby is, approved, in substantially the form presented to this
meeting, and that the appropriate officers of the fund be, and they hereby are,
authorized and directed to enter into and execute such Distribution Agreemtnt
with such modifications as said officers shall deem necessary or appropriate or
as may be required to conform with the requirements of any applicable statute,
regulation or regulatory body;
FURTHER RESOLVED, that the proposed Plan of Distribution (the "Plan")
is determined to be reasonably likely to benefit the Fund to its shareholders;
FURTHER RESOLVED, that the Plan be, and the same hereby is, approved;
FURTHER RESOLVED, that the proposed form of Sub-Distribution Agreement
of the Fund be, and the same hereby is, approved.
Approved: March 23, 1993
Resolutions of Board Designating Flag Investors Class A Shares
and Creating Flag Investors Class B Shares (now known as Class D Shares)
WHEREAS, the Board of Directors of Flag Investors Telephone Income
Fund, Inc. has previously designated one class of the Fund's shares: "Flag
Investors Telephone Income Fund Shares";
NOW THEREFORE BE IT RESOLVED, that such Shares be, and they hereby are,
further designated and classified as the Fund's Class A Shares;
FURTHER RESOLVED, that in accordance with the authority granted to the
Board of Directors of the Fund pursuant to Article VI, Section 4 of the Fund's
Articles of Incorporation, a second class of the Fund's 40 million authorized
shares of common stock, par value $.001, be and hereby is, classified and
designated as the Fund's "Flag Investors Class B Shares" (the "Class B Shares");
FURTHER RESOLVED, that the proper officers of the Fund be, and they
hereby are, authorized and directed in the name and on behalf of the Fund to
make all appropriate filings with the Securities and Exchange Commission (the
"Commission") with respect to the establishment of
<PAGE>
such new class of shares, the related Distribution Agreement and Plan of
Distribution under Rule 12b-1 under the Investment Company Act of 1940, as
amended (the "1940 Act") approved at this meeting by this Board of Directors,
including, if they deem it necessary or appropriate, supplements and
post-effective amendments under the Securities Act of 1933 (the "1933 Act") and
under the 1940 Act to the Fund's Registration Statement on Form N-1A
(Registration No. 2-87366), and all necessary exhibits and other instruments
relating thereto (collectively, the "Registration Statement"), procuring all
other necessary signatures thereon, and filing the appropriate exhibits thereto
with Commission under the 1933 Act and the 1940 Act;
FURTHER RESOLVED, that the proper officers of the Fund be, and
they hereby are, authorized and directed in the name and on behalf of the Fund,
to take any other action that the officer so acting may deem necessary or
appropriate in connection with the establishment and registration of the Class B
Shares of the Fund, the taking of any such action to establish conclusively such
officer's authority therefore and the approval and ratification thereof by the
Fund.
Approval of Distribution Agreement,
Plan of Distribution and Form of Sub-Distribution Agreement
for Flag Investors Class B Shares (now known as Class D Shares)
RESOLVED, that the proposed Distribution Agreement (including the form
of Sub-Distribution Agreement annexed as Exhibit A thereto previously adopted
for the Flag Investors family of funds), between Flag Investors Telephone Income
Fund, Inc. and Alex. Brown & Sons Incorporated with respect to the distribution
of the Flag Investors Class B Shares of the Fund (the "Class B Shares") be, and
the same hereby is, approved, in substantially the form presented to this
meeting, and that the appropriate officers of such fund be, and the same hereby
are, authorized and directed to enter into and execute such Distribution
Agreement with such modifications as said officers shall deem necessary or
appropriate or as may be required to conform with the requirements of any
applicable statute, regulation or regulatory body;
FURTHER RESOLVED, that the proposed Plan of Distribution (the "Plan")
for the Class B Shares is determined to be reasonably likely to benefit the Fund
and its shareholders and that, based on information reasonably available to the
Directors, expenditures contemplated by such Plan are comparable to expenditures
for other similar plans;
FURTHER RESOLVED, that the Plan be, and hereby is, approved.
<PAGE>
Approved: September 22, 1994
Resolutions of Board Reclassifying Old Flag Investors
Class B Shares and Creating New Flag Investors Class B Shares
RESOLVED, that all issued and outstanding Class B Shares of Flag
Investors Telephone Income Fund, Inc. (the "Fund") be, and they hereby are,
reclassified as Flag Investors Class D Shares (the "Class D Shares");
FURTHER RESOLVED, that the Board of Directors of the Fund, having
considered the growth in class assets, outlook for further growth and other
relevant considerations, have determined that the offering of the Class D Shares
should be terminated, such termination to be effective as of November 18, 1994;
FURTHER RESOLVED, that the proper officers of the Fund be, and each of
them hereby is, authorized and directed in the name and on behalf of the Fund,
to take any action that the officer so acting may deem necessary or appropriate,
to effect the termination of the offering of the Class D Shares;
FURTHER RESOLVED, that an additional class of shares of the Fund be,
and hereby is, classified and designated as the "Flag Investors Class B Shares"
(the "Class B Shares") and that unissued shares of common stock, par value $.001
per share of the Fund be, and the same hereby are, reclassified as follows:
Total # of Shares Class A Class B Class D Unclassified
- ----------------- ------- ------- ------- ------------
70,000,000 60,000,000 5,000,000 3,000,000 2,000,000
FURTHER RESOLVED, that the proper officers of the Fund be, and each of
them hereby is, authorized and directed to file articles supplementary to the
Fund's Articles of Incorporation and to take such other action as may be
necessary to designate and reclassify shares in the foregoing manner.
RESOLVED, that the Distribution Agreement between the Fund and Alex.
Brown & Sons Incorporated for the Class B Shares of the Fund be, and the same
hereby is, approved;
FURTHER RESOLVED, that the Plan of Distribution for the Class B Shares
of the Fund is determined to be reasonably likely to benefit the Fund and its
shareholders; and that based on information reasonably available to the
Directors, expenditures contemplated by such Plan are comparable to expenditures
for similar plans;
FURTHER RESOLVED, that said Plan be, and the same hereby is, approved.
<PAGE>
Date Approved: March 26, 1997
Approval of Amended Rule 18f-3 Plan
RESOLVED, based upon information presented to the Board of Directors of
Flag Investors Telephone Income Fund, Inc. (the "Fund"), that the Directors,
including a majority of the Directors who are not "interested persons" of the
Fund, have determined that the Fund's amended Rule 18f-3 Plan, including the
expense allocations described therein, is in the best interests of the fund and
each of its classes;
FURTHER RESOLVED, that the amended Rule 18f-3 Plan for the Fund be, and
hereby is, approved, in substantially the form presented to this meeting; and
FURTHER RESOLVED, that the proper officers of the Fund be, and they
hereby are, authorized and directed to take any and all actions necessary or
appropriate to cause the amended Rule 18f-3 Plan to be filed with the Securities
and Exchange Commission.
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
POWER OF ATTORNEY
-----------------
KNOW ALL PERSONS BY THESE PRESENTS, that, Bruce E. Behrens, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Scott J. Liotta, and each of them singly, his true and lawful
attorney-in-fact and agent, with full power of substitution or resubstitution,
to do any and all acts and things and to execute any and all instruments, in his
name, place and stead, which said attorney-in-fact and agent may deem necessary
or advisable or which may be required to enable Flag Investors Telephone Income
Fund, Inc. (the "Fund") to comply with the Securities Act of 1933, as amended
(the "1933 Act") and the Investment Company Act of 1940, as amended (the "1940
Act"), and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act, together with
any and all pre- and post-effective amendments thereto, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as President of the Fund such
Registration Statement and any and all such pre-and post-effective amendments
filed with the Securities and Exchange Commission under the 1933 Act and the
1940 Act, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney-in-fact and
agent, or either of them or their substitute or substitutes, shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ Bruce E. Behrens
-------------------------------
Bruce E. Behrens
Date: March 26, 1997
--------------
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
POWER OF ATTORNEY
-----------------
KNOW ALL PERSONS BY THESE PRESENTS, that, Charles W. Cole, Jr., whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Scott J. Liotta, and each of them singly, his true and lawful
attorney-in-fact and agent, with full power of substitution or resubstitution,
to do any and all acts and things and to execute any and all instruments, in his
name, place and stead, which said attorney-in-fact and agent may deem necessary
or advisable or which may be required to enable Flag Investors Telephone Income
Fund, Inc. (the "Fund") to comply with the Securities Act of 1933, as amended
(the "1933 Act") and the Investment Company Act of 1940, as amended (the "1940
Act"), and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act, together with
any and all pre- and post-effective amendments thereto, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director of the Fund such
Registration Statement and any and all such pre- and post-effective amendments
filed with the Securities and Exchange Commission under the 1933 Act and the
1940 Act, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney-in-fact and
agent, or either of them or their substitute or substitutes, shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ Charles W. Cole, Jr.
-------------------------------
Charles W. Cole, Jr.
Date: March 26, 1997
--------------
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
POWER OF ATTORNEY
-----------------
KNOW ALL PERSONS BY THESE PRESENTS, that, James J. Cunnane, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Scott J. Liotta, and each of them singly, his true and lawful
attorney-in-fact and agent, with full power of substitution or resubstitution,
to do any and all acts and things and to execute any and all instruments, in his
name, place and stead, which said attorney-in-fact and agent may deem necessary
or advisable or which may be required to enable Flag Investors Telephone Income
Fund, Inc. (the "Fund") to comply with the Securities Act of 1933, as amended
(the "1933 Act") and the Investment Company Act of 1940, as amended (the "1940
Act"), and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act, together with
any and all pre- and post-effective amendments thereto, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director of the Fund such
Registration Statement and any and all such pre- and post-effective amendments
filed with the Securities and Exchange Commission under the 1933 Act and the
1940 Act, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney-in-fact and
agent, or either of them or their substitute or substitutes, shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ James J. Cunnane
-------------------------------
James J. Cunnane
Date: March 26, 1997
--------------
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
POWER OF ATTORNEY
-----------------
KNOW ALL PERSONS BY THESE PRESENTS, that, Joseph A. Finelli, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Scott J. Liotta, and each of them singly, his true and lawful
attorney-in-fact and agent, with full power of substitution or resubstitution,
to do any and all acts and things and to execute any and all instruments, in his
name, place and stead, which said attorney-in-fact and agent may deem necessary
or advisable or which may be required to enable Flag Investors Telephone Income
Fund, Inc. (the "Fund") to comply with the Securities Act of 1933, as amended
(the "1933 Act") and the Investment Company Act of 1940, as amended (the "1940
Act"), and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act, together with
any and all pre- and post-effective amendments thereto, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as Chief Financial and
Accounting Officer of the Fund such Registration Statement and any and all such
pre- and post-effective amendments filed with the Securities and Exchange
Commission under the 1933 Act and the 1940 Act, and any other instruments or
documents related thereto, and the undersigned does hereby ratify and confirm
all that said attorney-in-fact and agent, or either of them or their substitute
or substitutes, shall lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ Joseph A. Finelli
-------------------------------
Joseph A. Finelli
Date: March 26, 1997
--------------
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
POWER OF ATTORNEY
-----------------
KNOW ALL PERSONS BY THESE PRESENTS, that, Richard T. Hale, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Scott J. Liotta, and each of them singly, his true and lawful
attorney-in-fact and agent, with full power of substitution or resubstitution,
to do any and all acts and things and to execute any and all instruments, in his
name, place and stead, which said attorney-in-fact and agent may deem necessary
or advisable or which may be required to enable Flag Investors Telephone Income
Fund, Inc. (the "Fund") to comply with the Securities Act of 1933, as amended
(the "1933 Act") and the Investment Company Act of 1940, as amended (the "1940
Act"), and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act, together with
any and all pre- and post-effective amendments thereto, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director of the Fund such
Registration Statement and any and all such pre- and post-effective amendments
filed with the Securities and Exchange Commission under the 1933 Act and the
1940 Act, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney-in-fact and
agent, or either of them or their substitute or substitutes, shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ Richard T. Hale
-------------------------------
Richard T. Hale
Date: March 26, 1997
--------------
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
POWER OF ATTORNEY
-----------------
KNOW ALL PERSONS BY THESE PRESENTS, that, Carl W. Vogt, whose signature
appears below, does hereby constitute and appoint Edward J. Veilleux and Scott
J. Liotta, and each of them singly, his true and lawful attorney-in-fact and
agent, with full power of substitution or resubstitution, to do any and all acts
and things and to execute any and all instruments, in his name, place and stead,
which said attorney-in-fact and agent may deem necessary or advisable or which
may be required to enable Flag Investors Telephone Income Fund, Inc. (the
"Fund") to comply with the Securities Act of 1933, as amended (the "1933 Act")
and the Investment Company Act of 1940, as amended (the "1940 Act"), and any
rules, regulations or requirements of the Securities and Exchange Commission in
respect thereof, in connection with the Fund's Registration Statement on Form
N-1A pursuant to the 1933 Act and the 1940 Act, together with any and all pre-
and post-effective amendments thereto, including specifically, but without
limiting the generality of the foregoing, the power and authority to sign in the
name and on behalf of the undersigned as a director of the Fund such
Registration Statement and any and all such pre- and post-effective amendments
filed with the Securities and Exchange Commission under the 1933 Act and the
1940 Act, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney-in-fact and
agent, or either of them or their substitute or substitutes, shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ Carl W. Vogt
-------------------------------
Carl W. Vogt
Date: March 26, 1997
--------------
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
POWER OF ATTORNEY
-----------------
KNOW ALL PERSONS BY THESE PRESENTS, that, John F. Kroeger, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Scott J. Liotta, and each of them singly, his true and lawful
attorney-in-fact and agent, with full power of substitution or resubstitution,
to do any and all acts and things and to execute any and all instruments, in his
name, place and stead, which said attorney-in-fact and agent may deem necessary
or advisable or which may be required to enable Flag Investors Telephone Income
Fund, Inc. (the "Fund") to comply with the Securities Act of 1933, as amended
(the "1933 Act") and the Investment Company Act of 1940, as amended (the "1940
Act"), and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act, together with
any and all pre- and post-effective amendments thereto, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director of the Fund such
Registration Statement and any and all such pre- and post-effective amendments
filed with the Securities and Exchange Commission under the 1933 Act and the
1940 Act, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney-in-fact and
agent, or either of them or their substitute or substitutes, shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ John F. Kroeger
-------------------------------
John F. Kroeger
Date: March 26, 1997
--------------
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
POWER OF ATTORNEY
-----------------
KNOW ALL PERSONS BY THESE PRESENTS, that, Louis E. Levy, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Scott J. Liotta, and each of them singly, his true and lawful
attorney-in-fact and agent, with full power of substitution or resubstitution,
to do any and all acts and things and to execute any and all instruments, in his
name, place and stead, which said attorney-in-fact and agent may deem necessary
or advisable or which may be required to enable Flag Investors Telephone Income
Fund, Inc. (the "Fund") to comply with the Securities Act of 1933, as amended
(the "1933 Act") and the Investment Company Act of 1940, as amended (the "1940
Act"), and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act, together with
any and all pre- and post-effective amendments thereto, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director of the Fund such
Registration Statement and any and all such pre- and post-effective amendments
filed with the Securities and Exchange Commission under the 1933 Act and the
1940 Act, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney-in-fact and
agent, or either of them or their substitute or substitutes, shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ Louis E. Levy
-------------------------------
Louis E. Levy
Date: March 26, 1997
--------------
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
POWER OF ATTORNEY
-----------------
KNOW ALL PERSONS BY THESE PRESENTS, that, Eugene J. McDonald, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Scott J. Liotta, and each of them singly, his true and lawful
attorney-in-fact and agent, with full power of substitution or resubstitution,
to do any and all acts and things and to execute any and all instruments, in his
name, place and stead, which said attorney-in-fact and agent may deem necessary
or advisable or which may be required to enable Flag Investors Telephone Income
Fund, Inc. (the "Fund") to comply with the Securities Act of 1933, as amended
(the "1933 Act") and the Investment Company Act of 1940, as amended (the "1940
Act"), and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act, together with
any and all pre- and post-effective amendments thereto, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director of the Fund such
Registration Statement and any and all such pre- and post-effective amendments
filed with the Securities and Exchange Commission under the 1933 Act and the
1940 Act, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney-in-fact and
agent, or either of them or their substitute or substitutes, shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ Eugene J. McDonald
-------------------------------
Eugene J. McDonald
Date: March 26, 1997
--------------
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND,INC.
POWER OF ATTORNEY
-----------------
KNOW ALL PERSONS BY THESE PRESENTS, that, Truman T. Semans, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Scott J. Liotta, and each of them singly, his true and lawful
attorney-in-fact and agent, with full power of substitution or resubstitution,
to do any and all acts and things and to execute any and all instruments, in his
name, place and stead, which said attorney-in-fact and agent may deem necessary
or advisable or which may be required to enable Flag Investors Telephone Income
Fund, Inc. (the "Fund") to comply with the Securities Act of 1933, as amended
(the "1933 Act") and the Investment Company Act of 1940, as amended (the "1940
Act"), and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act, together with
any and all pre- and post-effective amendments thereto, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director of the Fund such
Registration Statement and any and all such pre- and post-effective amendments
filed with the Securities and Exchange Commission under the 1933 Act and the
1940 Act, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney-in-fact and
agent, or either of them or their substitute or substitutes, shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ Truman T. Semans
-------------------------------
Truman T. Semans
Date: March 26, 1997
--------------
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
POWER OF ATTORNEY
-----------------
KNOW ALL PERSONS BY THESE PRESENTS, that, Rebecca W. Rimel, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Scott J. Liotta, and each of them singly, her true and lawful
attorney-in-fact and agent, with full power of substitution or resubstitution,
to do any and all acts and things and to execute any and all instruments, in her
name, place and stead, which said attorney-in-fact and agent may deem necessary
or advisable or which may be required to enable Flag Investors Telephone Income
Fund, Inc. (the "Fund") to comply with the Securities Act of 1933, as amended
(the "1933 Act") and the Investment Company Act of 1940, as amended (the "1940
Act"), and any rules, regulations or requirements of the Securities and Exchange
Commission in respect thereof, in connection with the Fund's Registration
Statement on Form N-1A pursuant to the 1933 Act and the 1940 Act, together with
any and all pre- and post-effective amendments thereto, including specifically,
but without limiting the generality of the foregoing, the power and authority to
sign in the name and on behalf of the undersigned as a director of the Fund such
Registration Statement and any and all such pre- and post-effective amendments
filed with the Securities and Exchange Commission under the 1933 Act and the
1940 Act, and any other instruments or documents related thereto, and the
undersigned does hereby ratify and confirm all that said attorney-in-fact and
agent, or either of them or their substitute or substitutes, shall lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set her hand and seal
as of the date set forth below.
/s/ Rebecca W. Rimel
-------------------------------
Rebecca W. Rimel
Date: March 26, 1997
--------------
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000731129
<NAME> FLAG INVESTORS TELEPHONE
<SERIES>
<NUMBER> 001
<NAME> TELEPHONE CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 356,000,582
<INVESTMENTS-AT-VALUE> 549,587,552
<RECEIVABLES> 2,137,853
<ASSETS-OTHER> 123,280
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 551,848,685
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,244,343
<TOTAL-LIABILITIES> 1,244,343
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 302,803,079
<SHARES-COMMON-STOCK> 32,421,696
<SHARES-COMMON-PRIOR> 33,120,036
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 13,937,442
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 193,586,970
<NET-ASSETS> 505,371,023
<DIVIDEND-INCOME> 14,654,396
<INTEREST-INCOME> 971,287
<OTHER-INCOME> 0
<EXPENSES-NET> 6,403,018
<NET-INVESTMENT-INCOME> 9,222,665
<REALIZED-GAINS-CURRENT> 44,618,521
<APPREC-INCREASE-CURRENT> 13,950,633
<NET-CHANGE-FROM-OPS> 67,791,819
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 8,654,688
<DISTRIBUTIONS-OF-GAINS> 29,498,290
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,730,952
<NUMBER-OF-SHARES-REDEEMED> 4,451,593
<SHARES-REINVESTED> 2,022,300
<NET-CHANGE-IN-ASSETS> (19,329,417)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,440,208
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,562,609
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,403,018
<AVERAGE-NET-ASSETS> 500,625,338
<PER-SHARE-NAV-BEGIN> 14.87
<PER-SHARE-NII> 0.27
<PER-SHARE-GAIN-APPREC> 1.67
<PER-SHARE-DIVIDEND> (0.38)
<PER-SHARE-DISTRIBUTIONS> (0.84)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.59
<EXPENSE-RATIO> 1.14
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000731129
<NAME> FLAG INVESTORS TELEPHONE
<SERIES>
<NUMBER> 002
<NAME> TELEPHONE CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 356,000,582
<INVESTMENTS-AT-VALUE> 549,587,552
<RECEIVABLES> 2,137,853
<ASSETS-OTHER> 123,280
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 551,848,685
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,244,343
<TOTAL-LIABILITIES> 1,244,343
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 16,617,054
<SHARES-COMMON-STOCK> 1,138,610
<SHARES-COMMON-PRIOR> 505,908
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 13,937,442
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 193,586,970
<NET-ASSETS> 17,660,516
<DIVIDEND-INCOME> 14,654,396
<INTEREST-INCOME> 971,287
<OTHER-INCOME> 0
<EXPENSES-NET> 6,403,018
<NET-INVESTMENT-INCOME> 9,222,665
<REALIZED-GAINS-CURRENT> 44,618,521
<APPREC-INCREASE-CURRENT> 13,950,633
<NET-CHANGE-FROM-OPS> 67,791,819
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 157,647
<DISTRIBUTIONS-OF-GAINS> 1,015,396
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 628,129
<NUMBER-OF-SHARES-REDEEMED> 68,656
<SHARES-REINVESTED> 73,229
<NET-CHANGE-IN-ASSETS> (19,329,417)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,440,208
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,562,609
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,403,018
<AVERAGE-NET-ASSETS> 13,177,051
<PER-SHARE-NAV-BEGIN> 14.83
<PER-SHARE-NII> 0.19
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