<PAGE>
As Filed With the Securities and Exchange Commission on February 27, 1998
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. 21 [X]
--
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 23 [X]
--
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
--------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
One South Street
Baltimore, MD 21202
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(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)
-----
on (date) pursuant to paragraph (b)
-----
60 days after filing pursuant to paragraph (a)(1)
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75 days after filing pursuant to paragraph (a)(2)
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X on May 1, 1998 pursuant to paragraph (a) of Rule 485.
-----
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<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
(Class A and Class B Shares)
Cross Reference Sheet
February 27, 1998
Items Required by Form N-1A
<TABLE>
<CAPTION>
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
- ------ -----------------
</TABLE>
Part C contains the information required by the items
contained therein under the items set forth in the form.
<PAGE>
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[GRAPHIC OMITTED]
FLAG INVESTORS
COMMUNICATIONS FUND, INC.
(Class A and Class B Shares)
(formerly, Flag Investors Telephone Income Fund, Inc.)
Prospectus & Application -- May 1, 1998
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This mutual fund (the "Fund") is designed to maximize total return. The Fund
will seek to achieve this objective through a combination of long-term growth
of capital and, to a lesser extent, current income. In seeking to achieve this
objective, the Fund invests primarily in common stock, securities convertible
thereto and debt obligations of companies in the communications field.
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 you with alternatives as to sales load and
Fund expenses. (See "How to Invest in the Fund.")
This Prospectus sets forth basic information that you should know about the
Fund prior to investing and should be retained for future reference. A
Statement of Additional Information dated May 1, 1998 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 ............................................ 7
How to Invest in the Fund .......................................... 7
How to Redeem Shares ............................................... 10
Telephone Transactions ............................................. 11
Dividends and Taxes ................................................ 11
Management of the Fund ............................................. 12
Investment Advisor and Sub-Advisor ................................. 12
Distributor ........................................................ 13
Custodian, Transfer Agent and
Accounting Services ............................................. 14
Performance Information ............................................ 14
General Information ................................................ 14
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
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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>
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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 ........................... 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 ................................................................ 0.70% 0.70%
12b-1 Fees ..................................................................... 0.25% 0.75%
Other Expenses (including a 0.25% shareholder servicing fee for Class B Shares) 0.16% 0.41%***
------ ------
Total Fund Operating Expenses .................................................. 1.11% 1.86%
====== =======
</TABLE>
- -----------
* If you purchase $1 million or more of Class A Shares, you will not have to
pay an initial sales charge. You may, however, be required to pay a
contingent deferred sales charge when you redeem your shares. (See "How to
Invest in the Fund--Class A Shares.")
** You will be required to pay a contingent deferred sales charge if you
redeem your Class B Shares within six years of purchase. The amount of the
charge declines in relation to the time you hold your shares. 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 your securities
dealer and qualified banks for services provided and expenses incurred in
maintaining your account, responding to your inquiries and providing you
with information about your investment.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Example: 1 year 3 years 5 years 10 years
- -------- -------- --------- --------- ------------
You would pay the following expenses on a $1,000 invest-
ment, assuming (1) 5% annual return and (2) redemption at
the end of each time period:
Class A Shares ......................................... $56 $79 $103 $ 174
Class B Shares ......................................... $59 $88 $121 $ 180*
You would pay the following expenses on the same invest-
ment, assuming no redemption:
Class B Shares ......................................... $19 $58 $101 $ 180*
</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 above table is to describe the various costs and
expenses that you will bear directly and indirectly when you invest in the
Fund. If you purchase shares of either class through a financial institution,
you may be charged separate fees by that institution.
The rules of the SEC require that the maximum sales charge be reflected in
the above table. However, you 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, you may pay more than the equivalent of
the maximum sales charges permitted by the Conduct Rules of the National
Association of Securities Dealers, Inc. ("NASD Rules") if you hold your shares
for a long time.
1
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<PAGE>
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FINANCIAL HIGHLIGHTS
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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, 1997 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, 1997, which can be
obtained at no charge by calling the Fund at (800) 767-FLAG.
(For a Class A Share outstanding throughout each year)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ----------------
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of year ......... $ 15.59 $ 14.87 $ 12.30
-------- -------- --------
Income from Investment Operations:
Net investment income ........................ 0.27 0.27 0.40
Net realized and unrealized gain/(loss) on
investments ................................ 5.41 1.67 3.58
-------- -------- --------
Total from Investment Operations ............. 5.68 1.94 3.98
-------- -------- --------
Less Distributions:
Dividends from net investment income and net
realized short-term gains .................. ( 0.40) ( 0.38) ( 0.41)
Distributions from net realized mid-term and
long-term gains ............................ ( 1.50) ( 0.84) ( 1.00)
--------- --------- --------
Total distributions .......................... ( 1.90) ( 1.22) ( 1.41)
--------- --------- --------
Net asset value at end of year ............... $ 19.37 $ 15.59 $ 14.87
========= ========= ========
Total Return(3) ............................... 37.36% 13.46% 33.44%
Ratios to Average Daily Net Assets:
Expenses ..................................... 1.11% 1.14% 0.93%(4)
Net investment income ........................ 1.07% 1.74% 2.85%(5)
Supplemental Data:
Net assets at end of year (000) .............. $ 622,865 $ 505,371 $492,454
Portfolio turnover rate ...................... 26% 20% 24%
Average commissions per share(6) ............. $ 0.0598 $ 0.0696 --
</TABLE>
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(1) Restated for two-for-one stock split, effected in the form of a stock
dividend to shareholders of record on October 27, 1989.
(2) Investment Company Capital Corp. became Investment Advisor to the Fund on
January 19, 1989.
(3) Total return excludes the effect of sales charge.
(4) Without the waiver of advisory fees, the ratio of expenses to average daily
net assets would have been 0.99%, 0.99%, 0.98%, 1.07%, 1.17%, 1.13% and
1.07% for the years ended December 31, 1995, 1994, 1993, 1992, 1991, 1990
and 1989, respectively.
(5) 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.
(6) 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
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<PAGE>
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FINANCIAL HIGHLIGHTS(continued)
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989(1)(2) 1988(1)
- ----------------- ---------------- ---------------- ---------------- ---------------- ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>
$ 13.70 $ 12.20 $ 11.28 $ 9.57 $ 10.98 $ 8.24 $ 7.50
-------- -------- -------- -------- -------- -------- --------
0.41 0.42 0.42 0.45 0.46 0.52 0.46
( 1.27) 1.78 0.93 1.74 ( 1.29) 3.38 0.97
--------- -------- -------- -------- -------- -------- --------
( 0.86) 2.20 1.35 2.19 ( 0.83) 3.90 1.43
--------- -------- -------- -------- -------- -------- --------
( 0.44) ( 0.42) ( 0.42) ( 0.46) ( 0.45) ( 0.52) ( 0.46)
( 0.10) ( 0.28) ( 0.01) ( 0.02) ( 0.13) ( 0.64) ( 0.23)
--------- -------- -------- -------- -------- -------- --------
( 0.54) ( 0.70) ( 0.43) ( 0.48) ( 0.58) ( 1.16) ( 0.69)
--------- -------- -------- -------- -------- -------- --------
$ 12.30 $ 13.70 $ 12.20 $ 11.28 $ 9.57 $ 10.98 $ 8.24
======== ======== ======== ======== ======== ======== ========
( 6.32)% 18.12% 12.35% 23.08% ( 7.55)% 48.86% 19.90%
0.92%(4) 0.92%(4) 0.92%(4) 0.92%(4) 0.92%(4) 0.93%(4) 0.92%
3.14%(5) 3.12%(5) 3.81%(5) 4.38%(5) 4.54%(5) 4.41%(5) 5.35%
$ 435,805 $469,163 $307,641 $238,571 $177,963 $162,449 $102,483
23% 14% 6% 7% 2% 27% 11%
-- -- -- -- -- -- --
</TABLE>
3
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<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (concluded)
- --------------------------------------------------------------------------------
(For a Class B Share outstanding throughout each period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended For the Period
December 31, January 3, 1995(1)
-------------------------- through
1997 1996 December 31, 1995
----------- ------------ ----------------------
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period .................. $ 15.51 $ 14.83 $ 12.28
-------- --------- ----------
Income from Investment Operations:
Net investment income ................................... 0.18 0.19 0.30
Net realized and unrealized gain on investments ......... 5.34 1.63 3.56
-------- --------- ----------
Total from Investment Operations ........................ 5.52 1.82 3.86
-------- --------- ----------
Less Distributions:
Dividends from net investment income and net
realized short-term gains ............................. ( 0.31) ( 0.30) ( 0.31)
Distributions from net realized mid-term and long-term
gains ................................................. ( 1.50) ( 0.84) ( 1.00)
--------- ---------- ----------
Total distributions ..................................... ( 1.81) ( 1.14) ( 1.31)
--------- ---------- ----------
Net asset value at end of period ........................ $ 19.22 $ 15.51 $ 14.83
========= ========== ==========
Total Return(2) .......................................... 36.36% 12.60% 32.42%
Ratios to Average Daily Net Assets:
Expenses ................................................ 1.86% 1.92% 1.70%(3)(4)
Net investment income ................................... 0.29% 0.95% 2.13%(3)(5)
Supplemental Data:
Net assets at end of period (000) ....................... $32,474 $ 17,661 $ 7,504
Portfolio turnover rate ................................. 26% 20% 24%
Average commissions per share(6) ........................ $0.0598 $ 0.0696 --
</TABLE>
- -----------
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Annualized.
(4) 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.
(5) 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.
(6) 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
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<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT PROGRAM
- --------------------------------------------------------------------------------
Investment Objective, Policies and Risk
Considerations
The Fund's investment objective is to maximize total return. The Fund
will seek to achieve this objective through a combination of long-term growth
of capital and, to a lesser extent, current income. In seeking this objective,
the Fund invests primarily in common stock, securities convertible thereto and
debt obligations of companies in the communications field. For this purpose,
companies would be considered to be in the "communications field" if they were
engaged in the research, development, manufacture or sale of communications
services, technology, equipment or products. Effective communication through
the transmission of voice, pictures and data is becoming increasingly important
and the communications field now embraces a wide variety of products and
services, such as local and long distance telephone service, wireless service
(e.g. cellular telephone or paging services), video, telecommunications
equipment, media, and information technology. There can be no assurance that
the Fund's investment objective will be met. Concentration in the
communications field will subject the Fund to the risks associated with that
field (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. The Fund will be non-diversified for purposes of the
Investment Company Act of 1940 (the "Investment Company Act") which means that
the performance of one or a small number of portfolio holdings can affect
overall performance more than would otherwise be the case.
The Fund's investment advisors believe that investing in a portfolio of
securities of companies in the communications field affords an attractive
opportunity for achieving the Fund's investment objective. The Fund's emphasis
is investment in companies offering products and services that both support
traditional communications and facilitate new information-based applications.
Information technology combines data processing and telecommunications to
support more efficient and economical business processes and consumer
activities. The rapidly improving performance and declining cost of
transmission have helped the global expansion of information technology. For
example, businesses have an increasing need to connect to remote users such as
employees, suppliers and customers. Consumers are increasingly relying on
telephone-based applications like on-line banking and shopping to save time and
money.
Worldwide telecommunications market expansion will create opportunities
for established and emerging providers of telecommunications products and
services. Although new, high growth technologies are being adopted at an
increasing rate, commercial acceptance still lags the introduction of new
products and services. Traditional communications companies, such as telephone
companies, are positioned to serve the existing and developing needs of their
customer base with a combination of current and new offerings. Evolving user
requirements have also led to the development of separate industry segments,
outside the local telephone and long distance businesses, which enable
non-traditional telecommunications providers a chance to benefit from the
growing worldwide demand for voice, data and video services.
Under normal market conditions at least 65% of the Fund's total assets
will be invested in common stock, securities convertible thereto and debt
obligations of companies in the communications field, as defined above.
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.)
5
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<PAGE>
- --------------------------------------------------------------------------------
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 (securities 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. 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, 1997,
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.
S&P
Rating Average
- ------------- ----------
AAA 1.68%
AA 0.00%
A 0.00%
BBB 0.00%
BB 0.88%
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.
Investment in Securities of Foreign Issuers
From time to time, the Fund may invest in American Depositary Receipts
("ADRs"), which are interests in securities of foreign companies, and up to 10%
of the Fund's total assets in debt and equity securities of issuers not
publicly traded in the United States, when the Fund's investment advisors
believe that such investments provide good opportunities for achieving income
and capital gains without undue risk.
Loans of Portfolio Securities
The Fund has the right to lend portfolio securities to approved
institutional borrowers for the purpose of increasing its net investment
income. These loans must be secured continuously by cash or equivalent
collateral, or by a letter of credit at least equal to the market value of the
securities loaned plus accrued interest or income. There may be a risk of delay
in recovery of the securities or even loss of rights in the collateral should
the borrower of the securities fail financially. The Fund's custodian or
another affiliate may act as securities lending agent.
Other Investments
The Fund may write covered call options if each such option is traded on
a national securities exchange (and may purchase calls in related closing
transactions). 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.
6
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<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The following investment restriction is a matter of fundamental policy
and may not be changed without shareholder approval. Accordingly, the Fund will
not:
Invest less than 65% of its total assets in the communications field,
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).
The Fund is subject to further investment restrictions that are set forth
in the Statement of Additional Information.
HOW TO INVEST IN THE FUND
- --------------------------------------------------------------------------------
You may purchase Class A Shares and Class B Shares through your
securities dealer or through any financial institution that is authorized to
service shareholder accounts ("Shareholder Servicing Agents"). You may also
purchase shares of either class 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.
The Class A and Class B alternatives permit you to choose the method of
purchasing shares that is best for you given the amount of your purchase, the
length of time you expect to hold the shares, and other circumstances. You
should consider whether, during the anticipated life of your 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, if you plan to
purchase $100,000 or more of Fund shares you will pay lower aggregate charges
and expenses by purchasing Class A Shares. (See "Fee Table.") Your securities
dealer or Shareholder Servicing Agent and their investment representatives may
receive different levels of compensation depending on which class of shares you
buy.
Your initial investment in either class must be at least $2,000.
Subsequent investments must be at least $100. The following are exceptions to
these minimums.
o If you are investing in an IRA account, your initial investment may be
as low as $1,000.
o If you are a shareholder of any other Flag Investors fund, your initial
investment in this Fund may be as low as $500.
o If you are a participant in the Fund's Automatic Investing Plan, your
initial investment may be as low as $250. Subsequent investments may
be as low as $100 if made monthly, but must be $250 if done quarterly.
(See "Purchases Through Automatic Investing Plan" below).
o There is no minimum investment requirement for qualified retirement
plans (i.e., 401(k) plans or pension and profit sharing plans).
You may purchase shares on any day on which the New York Stock Exchange
is open for business (a "Business Day"). Your purchase order will be executed
at a per share purchase price equal to the net asset value next determined
after it is received plus any applicable front-end sales charge (the "Offering
Price"). If your purchase is made by mail, it must be accompanied by payment of
the Offering Price. Purchases made through your securities dealer or
Shareholder Servicing Agent must be in accordance with their payment
procedures. Your purchase order may not be accepted if the sale of Fund shares
has been suspended or if it is determined that your purchase would be
detrimental to the interests of the Fund's shareholders.
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 its
share of the Fund's assets, 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 will be given their
market value which is normally based on current prices but which may be
determined according to "fair value" procedures approved 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
Your share purchase is made 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.
7
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<PAGE>
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Class A Shares
The sales charge on Class A Shares, which decreases as the amount of
purchase increases, is shown in the following table:
<TABLE>
<CAPTION>
Sales Charge
as Percentage of Dealer
------------------------- Compensation
Offering Net Amount as Percentage of
Amount of Purchase Price Invested Offering Price
- ----------------------------- ---------- ------------ -----------------
<S> <C> <C> <C>
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*
- ---------------------------- ---- ---- ----
</TABLE>
* If you purchase $1 million or more of Class A Shares, you will not have to
pay an initial sales charge. You may, however, be subject to a contingent
deferred sales charge when you redeem your shares. (See below.) The Fund's
distributor may make payments to your securities dealer or Shareholder
Servicing Agent in an amount up to 1.00% of the Offering Price.
You may obtain reduced sales charges as set forth in the table above by
accumulating purchase orders for, and existing investments in, Class A Shares
of this Fund and Class A or Class D shares of any other Flag Investors fund.
The applicable sales charge will be determined based on the total value of your
current purchases plus the value of your existing investments. (For this
purpose, existing investments will be valued at the higher of cost or current
value.) You may combine your purchases and investments with those of your
spouse and your children under the age of 21 for this purpose.
To obtain the reduced sales charge through this right of accumulation,
you must provide your securities dealer or Shareholder Servicing Agent with
sufficient information to verify that you have such a right. The Fund may amend
or terminate this right of accumulation at any time as to subsequent purchases.
You may also obtain the reduced sales charges shown above by executing a
written Letter of Intent that states your 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 does not require that you 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 your name) to secure payment of the
higher sales charge applicable to the shares actually purchased if you do not
purchase the full amount. 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. If you wish
to enter into a Letter of Intent in conjunction with an investment in Class A
Shares, you may do so by completing the appropriate section of the Application
Form attached to this Prospectus.
<PAGE>
You will not be charged a sales charge on purchases of $1 million or more
of Class A Shares. You may, however, be required to pay a contingent deferred
sales charge if you redeem the purchased shares within 24 months. The charge
will be made at the rate of 0.50% on the lesser of the value of the Class A
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 if
your securities dealer has agreed to return to the Fund's distributor (the
"Distributor") 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 Class A Shares not subject to such charge are
the first redeemed followed by other Class A Shares held for the longest period
of time.
You may purchase Class A Shares at net asset value (without sales charge)
under the following circumstances:
1) If you are purchasing shares in any of the following types of accounts:
(i) A fiduciary or advisory account with a bank, bank trust department,
registered investment advisory company, financial planner or securities
dealer purchasing shares on your behalf. To qualify for this provision
you must be paying an account management fee for the fiduciary or
advisory services. You may be charged an additional fee by your broker
or agent if you purchase shares in this manner;
(ii) A qualified retirement plan;
(iii) A Flag Investors fund payroll savings plan program.
2) If you are reinvesting some or all of the proceeds of a redemption of Class
A Shares made within the past 90 days.
3) If you are exchanging an investment in another Flag Investors fund for an
investment in this Fund (see "Purchases by Exchange" for a full
description of the conditions).
4) If you are a current or retired Director of the Fund, a director, an
employee or a member of the immediate family of an employee of any of the
following or their respective affiliates: the Distributor, the Advisors
and any broker-dealer authorized to sell Class A Shares.
8
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<PAGE>
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You may also purchase Class A Shares through a Systematic Purchase Plan.
Contact your securities dealer or Shareholder Servicing Agent for details.
Class B Shares
You will not be charged a sales charge at the time of purchase of Class B
Shares. However, you will be charged a contingent deferred sales charge on
certain Class B Share redemptions made within six years of your 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 first, you have redeemed
any Class B Shares that represent reinvested dividends and distributions and
second, the Class B Shares you 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 since you purchased the shares (the "holding period"). For
purposes of determining this holding period, all purchases 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 of your
purchase.
Waiver of Contingent Deferred Sales Charge. The contingent deferred sales
charge will be waived: (i) following your death or initial determination of
disability (as defined in the Internal Revenue Code of 1986, as amended); or
(ii) to the extent that the redemption represents a minimum required
distribution from your individual retirement account or other retirement plan.
The waiver with respect to (i) above is only applicable in cases where your
account is registered (a) in the name of an individual person, (b) as a joint
tenancy with rights of survivorship, (c) as community property or (d) in the
name of a minor child under the Uniform Gifts or Uniform Transfers to Minors
Act. You, or your representative must notify the Fund's transfer agent (the
"Transfer Agent") prior to the time of redemption if such circumstances exist
and you are 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 of your purchase, 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 you.
For purposes of conversion to Class A Shares, shares received as
dividends and other distributions paid on Class B Shares in your account will
be considered to be held in a separate sub-account. Each time any Class B
Shares in your 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.
You may also purchase Class B Shares through a Systematic Purchase Plan.
Contact your securities dealer or Shareholder Servicing Agent for details.
<PAGE>
Purchases by Exchange
You may exchange shares of any other Flag Investors fund with the same
sales charge structure for an equal dollar amount of Class A or Class B Shares,
as applicable, without payment of the sales charges described above or any
other charge. In addition, you may exchange Class A shares of any Flag
Investors fund with a lower sales charge (with the exception of Flag Investors
Cash Reserve Prime Class A Shares) for an equal dollar amount of Class A Shares
if you have owned the shares you are redeeming for at least 24 months. If you
have owned them for less than 24 months, you may exchange them for Class A
Shares if you pay the difference in sales charges. You may enter both your
redemption and purchase orders on the same Business Day or, if you have already
redeemed the shares of the other fund, you may enter your purchase order within
90 days of the redemption.
When you acquire Fund shares through an exchange from another fund in the
Flag Investors family of funds, the Fund will combine the period for which the
original shares were held prior to the exchange with the holding period of the
shares acquired in the exchange for purposes of determining what, if any,
contingent deferred sales charge is applicable upon a redemption of any such
shares.
9
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<PAGE>
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The net asset value of shares purchased and redeemed in an exchange
request received on the same Business Day will be determined on that 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.
You may exercise this exchange privilege with respect to other Flag
Investors funds 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.
Purchases Through Automatic Investing Plan
You 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 your checking account using a pre-authorized check and will be invested in
the class of shares selected, 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 you or the Fund upon 30 days'
prior written notice to the other party. If you wish to enroll in the Automatic
Investing Plan or if you wish to obtain additional purchase information,
complete the appropriate section of the Application Form attached to this
Prospectus.
Purchases Through Dividend Reinvestment
Unless you elect otherwise, all income dividends and net capital gains
distributions will be reinvested in additional Fund shares of the same class at
net asset value. You may elect to receive your distributions in cash or to
terminate automatic reinvestment by completing the appropriate section of the
attached Application Form or by giving written notice to the Transfer Agent at
the address listed on page 16 of this Prospectus, either directly or through
your securities dealer or Shareholder Servicing Agent, at least five days
before the next date on which dividends or distributions will be paid.
You may also have your distributions invested in shares of other funds in
the Flag Investors family of funds. Call your securities dealer or the Transfer
Agent for additional information.
<PAGE>
HOW TO REDEEM SHARES
- --------------------------------------------------------------------------------
You may redeem all or part of your investment on any Business Day through
your securities dealer, your Shareholder Servicing Agent or the Transfer Agent.
You may redeem up to $50,000 of either class by telephone. (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 your order (or, if stock certificates have been
issued for the shares to be redeemed, after you tender 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.
You will be paid for redeemed shares by check which will be mailed within seven
days after your redemption order is received in proper form.
The Transfer Agent, your securities dealer or your Shareholder Servicing
Agent may require the following documents in order to redeem your shares:
1) A letter of instructions, specifying your account number and the number of
shares or dollar amount to be redeemed, signed by all owners of the shares
in the exact names in which the account is maintained;
2) For redemptions in excess of $50,000, a guarantee of your signature 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 your account have been
redeemed on a dividend payable date, the dividend will be remitted to you by
check.
The Fund has the power, under its Articles of Incorporation, to redeem
your account upon 60 days' notice if its value falls below $500 due to your
redemptions.
Systematic Withdrawal Plan
If you hold Class A Shares or Class B Shares having a value of $10,000 or
more, you may arrange to
10
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<PAGE>
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have a portion of your 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, your account may eventually be exhausted. Because Class A Share
purchases include a sales charge that will not be recovered at the time of
redemption, you should not have a withdrawal plan in effect at the same time
you are making recurring purchases. In addition, you may be subject to a
contingent deferred sales charge upon redemption of Class B Shares. (See "How
to Invest in the Fund -- Class B Shares.") If you wish to participate in the
Fund's Systematic Withdrawal Plan, complete the appropriate section of the
Application Form attached to this Prospectus.
TELEPHONE TRANSACTIONS
- --------------------------------------------------------------------------------
You may redeem shares of either class in amounts up to $50,000 or
exchange shares in any amount, 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).
Telephone transaction privileges are automatic unless you specifically request
that no telephone redemptions or exchanges be accepted for your account. 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 com-municated by telephone are genuine. These
procedures include requiring you to provide certain personal identification
information at the time your account is opened and prior to effecting each
transaction requested by telephone. You may be required to provide additional
telecopied instructions. 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. Your telephone transaction request will be recorded.
During periods of extreme economic or market changes, you may experience
difficulty in effecting telephone transactions. In such event, requests should
be made by 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.")
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
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
affecting the Fund and its shareholders 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 tax treatment of the Fund or the shareholders, and the
discussion here is not intended as a substitute for careful tax planning.
Accordingly, you are urged to consult with your tax advisor regarding specific
questions.
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. Unless
you are otherwise exempt, you will be generally subject to federal income tax
on the amounts distributed to you, regardless of whether such distributions are
paid in cash or reinvested in additional shares.
You will be taxed on 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, as gains from the sale or exchange of a capital asset held for more
than one year regardless of the length of
11
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<PAGE>
- --------------------------------------------------------------------------------
time you have held the shares. You will be taxed on all other income
distributions as ordinary income. If you are a corporate shareholder, you may
be entitled to the dividends received deduction on a portion of dividends
received from the Fund. You will be advised annually as to the federal income
tax status of all distributions.
Ordinarily, you should include all dividends as 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 you and paid by the Fund in the year
in which the dividends were declared.
The Fund intends to make sufficient distributions of its ordinary income
and capital gain net income prior to the end of each calendar year to avoid
liability for federal excise tax.
The sale, exchange or redemption of Fund shares is a taxable event for
you.
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. The day-to-day operations of the Fund are delegated to the
Fund's executive officers, to the Fund's advisors and to the Distributor. A
majority of the Directors are not affiliated with the Fund's advisors or the
Distributor.
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 BT Alex. Brown
Cash Reserve Fund, Inc., which funds had approximately $6.1 billion of net
assets as of December 31, 1997. ABIM is a registered investment advisor with
approximately $7.2 billion under management as of December 31, 1997.
Pursuant to the terms of the Investment Advisory Agreement, ICC is
responsible for supervising and managing 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 certain affiliates, provided that
compensation to such affiliates 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, 1997, ICC received a fee equal to 0.70%
of the Fund's average daily net assets. From such amounts ICC paid ABIM a fee
equal to 0.49% 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 Bankers Trust New York Corporation. ABIM
is a limited partnership affiliated with the Advisor. Buppert, Behrens & Owen,
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. BT
Alex. Brown owns a 1% general partnership interest in ABIM and BT Alex. Brown
Holdings 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. An affiliate of ICC serves as the
Fund's custodian. (See "Custodian, Transfer Agent and Accounting Services.")
Portfolio Managers
Messrs. Bruce E. Behrens and Liam D. Burke have shared primary
responsibility for managing the
12
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<PAGE>
- --------------------------------------------------------------------------------
Fund's assets since May 1, 1997. From the Fund's inception through April 30,
1997, Mr. Behrens shared that responsibility with Hobart C. Buppert, II, who
remains at ABIM.
Bruce E. Behrens -- 30 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 Securities
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 -- 9 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.
DISTRIBUTOR
- --------------------------------------------------------------------------------
ICC Distributors, Inc. ("ICC Distributors" or the "Distributor") has
served as distributor for each class of the Fund's shares since August 31,
1997. The Distributor is a registered broker-dealer that offers distribution
services to a variety of registered investment companies including other funds
in the Flag Investors family of funds and BT Alex. Brown Cash Reserve Fund,
Inc. The Distributor is not affiliated with the Advisors.
The Fund has adopted two separate 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 Shareholder Servicing Agreements with certain financial
institutions, including certain banks and BT Alex. Brown Incorporated, to
provide shareholder services, pursuant to which the Distributor may allocate on
a proportional basis up to all of its distribution fee as compensation for such
financial institutions' ongoing shareholder services. Such financial
institutions may charge you separately for these services.
As compensation for providing distribution services for the Class A
Shares for the period from August 31, 1997 through December 31, 1997, the
Distributor received a fee equal to 0.25% (annualized) of the Class A Shares'
average daily net assets.
As compensation for providing distribution and shareholder servicing for
the Class B Shares for the period from August 31, 1997 through December 31,
1997, the Distributor received a distribution fee equal to 0.75% (annualized)
of the Class B Shares' average daily net assets and a shareholder servicing fee
equal to 0.25% (annualized) of the Class B Shares' average daily net assets.
The distribution fee is used to compensate the Distributor for its services and
expenses in distributing the Class B Shares. The shareholder servicing fee is
used to compensate the Distributor, securities dealers and Shareholder
Servicing Agents for services provided and expenses incurred in maintaining
your account, responding to your inquiries and providing you with information
on your investment.
Payments under the Plans are made as described above regardless of the
Distributor's actual cost of providing distribution services. If the cost of
providing distribution services is less than the payments received, the
Distributor may retain the unexpended portion of the distribution fee. The
Advisor or the Distributor, and their respective affiliates, will make payments
from their own resources to securities dealers or Shareholder Servicing Agents.
Payments by the Distributor will include additional discounts or promotional
incentives in the form of cash or other compensation (including merchandise or
travel).
13
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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, 1997, ICC received a fee equal to 0.02% of the Fund's average
daily net assets. Bankers Trust Company, a subsidiary of Bankers Trust New York
Corporation, acts as custodian of the Fund's assets. (See the Statement of
Additional Information.)
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 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 85 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
Communications Fund Class A Shares" and "Flag Investors Communications
14
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<PAGE>
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Fund Class B Shares." The Board has no present intention of establishing any
additional series of the Fund but the Fund does have two other classes of
shares in addition to the shares offered hereby: "Flag Investors Communications
Fund Institutional Shares," which are offered by a separate prospectus and
"Flag Investors Communications Fund Class D Shares," which are not currently
being offered. Additional information concerning the Fund's Institutional
Shares may be obtained by calling the Fund at (800) 767-FLAG. 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 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 by Maryland law, the Fund does not expect to hold annual
meetings of shareholders. However, 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
If you have questions concerning your shares, you should contact the Fund
at (800) 767-FLAG, the Transfer Agent at (800) 553-8080, or your securities
dealer or Shareholder Servicing Agent.
15
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
FLAG INVESTORS COMMUNICATIONS 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 ICC DISTRIBUTORS, INC.
One South Street P.O. Box 7558
Baltimore, Maryland 21202 Portland, Maine 04101
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
BANKERS TRUST COMPANY MORGAN, LEWIS & BOCKIUS LLP
130 Liberty Street 2000 One Logan Square
New York, New York 10006 Philadelphia, Pennsylvania 19103
16
- --------------------------------------------------------------------------------
<PAGE>
FLAG INVESTORS COMMUNICATIONS FUND, INC.
NEW ACCOUNT APPLICATION
- --------------------------------------------------------------------------------
Make check payable to "Flag Investors Communications Fund, Inc." and mail with
this Application to:
Flag Investors Funds
P.O. Box 419663
Kansas City, MO 64141-6663
Attn: Flag Investors Communications Fund, Inc.
For assistance in completing this Application please call: 1-800-553-8080 Monday
through Friday, 8:30 a.m. to 5:30 p.m. (Eastern Time).
To open an IRA account, please call 1-800-767-3524 for an IRA information kit.
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 $ _________________
Your Account Registration (Please Print)
Existing Account No., if any: __________________________________
Individual or Joint Tenant
__________________________________________________________________
First Name Initial Last Name
__________________________________________________________________
Social Security Number
__________________________________________________________________
Joint Tenant Initial Last Name
Corporations, Trusts, Partnerships, etc.
__________________________________________________________________
Name of Corporation, Trust or Partnership
_________________ _________________________________________________
Tax ID Number Date of Trust
__________________________________________________________________
Name of Trustees (If to be included in the Registration)
__________________________________________________________________
For the Benefit of
Gifts to Minors
__________________________________________________________________
Custodian's Name (only one allowed by law)
__________________________________________________________________
Minor's Name (only one)
__________________________________________________________________
Social Security Number of Minor
under the __________________ Uniform Gifts to Minors Act
State of Residence
Mailing Address
__________________________________________________________________
Street
__________________________________________________________________
City State Zip
(____)____________________________________________________________
Daytime Phone
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
Right of Accumulation -- Class A Shares only (Optional)
List the Account numbers of other Flag Investors Funds 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
<PAGE>
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 Depositor's Signature Date
No., if any (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: ________________________
_________________________
Signature and Taxpayer Certification
- --------------------------------------------------------------------------------
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 your
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.
- --------------------------------------------------------------------------------
I have received a copy of the Fund's prospectus. 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 Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required to avoid backup
withholding.
- --------------------------------------------------------------------------------
__________________________________ __________________________________________
Signature Date Signature (if joint acct., both Date
must sign)
- --------------------------------------------------------------------------------
For Dealer Use Only
Dealer's Name: ______________________ Dealer Code: _______________________
Dealer's Address: ______________________ Branch Code: _______________________
______________________
Representative: ______________________ Rep. No.: _______________________
A-2
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
(Institutional Shares)
Cross Reference Sheet
February 27, 1998
Items Required by Form N-1A
<TABLE>
<CAPTION>
<S> <C> <C>
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 (Class A Shares)
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 Institutional Shares
Item 8. Redemption or Repurchase How to Redeem Institutional Shares
Item 9. Pending Legal Proceedings **
</TABLE>
- ------------------
* Information required by Item 5A with respect to the Fund's Institutional
Shares when available will be contained in the Fund's 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 (except
Institutional Shares)
Part C Other Information
- ------ -----------------
</TABLE>
Part C contains the information required by the items
contained therein under the items set
forth in the form.
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
COMMUNICATIONS FUND, INC.
(Institutional Shares)
(formerly, Flag Investors Telephone Income Fund, Inc.)
Prospectus & Application -- May 1, 1998
- --------------------------------------------------------------------------------
This mutual fund (the "Fund") is designed to maximize total return. The Fund
will seek to achieve this objective through a combination of long-term growth
of capital and, to a lesser extent, current income. In seeking to achieve this
objective, the Fund invests primarily in common stock, securities convertible
thereto and debt obligations of companies in the communications field.
Flag Investors Institutional Shares of the Fund ("Institutional Shares") are
available through your securities dealer or the Fund's transfer agent and may
be purchased only by eligible institutions or by clients of investment advisory
affiliates of BT Alex. Brown Incorporated ("BT Alex. Brown"). (See "How to
Invest in Institutional Shares.")
This Prospectus sets forth basic information that you should know about the
Fund prior to investing. You should retain it for future reference. A Statement
of Additional Information dated May 1, 1998 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 ............................ 4
Investment Restrictions ....................... 6
How to Invest in Institutional Shares ......... 6
How to Redeem Institutional Shares ............ 7
Telephone Transactions ........................ 7
Dividends and Taxes ........................... 7
Management of the Fund ........................ 8
Investment Advisor and Sub-Advisor ............ 8
Distributor ................................... 9
Custodian, Transfer Agent and
Accounting Services ........................ 10
Performance Information ....................... 10
General Information ........................... 10
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>
<S> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ........................................ None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) ........................................ None
Maximum Deferred Sales Charge (as a percentage of original purchase price
or redemption proceeds, whichever is lower) ................................ None
Annual Fund Operating Expenses (as a percentage of average daily net assets):
Management Fees ............................................................. 0.70%
12b-1 Fees .................................................................. None
Other Expenses .............................................................. 0.16%
------
Total Fund Operating Expenses ............................................... 0.86%
======
</TABLE>
Example: 1 year 3 years
- --------------------------------------------------------- -------- --------
You would pay the following expenses on a $1,000 invest-
ment, assuming (1) 5% annual return and (2) redemption at
the end of each time period: ............................ $9 $27
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 above table is to describe the various costs and
expenses that you will bear indirectly when you invest in Institutional Shares.
If you purchase Institutional Shares through a financial institution, you may
be charged separate fees by that institution. The Expenses and Example for the
Institutional Shares, which have been offered since __________ , 1998, are based
on the Fund's expenses for the Class A Shares, another class of shares offered
by the Fund, less the 12b-1 fees charged to that class.
1
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The Fund has offered the Institutional Shares since _________ , 1998.
However, the Fund has offered Class A Shares since January 18, 1984. Historical
financial information is not fully applicable to the Institutional Shares
because the expenses paid by the Fund in the past differ from those the
Institutional Shares will incur. (See "Fee Table.") Nevertheless, historical
information about the Fund may be useful to investors if they take into account
the differences in expenses. Accordingly, the financial highlights included in
the following table are a part of the Fund's financial statements for the Class
A Shares for the periods indicated and have been audited by Coopers & Lybrand
L.L.P., independent accountants. The financial statements and financial
highlights for the Class A Shares for the year ended December 31, 1997 and the
report thereon of Coopers & Lybrand L.L.P. are included in the Statement of
Additional Information. Additional performance information for the Class A
Shares is contained in the Fund's Annual Report for the fiscal year ended
December 31, 1997, which can be obtained at no charge by calling the Fund at
(800) 767-FLAG.
(For a share outstanding throughout each year)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares
------------------------------------------------------------------
1997 1996 1995 1994
------------ ------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of year .................. $ 15.59 $ 14.87 $ 12.30 $ 13.70
-------- -------- -------- --------
Income from Investment Operations:
Net investment income ................................. 0.27 0.27 0.40 0.41
Net realized and unrealized gain/(loss) on investments. 5.41 1.67 3.58 (1.27)
-------- -------- -------- --------
Total from Investment Operations ...................... 5.68 1.94 3.98 (0.86)
-------- -------- -------- --------
Less Distributions:
Dividends from net investment income and net
realized short-term gains ........................... (0.40) (0.38) (0.41) (0.44)
Distributions from net realized mid-term and
long-term gains ..................................... (1.50) (0.84) (1.00) (0.10)
-------- -------- -------- --------
Total distributions ................................... (1.90) (1.22) (1.41) (0.54)
-------- -------- -------- --------
Net asset value at end of year ........................ $ 19.37 $ 15.59 $ 14.87 $ 12.30
======== ======== ======== ========
Total Return(3) ........................................ 37.36% 13.46% 33.44% (6.32)%
Ratios to Average Daily Net Assets:
Expenses .............................................. 1.11% 1.14% 0.93%(4) 0.92%(4)
Net investment income ................................. 1.07% 1.74% 2.85%(5) 3.14%(5)
Supplemental Data:
Net assets at end of year (000) ....................... $622,865 $505,371 $492,454 $435,805
Portfolio turnover rate ............................... 26% 20% 24% 23%
Average commissions per share(6) ...................... $ 0.0598 $ 0.0696 -- --
</TABLE>
- --------------------------------------------------------------------------------
(1) Restated for two-for-one stock split, effected in the form of a stock
dividend to shareholders of record on October 27, 1989.
(2) Investment Company Capital Corp. became Investment Advisor to the Fund on
January 19, 1989.
(3) Total return excludes the effect of sales charge.
(4) 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.
(5) 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.
(6) 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(concluded)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares
-----------------------------------
For the Year Ended December 31,
-----------------------------------
1993 1992 1991 1990 1989(1)(2) 1988(1) 1987(1)
- ----------------- ---------------- ---------------- ---------------- ---------------- ------------ -----------
<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%(4) 0.92%(4) 0.92%(4) 0.92%(4) 0.93%(4) 0.92% 0.88%
3.12%(5) 3.81%(5) 4.38%(5) 4.54%(5) 4.41%(5) 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>
- --------------------------------------------------------------------------------
INVESTMENT PROGRAM
- --------------------------------------------------------------------------------
Investment Objective, Policies and Risk
Considerations
The Fund's investment objective is to maximize total return. The Fund
will seek to achieve this objective through a combination of long-term growth
of capital and, to a lesser extent, current income. In seeking this objective,
the Fund invests primarily in common stock, securities convertible thereto and
debt obligations of companies in the communications field. For this purpose,
companies would be considered to be in the "communications field" if they were
engaged in the research, development, manufacture or sale of communications
services, technology, equipment or products. Effective communication through
the transmission of voice, pictures and data is becoming increasingly important
and the communications field now embraces a wide variety of products and
services, such as local and long distance telephone service, wireless service
(e.g. cellular telephone or paging services), video, telecommunications
equipment, media, and information technology. There can be no assurance that
the Fund's investment objective will be met. Concentration in the
communications field will subject the Fund to the risks associated with that
field (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. The Fund will be non-diversified for purposes of the
Investment Company Act of 1940 (the "Investment Company Act") which means that
the performance of one or a small number of portfolio holdings can affect
overall performance more than would otherwise be the case.
The Fund's investment advisors believe that investing in a portfolio of
securities of companies in the communications field affords an attractive
opportunity for achieving the Fund's investment objective. The Fund's emphasis
is investment in companies offering products and services that both support
traditional communications and facilitate new information-based applications.
Information technology combines data processing and telecommunications to
support more efficient and economical business processes and consumer
activities. The rapidly improving performance and declining cost of
transmission have helped the global expansion of information technology. For
example, businesses have an increasing need to connect to remote users such as
employees, suppliers and customers. Customers are increasingly relying on
telephone-based applications like on-line banking and shopping to save time and
money.
Worldwide telecommunications market expansion will create opportunities
for established and emerging providers of telecommunications products and
services. Although new, high growth technologies are being adopted at an
increasing rate, commercial acceptance still lags the introduction of new
products and services. Traditional communications companies, such as telephone
companies, are positioned to serve the existing and developing needs of their
customer base with a combination of current and new offerings. Evolving user
requirements have also led to the development of separate industry segments,
outside the local telephone and long distance businesses, which enable
non-traditional telecommunications providers a chance to benefit from the
growing worldwide demand for voice, data and video services.
Under normal market conditions at least 65% of the Fund's total assets
will be invested in common stock, securities convertible thereto and debt
obligations of companies in the communications field. 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
4
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
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 (securities 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. 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, 1997,
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.
S&P
Rating Average
- ------------- ----------
AAA 1.68%
AA 0.00%
A 0.00%
BBB 0.00%
BB 0.88%
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.
Investment in Securities of Foreign Issuers
From time to time, the Fund may invest in American Depositary Receipts
("ADRs"), which are interests in securities of foreign companies, and up to 10%
of the Fund's total assets in debt and equity securities of issuers not
publicly traded in the United States, when the Fund's investment advisors
believe that such investments provide good opportunities for achieving income
and capital gains without undue risk.
Loans of Portfolio Securities
The Fund has the right to lend portfolio securities to approved
institutional borrowers for the purpose of increasing its net investment
income. These loans must be secured continuously by cash or equivalent
collateral, or by a letter of credit at least equal to the market value of the
securities loaned plus accrued interest or income. There may be a risk of delay
in recovery of the securities or even loss of rights in the collateral should
the borrower of the securities fail financially. The Fund's custodian or
another affiliate may act as securities lending agent.
Other Investments
The Fund may write covered call options if each such option is traded on
a national securities exchange (and may purchase calls in related closing
transactions). 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.
5
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<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The following investment restriction is a matter of fundamental policy
and may not be changed without shareholder approval. Accordingly, the Fund will
not:
1) Invest less than 65% of its total assets in the communications field, 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).
The Fund is subject to further investment restrictions that are set forth
in the Statement of Additional Information.
HOW TO INVEST IN INSTITUTIONAL SHARES
- -----------------------------------------------------------------------------
You may purchase Institutional Shares if you are either of the following:
1. An eligible institution (e.g., a financial institution, corporation,
investment counselor, qualified retirement plan, trust, estate or
educational, religious or charitable institution). If you are a
qualified retirement plan, your initial investment must be at least
$1,000,000. If you are any of the other institutions listed, your
initial investment must be at least $500,000. You may purchase
Institutional Shares through your securities dealer or through any
financial institution that is authorized to service shareholder
accounts ("Shareholder Servicing Agents"). You may also purchase
Institutional Shares by completing the attached Application Form and
returning it, together with payment of the purchase price, as
instructed.
2. A client of an investment advisory affiliate of BT Alex. Brown
purchasing shares in your investment advisory account. Your initial
or subsequent investments may be in any amount. Your investment
advisor will assist you in purchasing Institutional Shares.
You may purchase Institutional Shares on any day on which the New York
Stock Exchange is open for business (a "Business Day"). Your purchase order
will be executed at a per share purchase price equal to the net asset value
next determined after it is received. Purchases made through your securities
dealer or Shareholder Servicing Agent must be in accordance with their payment
procedures.
Your purchase order may not be accepted if the sale of Fund shares has
been suspended or if it is determined that your purchase would be detrimental
to the interests of the Fund's shareholders.
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
its share of the Fund's assets, 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 will be given their
market value which is normally based on current prices but which may be
determined according to "fair value" procedures approved by the Fund's Board of
Directors.
Purchases by Exchange
You may exchange Institutional shares of other Flag Investors funds that
you own for an equal dollar amount of Institutional Shares of the Fund by
notifying the Fund's transfer agent (the "Transfer Agent") by telephone on any
Business Day between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time) (see
"Telephone Transactions" below) or by regular or express mail at the address
listed on page 12 of this Prospectus. If your shares are held in an account
with your securities dealer, Shareholder Servicing Agent or investment advisor,
ask them to effect the exchange for you.
The net asset value of Institutional Shares purchased and redeemed in an
exchange request received on the same Business Day will be determined on that
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.
The Fund may modify or terminate this offer of exchange at any time on 60
days' prior written notice to shareholders.
Other Information
In the interest of economy and convenience and because of the operating
procedures for the Institutional Shares, certificates representing such shares
will not be issued.
6
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<PAGE>
- --------------------------------------------------------------------------------
HOW TO REDEEM INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
You may redeem all or part of your investment on any Business Day by
transmitting a redemption order through your securities dealer, your Shareholder
Servicing Agent or the Transfer Agent. You may also redeem your shares by
telephone (in amounts up to $500,000). (See "Telephone Transactions" below.) A
redemption order is effected at the net asset value per share next determined
after receipt of your order in proper form. 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. You will be paid for redeemed Institutional Shares by
wire transfer of funds to your securities dealer, Shareholder Servicing Agent or
bank, upon receipt of a duly authorized redemption request as promptly as
feasible and, under most circumstances, within three Business Days.
Dividends payable up to the date of redemption of Institutional Shares
will be paid on the next dividend payable date. If all of the shares in your
account have been redeemed on a dividend payable date, the dividend will be
remitted by wire to your securities dealer, Shareholder Servicing Agent or
bank.
The Fund has the power, under its Articles of Incorporation, to redeem
your account upon 60 days' notice if its value falls below $500 due to your
redemptions.
TELEPHONE TRANSACTIONS
- --------------------------------------------------------------------------------
You may redeem Institutional Shares in amounts up to $500,000, or
exchange Institutional shares of other Flag Investors funds in any amount 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). If your shares are held in an
account with your securities dealer, Shareholder Servicing Agent or investment
advisor, ask them to effect your transaction. Telephone transaction privileges
are automatic unless you specifically request that no telephone redemptions or
exchanges be accepted for your account. 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 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 you to provide certain personal identification
information at the time your account is opened and prior to effecting each
transaction requested by telephone. You may be required to provide additional
telecopied instructions. 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. Your telephone transaction requests will be recorded.
During periods of extreme economic or market changes, you may experience
difficulty in effecting telephone transactions. In such event, requests should
be made by express mail or facsimile. (See "How to Invest in Institutional
Shares -- Purchases by Exchange" and "How to Redeem Institutional Shares.")
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
normally will distribute to shareholders any net capital gains on an annual
basis.
Unless you elect otherwise, all income dividends and net capital gains
distributions will be reinvested in additional Institutional Shares at net
asset value. You may elect to terminate automatic reinvestment by giving
written notice to the Transfer Agent at the address listed on page 12 of this
Prospectus, either directly or through your securities dealer or Shareholder
Servicing Agent, at least five days before the next date on which dividends or
distributions will be paid.
7
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<PAGE>
- --------------------------------------------------------------------------------
Tax Treatment of Dividends and Distributions
The following summary of certain federal income tax consequences
affecting the Fund and its shareholders 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 tax treatment of the Fund or the shareholders, and the
discussion here is not intended as a substitute for careful tax planning.
Accordingly, you are urged to consult with your tax advisor regarding any
specific questions.
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. Unless
you are otherwise exempt, you will be generally subject to federal income tax on
the amounts distributed to you, regardless of whether such distributions are
paid to you in cash or reinvested in additional Institutional Shares.
You will be taxed on 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, as gains from the sale or exchange of a capital asset held for more
than one year regardless of the length of time you have held the Institutional
Shares. You will be taxed on all other income distributions as ordinary income.
If you are a corporate shareholder, you may be entitled to the dividends
received deduction on a portion of dividends received from the Fund. You will
be advised annually as to the federal income tax status of all distributions.
Ordinarily, you should include all dividends as 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 you and paid by the Fund in the year
in which the dividends were declared.
The Fund intends to make sufficient distributions of its ordinary income
and capital gain net income prior to the end of each calendar year to avoid
liability for federal excise tax.
The sale, exchange or redemption of Institutional Shares is a taxable
event for you.
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. The day-to-day operations of the Fund are delegated to the
Fund's executive officers, to the Fund's investment advisors and its
distributor. A majority of the Directors are not affiliated with the Fund's
investment advisors or its distributor.
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 BT Alex. Brown
Cash Reserve Fund, Inc., which funds had approximately $6.1 billion of net
assets as of December 31, 1997. ABIM is a registered investment advisor with
approximately $7.2 billion under management as of December 31, 1997.
Pursuant to the terms of the Investment Advisory Agreement, ICC is
responsible for supervising and managing 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 certain affiliates, provided that
compensation to such affiliates 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
8
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<PAGE>
- --------------------------------------------------------------------------------
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, 1997, ICC received a fee equal to 0.70%
of the Fund's average daily net assets and from such fee paid ABIM a
sub-advisory fee equal to 0.49% 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 Bankers Trust New York Corporation. ABIM
is a limited partnership affiliated with the Advisor. Buppert, Behrens & Owen,
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. BT
Alex. Brown owns a 1% general partnership interest in ABIM and BT Alex. Brown
Holdings, Inc. 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. An affiliate of ICC serves as the
Fund's custodian. (See "Custodian, Transfer Agent and Accounting Services.")
Portfolio Managers
Messrs. Bruce E. Behrens and Liam D. Burke have shared primary
responsibility for managing the Fund's assets since May 1, 1997. From the
Fund's inception through April 30, 1997, Mr. Behrens shared that responsibility
with Hobart C. Buppert, II, who remains at ABIM.
Bruce E. Behrens -- 30 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 -- 9 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.
DISTRIBUTOR
- --------------------------------------------------------------------------------
ICC Distributors, Inc. ("ICC Distributors" or the "Distributor") has
served as distributor of each class of the Fund's shares since August 31, 1997.
ICC Distributors receives no compensation for distributing the Institutional
Shares. ICC Distributors is a registered broker-dealer that offers distribution
services to a variety of registered investment companies including other funds
in the Flag Investors family of funds and BT Alex. Brown Cash Reserve Fund,
Inc. ICC Distributors is not affiliated with either the Advisor or the Sub-
ICC Distributors bears all expenses associated with advertisements,
promotional materials, sales literature and printing and mailing prospectuses
to other than Fund shareholders. The Advisor or its affiliates may make
payments from their own resources to securities dealers and Shareholder
Servicing Agents.
9
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<PAGE>
- --------------------------------------------------------------------------------
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, 1997, ICC received a fee equal to 0.02% of the Fund's average
daily net assets. Bankers Trust Company, a subsidiary of Bankers Trust New York
Corporation, acts as custodian of the Fund's assets. (See the Statement of
Additional Information.)
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 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 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 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 your
bank with respect to accounts through which your Institutional Shares may be
purchased, although not included in calculations of performance, will reduce
your 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 85 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
Communications Fund
10
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<PAGE>
- --------------------------------------------------------------------------------
Institutional Shares." The Board has no present intention of establishing any
additional series of the Fund but the Fund does have three other classes of
shares in addition to the shares offered hereby: "Flag Investors Communications
Fund Class A Shares" and "Flag Investors Communications Fund Class B Shares,"
which are offered by a separate prospectus and "Flag Investors Communications
Fund Class D Shares," which are not currently being offered. Additional
information concerning the Fund's Class A and Class B Shares may be obtained by
calling the Fund at (800) 767-FLAG. 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 Institutional Shares. All classes of
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 by 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
You will be furnished 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
If you have any questions concerning your Institutional Shares, you
should contact the Fund at (800) 767-FLAG, the Transfer Agent at (800)
553-8080, or your securities dealer or Shareholder Servicing Agent.
11
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<PAGE>
FLAG INVESTORS COMMUNICATIONS FUND, INC.
(INSTITUTIONAL SHARES)
NEW ACCOUNT APPLICATION
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
Make check payable to "Flag Investors Communications For assistance in completing this Application please call:
Fund, Inc." and mail with this Application to: 1-800-553-8080 Monday through Friday, 8:30 a.m. to 5:30 p.m.
(Eastern Time).
Flag Investors Funds
330 West 9th Street, First Floor
Kansas City, MO 64105
Attn: Flag Investors Communications Fund, Inc.
If you are paying by check, make check payable to "Flag Investors Communications Fund, Inc." and mail with this
Application. If you are paying by wire, see instructions below.
- --------------------------------------------------------------------------------
Your Account Registration (Please Print)
Name on Account
Mailing Address
- -----------------------------------------
Name of Corporation, Trust or Partnership --------------------------------------------
Name of Individual to Receive Correspondence
- -----------------------------------------
Tax ID Number --------------------------------------------
Street
/ / Corporation / / Partnership / / Trust
--------------------------------------------
City State Zip
/ / Non-Profit or Charitable Organization / / Other ___________ ( )
--------------------------------------------
If a Trust, please provide the following: Daytime Phone
- ---------------------------------------------------------------------------------------------------------------
Date of Trust For the Benefit of
- --------------------------------------------------------------------------------
Name of Trustees (If to be included in the Registration)
- --------------------------------------------------------------------------------
</TABLE>
Initial Investment
The minimum initial purchase for the Institutional Shares of the Fund is
$500,000, except that the minimum initial purchase is $1,000,000 for qualified
retirement plans. There is no minimum for clients of investment advisory
affiliates of BT Alex. Brown Incorporated or for subsequent investments.
Indicate the amount to be invested and the method of payment:
__ A. By Mail: Enclosed is a check in the amount of $____________ payable to
Flag Investors Communications Fund, Inc.
__ B. By Wire: A bank wire in the amount of $__________ has been sent
from __________________________ ______________________________
Name of Bank Wire Control Number
Wire Instructions
Follow the instructions below to arrange for a wire transfer for initial
investment:
o Send completed Application by overnight carrier to Flag Investors
Funds at the address listed above.
o Call 1-800-553-8080 to obtain new investor's Fund account number.
o Wire payment of the purchase price to Investors Fiduciary Trust
Company ("IFTC"), as follows:
IFTC
a/c Flag Investors Funds
Acct. # 7519206
ABA # 1010-0362-1
Kansas City, Missouri 64105
Please include the following information in the wire:
o Flag Investors Communications Fund, Inc. -- Institutional Shares
o The amount to be invested
o "For further credit to ________________________________________."
(Investor's Fund Account Number)
<PAGE>
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Distribution Options
Please check appropriate boxes. If none of the options are selected, all
distributions will be reinvested in additional Institutional Shares of the
Fund.
Income Dividends Capital Gains
/ / Reinvested in additional shares / / Reinvested in additional shares
/ / Paid in cash / / Paid in cash
- -------------------------------------------------------------------------------
Telephone Transactions
I understand that I will automatically have telephone redemption privileges
(for amounts up to $500,000) and exchange privileges (with respect to
Institutional Shares of other Flag Investors Funds) unless I mark one or both
of the boxes below:
No, I do not want: / / Telephone redemption privileges
/ / Telephone exchange privileges
Redemptions effected by telephone will be
wired to the bank account designated below.
- --------------------------------------------------------------------------------
Bank Account Designation
(This Section Must Be Completed)
Please attach a blank, voided check to provide account and bank routing
information.
- --------------------------------------------------------------------------------
Name of Bank Branch
- --------------------------------------------------------------------------------
Bank Address City/State/Zip
- --------------------------------------------------------------------------------
Name(s) on Account
- --------------------------------------------------------------------------------
Account Number A.B.A. Number
A-1
<PAGE>
Acknowledgment, Certificate and Signature
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 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 has been provided above, I have applied, or intend to
apply, to the IRS for a Tax ID Number, and I understand that if I do not
provide such number to the Transfer Agent within 60 days of the date of
this Application or if I fail to furnish my correct Tax ID Number, I may
be subject to a penalty and a 31% backup withholding on distributions and
redemption proceeds. (Please provide your Tax ID 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.
I have received a copy of the Fund's prospectus. 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 Internal Revenue Service does not require your consent to any provision of
this document other than the certifications required
to avoid backup withholding.
- --------------------------------------------------------------------------------
Signature of Corporate Officer, General Partner, Trustee, etc. Date
- --------------------------------------------------------------------------------
Signature of Corporate Officer, General Partner, Trustee, etc. Date
Person(s) Authorized to Conduct Transactions
The following person(s) ("Authorized Person(s)") are currently officers,
trustees, general partners or other authorized agents of the investor.
Any ______ * of the Authorized Person(s) is, by lawful and appropriate action of
the investor, a person entitled to give instructions regarding purchases and
redemptions or make inquiries regarding the Account.
- ------------------------------------ ------------------------------------
Name/Title Signature Date
- ------------------------------------ ------------------------------------
Name/Title Signature Date
- ------------------------------------ ------------------------------------
Name/Title Signature Date
- ------------------------------------ ------------------------------------
Name/Title Signature Date
The signature appearing to the right of each Authorized Person is that person's
signature. Investment Company Capital Corp. ("ICC") may, without inquiry, act
upon the instructions (whether verbal, written, or provided by wire,
telecommunication, or any other process) of any person claiming to be an
Authorized Person. Neither ICC nor any entity on behalf of which ICC is acting
shall be liable for any claims or expenses (including legal fees) or for any
losses resulting from actions taken upon any instructions believed to be
genuine. ICC may continue to rely on the instructions made by any person
claiming to be an Authorized Person until it is informed through an amended
Application that the person is no longer an Authorized Person and it has a
reasonable period (not to exceed one week) to process the amended Application.
Provisions of this Application shall be equally Applicable to any successor of
ICC.
* If this space is left blank, any one Authorized Person is authorized to give
instructions and make inquiries. Verbal instructions will be accepted from
any one Authorized Person. Written instructions will require signatures of
the number of Authorized Persons indicated in this space.
- --------------------------------------------------------------------------------
Certificate of Authority
Investors must complete one of the following two Certificates of Authority.
Certificate A: FOR CORPORATIONS AND UNINCORPORATED ASSOCIATIONS (With a Board
of Directors or Board of Trustees.)
I _____________________, Secretary of the above-named investor, do hereby
certify that at a meeting on _______________, at which a quorum was present
throughout, the Board of Directors (Board of Trustees) of the investor duly
adopted a resolution which is in full force and effect and in accordance with
the investor's charter and by-laws, which resolution did the following: (1)
empowered the officers/trustees executing this Application (or amendment) to do
so on behalf of the investor; (2) empowered the above-named Authorized
Person(s) to effect securities transactions for the investor on the terms
described above; (3) authorized the Secretary to certify, from time to time,
the names and titles of the officers of the investor and to notify ICC when
changes in officers occur; and (4) authorized the Secretary to certify that
such a resolution has been duly adopted and will remain in full force and
effect until ICC receives a duly-executed amendment to the Certification form.
Witness my hand and seal on behalf of the investor.
this ___ day of _________, 199_
Secretary _____________________________________________________________
The undersigned officer (other than the Secretary) hereby certifies that the
foregoing instrument has been signed by the Secretary of the investor.
- --------------------------------------------------------------------------------
Signature and title Date
Certificate B: FOR PARTNERSHIPS AND TRUSTS (Even if you are the sole trustee)
The undersigned certify that they are all general partners/trustees of the
investor and that they have done the following under the authority of the
investor's partnership agreement/trust instrument: (1) empowered the general
partner/trustee executing this Application (or amendment) to do so on behalf of
the investor; (2) empowered the above-named Authorized Person(s) to effect
securities transactions for the investor on the terms described above; (3)
authorized the Secretary to certify, from time to time, the names of the
general partners/trustees of the investor and to notify ICC when changes in
general partners/trustees occur. This authorization will remain in full force
and effect until ICC receives a further duly-executed certification. (If there
are not enough spaces here for all necessary signatures, complete a separate
certificate containing the language of this Certificate B and attach it to the
Application).
- --------------------------------------------------------------------------------
Signature and title Date
- --------------------------------------------------------------------------------
Signature and title Date
A-2
<PAGE>
- --------------------------------------------------------------------------------
FLAG INVESTORS COMMUNICATIONS FUND, INC.
(Institutional Shares)
Investment Advisor
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
Sub-Advisor Distributor
ALEX. BROWN INVESTMENT MANAGEMENT ICC DISTRIBUTORS, INC.
One South Street P.O. Box 7558
Baltimore, Maryland 21202 Portland, Maine 04101
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
BANKERS TRUST COMPANY MORGAN, LEWIS & BOCKIUS LLP
130 Liberty Street 2000 One Logan Square
New York, New York 10006 Philadelphia, Pennsylvania 19103
12
- --------------------------------------------------------------------------------
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------
FLAG INVESTORS COMMUNICATIONS FUND, INC.
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 THE FUND, ONE SOUTH
STREET, BALTIMORE, MARYLAND 21202, (800) 767-FLAG.
Statement of Additional Information Dated: May 1, 1998
for the Prospectuses Dated: May 1, 1998
for the
Flag Investors Class A Shares
Flag Investors Class B Shares
and
Flag Investors Institutional Shares
<PAGE>
TABLE OF CONTENTS
Page
1. General Information and History.............................. 1
2. Investment Objective and Policies............................ 2
3. Valuation of Shares and Redemption........................... 6
4. Federal Tax Treatment of Dividends and Distributions......... 7
5. Management of the Fund....................................... 10
6. Investment Advisory and other Services....................... 14
7. Distribution of Fund Shares.................................. 16
8. Brokerage.................................................... 20
9. Capital Stock................................................ 21
10. Semi-Annual Reports.......................................... 22
11. Custodian, Transfer Agent and Accounting Services............ 22
12. Independent Accountants...................................... 23
13. Performance Information...................................... 23
14. Control Persons and Principal Holders of Securities.......... 25
15. Financial Statements ........................................ 26
Appendix..................................................... A-1
<PAGE>
1. GENERAL INFORMATION AND HISTORY
Flag Investors Communications 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. Prior to May 1, 1998 the Fund
was known as the Flag Investors Telephone Income Fund, Inc.
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 three classes of
shares: Flag Investors Communications Fund Class A Shares ("Class A Shares"),
Flag Investors Communications Fund Class B Shares ("Class B Shares") and Flag
Investors Communications Fund Institutional Shares ("Institutional Shares")
(collectively, "Shares"). As used herein, the "Fund" refers to Flag Investors
Communications Fund, Inc. and specific references to any 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 Prospectuses which may be obtained
without charge from the Fund's distributor (the "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
Prospectuses. To avoid unnecessary repetition, references are made to related
sections of the Prospectuses. In addition, the Prospectuses 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 and commenced operations on January 18, 1984. 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. The
Fund commenced offering the Class B Shares on January 3, 1995 and the
Institutional Shares on February __, 1998.
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 reclassified as Flag Investors Communications Fund
Class D Shares on May 1, 1998. Shares of that class are not currently being
offered although shares remain outstanding.
Under a license agreement dated January 19, 1989 between the
Fund and Alex. Brown Incorporated (now BT Alex. Brown Incorporated), BT 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.
-1-
<PAGE>
2. INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to maximize total return.
The Fund will seek to achieve this objective through a combination of long-term
growth of capital and, to a lesser extent, current income. In seeking this
objective, the Fund invests primarily in common stock, securities convertible
thereto and debt obligations of companies in the communications field. 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 communications field affords an attractive
opportunity for achieving this investment objective. There can be no assurance,
however, that the Fund's investment objective will be achieved. The Fund's
investment objective may not be changed by the Board of Directors without
shareholder approval.
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 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.
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, 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.
-2-
<PAGE>
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.
-3-
<PAGE>
Lending of Portfolio Securities
The Fund may lend its investment securities to approved institutional
borrowers who need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its investment
securities, the Fund attempts to increase its net investment income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for the
account of the Fund. The Fund may lend its investment securities so long as the
terms, structure and the aggregate amount of such loans are not inconsistent
with the Investment Company Act of 1940, as amended (the "1940 Act") or the
Rules and Regulations or interpretations of the SEC thereunder, which currently
require that (a) the borrower pledge and maintain with the Fund collateral
consisting of liquid, unencumbered assets having a value at all times not less
than 100% of the value of the securities loaned, (b) the borrower add to such
collateral whenever the price of the securities loaned rises (i.e., the borrower
"marks to the market" on a daily basis), (c) the loan be made subject to
termination by the Fund at any time, and (d) the Fund receive reasonable
interest on the loan (which may include the Fund investing any cash collateral
in interest bearing short-term investments), and distributions on the loaned
securities and any increase in their market value. There may be risks of delay
in recovery of the securities or even loss of rights in the collateral should
the borrower of the securities fail financially. However, loans will be made
only to borrowers deemed by the Advisors to be of good standing and when, in the
judgment of the Advisors, the consideration which can be earned currently from
such securities loans justifies the attendant risk. All relevant facts and
circumstances, including the creditworthiness of the borrower, will be
considered in making decisions with respect to the lending of securities,
subject to review by the Board of Directors of the Fund.
At the present time, the staff of the SEC does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Board of Directors. In addition, voting
rights may pass with the loaned securities, but if a material event will occur
affecting an investment on loan, the loan must be called and the securities
voted.
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
-4-
<PAGE>
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.
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
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;
-5-
<PAGE>
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);
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, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
The Fund may enter into agreements that allow a third party,
as agent for the Fund, to accept orders from its customers up until the Fund's
close of business which is ordinarily 4:00 p.m. (Eastern Time). So long as a
third party receives an order prior to the Fund's close of business, the order
is deemed to have been received by the Fund and, accordingly, may receive the
net asset value computed at the close of business that day. These "late day"
agreements are intended to permit shareholders placing orders with third parties
to place orders up to the same time as other shareholders.
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.
-6-
<PAGE>
Under normal circumstances, the Fund will redeem Class A
Shares and Class B Shares by check and Institutional Shares by wire transfer of
funds 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 in the
Prospectus under "How to Invest in the Fund," 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 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.
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, 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.
-7-
<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 gains from the
sale or exchange of a capital asset held for more than one year, 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 the 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 Shares will
be capital gain or loss, which will be long-term if the Shares have been held
for eighteen months or more, mid-term if the Shares have been held for more than
twelve but less than eighteen months, and otherwise will be short-term. However,
a shareholder who realizes a loss on the sale, exchange or redemption of Shares
held for six months or less and has previously received a capital gains
distribution with respect to the Shares (or has included in income any
undistributed net capital gains of the Fund with respect to such Shares) 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 Shares 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
-8-
<PAGE>
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.
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.
-9-
<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 (10/27/26)
Managing Director Emeritus, BT Alex. Brown Incorporated; Formerly, Vice
Chairman, Alex. Brown Incorporated (now BT Alex. Brown Incorporated);
Vice Chairman, Alex. Brown Capital Advisory & Trust Company; and
Director, Investment Company Capital Corp. (registered investment
advisor).
*RICHARD T. HALE, Director (7/17/45)
Managing Director, BT Alex. Brown Incorporated; Director and President,
Investment Company Capital Corp. (registered investment advisor); and
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; and Partner, KPMG Peat Marwick, retired 1990.
EUGENE J. MCDONALD, Director (7/14/32)
Duke Management Company, Erwin Square, Suite 1000, 2200 West Main
Street, Durham, North Carolina 27705. President, Duke Management
Company (investments); Executive Vice President, Duke University
(education, research and health care); Director, Central Carolina Bank
& Trust (banking), Key Funds (registered investment companies); DP Mann
Holdings (insurance); Formerly, Director 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, Pennsylvania 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.
-10-
<PAGE>
CARL W. VOGT, Esq., 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) and American Science &
Engineering (x-ray detection equipment); Formerly, Chairman and Member,
National Transportation Safety Board; Director, National Railroad
Passenger Corporation (Amtrak); and Member, Aviation System Capacity
Advisory Committee (Federal Aviation Administration).
HARRY WOOLF, President (8/12/23)
Institute for Advanced Study, Olden Lane, Princeton, New Jersey 08540.
Professor-at- Large Emeritus, Institute for Advanced Study; Director,
ATL and Spacelabs Medical Corp. (medical equipment); and Family Health
International (non-profit research and education); Director, Research
America (non-profit medical research); Formerly, Director, Flag
Investors/ISI/BT Alex. Brown Family of Funds; Trustee, Rockefeller
Foundation; Director, Merrill Lynch Cluster C Funds (registered
investment companies); and Trustee, Reed College (education).
AMY M. OLMERT, Secretary (5/14/63)
Vice President, BT Alex. Brown Incorporated, June 1997-Present.
Formerly, Senior Manager, Coopers & Lybrand L.L.P., September 1988 -
June 1997.
JOSEPH A. FINELLI, Treasurer (1/24/57)
Vice President, BT Alex. Brown Incorporated and Vice President,
Investment Company Capital Corp. (registered investment advisor),
September 1995-Present; Formerly, Vice President and Treasurer, The
Delaware Group of Funds (registered investment companies) and Vice
President, Delaware Management Company, Inc. (investments), 1980-August
1995.
SCOTT J. LIOTTA, Assistant Secretary (3/18/65)
Assistant Vice President, BT Alex. Brown 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.
- -------------------
* Messrs. Semans and Hale are directors who are "interested persons,"
as defined in the 1940 Act.
Directors and officers of the Fund are also directors and
officers of some or all of the other investment companies managed, administered
or advised by BT Alex. Brown Incorporated ("BT Alex. Brown") or its affiliates.
There are currently 13 funds in the Flag Investors/ISI Funds and BT Alex. Brown
Cash Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr. Hale serves as
Chairman of four funds and Director of eight other funds in the Fund Complex.
Mr. Semans serves as Chairman of five funds and as a Director of six other funds
in the Fund Complex. Messrs. Cunnane, Kroeger, Levy and McDonald serve as
Directors of each fund in the Fund Complex. Ms. Rimel and Mr. Vogt serve as
Directors of 11 funds in the Fund Complex. Mr. Woolf serves as President of
seven funds in the Fund Complex. Ms. Olmert serves as Secretary, Mr. Finelli
serves as Treasurer and Mr. Liotta serves as Assistant Secretary of each of the
funds in the Fund Complex.
-11-
<PAGE>
Some of the Directors of the Fund are customers of, and have
had normal brokerage transactions with, BT Alex. Brown or its affiliates 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.
With the exception of the Fund's President, officers of the
Fund receive no direct remuneration in such capacity from the Fund. Officers and
Directors of the Fund who are officers or directors of BT Alex. Brown 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) (an "Independent Director") and Mr. Woolf, the
Fund's President, receives an aggregate annual fee (plus reimbursement for
reasonable out-of-pocket expenses incurred in connection with his or her
attendance at board and committee meetings) from 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, 1997, Independent Directors' fees attributable to the assets of the
Fund totaled $28,152.
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, 1997.
<TABLE>
<CAPTION>
COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------------
Total Compensation
Name of Person, Position Aggregate Compensation Pension or Retirement From the Fund
From the Fund Payable to Benefits Accrued As and Fund Complex
Directors for the Fiscal Year Part of Fund Expenses Payable to Directors
Ended December 31, 1997 for the Fiscal Year
Ended December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Truman T. Semans, Chairman (1) $0 $0 $0
Richard T. Hale, Director(1) $0 $0 $0
Charles W. Cole, Jr., Director (1), (2) $0 $0 $0
James J. Cunnane, Director $3,600 (3) (4) $39,000 for service on 13
Boards in the Fund Complex
John F. Kroeger, Director $4,523 (3) (4) $49,000 for service on 13
Boards in the Fund Complex
Louis E. Levy, Director $3,600 (3) (4) $39,000 for service on 13
Boards in the Fund Complex
Eugene J. McDonald, Director $3,600 (3) (4) $39,000 for service on 13
Boards in the Fund Complex
Rebecca W. Rimel, Director $3,656 (3) (4) $39,000 for service on 11(5)
Boards in the Fund Complex
Carl W. Vogt, Esq., Director $3,714 (3) (4) $39,000 for service on 11(5)
Boards in the Fund Complex
</TABLE>
-12-
<PAGE>
(1) A Director who is an "interested person" as defined in the 1940 Act.
(2) Resigned effective September 1, 1997.
(3) Of amounts payable to Messrs. Cunnane, Kroeger, Levy, McDonald and Vogt,
and to Ms. Rimel, $0, $0, $3,600, $3,714 and $3,656, respectively, was
deferred pursuant to a deferred compensation plan.
(4) 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, 1997 was approximately $62,142.
(5) 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 Mr. Woolf 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. 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, 1997 are as follows: for Mr. Cunnane, 3 years; for Mr. Kroeger,
15 years; for Mr. Levy, 3 years; for Mr. McDonald, 5 years; for Ms. Rimel, 2
years; and for Mr. Vogt, 2 years.
<TABLE>
<CAPTION>
Years of Service Estimated Annual Benefits Payable By Fund Complex Upon Retirement
- ---------------- -----------------------------------------------------------------
Chairman of Audit Committee Other Participants
--------------------------- ------------------
<S> <C> <C>
6 years $4,900 $3,900
7 years $9,800 $7,800
8 years $14,700 $11,700
9 years $19,600 $15,600
10 years or more $24,500 $19,500
</TABLE>
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 from among various Flag Investors funds and BT
Alex. Brown Cash Reserve Fund, Inc. in which all or part of their deferral
account shall be deemed to be invested. Distributions from the deferring
Directors' deferral accounts will be paid in cash, in generally equal quarterly
installments over a period of ten years.
-13-
<PAGE>
Code of Ethics
The Board of Directors of the Fund has adopted a Code of Ethics
pursuant to Rule 17j-1 under the 1940 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 any officer, director or
employee of the Fund, or the Advisors or, if they are access persons in the case
of the Distribu tor, 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.
Trading by investment personnel and certain other employees of the Advisor or
Sub-Advisor, as appropriate, would be exempt from this "blackout period"
provided that (1) the market capitalization of a particular security exceeds $2
billion; and (2) orders of such entity (including trades of both clients and
covered persons) do not exceed ten percent of the daily average trading volume
of the security for the prior 15 days. 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 June 17, 1997, the Board of Directors of the Fund, including a
majority of the Independent Directors, 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. The Investment Advisory Agreement and the Sub-Advisory
Agreement were approved by a vote of shareholders of the Fund on August 14,
1997. ICC, the investment advisor, is an indirect subsidiary of Bankers Trust
New York Corporation. ABIM is a limited partnership affiliated with the Advisor.
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. BT Alex. Brown owns a 1% general partnership interest in ABIM
and BT Alex. Brown Holdings, Inc. owns the remaining limited partnership
interest. ICC also serves as investment advisor and ABIM serves as sub-advisor
to other funds in the Flag Investors family of funds.
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 provided that ICC continues to supervise the performance
of ABIM and report thereon to the Fund's Board of Directors. 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
-14-
<PAGE>
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.
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
Independent 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 (as defined under "Capital
Stock"). 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 (as defined in the 1940
Act). The Sub-Advisory Agreement has similar termination provisions.
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: 1997 1996 1995
- ------------- ---- ---- ----
ICC $ 4,172,769 $ 3,562,609 $ 2,297,474*
ABIM $ 2,944,897 $ 2,430,407 $ 1,541,505
--------------
* Net of fee waivers. 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. An affiliate of ICC serves as the
Fund's custodian. See "Custodian, Transfer Agent and Accounting Services."
7. DISTRIBUTION OF FUND SHARES
ICC Distributors, Inc. ("ICC Distributors" or the "Distributor") serves
as the distributor of each class of the Fund's Shares pursuant to a Distribution
Agreement (the "Distribution Agreement") effective August 31, 1997. Prior to
August 31, 1997, Alex. Brown & Sons Incorporated ("Alex. Brown")
-15-
<PAGE>
served as the Fund's distributor for the same rate of compensation and on
substantially the same terms as the current Distribution Agreement.
The Distribution Agreement provides that ICC Distributors shall;
(i) use reasonable efforts to sell Shares upon the terms and conditions
contained in the Distribution Agreement and the Fund's then current Prospectus;
(ii) use its best efforts to conform with the requirements of all federal and
state laws relating to the sale of the Shares; (iii) adopt and follow procedures
as may be necessary to comply with the requirements of the National Association
of Securities Dealers, Inc. and any other applicable self-regulatory
organization; (iv) perform its duties under the supervision of and in accordance
with the directives of the Fund's Board of Directors and the Fund's Articles of
Incorporation and By-Laws; and (v) provide the Fund's Board of Directors with a
written report of the amounts expended in connection with the Distribution
Agreement. ICC Distributors shall devote reasonable time and effort to effect
sales of Shares but shall not be obligated to sell any specific number of
Shares. The services of ICC Distributors are not exclusive and ICC Distributors
shall not be liable to the Fund or its shareholders for any error of judgment or
mistake of law, for any losses arising out of any investment, or for any action
or inaction of ICC Distributors in the absence of bad faith, willful misfeasance
or gross negligence in the performance of ICC Distributors' duties or
obligations under the Distribution Agreement or by reason of ICC Distributors'
reckless disregard of its duties and obligations under the Distribution
Agreement. The Distribution Agreement further provides that the Fund and ICC
Distributors will mutually indemnify each other for losses relating to
disclosures in the Fund's registration statement.
The Distribution Agreement may be terminated at any time upon 60
days' written notice by the Fund, without penalty, by the vote of a majority of
the Fund's Independent Directors or by a vote of a majority of the Fund's
outstanding Shares of the related class (as defined under "Capital Stock") or
upon 60 days' written notice by the Distributor and shall automatically
terminate in the event of an assignment. The Distribution Agreement has an
initial term of one year from the date of effectiveness. It shall continue in
effect thereafter with respect to each class of the Fund provided that it is
approved at least annually by (i) a vote of a majority of the outstanding voting
securities of the related class of the Fund or (ii) a vote of a majority of the
Fund's Board of Directors including a majority of the Independent Directors and,
with respect to each class of the Fund for which there is a plan of
distribution, so long as such plan of distribution is approved at least annually
by the Independent Directors in person at a meeting called for the purpose of
voting on such approval. The Distribution Agreement, including the form of Sub-
Distribution Agreement, was initially approved by the Board of Directors,
including a majority of the Independent Directors, on August 4, 1997 and most
recently on March __, 1998.
ICC Distributors 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. Any Sub-Distribution Agreement may be
terminated in the same manner as the Distribution Agreement and shall
automatically terminate in the event of an assignment.
In addition, with respect to Class A Shares and Class B Shares
the Fund may enter into Shareholder Servicing Agreements with certain financial
institutions, such as BT Alex. Brown and certain banks, to act as Shareholder
Servicing Agents, pursuant to which ICC Distributors will allocate a portion of
its distribution fee as compensation for such financial institutions' ongoing
shareholder services. The Fund may also enter into Shareholder Servicing
Agreements pursuant to which the Advisor, the Distributor or their respective
affiliates will provide compensation out of their own resources for 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
-16-
<PAGE>
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.
As compensation for providing distribution services as described
above, the Fund will pay ICC Distributors for the 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 Class B Shares, the Fund will pay ICC Distributors, 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, ICC Distributors expects to allocate up to
all of its fee to Participating Dealers and Shareholder Servicing Agents. With
respect to the Class B Shares, ICC Distributors expects to retain the entire
distribution fee as reimbursement for front-end payments to Participating
Dealers. In addition, with respect to the Class B Shares, the Fund will pay ICC
Distributors a shareholder servicing fee at an annual rate of .25% of the
average daily net assets of the Class B Shares. (See the Prospectus.) ICC
Distributors expects to allocate most of its shareholder servicing fee to
Participating Dealers and Shareholder Servicing Agents. ICC Distributors does
not receive compensation for distributing Institutional Shares.
As compensation for providing distribution and shareholder
services to the Fund for the last three fiscal years, the Fund's distributor
received aggregate fees in the following amounts:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
------------------------------
Fee 1997 1996 1995
--- ---- ---- ----
<S> <C> <C> <C>
12b-1 Fee $ 1,545,188(1) $ 1,350,396(3) $ 1,180,141(3)
Shareholder Servicing Fee $ 59,629(2) $ 32,943(3) $8,783(3,4)
(Class B Shares)
</TABLE>
- -------------------------------------------------------
(1) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $974,875 and ICC Distributors, the Fund's distributor
effective August 31, 1997, received $570,313.
(2) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $35,479 and ICC Distributors, the Fund's distributor
effective August 31, 1997, received $24,150.
(3) Fees received by Alex. Brown, the Fund's distributor for the fiscal years
ended December 31, 1996 and December 31, 1995.
(4) For the period from January 3, 1995 (commencement of operations of Class
B Shares) through December 31, 1995.
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 class of Shares (except Institutional Shares) (the "Plans"). Under the
Plans, the Fund pays a fee to ICC Distributors for distribution and other
shareholder servicing assistance as set forth in the Distribution Agreement, and
ICC Distributors is authorized to make payments out of its fees to Participating
Dealers and Shareholder Servicing Agents. The Plans 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
Independent Directors, by votes cast in person at a meeting called for
-17-
<PAGE>
such purpose. The Plans were most recently approved by the Board of Directors,
including a majority of the Independent Directors, on September 16, 1997.
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 Agreement without the approval of the shareholders of the Fund.
The Plans may be terminated at any time upon sixty days' notice, in either case
without penalty, by the vote of a majority of the Independent Directors or by a
vote of a majority of the outstanding class of Shares (as defined under "Capital
Stock").
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 ICC Distributors pursuant
to the Distribution Agreement and to broker-dealers pursuant to Sub-Distribution
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 Independent Directors shall be committed to the
discretion of the Independent Directors then in office.
If either Plan is terminated in accordance with its terms, the
obligation of the Fund to make payments to ICC Distributors pursuant to the Plan
will cease and the Fund will not be required to make any payments past the date
the Distribution Agreement terminates with respect to that class. In return for
payments received pursuant to the Plans for the last three fiscal years, the
Fund's distributor 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.
The Fund's distributor received commissions on the sale of Class
A and contingent deferred sales loads on the Class B Shares and from such
commissions and sales charges retained the following amounts:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
------------------------------
Class 1997 1996 1995
----- ---- ---- ----
Received Retained Received Retained Received Retained
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Class A $ (1) $ (3) $717,441(5) $255,062(5) $146,261(5) $73,667(5)
Commissions
Class B $ (2) $ (4) $377,125(5) $377,125(5) 78,146(5),(6) 78,146(5),(6)
Contingent
Deferred Sales
Charge
</TABLE>
- -------------
(1) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received ________ and ICC Distributors, the Fund's distributor
effective August 31, 1997 received _________.
(2) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received ________ and ICC Distributors, the Fund's distributor
effective August 31, 1997 received _________.
(3) Of commissions received, Alex. Brown retained _____________ and ICC
Distributors retained ______, respectively.
(4) Of sales charges received, Alex. Brown retained _____________ and
ICC Distributors retained ______, respectively.
(5) By Alex. Brown, the Fund's distributor for the fiscal years ended
December 31, 1996 and December 31, 1995.
(6) For the period from January 3, 1995 (commencement of operations of Class
B Shares) through December 31, 1995.
-18-
<PAGE>
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, 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 Independent 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 ICC, ABIM, or ICC
Distributors.
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, its affiliates and ICC Distributors.
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 the
Advisors or their affiliates in any transaction in which the Advisors or their
affiliates act as a principal, nor will the Fund buy or sell over-the-counter
securities with the Advisors or their affiliates acting as market maker.
If the Advisors or their affiliates are 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
-19-
<PAGE>
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 the Advisors or their
Affiliates higher commissions than another broker might have charged on
brokerage transactions for the Fund for brokerage or research services. The
allocation of orders among broker-dealers and the commission rates paid by the
Fund will be reviewed periodically by the Board.
Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions, on an agency basis,
through the Advisors or their Affiliates. 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 the
Advisors or their affiliates 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.
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.
-20-
<PAGE>
ICC directed transactions to broker-dealers and paid related
commissions because of research services in the following amounts:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Transactions Directed $312,672,931 $ 191,851,754 $ 288,166,553
Commissions Paid $406,249 $ 396,046 $ 386,539
</TABLE>
For the period from September 1, 1997 through December 31, 1997,
the Fund paid no brokerage commissions to BT Alex. Brown or its affiliates. For
the period from January 1, 1997 through August 31, 1997 and in the fiscal year
ended December 31, 1996, the Fund paid Alex. Brown brokerage commissions in the
aggregate amount of $0 and $7,000, which represented 0% and 1.9% of the Fund's
aggregate brokerage commissions for the periods and which were paid on
transactions that represented 0% and 2.9% 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 1940 Act) that the
Fund has acquired during its most recent fiscal year. As of December 31, 1997,
the Fund held a 6.25% repurchase agreement issued by Goldman Sachs valued at
$7,848,000. Goldman Sachs is a "regular broker or dealer" of the Fund.
9. CAPITAL STOCK
Under the Fund's Articles of Incorporation, the Fund has 85
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 four
classes of Shares: Flag Investors Communications Fund Class A Shares, Flag
Investors Communications Fund Class B Shares; Flag Investors Communications Fund
Class D Shares and Flag Investors Communications Fund Institutional Shares. The
Flag Investors Communications 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 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
-21-
<PAGE>
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
Bankers Trust Company ("Bankers Trust") has been retained to act
as custodian of the Fund's investments. Bankers Trust receives such compensation
from the Fund for its services as custodian as may be agreed to from time to
time by Bankers Trust and the Fund. For the period from September 22, 1997
through December 31, 1997, Bankers Trust accrued fees of $18,189. 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, 1997, such fees totaled $501,719.
ICC also provides certain accounting services to the Fund under a
Master Services Agreement between the Fund and ICC. As compensation for these
services, ICC receives an annual fee, calculated daily and paid monthly as shown
below.
Average Daily Net Assets Incremental Annual Accounting 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%
$ 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 reimburses 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 to the Fund for the
fiscal year ended December 31, 1997, ICC received fees of $119,938.
-22-
<PAGE>
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 later commencement of
operations of the series or class). 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 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.
-23-
<PAGE>
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, 1997 were as follows:
<TABLE>
<CAPTION>
One-Year Period Ended Five-Year Period Ended Ten-Year Period Ended Inception Through
December 31, 1997 December 31, 1997 December 31, 1997 December 31, 1997
----------------- ----------------- ----------------- -----------------
Ending Average Ending Average Ending Average Ending Average
Redeemable Annual Redeemable Annual Redeemable Annual Redeemable Annual
Value Total Value Total Value Total Value Total
Class Return Return Return Return
- ----- ---------- ------ ---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A $4,418.60 31.18% $8,185.40 17.05% $10,356.74 17.51% $12,450.50 * 17.46%*
January 18, 1984+
Class B $1,599.18 32.36% N/A N/A N/A N/A $2,200.68 26.14%
January 3, 1995+
Class D $1,696.38 33.90% N/A N/A N/A N/A $2,363.66 15.91%
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.
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 rate in fiscal year 1997 was
26% and in fiscal year 1996 was 20%.
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 December 31, 1997.
As of December 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). As of December 31, 1997, the Fund's ratings for
separate periods within its investment category
-24-
<PAGE>
of domestic equity funds, were three stars among 2,332 funds for three years,
three stars among 1,292 funds for five years and four stars among 676 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%.
14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
To Fund management's knowledge, no persons held beneficially or of
record 5% or more of the Fund's outstanding shares, as of February 2, 1998:
As of February 2, 1998, the Directors and officers as a group owned
less than 1% of the Fund's total outstanding shares.
15. FINANCIAL STATEMENTS
See next page.
-25-
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Statement of Net Assets December 31, 1997
<TABLE>
<CAPTION>
Market Value
Shares Security (Note 1)
- -------------------------------------------------------------------------------------
<S><C>
TELECOMMUNICATIONS INDUSTRY -- 92.4%
Common Stock -- 92.4%
320,408 AirTouch Communications Inc.* $ 13,316,957
600,000 America Online, Inc.* 53,512,500
320,000 Ameritech Corporation 25,760,000
416,608 Bell Atlantic Corporation 37,911,328
366,428 BlackBox Corporation* 12,962,390
200,000 Brooks Fiber Properties, Inc.* 11,000,000
172,500 CellStar Corporation* 3,428,437
1,130,100 Cincinnati Bell Inc. 35,033,100
469,700 Clearnet Communications Inc.-- Class A* 5,342,838
200,000 DSC Communications Corporation* 4,800,000
470,300 First Data Corporation 13,756,275
993,400 Frontier Corporation 23,903,687
500,000 General Communications, Inc.* 3,312,500
693,820 GTE Corporation 36,252,095
315,235 Lucent Technologies Inc. 25,179,396
200,000 MCI Communications Corporation 8,562,500
405,000 Mobile Telecommunication Technologies
Corporation* 8,910,000
265,000 Motorola Inc. 15,121,563
200,000 NEXTEL Communications Inc.-- Class A* 5,200,000
1,495,000 Novell Inc.* 11,212,500
520,347 Orbital Sciences Corporation* 15,480,323
200,000 Pacific Gateway Exchange, Inc.* 10,762,500
312,200 Qwest Communications International Inc.* 18,575,900
1,544,760 SBC Communications Inc. 113,153,670
250,000 Sprint Corporation 14,656,250
53,400 TCA Cable TV, Inc. 2,456,400
128,000 Telefonica de Espana SA ADR 11,656,000
285,000 Telefonos de Mexico SA ADR-- Series L 15,977,813
184,100 Teleglobe Inc. 5,592,038
573,000 U.S. West Communications Group 25,856,625
150,000 Vimpel-Communications-- SP ADR* 5,343,750
1,031,300 WorldCom, Inc.* 31,196,825
259,000 3Com Corporation* 9,048,813
------------
Total Common Stock of Telecommunications Industry
(Cost $336,509,211) 634,234,973
------------
</TABLE>
-26-
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (concluded) December 31, 1997
<TABLE>
<CAPTION>
Shares/ Market Value
Par (000) Security (Note 1)
- -------------------------------------------------------------------------------------
<S><C>
NON-TELECOMMUNICATIONS INDUSTRY - 6.5%
Common Stock -- 5.7%
626,900 Alexander Haagen Properties, Inc. $ 10,931,569
620,548 Conseco Inc. 28,196,149
------------
Total Common Stock of Non-Telecommunications
Industry (Cost $10,960,927) 39,127,718
------------
Corporate Bond -- 0.8%
$5,000 HMH Properties, 9.5%, 5/15/05
(Cost $4,917,676) 5,325,000
------------
Total Non-Telecommunications Industry
(Cost $15,878,603) 44,452,718
------------
REPURCHASE AGREEMENT -- 1.1%
7,848 Goldman Sachs & Co., 6.25%
Dated 12/31/97, to be repurchased at $7,850,725
on 1/2/98, collateralized by U.S. Treasury Notes
with a market value of $8,005,743.
(Cost $7,848,000) 7,848,000
------------
Total Investments in Securities -- 100.0%
(Cost $360,235,814)** 686,535,691
Liabilities in Excess of Other Assets, Net-- (0.0)% (265,252)
------------
Net Assets-- 100.0% $686,270,439
============
</TABLE>
-27-
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net Asset Value Per:
Class A Share
($622,865,153 / 32,149,145 shares outstanding) $19.37(1)
======
Class B Share
($32,474,116 / 1,689,565 shares outstanding) $19.22(2)
======
Class D Share
($30,931,170 / 1,597,845 shares outstanding) $19.36(3)
======
Maximum Offering Price Per:
Class A Share
($19.37 / 0.955) $20.28
======
Class B Share $19.22
======
Class D Share
($19.36 / 0.985) $19.65
======
- ------
* Non-income producing security.
** Aggregate cost for federal tax purposes was $358,380,658.
(1) Redemption value is $19.37.
(2) Redemption value is $18.45 following a 4.00% maximum contingent deferred
sales charge.
(3) Redemption value is $19.17 following a 1.00% maximum contingent deferred
sales charge.
See Notes to Financial Statements.
-28-
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Statement of Operations
<TABLE>
<CAPTION>
For the
Year Ended
December 31,
- -----------------------------------------------------------------------------------
1997
<S><C>
Investment Income (Note 1):
Dividends $ 12,090,126
Interest 1,073,514
Less: Foreign taxes withheld (119,424)
------------
Total income 13,044,216
------------
Expenses:
Investment advisory fee (Note 2) 4,172,769
Distribution fee (Note 2) 1,775,102
Transfer agent fee (Note 2) 501,719
Accounting fee (Note 2) 119,938
Custodian fee (Note 2) 65,443
Directors' pension 62,142
Printing and postage 61,407
Registration fees 34,821
Legal 32,727
Audit 29,988
Directors' fees 28,152
Miscellaneous 9,962
------------
Total expenses 6,894,170
------------
Net investment income 6,150,046
------------
Realized and unrealized gain/(loss) on investments:
Net realized gain from security transactions 53,763,750
Change in unrealized appreciation or depreciation of investments 132,712,907
------------
Net gain on investments 186,476,657
------------
Net increase in net assets resulting from operations $192,626,703
============
</TABLE>
See Notes to Financial Statements.
-29-
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended December 31,
- ------------------------------------------------------------------------------------
1997 1996
<S><C>
Increase/(Decrease) in Net Assets:
Operations:
Net investment income $ 6,150,046 $ 9,222,665
Net realized gain from security
transactions 53,763,750 44,618,521
Change in unrealized appreciation or
depreciation of investments 132,712,907 13,950,633
------------ ------------
Net increase in net assets resulting
from operations 192,626,703 67,791,819
------------ ------------
Distributions to Shareholders from:
Net investment income and short-term gains:
Class A Shares (12,292,592) (8,654,688)
Class B Shares (438,661) (157,647)
Class D Shares (560,042) (410,330)
Net realized mid-term and long-term gains:
Class A Shares (45,697,778) (29,498,290)
Class B Shares (2,233,281) (1,015,396)
Class D Shares (2,314,208) (1,607,601)
------------ ------------
Total distributions (63,536,562) (41,343,952)
------------ ------------
Capital Share Transactions (Note 3):
Proceeds from sale of shares 32,057,019 36,388,229
Value of shares issued in reinvestment
of dividends 52,863,614 33,751,356
Cost of shares repurchased (78,344,677) (77,258,035)
------------ ------------
Increase/(decrease) in net assets derived from
capital share transactions 6,575,956 (7,118,450)
------------ ------------
Total increase in net assets 135,666,097 19,329,417
Net Assets:
Beginning of year 550,604,342 531,274,925
------------ ------------
End of year $686,270,439 $550,604,342
============ ============
</TABLE>
See Notes to Financial Statements.
-30-
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Financial Highlights -- Class A Shares
(For a share outstanding throughout each year)
For the
Year Ended
December 31,
- -------------------------------------------------------------------------------
1997
Per Share Operating Performance:
Net asset value at beginning of year $ 15.59
--------
Income from Investment Operations:
Net investment income 0.27
Net realized and unrealized gain/(loss) on investments 5.41
--------
Total from Investment Operations 5.68
--------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.40)
Distributions from net realized mid-term and long-term gains (1.50)
--------
Total distributions (1.90)
--------
Net asset value at end of year $ 19.37
========
Total Return(1) 37.36%
Ratios to Average Daily Net Assets:
Expenses 1.11%
Net investment income 1.07%
Supplemental Data:
Net assets at end of year (000) $622,865
Portfolio turnover rate 26%
Average commissions per share(4) $ 0.0598
- -------
(1) Total return excludes the effect of sales charge.
(2) Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 0.99%, 0.99% and 0.98% for the
years ended December 31, 1995, 1994 and 1993, respectively.
(3) 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% and 3.06%
for the years ended December 31, 1995, 1994 and 1993, respectively.
(4) 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.
-31-
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of year $ 14.87 $ 12.30 $ 13.70 $ 12.20
------- ------- ------- -------
Income from Investment Operations:
Net investment income 0.27 0.40 0.41 0.42
Net realized and unrealized gain/(loss) on investments 1.67 3.58 (1.27) 1.78
------- ------- ------- -------
Total from Investment Operations 1.94 3.98 (0.86) 2.20
------- ------- ------- -------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.38) (0.41) (0.44) (0.42)
Distributions from net realized mid-term and long-term gains (0.84) (1.00) (0.10) (0.28)
------- ------- ------- -------
Total distributions (1.22) (1.41) (0.54) (0.70)
------- ------- ------- -------
Net asset value at end of year $ 15.59 $ 14.87 $ 12.30 $ 13.70
======= ======= ======= =======
Total Return(1) 13.46% 33.44% (6.32)% 18.12%
Ratios to Average Daily Net Assets:
Expenses 1.14% 0.93%(2) 0.92%(2) 0.92%(2)
Net investment income 1.74% 2.85%(3) 3.14%(3) 3.12%(3)
Supplemental Data:
Net assets at end of year (000) $505,371 $492,454 $435,805 $469,163
Portfolio turnover rate 20% 24% 23% 14%
Average commissions per share(4) $ 0.0696 -- -- --
</TABLE>
See Notes to Financial Statements.
-32-
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Financial Highlights -- Class B Shares
(For a share outstanding throughout each period)
For the
Year Ended
December 31,
- --------------------------------------------------------------------------------
1997
Per Share Operating Performance:
Net asset value at beginning of period $ 15.51
-------
Income from Investment Operations:
Net investment income 0.18
Net realized and unrealized gain on investments 5.34
-------
Total from Investment Operations 5.52
-------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.31)
Distributions from net realized mid-term and long-term gains (1.50)
-------
Total distributions (1.81)
-------
Net asset value at end of period $ 19.22
=======
Total Return(2) 36.36%
Ratios to Average Daily Net Assets:
Expenses 1.86%
Net investment income 0.29%
Supplemental Data:
Net assets at end of period (000) $32,474
Portfolio turnover rate 26%
Average commissions per share(6) $0.0598
- ---------
(1) Commencement of operations.
(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 1.74% (annualized) for the period
ended December 31, 1995.
(4) 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.
(5) Annualized.
(6) 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.
-33-
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
For the Year January 3, 1995(1)
Ended December 31, through December 31,
- ---------------------------------------------------------------------------------------------------------
1996 1995
<S> <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:
Distributions from net investment income
and net realized short-term gains (0.30) (0.31)
Distributions from net realized mid-term and 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(2) 12.60% 32.42%
Ratios to Average Daily Net Assets:
Expenses 1.92% 1.70%(3,5)
Net investment income 0.95% 2.13%(4,5)
Supplemental Data:
Net assets at end of period (000) $17,661 $7,504
Portfolio turnover rate 20% 24%
Average commissions per share(6) $0.0696 --
</TABLE>
See Notes to Financial Statements.
-34-
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- -----------------------------------------------------------------------------
Financial Highlights -- Class D Shares
(For a share outstanding throughout each period)
For the
Year Ended
December 31,
- -----------------------------------------------------------------------------
1997
Per Share Operating Performance:
Net asset value at beginning of period $ 15.59
-------
Income from Investment Operations:
Net investment income 0.23
Net realized and unrealized gain/(loss) on investments 5.40
-------
Total from Investment Operations 5.63
-------
Less Distributions:
Distributions from net investment income
and net realized short-term gains (0.36)
Distributions in excess of net investment income --
Distributions from net realized long-term gains (1.50)
-------
Total distributions (1.86)
-------
Net asset value at end of period $ 19.36
=======
Total Return(2) 36.94%
Ratios to Average Daily Net Assets:
Expenses 1.46%
Net investment income 0.73%
Supplemental Data:
Net assets at end of period (000) $30,931
Portfolio turnover rate 26%
Average commissions per share(6) $ 0.0598
- --------------------------------------------------------------------------------
(1) Commencement of operations.
(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 1.34%, 1.34% and 1.31% for the
years ended December 31, 1995, 1994 and the period ended December 31, 1993,
respectively.
(4) Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 2.44%, 2.74% and 1.98%
for the years ended December 31, 1995, 1994 and the period ended December
31, 1993, respectively.
(5) Annualized.
(6) 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.
-35-
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
April 6, 1993(1)
through
For the Year Ended December 31, December 31,
- -------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
<S> <C>
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(2) 13.00% 32.91% (6.13)% 8.01%
Ratios to Average Daily Net Assets:
Expenses 1.49% 1.28%(3) 1.27%(3) 1.27%(3,5)
Net investment income 1.40% 2.50%(4) 2.81%(4) 2.73%(4,5)
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(6) $0.0696 -- -- --
</TABLE>
See Notes to Financial Statements.
-36-
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements
NOTE 1--Significant Accounting Policies
Flag Investors Telephone Income Fund, Inc. (the "Fund"), which is organized
as a Maryland Corporation and commenced operations January 18, 1984, is
registered under the Investment Company Act of 1940 as a non-diversified,
open-end investment management company. On January 18, 1984 (the exchange date),
investors received five Fund shares for each American Telephone & Telegraph
Company (AT&T) share, with rights to the divested Bell regional operating
companies attached, in a tax-free exchange. The Fund's objective is 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.
The Fund consists of three share classes: Class A Shares, which commenced
January 18, 1984; Class D Shares, which commenced April 6, 1993; and Class B
Shares, which commenced January 3, 1995. The Fund has not sold Class D Shares
since November 18, 1994, but existing shareholders may reinvest their dividends.
The Class A, Class B and Class D Shares are subject to different sales
charges. The Class A Shares have a front-end sales charge, the Class B Shares
have a contingent deferred sales charge and the Class D Shares have both a
front-end sales charge and a contingent deferred sales charge. In addition, each
class has a different distribution fee.
When preparing the Fund's financial statements, management makes estimates
and assumptions to comply with generally accepted accounting principles. These
estimates affect 1) the assets and liabilities that we report at the date of the
financial statements; 2) the contingent assets and liabilities that we disclose
at the date of the financial statements; and 3) the revenues and expenses that
we report for the period. Our estimates could be different from the actual
results. The Fund's significant accounting policies are:
A. SECURITY VALUATION--The Fund values a portfolio security that is
primarily traded on a national exchange by using the last price reported
for the day. If there are no sales or the security is not traded on a
listed exchange, the Fund values the security at the average of the last
bid and asked prices in the over-the-counter market. When a market
quotation is unavailable, the Investment Advisor determines a fair value
using procedures that the Board of Directors establishes and monitors.
-37-
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
NOTE 1--continued
As of December 31, 1997, there were no Board valued securities. The Fund
values short-term obligations with maturities of 60 days or less at
amortized cost.
B. REPURCHASE AGREEMENTS--The Fund may enter into tri-party repurchase
agreements with broker-dealers and domestic banks. A repurchase
agreement is a short-term investment in which the Fund buys a debt
security that the broker agrees to repurchase at a set time and price.
The third party, which is the broker's custodial bank, holds the
collateral in a separate account until the repurchase agreement matures.
The agreement ensures that the collateral's market value, including any
accrued interest, is sufficient if the broker defaults. The Fund's
access to the collateral may be delayed or limited if the broker
defaults and the value of the collateral declines or if the broker
enters into an insolvency proceeding.
C. FEDERAL INCOME TAX--The Fund determines its distributions according to
income tax regulations, which may be different from generally accepted
accounting principles. As a result, the Fund occasionally makes
reclassifications within its capital accounts to reflect income and
gains that are available for distribution under income tax regulations.
The Fund is organized as a regulated investment company. As long as it
maintains this status and distributes to its shareholders substantially
all of its taxable net investment income and net realized capital gains,
it will be exempt from most, if not all, federal income and excise
taxes. As a result, the Fund has made no provisions for federal income
taxes.
D. SECURITIES TRANSACTIONS, INVESTMENT INCOME, DISTRIBUTIONS AND OTHER--The
Fund uses the trade date to account for security transactions and the
specific identification method for financial reporting and income tax
purposes to determine the cost of investments sold or redeemed. For
financial reporting purposes, the cost includes the value of the
securities received in the exchange. For income tax purposes, the tax
cost is based on the AT&T shares in the hands of the exchanging AT&T
shareholders on the exchange date. Interest income is recorded on an
accrual basis and includes the pro rata amortization of premiums and
accretion of discounts when appropriate. Income and common expenses are
allocated to each class based on its respective average net assets.
Class specific expenses are charged directly to each class. Dividend
income and distributions to shareholders are recorded on the ex-dividend
date.
-38-
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
NOTE 2--Investment Advisory Fees, Transactions with Affiliates and Other Fees
Investment Company Capital Corp. ("ICC"), a subsidiary of Bankers Trust New
York Corporation, is the Fund's investment advisor and Alex. Brown Investment
Management ("ABIM") is the Fund's subadvisor. As compensation for its advisory
services, the Fund pays ICC an annual fee based on the Fund's average daily net
assets. This fee is calculated daily and paid monthly at the following annual
rates: 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 the amount over $1.5
billion.
As compensation for its subadvisory services, ICC pays ABIM a fee from its
advisory fee based on the Fund's average daily net assets. This fee is
calculated daily and paid monthly at the following annual rates: 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 the amount over $1.5 billion.
Certain officers and directors of the Fund are also officers or directors
of the Fund's investment advisor.
As compensation for its accounting services, the Fund pays ICC an annual
fee that is calculated daily and paid monthly from the Fund's average daily net
assets. The Fund paid ICC $119,938 for accounting services for the year ended
December 31, 1997.
As compensation for its transfer agent services, the Fund pays ICC a per
account fee that is calculated and paid monthly. The Fund paid ICC $501,719 for
transfer agent services for the year ended December 31, 1997.
Effective September 22, 1997, Bankers Trust Company became the Fund's
custodian. Prior to September 22, 1997, PNCBank served as the Fund's custodian.
From September 22, 1997 to December 31, 1997, the Fund accrued $18,189 in
custody expenses.
As compensation for providing distribution services, the Fund pays ICC
Distributors ("ICC Distributors"), which is not related to ICC, an annual fee
that is calculated daily and paid monthly. This fee is paid at an annual rate
equal to 0.25% of the Class A Shares' average daily net assets, 1.00% (including
a
-39-
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
NOTE 2--concluded
0.25% shareholder servicing fee) of the Class B Shares' average daily net assets
and 0.60% of the Class D Shares' average daily net assets. For the year ended
December 31, 1997, distribution fees aggregated $1,775,102, of which $1,366,303
was attributable to the Class A Shares, $238,514 was attributable to the Class B
Shares and $170,285 was attributable to the Class D Shares. Prior to September
1, 1997, Alex. Brown & Sons Incorporated served as the Fund's distributor for
the same compensation and on substantially the same terms as ICC Distributors
and earned $497, 863 for Class A Shares, $96,600 for Class B Shares and $60,149
for Class D Shares.
The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the year ended
December 31, 1997 was $62,142, and the accrued liability was $78,065.
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, 5 million Class B, 3 million Class D and 2
million undesignated). Transactions in shares of the Fund were as follows:
Class A Shares
--------------------------------
For the For the
Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996
------------- -------------
Shares sold 1,332,424 1,730,953
Shares issued to shareholders on
reinvestment of dividends 2,595,376 2,022,300
Shares redeemed (4,200,351) (4,451,593)
------------ ------------
Net decrease in shares outstanding (272,551) (698,340)
============ ============
Proceeds from sale of shares $ 23,153,177 $ 26,738,906
Value of reinvested dividends 47,729,473 30,812,547
Cost of shares redeemed (71,340,867) (69,090,064)
------------ ------------
Net decrease from capital share transactions $ (458,217) $(11,538,611)
============ ============
-40-
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (concluded)
NOTE 3--concluded
Class B Shares
--------------------------------
For the For the
Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996
------------- -------------
Shares sold 506,254 628,129
Shares issued to shareholders on
reinvestment of dividends 138,015 73,229
Shares redeemed (93,315) (68,656)
----------- -----------
Net increase in shares outstanding 550,955 632,702
=========== ===========
Proceeds from sale of shares $ 8,903,842 $ 9,649,323
Value of reinvested dividends 2,533,345 1,109,830
Cost of shares redeemed (1,625,592) (1,071,919)
----------- -----------
Net increase from capital share transactions $ 9,811,595 $ 9,687,234
=========== ===========
Class D Shares
-------------------------------
For the For the
Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996
------------- -------------
Shares sold -- --
Shares issued to shareholders on
reinvestment of dividends 141,577 120,074
Shares redeemed (312,350) (456,901)
----------- -----------
Net decrease in shares outstanding (170,773) (336,827)
=========== ===========
Proceeds from sale of shares $ -- $ --
Value of reinvested dividends 2,600,796 1,828,979
Cost of shares redeemed (5,378,218) (7,096,052)
----------- -----------
Net decrease from capital share transactions $(2,777,422) $(5,267,073)
=========== ===========
-41-
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
NOTE 4--Investment Transactions
Excluding short-term and U.S. government obligations, purchases of
investment securities aggregated $151,901,940 and sales of investment securities
aggregated $203,875,781 for the year ended December 31, 1997.
On December 31, 1997, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $328,155,033
of which $331,656,230 related to appreciated securities and $3,501,197 related
to depreciated securities.
NOTE 5--Net Assets
On December 31, 1997, net assets consisted of:
Paid-in capital:
Class A Shares $302,344,862
Class B Shares 26,428,649
Class D Shares 20,882,375
Accumulated net realized gain from security transactions 10,314,676
Unrealized appreciation of investments 326,299,877
------------
$686,270,439
============
NOTE 6--Shareholder Meeting
Alex. Brown Incorporated, which was the parent corporation of the Fund's
investment advisor, merged into a subsidiary of Bankers Trust New York
Corporation on September 1, 1997. Due to the change in control of Alex. Brown
Incorporated, the Flag Investors Telephone Income Fund held a special meeting
for its shareholders on August 14, 1997. During the meeting, shareholders
approved a new Investment Advisory Agreement between the Fund and ICC and a new
Sub-Advisory Agreement among the Fund, ICC and ABIM. The new agreements are
substantially the same as the former agreements.
-42-
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND
- --------------------------------------------------------------------------------
Report of Independent Accountants
To the Shareholders and Board of Directors of
Flag Investors Telephone Income Fund, Inc.
We have audited the accompanying statement of net assets of Flag Investors
Telephone Income Fund, Inc., ("the Fund"), as of December 31, 1997 and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended and the
financial highlights for each of the five years in the period then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
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, 1997 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, 1997, the results of
its operations for the year then ended, the changes in its net assets and its
financial highlights for each of the five years in the period then ended in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
January 29, 1998
-43-
<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, 1988 through December 31,
1997
- Statement of Net Assets as of December 31,
1997
- Statement of Operations for the fiscal year
ended December 31, 1997
- Statement of Changes in Net Assets for the
fiscal years ended December 31, 1997 and
December 31, 1996
- 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;(1)
(b) Articles Supplementary, as filed with
the Maryland Department of Assessments
and Taxation on September 13, 1990;(1)
(c) Articles Supplementary, as filed with
the Maryland Department of Assessments
and Taxation on December 27, 1993;(1)
(d) Articles Supplementary, as filed with
the Maryland Department of Assessments
and Taxation on November 18, 1994;(1)
(e) Articles Supplementary, as filed with
the Maryland Department of Assessments
and Taxation on January 20, 1998
(adding the Flag Investors
Institutional Shares), filed herewith;
(2) By-Laws, as amended through December 18,
1996;(2)
(3) None;
<PAGE>
(4) (a) Specimen Security with respect to
Flag Investors Telephone Income Fund
Class A Shares;(3)
(b) Specimen Security with respect to the
Flag Investors Telephone Income Fund
Class D Shares;(3)
(c) Specimen Security with respect to Flag
Investors Telephone Income Fund Class
B Shares;(3)
(5) (a) Investment Advisory Agreement dated as
of September 1, 1997 between
Registrant and Investment Company
Capital Corp., filed herewith;
(b) Sub-Advisory Agreement dated as of
September 1, 1997 among Registrant,
Investment Company Capital Corp. and
Alex. Brown Investment Management,
filed herewith;
(6) (a) Distribution Agreement dated as of
August 31, 1997 between Registrant and
ICC Distributors, Inc., filed
herewith;
(b) Form of Sub-Distribution Agreement
between ICC Distributors, Inc. and
Participating Broker-Dealers, filed
herewith;
(c) Form of Shareholder Servicing
Agreement between Registrant and
Shareholder Servicing Agents, filed
herewith;
(7) None;
(8) (a) Form of Custodian Agreement between
Registrant and Bankers Trust Company,
filed herewith;
(b) Master Services Agreement between
Registrant and Investment Company
Capital Corp. with Appendices for the
provision of Accounting and Transfer
Agency Services;(1)
(9) Group Purchase Plan Application;(1)
(10) Opinion of counsel;(1)
(11) (a) Consent of Coopers & Lybrand L.L.P.,
filed herewith;
(b) Consents to being named as
Director;(1)
(12) None;
(13) Subscription Agreement re: initial $100,000
capital;(1)
(14) None;
(15) (a) Distribution Plan;(1)
<PAGE>
(b) Distribution Plan with respect to the
Flag Investors Telephone Income Fund
Class D Shares;(1)
(c) Distribution Plan with respect to the
Flag Investors Telephone Income Fund
Class B Shares;(1)
(d) Amended Distribution Plan (Flag
Investors Class A Shares), filed
herewith;
(e) Amended Distribution Plan (Flag
Investors Class B Shares), filed
herewith;
(f) Amended Distribution Plan (Flag
Investors Class D Shares), filed
herewith;
(16) Schedule of Computation of Performance
Quotations (unaudited);(1)
(18) (a) Rule 18f-3 Plan;(1)
(b) Amended Rule 18f-3 Plan, as amended
through March 26, 1997;(2)
(c) Amended Rule 18f-3 Plan, filed
herewith
(24) Powers of Attorney, filed herewith.
(27) Financial Data Schedule, filed herewith.
- ------------------
1 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 Incorporated by reference to Post-Effective Amendment No. 20 to Registrant's
Registration Statement on Form N-1A (Registration No. 2-87336), filed with
the Securities and Exchange Commission via EDGAR on April 28, 1997.
3 Incorporated by reference to Exhibit 1 (Articles of Incorporation), as
amended to date to Post Effective Amendment No. 19 and this Post Effective
Amendment No. 21 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 and February 27, 1998 and Exhibit 2
(By-Laws) as amended to date, to Post Effective Amendment No. 20 to such
Registration Statement, filed with the Securities and Exchange Commission
via EDGAR on April 28, 1997.
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.
<PAGE>
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.
The following information is given as of February 2, 1998:
Title of Class Number of Record Holders
-------------- ------------------------
Shares of Common Stock
Class A 22,846
Class B 2,004
Class D 1,849
Institutional Shares 0
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
<PAGE>
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 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) ICC Distributors, Inc. acts as distributor for BT 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.
<PAGE>
(b)
Names and Principal Position and Offices Position and Offices
Business Address* with Principal Underwriter with Registrant
- --------------------- -------------------------- ---------------
John Y. Keefer President None
Sara M. Morris Treasurer None
David I. Goldstein Secretary None
Richard C. Butt Vice President None
Margaret J. Fenderson Assistant Treasurer None
Dana L. Lukens Assistant Secretary None
Nanette K. Chern Chief Compliance Officer None
- ---------------------
* Two Portland Square
Portland, Maine 04101
(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, dividend disbursing agent and accounting
services provider, 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 Alex. Brown
Investment Management, Registrant's sub-advisor, One South Street,
Baltimore, Maryland 21202, by Registrant's distributor, ICC
Distributors, Inc., Two Portland Square, Portland, Maine 04101, or by
the Registrant's custodian, Bankers Trust Company, 130 Liberty Street,
New York, New York 10006.
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.
<PAGE>
(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.
<PAGE>
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment No. 21 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 27th day of February, 1998.
FLAG INVESTORS TELEPHONE
INCOME FUND, INC.
By: /s/ Harry Woolf
----------------------------
Harry Woolf
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:
<TABLE>
<CAPTION>
<S> <C> <C>
*
- -----------------------------
Truman T. Semans Chairman and Director February 27, 1998
*
- -----------------------------
James J. Cunnane Director February 27, 1998
*
- -----------------------------
Richard T. Hale Director February 27, 1998
*
- -----------------------------
John F. Kroeger Director February 27, 1998
*
- -----------------------------
Louis E. Levy Director February 27, 1998
*
- -----------------------------
Eugene J. McDonald Director February 27, 1998
*
- -----------------------------
Rebecca W. Rimel Director February 27, 1998
*
- -----------------------------
Carl W. Vogt Director February 27, 1998
/s/ Harry Woolf
- -----------------------------
Harry Woolf President February 27, 1998
/s/ Joseph A. Finelli
- -----------------------------
Joseph A. Finelli Chief Financial February 27, 1998
and Accounting
Officer
*By: /s/ Amy M. Olmert
- -----------------------------
Amy M. Olmert
Attorney-In-Fact
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EDGAR
Exhibit
Number Description
- ------ -----------
<S> <C> <C>
(1)(a) Articles of Incorporation;(1)
(1)(b) Articles Supplementary, as filed with the Maryland Department of Assessments
and Taxation on September 13, 1990;
(1)(c) Articles Supplementary, as filed with the Maryland Department of Assessments
and Taxation on December 27, 1993;(1)
(1)(d) Articles Supplementary, as filed with the Maryland Department of Assessments
and Taxation on November 18, 1994;(1)
EX-99.B (1)(e) Articles Supplementary, as filed with the Maryland Department of Assessments
and Taxation on January 20, 1998 (adding the Flag Investors Institutional
Shares), filed herewith;
(2) By-Laws, as amended through December 18, 1996;(2)
(3) None;
(4)(a) Specimen Security with respect to Flag Investors Telephone Income Fund
Class A Shares;(3)
(4)(b) Specimen Security with respect to the Flag Investors Telephone Income Fund
Class D Shares;(3)
(4)(c) Specimen Security with respect to Flag Investors Telephone Income Fund
Class B Shares;(3)
EX-99.B (5)(a) Investment Advisory Agreement dated as of September 1, 1997 between
Registrant and Investment Company Capital Corp., filed herewith;
EX-99.B (5)(b) Sub-Advisory Agreement dated as of September 1, 1997 among Registrant,
Investment Company Capital Corp. and Alex. Brown Investment Management,
filed herewith;
EX-99.B (6)(a) Distribution Agreement dated as of August 31, 1997 between Registrant and
ICC Distributors, Inc., filed herewith;
EX-99.B (6)(b) Form of Sub-Distribution Agreement between ICC Distributors, Inc. and
Participating Broker-Dealers, filed herewith;
EX-99.B (6)(c) Form of Shareholder Servicing Agreement between Registrant and Shareholder
Servicing Agents, filed herewith;
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(7) None;
EX-99.B (8)(a) Form of Custodian Agreement between Registrant and Bankers Trust
Company, filed herewith;
(8)(b) Master Services Agreement between Registrant and Investment Company
Capital Corp. with Appendices for the provision of Accounting and Transfer
Agency Services;(1)
(9) Group Purchase Plan Application;(1)
(10) Opinion of counsel;(1)
EX-99.B (11)(a) Consent of Coopers & Lybrand L.L.P., filed herewith;
(11)(b) Consents to being named as Director;(1)
(12) None;
(13) Subscription Agreement re: initial $100,000 capital;(1)
(14) None
(15)(a) Distribution Plan;(1)
(15)(b) Distribution Plan with respect to the Flag Investors Telephone Income Fund
Class D Shares;(1)
(15)(c) Distribution Plan with respect to the Flag Investors Telephone Income Fund
Class B Shares;(1)
EX-99.B (15)(d) Amended Distribution Plan (Flag Investors Class A Shares), filed herewith;
EX-99.B (15)(e) Amended Distribution Plan (Flag Investors Class B Shares), filed herewith;
EX-99.B (15)(f) Amended Distribution Plan (Flag Investors Class D Shares), filed herewith;
(16) Schedule of Computation of Performance Quotations (unaudited);(1)
(18) (a)Rule 18f-3 Plan;(1)
(18)(b) Amended Rule 18f-3 Plan, as amended through March 26,
1997;(2)
EX-99.B (18)(c) Amended Rule 18f-3 Plan, filed herewith
EX-99.B (24) Powers of Attorney, filed herewith.
EX-27 (27) Financial Data Schedule filed herewith.
</TABLE>
- --------------------------------------------------------------------------------
(1) 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.
<PAGE>
(2) Incorporated by reference to Post-Effective Amendment No. 20 to Registrant's
Registration Statement on Form N-1A (Registration No. 2-87336), filed with
the Securities and Exchange Commission via EDGAR on April 28, 1997.
(3) Incorporated by reference to Exhibit 1 (Articles of Incorporation), as
amended to date to Post Effective Amendment No. 19 and this Post Effective
Amendment No. 21 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 and February 27, 1998 and Exhibit 2
(By-Laws) as amended to date, to Post Effective Amendment No. 20 to such
Registration Statement, filed with the Securities and Exchange Commission
via EDGAR on April 28, 1997.
<PAGE>
EXHIBIT 99.B(1)(e)
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
ARTICLES SUPPLEMENTARY
FLAG INVESTORS TELEPHONE INCOME FUND, INC.(the "Corporation") having
its principal office in the City of Baltimore, certifies that:
FIRST: The Corporation's Board of Directors in accordance with
Section 2-105(c) of the Maryland General Corporation Law at a meeting
duly convened and held on December 18, 1997 has adopted a resolution
designating a new class of shares and increasing the total number of
shares of capital stock which the Corporation has the authority to
issue to eighty-five million (85,000,000) shares of Common Stock, par
value $.001 per share, having an aggregate par value of eighty-five
thousand dollars ($85,000.00), all of which shares are designated as
follows: sixty million (60,000,000) shares are designated "Flag
Investors Telephone Income Fund Class A Shares" (the "Class A Shares"),
five million (5,000,000) shares are designated "Flag Investors
Telephone Income Fund Class B Shares" (the "Class B Shares"), three
million (3,000,000) shares are designated "Flag Investors Telephone
Income Fund Class D Shares" (the "Class D Shares"), fifteen million
(15,000,000) shares are designated "Flag Investors Telephone Income
Fund Institutional Shares"(the "Institutional Shares") and two million
(2,000,000) shares remain undesignated.
SECOND: Immediately before the increase in authorized shares
and the designation of Institutional Shares pursuant to these Articles
Supplementary, the Corporation was authorized to issue seventy million
(70,000,000) shares of Common Stock, par value $.001 per share, having
an aggregate par value of seventy thousand dollars ($70,000.00), of
which sixty million (60,000,000) shares were designated "Flag Investors
Telephone Income Fund Class A Shares",
<PAGE>
five million (5,000,000) shares were designated "Flag Investors
Telephone Income Fund Class B Shares", three million (3,000,000) shares
were designated "Flag Investors Telephone Income Fund Class D Shares"
and two million (2,000,000) shares remained undesignated.
THIRD: The Corporation is registered as an open-end investment
company under the Investment Company Act of 1940, as amended.
IN WITNESS WHEREOF, Flag Investors Telephone Income Fund, Inc. has
caused these Articles Supplementary to be executed by its President and its
corporate seal to be affixed and attested by its Secretary on this 19th day of
December, 1997.
[CORPORATE SEAL]
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
By: /s/ Harry Woolf
-----------------------------------
Harry Woolf
President
Attest: /s/ Amy M. Olmert
-----------------------------
Secretary
The undersigned, President of FLAG INVESTORS TELEPHONE INCOME FUND,
INC., who executed on behalf of said corporation the foregoing Articles
Supplementary to the Articles of Incorporation of which this certificate is made
a part, hereby acknowledges, in the name and on behalf of said corporation, the
foregoing Articles Supplementary to the Articles of Incorporation to be the
corporate act of said corporation and further certifies that, to the best of his
knowledge, information and belief, the matters and facts set forth therein with
respect to the approval thereof are true in all material respects, under the
penalties of perjury.
/s/ Harry Woolf
-----------------------------------
Harry Woolf
President
<PAGE>
EX-99.B(5)(a)
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT is made as of the 1st day of September, 1997 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,
non-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 into 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 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 Advisor. 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
-2-
<PAGE>
which they engage, or with respect to securities which the Advisor
considers desirable for inclusion in the Fund's portfolio;
(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
-3-
<PAGE>
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.
Consistent with the Conduct Rules 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;
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<PAGE>
(d) the provisions 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 and the Advisor as follows:
(a) The Advisor shall, subject to compliance with
applicable banking regulations, furnish, at its expense and without
cost to the Fund, the services of 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. Payment of the Advisor's compensation for the preceding month shall be
made as promptly as possible.
10. 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
-6-
<PAGE>
serving as partners, officers, trustees or directors of any other firm, trust or
corporation, including other investment companies.
11. 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 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, 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).
14. 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.
15. 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 One South Street, Baltimore,
Maryland 21202.
16. 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
-7-
<PAGE>
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.
-8-
<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/ Amy M. Olmert By: /s/ Harry Woolf
- --------------------------- -------------------------------
Amy M. Olmert Name: Harry Woolf
Title: President
Attest: INVESTMENT COMPANY CAPITAL
CORP.
/s/ Amy M. Olmert By: /s/ Edward J. Veilleux
- --------------------------- -------------------------------
Amy M. Olmert Name: Edward J. Veilleux
Title: Executive Vice President
-9-
<PAGE>
EX-99.B(5)(b)
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
SUB-ADVISORY AGREEMENT
THIS AGREEMENT is made as of the 1st day of September, 1997 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, non-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 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");
<PAGE>
(c) Resolutions of the Fund's Board of Directors and
shareholders authorizing the appointment of the Sub-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 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 Conduct Rules 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, subject to compliance with
applicable banking regulations, 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
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<PAGE>
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.
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. Payment of the
Sub-Advisor's compensation for the preceding month shall be made as promptly as
possible.
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 Agreement upon the request of the Fund's Board of
Directors. Such services will be performed
-5-
<PAGE>
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. 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 12
hereof, for two years from the date hereof.
11. 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.
12. 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 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).
13. 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.
-6-
<PAGE>
14. 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.
15. 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 One South
Street, Baltimore, Maryland 21202.
16. 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.
-7-
<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/ Amy M. Olmert By: /s/ Harry Woolf
- ------------------------ -------------------------------
Amy M. Olmert Name: Harry Woolf
Title: President
Attest: INVESTMENT COMPANY CAPITAL CORP.
/s/ Amy M. Olmert By: /s/ Edward J. Veilleux
- ------------------------ -------------------------------
Amy M. Olmert Name: Edward J. Veilleux
Title: Executive Vice President
Attest: ALEX. BROWN INVESTMENT
MANAGEMENT
/s/ Amy M. Olmert By: /s/ J. Dorsey Brown, III
- ------------------------ -------------------------------
Amy M. Olmert Name: J. Dorsey Brown, III
Title: Chief Executive Officer
-8-
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
DISTRIBUTION AGREEMENT
AGREEMENT made as of the 31st day of August, 1997, by and between Flag
Investors Telephone Income Fund, Inc., with its principal office and place of
business at One South Street, Baltimore, Maryland 21202 (the "Fund"), and ICC
Distributors, Inc., a Delaware corporation with its principal office and place
of business at Two Portland Square, Portland, Maine 04101 (the "Distributor").
WHEREAS, the Fund is registered under the Investment Company Act of 1940,
as amended (the "1940 Act"), as an open-end management investment company, may
issue its shares of common stock (the "Shares") in separate series and classes
and continuously offers for sale its Shares to the public; and
WHEREAS, the Distributor is registered under the Securities Exchange Act of
1934, as amended ("1934 Act"), as a broker-dealer and is engaged in the business
of selling shares of registered investment companies either directly to
purchasers or through other securities dealers;
WHEREAS, the Fund offers Shares in one or more series as listed in
Appendix A hereto (each such series, together with all other series subsequently
established by the Fund and made subject to this Agreement in accordance with
Section 16, being herein referred to as a "Series," and collectively as the
"Series") and the Fund offers shares of one or more classes (each such class
together with all other classes subsequently established by a Series being
herein referred to as a "Class," and collectively as the "Classes");
WHEREAS, the Fund desires that the Distributor offer the Shares of each
Series and Class thereof to the public and the Distributor is willing to provide
those services on the terms and conditions set forth in this Agreement in order
to promote the growth of the Fund and facilitate the distribution of the Shares;
NOW THEREFORE, for and in consideration of the mutual covenants and
agreements contained herein, the Fund and the Distributor hereby agree as
follows:
SECTION 1. DELIVERY OF DOCUMENTS AND APPOINTMENT
(a) The Fund has delivered to the Distributor properly certified or
authenticated copies of its Articles of Incorporation and Bylaws (collectively,
as amended from time to time, "Organic Documents"), the Fund's Notification of
Registration filed with the U.S. Securities and Exchange Commission ("SEC")
pursuant to Section 8(a) of the 1940 Act on Form N-8A under the 1940 Act, the
Fund's Registration Statement and all amendments thereto filed with the SEC
pursuant to the
- 1 -
<PAGE>
Securities Act of 1933, as amended (the "Securities Act"), or the 1940 Act (the
"Registration Statement") and its current Prospectuses and Statements of
Additional Information (collectively, as currently in effect and as amended or
supplemented, the "Prospectus") and shall promptly furnish the Distributor with
all amendments of or supplements to the foregoing, each properly certified or
authenticated. In addition, the Fund shall furnish the Distributor with properly
certified or authenticated copies of all documents, notices and reports filed
with the SEC.
(b) The Fund has delivered to the Distributor certified copies of the
resolutions of the Board of Directors (the "Board") authorizing the appointment
of the Distributor as distributor and approving this Agreement.
(b) The Fund hereby appoints the Distributor as its principal underwriter
and distributor to sell its Shares to the public and hereby agrees during the
term of this Agreement to sell its Shares to the Distributor upon the terms and
conditions herein set forth.
SECTION 2. EXCLUSIVE NATURE OF DUTIES
The Distributor shall be the exclusive representative of the Fund to act as
its principal underwriter and distributor except that the rights given under
this Agreement to the Distributor shall not apply to Shares issued in connection
with the merger, consolidation or reorganization of any other investment company
with the Fund; the Fund's acquisition by purchase or otherwise of all or
substantially all of the assets or stock of any other investment company; or the
reinvestment in Shares by the Fund's shareholders of dividends or other
distributions or any other offering by the Fund of securities to its
shareholders.
SECTION 3. PURCHASE OF SHARES; OFFERING OF SHARES
(a) The Distributor shall have the right to buy from the Fund the Shares
needed to fill unconditional orders for unsold Shares of the Fund as shall then
be effectively registered under the Securities Act placed with the Distributor
by investors or securities dealers or depository institutions or other financial
intermediaries acting as agent for their customers or on their own behalf.
Alternatively, the Distributor may act as the Fund's agent, to offer, and to
solicit offers to subscribe to, unsold Shares of the Fund as shall then be
effectively registered under the Securities Act. The Distributor will promptly
forward all orders and subscriptions for Shares of the Fund. The price which the
Distributor shall pay for Shares purchased by it from the Fund shall be the net
asset value, determined as set forth in Section 3(c) hereof, used in determining
the public offering price on which the orders are based. The price at which the
Distributor shall offer and sell Shares to investors shall be the public
offering price, as set forth in Section 3(b) hereof. The Distributor may sell
Shares to securities dealers, depository institutions or other financial
intermediaries acting as agent for their
<PAGE>
customers that have entered into agreements with the Distributor pursuant to
Section 9 hereof or acting on their own behalf. The Fund reserves the right to
sell its Shares directly to investors through subscriptions received by the
Fund, but no such direct sales shall affect the sales charges due to the
Distributor hereunder.
(b) The public offering price of the Shares of the Fund, i.e., the price
per Share at which the Distributor or selected dealers or selected agents (each
as defined in Section 11 hereof) may sell Shares to the public or to those
persons eligible to invest in Shares as described in the Fund's Prospectus,
shall be the public offering price determined in accordance with the then
currently effective Prospectus of the Fund or Class thereof under the Securities
Act, relating to such Shares, but not to exceed the net asset value at which the
Distributor, when acting as principal, is to purchase such Shares, plus, in the
case of Shares for which an initial sales charge is assessed, an initial charge
equal to a specified percentage or percentages of the public offering price of
the Shares as set forth in the current Prospectus relating to the Shares. In the
case of Shares for which an initial sales charge may be assessed, Shares may be
sold to certain classes of persons at reduced sales charges or without any sales
charge as from time to time set forth in the current Prospectus relating to the
Shares. The Fund will advise the Distributor of the net asset value per Share at
each time as the net asset value per Share shall have been determined by the
Fund.
(c) The net asset value per Share of each Series or Class thereof shall be
determined by the Fund, or an agent of the Fund, as of the close of the New York
Stock Exchange or such other time as set forth in the applicable Prospectus on
the Fund business day in accordance with the method set forth in the Prospectus
and guidelines established by the Board.
(d) The Fund reserves the right to suspend the offering of Shares of any
Class at any time in the absolute discretion of the Board, and upon notice of
such suspension the Distributor shall cease to offer Shares of the Fund or
Classes thereof specified in the notice.
(e) The Fund, or any agent of the Fund designated in writing to the
Distributor by the Fund, shall be promptly advised by the Distributor of all
purchase orders for Shares received by the Distributor and all subscriptions for
Shares obtained by the Distributor as agent shall be directed to the Fund for
acceptance and shall not be binding until accepted by the Fund. Any order or
subscription may be rejected by the Fund; provided, however, that the Fund will
not arbitrarily or without reasonable cause refuse to accept or confirm orders
or subscriptions for the purchase of Shares. The Fund (or its agent) will
confirm orders and subscriptions upon their receipt, will make appropriate book
entries and, upon receipt by the Fund (or its agent) of payment thereof, will
issue such Shares in certificated or uncertificated form pursuant to the
instructions of the Distributor. The Distributor agrees to cause such payment
and such instructions to be delivered promptly to the Fund (or its agent).
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<PAGE>
SECTION 4. REPURCHASE OR REDEMPTION OF SHARES
(a) Any of the outstanding Shares of the Fund may be tendered for
redemption at any time, and the Fund agrees to redeem or repurchase the Shares
so tendered in accordance with its obligations as set forth in the Fund's
Organic Documents and the Prospectus relating to the Shares. The price to be
paid to redeem or repurchase the Shares of the Fund shall be equal to the net
asset value calculated in accordance with the provisions of Section 3(b) hereof
less, in the case of Shares for which a deferred sales charge is assessed, a
deferred sales charge equal to a specified percentage or percentages of the net
asset value of those Shares as from time to time set forth in the Prospectus
relating to those Shares or their cost, whichever is less. Shares for which a
deferred sales charge may be assessed and that have been outstanding for a
specified period of time may be redeemed without payment of a deferred sales
charge as from time to time set forth in the Prospectus relating to those
Shares.
(b) The Fund or its designated agent shall pay (i) the total amount of the
redemption price consisting of the redemption price less any applicable deferred
sales charge to the redeeming shareholder or its agent and (ii) except as may be
otherwise required by the Conduct Rules (the "Rules") of the National
Association of Securities Dealers, Inc. (the "NASD") and any interpretations
thereof, any applicable deferred sales charges to the Distributor in accordance
with the Distributor's instructions on or before the third business day
subsequent to each calendar month-end.
(c) Redemption of Shares or payment therefor may be suspended at times when
the New York Stock Exchange is closed for any reason other than its customary
weekend or holiday closings, when trading thereon is restricted, when an
emergency exists as a result of which disposal by the Fund of securities owned
by the Fund is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or during any
other period when the SEC so permits.
SECTION 5. DUTIES AND REPRESENTATIONS OF THE DISTRIBUTOR
(a) The Distributor shall use reasonable efforts to sell Shares of the Fund
upon the terms and conditions contained herein and in the then current
Prospectus. The Distributor shall devote reasonable time and effort to effect
sales of Shares but shall not be obligated to sell any specific number of
Shares. The services of the Distributor to the Fund hereunder are not to be
deemed exclusive, and nothing herein contained shall prevent the Distributor
from entering into like arrangements with other investment companies so long as
the performance of its obligations hereunder is not impaired thereby.
<PAGE>
(b) In selling Shares of the Fund, the Distributor shall use its best
efforts in all material respects duly to conform with the requirements of all
federal and state laws relating to the sale of the Shares. None of the
Distributor, any selected dealer, any selected agent or any other person is
authorized by the Fund to give any information or to make any representations
other than as is contained in the Fund's Prospectus or any advertising materials
or sales literature specifically approved in writing by the Fund or its agents.
(c) The Distributor shall adopt and follow procedures for the confirmation
of sales to investors and selected dealers or selected agents, the collection of
amounts payable by investors and selected dealers or selected agents on such
sales, and the cancellation of unsettled transactions, as may be necessary to
comply with the requirements of the NASD and any other applicable
self-regulatory organization.
(d) The Distributor will perform its duties hereunder under the supervision
of and in accordance with the directives of the Board. The Distributor will
perform its duties hereunder in accordance with the Fund's Organic Documents and
Prospectuses and with the instructions and directions of the Board and will
conform to and comply with the requirements of the 1940 Act, the Securities Act
and other applicable laws.
(e) The Distributor shall provide the Board with a written report of the
amounts expended in connection with this Agreement as requested by the Board.
(f) The Distributor represents and warrants to the Fund that:
(i) It is a corporation duly organized and existing and in
good standing under the laws of the State of Delaware and it is duly
qualified to carry on its business in the State of Maine;
(ii) It is empowered under applicable laws and by its Articles
of Incorporation to enter into and perform this Agreement;
(iii) All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement;
(iv) It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and
obligations under this Agreement;
(v) This Agreement, when executed and delivered, will
constitute a legal, valid and binding obligation of the Distributor,
enforceable against the Distributor in accordance with its terms,
subject to bankruptcy, insolvency, reorganization, moratorium and other
laws of general application affecting the rights and remedies of
creditors and secured parties;
- 5 -
<PAGE>
(vi) It is registered under the 1934 Act with the SEC as a
broker-dealer, it is a member in good standing of the NASD, it will
abide by the rules and regulations of the NASD, and it will notify the
Fund if its membership in the NASD is terminated or suspended; and
(vii) The performance by the Distributor of its obligations
hereunder does not and will not contravene any provision of its
Articles of Incorporation.
(g) Notwithstanding anything in this Agreement, including the Appendices,
to the contrary, the Distributor makes no warranty or representation as to the
number of selected dealers or selected agents with which it has entered into
agreements in accordance with Section 11 hereof, as to the availability of any
Shares to be sold through any selected dealer, selected agent or other
intermediary or as to any other matter not specifically set forth herein.
SECTION 6. DUTIES AND REPRESENTATIONS OF THE FUND
(a) The Fund shall furnish to the Distributor copies of all financial
statements and other documents to be delivered to shareholders or investors at
least two Fund business days prior to such delivery and shall furnish the
Distributor copies of all other financial statements, documents and other papers
or information which the Distributor may reasonably request for use in
connection with the distribution of Shares. The Fund shall make available to the
Distributor the number of copies of its Prospectuses as the Distributor shall
reasonably request.
(b) The Fund shall take, from time to time, subject to the approval of its
Board and any required approval of its shareholders, all action necessary to fix
the number of authorized Shares (if such number is not limited) and to register
the Shares under the Securities Act, to the end that there will be available for
sale the number of Shares as reasonably may be expected to be sold pursuant to
this Agreement.
(c) The Fund shall register or qualify its Shares for sale under the
securities laws of the various states of the United States and other
jurisdictions ("States") as the Fund, in its sole discretion shall determine.
Any registration or qualification may be withheld, terminated or withdrawn by
the Fund at any time in its discretion. The Distributor shall furnish such
information and other material relating to its affairs and activities as may be
required by the Fund in connection with such registration or qualification.
<PAGE>
(d) The Fund represents and warrants to the Distributor that:
(i) It is a corporation duly organized and existing and in
good standing under the laws of the State of Maryland;
(ii) It is empowered under applicable laws and by its Organic
Documents to enter into and perform this Agreement;
(iii) All proceedings required by the Organic Documents have
been taken to authorize it to enter into and perform its duties under
this Agreement;
(iv) It is registered as an open-end management investment
company with the SEC under the 1940 Act;
(v) All Shares, when issued, shall be validly issued, fully
paid and non-assessable;
(vi) This Agreement, when executed and delivered, will
constitute a legal, valid and binding obligation of the Fund,
enforceable against the Fund in accordance with its terms, subject to
bankruptcy, insolvency, reorganization, moratorium and other laws of
general application affecting the rights and remedies of creditors and
secured parties;
(vii) The performance by the Fund of its obligations hereunder
does not and will not contravene any provision of its Articles of
Incorporation.
(viii) The Fund's Registration Statement is currently
effective and will remain effective with respect to all Shares of the
Fund's Series and Classes thereof being offered for sale;
(ix) It will use its best efforts to ensure that its
Registration Statement and Prospectuses have been or will be, as the
case may be, carefully prepared in conformity with the requirements of
the Securities Act and the rules and regulations thereunder;
(x) It will use its best efforts to ensure that (A) its
Registration Statement and Prospectuses contain or will contain all
statements required to be stated therein in accordance with the
Securities Act and the rules and regulations thereunder, (B) all
statements of fact contained or to be contained in the Registration
Statement or Prospectuses are or will be true and correct at the time
indicated or on the effective date as the case may be and (C) neither
the Registration Statement nor any Prospectus, when they shall become
effective or be authorized for use, will include an untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading to a
purchaser of Shares;
- 7 -
<PAGE>
(xi) It will from time to time file such amendment or
amendments to its Registration Statement and Prospectuses as, in the
light of then-current and then-prospective developments, shall, in the
opinion of its counsel, be necessary in order to have the Registration
Statement and Prospectuses at all times contain all material facts
required to be stated therein or necessary to make any statements
therein not misleading to a purchaser of Shares ("Required
Amendments");
(xii) It shall not file any amendment to its Registration
Statement or Prospectuses without giving the Distributor reasonable
advance notice thereof (which shall be at least three Fund business
days); provided, however, that nothing contained in this Agreement
shall in any way limit the Fund's right to file at any time such
amendments to its Registration Statement or Prospectuses, of whatever
character, as the Fund may deem advisable, such right being in all
respects absolute and unconditional; and
(xiii) It will use its best efforts to ensure that (A) any
amendment to its Registration Statement or Prospectuses hereafter filed
will, when it becomes effective, contain all statements required to be
stated therein in accordance with the 1940 Act and the rules and
regulations thereunder, (B) all statements of fact contained in the
Registration Statement or Prospectuses will, when it becomes effective,
be true and correct at the time indicated or on the effective date as
the case may be and (C) no such amendment, when it becomes effective,
will include an untrue statement of a material fact or will omit to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading to a purchaser of the
Shares.
SECTION 7. STANDARD OF CARE
(a) The Distributor shall use its best judgment and efforts in rendering
services to the Fund under this Agreement but shall be under no duty to take any
action except as specifically set forth herein or as may be specifically agreed
to by the Distributor in writing. The Distributor shall not be liable to the
Fund or any of the Fund's shareholders for any error of judgment or mistake of
law, for any loss arising out of any investment, or for any action or inaction
of the Distributor in the absence of bad faith, willful misfeasance or gross
negligence in the performance of the Distributor's duties or obligations under
this Agreement or by reason of the Distributor's reckless disregard of its
duties and obligations under this Agreement
(b) The Distributor shall not be liable to the Fund for any action taken or
failure to act in good faith reliance upon:
<PAGE>
(i) the advice of the Fund or of counsel, who may be
counsel to the Fund or counsel to the Distributor;
(ii) any oral instruction which the Distributor receives and
which it reasonably believes in good faith was transmitted by the
person or persons authorized by the Board to give such oral instruction
(the Distributor shall have no duty or obligation to make any inquiry
or effort of certification of such oral instruction);
(iii) any written instruction or certified copy of any
resolution of the Board, and the Distributor may rely upon the
genuineness of any such document or copy thereof reasonably believed in
good faith by the Distributor to have been validly executed; or
(iv) any signature, instruction, request, letter of
transmittal, certificate, opinion of counsel, statement, instrument,
report, notice, consent, order, or other document reasonably believed
in good faith by the Distributor to be genuine and to have been signed
or presented by the Fund or other proper party or parties;
and the Distributor shall not be under any duty or obligation to inquire into
the validity or invalidity or authority or lack thereof of any statement, oral
or written instruction, resolution, signature, request, letter of transmittal,
certificate, opinion of counsel, instrument, report, notice, consent, order, or
any other document or instrument which the Distributor reasonably believes in
good faith to be genuine.
(c) The Distributor shall not be responsible or liable for any failure
or delay in performance of its obligations under this Agreement arising out of
or caused, directly or indirectly, by circumstances beyond its reasonable
control including, without limitation, acts of civil or military authority,
national emergencies, labor difficulties (other than those related to the
Distributor's employees), fire, mechanical breakdowns, flood or catastrophe,
acts of God, insurrection, war, riots or failure of the mails, transportation,
communication or power supply. In addition, to the extent the Distributor's
obligations hereunder are to oversee or monitor the activities of third parties,
the Distributor shall not be liable for any failure or delay in the performance
of the Distributor's duties caused, directly or indirectly, by the failure or
delay of such third parties in performing their respective duties or cooperating
reasonably and in a timely manner with the Distributor.
- 9 -
<PAGE>
SECTION 8. INDEMNIFICATION
(a) The Fund will indemnify, defend and hold the Distributor, its
employees, agents, directors and officers and any person who controls the
Distributor within the meaning of section 15 of the Securities Act or section 20
of the 1934 Act ("Distributor Indemnitees") free and harmless from and against
any and all claims, demands, actions, suits, judgments, liabilities, losses,
damages, costs, charges, reasonable counsel fees and other expenses of every
nature and character (including the cost of investigating or defending such
claims, demands, actions, suits or liabilities and any reasonable counsel fees
incurred in connection therewith) which any Distributor Indemnitee may incur,
under the Securities Act, under the securities laws of the various States or
under common law or otherwise, arising out of or based upon any alleged untrue
statement of a material fact contained in the Fund's Registration Statement or
Prospectuses, arising out of or based upon any alleged omission to state a
material fact required to be stated in any one thereof or necessary to make the
statements in any one thereof not misleading, or arising out of or based upon
any filing made with the regulatory authorities of any State unless such
statement or omission was made in reliance upon, and in conformity with,
information furnished in writing to the Fund in connection with the preparation
of the Registration Statement, exhibits to the Registration Statement or filings
made with the regulatory authorities of any State by or on behalf of the
Distributor ("Distributor Claims").
After receipt of the Distributor's notice of termination under Section
13(e), the Fund shall indemnify and hold each Distributor Indemnitee free and
harmless from and against any Distributor Claim; provided, that the term
Distributor Claim for purposes of this sentence shall mean any Distributor Claim
related to the matters for which the Distributor has requested amendment to the
Fund's Registration Statement and for which the Fund has not filed a Required
Amendment, regardless of with respect to such matters whether any statement in
or omission from the Registration Statement was made in reliance upon, or in
conformity with, information furnished to the Fund by or on behalf of the
Distributor.
(b) The Fund may assume the defense of any suit brought to enforce any
Distributor Claim and may retain counsel of good standing chosen by the Fund and
approved by the Distributor, which approval shall not be withheld unreasonably.
The Fund shall advise the Distributor that it will assume the defense of the
suit and retain counsel within ten (10) days of receipt of the notice of the
claim. If the Fund assumes the defense of any such suit and retains counsel, the
defendants shall bear the fees and expenses of any additional counsel that they
retain. If the Fund does not assume the defense of any such suit, or if
Distributor does not approve of counsel chosen by the Fund or has been advised
that it may have available defenses or claims that are not available to or
conflict with those available to the Fund, the Fund will reimburse any
Distributor Indemnitee named as defendant in such suit for the reasonable fees
and expenses of any counsel that person retains. A Distributor
<PAGE>
Indemnitee shall not settle or confess any claim without the prior written
consent of the Fund, which consent shall not be unreasonably withheld or
delayed.
(c) The Distributor will indemnify, defend and hold the Fund and its
several officers and directors (collectively, the "Fund Indemnitees"), free and
harmless from and against any and all claims, demands, actions, suits,
judgments, liabilities, losses, damages, costs, charges, reasonable counsel fees
and other expenses of every nature and character (including the cost of
investigating or defending such claims, demands, actions, suits or liabilities
and any reasonable counsel fees incurred in connection therewith), but only to
the extent that such claims, demands, actions, suits, judgments, liabilities,
losses, damages, costs, charges, reasonable counsel fees and other expenses
result from, arise out of or are based upon:
(i) any alleged untrue statement of a material fact contained
in the Fund's Registration Statement or Prospectus or any alleged
omission of a material fact required to be stated or necessary to make
the statements therein not misleading, if such statement or omission
was made in reliance upon, and in conformity with, information
furnished to the Fund in writing in connection with the preparation of
the Registration Statement or Prospectus by or on behalf of the
Distributor; or
(ii) any act of, or omission by, Distributor or its sales
representatives that does not conform to the standard of care set forth
in Section 7 of this Agreement (collectively, "Fund Claims").
(d) The Distributor may assume the defense of any suit brought to enforce
any Fund Claim and may retain counsel of good standing chosen by the Distributor
and approved by the Fund, which approval shall not be withheld unreasonably. The
Distributor shall advise the Fund that it will assume the defense of the suit
and retain counsel within ten (10) days of receipt of the notice of the claim.
If the Distributor assumes the defense of any such suit and retains counsel, the
defendants shall bear the fees and expenses of any additional counsel that they
retain. If the Distributor does not assume the defense of any such suit, or if
the Fund does not approve of counsel chosen by the Distributor or has been
advised that it may have available defenses or claims that are not available to
or conflict with those available to the Distributor, the Distributor will
reimburse any Fund Indemnitee named as defendant in such suit for the reasonable
fees and expenses of any counsel that person retains. A Fund Indemnitee shall
not settle or confess any claim without the prior written consent of the
Distributor, which consent shall not be unreasonably withheld or delayed.
(e) The Fund's and the Distributor's obligations to provide indemnification
under this Section is conditioned upon the Fund or the Distributor receiving
notice of any action brought against a Distributor Indemnitee or Fund
Indemnitee, respectively, by the person against whom such action is brought
within twenty (20) days after the summons or other first legal process is
served. Such notice shall refer to the person or persons against whom the action
is brought. The failure to
- 11 -
<PAGE>
provide such notice shall not relieve the party entitled to such notice of any
liability that it may have to any Distributor Indemnitee or Fund Indemnitee
except to the extent that the ability of the party entitled to such notice to
defend such action has been materially adversely affected by the failure to
provide notice.
(f) The provisions of this Section and the parties' representations and
warranties in this Agreement shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Distributor
Indemnitee or Fund Indemnitee and shall survive the sale and redemption of any
Shares made pursuant to subscriptions obtained by the Distributor. The
indemnification provisions of this Section will inure exclusively to the benefit
of each person that may be a Distributor Indemnitee or Fund Indemnitee at any
time and their respective successors and assigns (it being intended that such
persons be deemed to be third party beneficiaries under this Agreement).
(g) The Distributor agrees promptly to notify the Fund of the commencement
of any litigation or proceeding of which it becomes aware arising out of or in
any way connected with the issuance or sale of Shares. The Fund agrees promptly
to notify the Distributor of the commencement of any litigation or proceeding of
which it becomes aware arising out of or in any way connected with the issuance
or sale of its Shares.
(h) Nothing contained herein shall require the Fund to take any action
contrary to any provision of its Organic Documents or any applicable statute or
regulation or shall require the Distributor to take any action contrary to any
provision of its Articles of Incorporation or Bylaws or any applicable statute
or regulation; provided, however, that neither the Fund nor the Distributor may
amend their Organic Documents or Articles of Incorporation and Bylaws,
respectively, in any manner that would result in a violation of a representation
or warranty made in this Agreement, except if required by any applicable statute
or regulation.
(i) Nothing contained in this section shall be construed to protect the
Distributor against any liability to the Fund or the security holders of the
Fund to which the Distributor would otherwise be subject by reason of its
failure to satisfy the standard of care set forth in Section 7 of this
Agreement.
<PAGE>
SECTION 9. NOTIFICATION TO THE DISTRIBUTOR
The Fund shall advise the Distributor immediately: (i) of any request
by the SEC for amendments to the Fund's Registration Statement or Prospectus or
for additional information; (ii) in the event of the issuance by the SEC of any
stop order suspending the effectiveness of the Fund's Registration Statement or
any Prospectus or the initiation of any proceedings for that purpose; (iii) of
the happening of any material event which makes untrue any statement made in the
Fund's then current Registration Statement or Prospectus or which requires the
making of a change in either thereof in order to make the statements therein not
misleading; and (iv) of all action of the SEC with respect to any amendments to
the Fund's Registration Statement or Prospectus which may from time to time be
filed with the Commission under the 1940 Act or the Securities Act.
SECTION 10. COMPENSATION; EXPENSES
(a) In consideration of the Distributor's services in connection with the
distribution of Shares of the Fund and each Class thereof, the Distributor shall
receive: (i) any applicable sales charge assessed upon investors in connection
with the purchase of Shares; (ii) from the Fund, any applicable contingent
deferred sales charge ("CDSC") assessed upon investors in connection with the
redemption of Shares; (iii) from the Fund, the distribution service fees with
respect to the Shares of those Classes as designated in Appendix A for which a
plan under Rule 12b-1 under the 1940 Act (a "Plan") is effective (the
"Distribution Fee"); and (iv) from the Fund, the shareholder service fees with
respect to the Shares of those Classes as designated in Appendix A (the "Service
Fee"). The Distribution Fee and Service Fee shall be accrued daily by each
applicable Fund or Class thereof and shall be paid monthly as promptly as
possible after the last day of each calendar month but in any event on or before
the fifth (5th) Fund business day after month-end, at the rate or in the amounts
set forth in Appendix A and, as applicable, the Plan(s). The Fund grants and
transfers to the Distributor a general unperfected lien and security interest in
any and all securities and other assets of the Fund now or hereafter maintained
in an account at the Fund's custodian on behalf of the Fund to secure any
Distribution Fees and Service Fees owed the Distributor by the Fund under this
Agreement.
(b) The Fund shall cause its transfer agent (the "Transfer Agent") to
withhold, from redemption proceeds payable to holders of Shares of the Series
and the Classes thereof, all CDSCs properly payable by the shareholders in
accordance with the terms of the applicable Prospectus and shall cause the
Transfer Agent to pay such amounts over to the Distributor as promptly as
possible after each month end.
(c) Except as specified in Sections 8 and 10(a), the Distributor shall be
entitled to no compensation or reimbursement of expenses for the services
provided by the Distributor pursuant to this Agreement. The Distributor may
receive compensation from the Fund's investment advisors, other service
providers or their respective affiliates (collectively, the "Advisor") for its
services
- 13 -
<PAGE>
hereunder or for additional services all as may be agreed to between the Advisor
and the Distributor. Notwithstanding anything in this Agreement to the contrary,
to the extent the Distributor receives compensation from the Advisor that is
disclosed to the Board, the Fund will indemnify, defend and hold each
Distributor Indemnitees free and harmless from and against any and all claims,
demands, actions, suits, judgments, liabilities, losses, damages, costs,
charges, reasonable counsel fees and other expenses of every nature and
character (including the cost of investigating or defending such claims,
demands, actions, suits or liabilities and any reasonable counsel fees incurred
in connection therewith) related in any way to such payment.
(d) The Fund shall be responsible and assumes the obligation for payment of
all its expenses, including fees and disbursements of its counsel and auditors,
in connection with the preparation and filing of the Registration Statement and
Prospectuses (including but not limited to the expense of setting in type the
Registration Statement and Prospectuses and printing sufficient quantities for
internal compliance, regulatory purposes and for distribution to current
shareholders).
(e) The Fund shall bear the cost and expenses (i) of the registration of
its Shares for sale under the Securities Act; (ii) of the registration or
qualification of its Shares for sale under the securities laws of the various
States; (iii) if necessary or advisable in connection therewith, of qualifying
the Fund, or its Series or the Classes thereof (but not the Distributor) as an
issuer or as a broker or dealer, in such States as shall be selected by the
Fund; and (iv) payable to each State for continuing registration or
qualification therein until the Fund decides to discontinue registration or
qualification. The Distributor shall pay all expenses relating to the
Distributor's broker-dealer qualification.
SECTION 11. SELECTED DEALER AND SELECTED AGENT AGREEMENTS
(a) The Distributor shall have the right to enter into sub-distribution
agreements with securities dealers of its choice ("selected dealers") and with
depository institutions and other financial intermediaries of its choice
("selected agents") for the sale of Shares and to fix therein the portion of the
sales charge, if any, that may be allocated to the selected dealers or selected
agents; provided, that all such agreements shall be in substantially the form of
agreement as set forth in Appendix B hereto. Shares of each Series or Class
thereof shall be resold by selected dealers or selected agents only at the
public offering price(s) set forth in the Prospectus relating to the Shares. The
Distributor shall offer and sell Shares of the Fund only to such selected
dealers as are members in good standing of the NASD. The Distributor shall have
the right to enter into shareholder servicing agreements with financial
intermediaries of its choice; provided, that all such agreements shall be in
substantially the form of agreement as set forth in Appendix C hereto.
<PAGE>
(b) The Distributor will supervise the Fund's relationship with selected
dealers and agents and may make payments to those selected dealers and agents in
such amounts as the Distributor may determine from time to time in its sole
discretion. The amount of payments to selected dealers and agents by the
Distributor may be reviewed by the Board from time to time; provided, however,
that no payment by the Distributor to any selected dealer or agent with respect
to a Share shall exceed the amount of payments made to the Distributor hereunder
with respect to that Share.
SECTION 12. CONFIDENTIALITY
The Distributor agrees to treat all records and other information related
to the Fund as proprietary information of the Fund and, on behalf of itself and
its employees, to keep confidential all such information, except that the
Distributor may:
(i) prepare or assist in the preparation of periodic reports
to shareholders and regulatory bodies such as the SEC;
(ii) provide information typically supplied in the investment
company industry to companies that track or report price, performance
or other information regarding investment companies; and
(iii) release such other information as approved in writing by
the Fund, which approval shall not be unreasonably withheld;
provided, however, that the Distributor may release any information regarding
the Fund without the consent of the Fund if the Distributor reasonably believes
that it may be exposed to civil or criminal legal proceedings for failure to
comply, when requested to release any information by duly constituted
authorities or when so requested by the Fund.
SECTION 13. EFFECTIVENESS, DURATION AND TERMINATION
(a) This Agreement shall become effective with respect to each series or
class listed in Appendix A on the later of (i) August 31, 1997 or (ii) the date
on which the Fund's Registration Statement relating to Shares of the Fund
becomes effective. Upon effectiveness of this Agreement, it shall supersede all
previous agreements between the parties hereto covering the subject matter
hereof insofar as such Agreement may have been deemed to relate to the Fund.
(b) This Agreement shall continue in effect with respect to a Series Fund
for a period of one year from its effectiveness and thereafter shall continue in
effect with respect to the Series until terminated; provided, that continuance
is specifically approved at least annually (i) by the Board or by a vote of a
majority of the outstanding voting securities of the Fund and (ii) by a vote of
a majority of Directors of the Fund (I) who are not parties to this Agreement or
interested persons of
- 15 -
<PAGE>
any such party (other than as Directors of the Fund) and (II) with respect to
each Class of a Series for which there is an effective Plan, who do not have any
direct or indirect financial interest in any such Plan applicable to the Class
or in any agreements related to the Plan, cast in person at a meeting called for
the purpose of voting on such approval.
(c) This Agreement may be terminated at any time with respect to a Series,
without the payment of any penalty, (i) by the Board or by a vote of a majority
of the outstanding voting securities of the Series or, with respect to each
Class for which there is an effective Plan, a majority of Directors of the Fund
who do not have any direct or indirect financial interest in any such Plan or in
any agreements related to the Plan, on 60 days' written notice to the
Distributor or (ii) by the Distributor on 60 days' written notice to the Fund.
(d) This Agreement shall automatically terminate upon its assignment and
upon the termination of the Distributor's membership in the NASD.
(e) If the Fund does not file a Required Amendment within fifteen days
following receipt of a written request from the Distributor to do so, the
Distributor may, at its option, terminate this Agreement immediately.
(f) The obligations of Sections 5(e), 6(d), 8, 9 and 10 shall survive
any termination of this Agreement with respect to a Series or Class thereof.
SECTION 14. NOTICES
Any notice required or permitted to be given hereunder by the Distributor
to the Fund or the Fund to the Distributor shall be deemed sufficiently given if
personally delivered or sent by telegram, facsimile or registered, certified or
overnight mail, postage prepaid, addressed by the party giving such notice to
the other party at the last address furnished by the other party to the party
giving such notice, and unless and until changed pursuant to the foregoing
provisions hereof each such notice shall be addressed to the Fund or the
Distributor, as the case may be, at their respective principal places of
business.
<PAGE>
SECTION 15. ACTIVITIES OF THE DISTRIBUTOR
Except to the extent necessary to perform the Distributor's obligations
hereunder, nothing herein shall be deemed to limit or restrict the Distributor's
right, or the right of any of the Distributor's employees, agents, officers or
directors who may also be a director, officer or employee of the Fund, or
affiliated persons of the Fund to engage in any other business or to devote time
and attention to the management or other aspects of any other business, whether
of a similar or dissimilar nature, or to render services of any kind to any
other corporation, trust, firm, individual or association.
SECTION 16. ADDITIONAL FUNDS AND CLASSES
In the event that the Fund establishes one or more series of Shares or
one or more classes of Shares after the effectiveness of this Agreement, such
series of Shares or classes of Shares, as the case may be, shall become Series
and Classes under this Agreement upon approval of this Agreement by the Fund
with respect to the series of Shares or class of Shares and the execution of an
amended Appendix A reflecting the applicable names and terms. The Distributor
may elect not to make any such series or classes subject to this
Agreement.
SECTION 17. MISCELLANEOUS
(a) The Distributor shall not be liable to the Fund and the Fund shall
not be liable to the Distributor for consequential damages under any provision
of this Agreement except that Distributor Claims, as that term is used in
Section 8(a), shall include consequential damages related to, arising out of or
based upon any filing made with the regulatory authorities of any State.
(b) No provisions of this Agreement may be amended or modified in any
manner except by a written agreement properly authorized and executed by the
Distributor and the Fund.
(c) This Agreement shall be governed by, and the provisions of this
Agreement shall be construed and interpreted under and in accordance with, the
laws of the State of Maryland.
(d) This Agreement constitutes the entire agreement between the
Distributor and the Fund and supersedes any prior agreement with respect to the
subject matter hereof, whether oral or written.
(e) This Agreement may be executed by the parties hereto on any number
of counterparts, and all of the counterparts taken together shall be deemed to
constitute one and the same instrument.
- 17 -
<PAGE>
(f) If any part, term or provision of this Agreement is held to be illegal,
in conflict with any law or otherwise invalid, the remaining portion or portions
shall be considered severable and not be affected, and the rights and
obligations of the parties shall be construed and enforced as if the Agreement
did not contain the particular part, term or provision held to be illegal or
invalid.
(g) Section headings in this Agreement are included for convenience only
and are not to be used to construe or interpret this Agreement.
(h) No affiliated person, employee, agent, officer or director of the
Distributor shall be liable at law or in equity for the Distributor's
obligations under this Agreement.
(i) The Fund shall be liable to the Distributor only with respect to those
Series and Classes of the Fund and the Distributor shall look solely to the Fund
to satisfy any liability of a Series or Class thereof to the Distributor.
(j) Each of the undersigned warrants and represents that they have full
power and authority to sign this Agreement on behalf of the party indicated and
that their signature will bind the party indicated to the terms hereof.
(k) The terms "vote of a majority of the outstanding voting securities,"
"interested person," "affiliated person" and "assignment" shall have the
meanings ascribed thereto in the 1940 Act.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf by and through their duly authorized
officers, as of the day and year first above written.
FLAG INVESTORS TELEPHONE INCOME
FUND, INC.
By:
-------------------------------------
Name:
Secretary
<PAGE>
ICC DISTRIBUTORS, INC.
By: /s/ John Y. Keffer
---------------------------------------
John Y. Keffer
President
- 19 -
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
DISTRIBUTION AGREEMENT
Appendix A
as of August 31, 1997
<TABLE>
<CAPTION>
Distribution Service
Series Class Fee Fee
- ------ ----- ------------ -------
<S> <C> <C> <C>
Flag Investors Telephone Income Fund, Inc. Class A 0.25% ----
Class B 0.75% 0.25%
Class D 0.60% ----
Institutional Class ---- ----
</TABLE>
- A1 -
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
DISTRIBUTION AGREEMENT
Appendix B
[Form of Sub-Distribution Agreement]
FLAG INVESTORS FUNDS
SUB-DISTRIBUTION AGREEMENT
Ladies and Gentlemen:
ICC Distributors, Inc. ("ICC"), a Delaware corporation, serves as
Distributor (the "Distributor") of the Flag Investors Funds (collectively, the
"Funds", individually, a "Fund"). The Funds are open-end investment companies
(or series thereof) 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" as used herein refers to each
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:
- B1 -
<PAGE>
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
the 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 said assets are at least $25,000 in the fund family 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.
- B2 -
<PAGE>
5. Qualification to Act. You represent that you are a member in good
standing of 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 Conduct Rules (formerly the
Rules of Fair Practice) of the NASD, including, without limitation, the
provisions of Rule 2830 (formerly Section 26) of such Rules. You agree that you
will not combine customer orders to reach breakpoints in commission for any
purposes whatsoever unless authorized by the then current Prospectus in respect
of a particular class of Shares 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 relevant 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 make appropriate notice filings in
certain states where such filing is required. We will inform you as to the
states or other jurisdictions in which we believe the Shares are eligible for
sale under the respective securities laws of such states. You agree that you
will offer Shares to your customers only in those states where such Shares are
eligible to be sold. We assume no responsibility or obligation as to your right
to sell Shares in any jurisdiction.
7. Authority of Fund. Each Fund 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 provisions of the
Investment
- B3 -
<PAGE>
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 such
phrase is 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 other than this agreement and those
pertaining to this agreement should be sent to the address listed below. Any
notice to you shall be duly given if mailed or telegraphed to you at the address
specified by you below.
Flag Investors Funds
330 West 9th Street, 1st Floor
Kansas City, MO 64105
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us both copies of this Agreement to:
Flag Investors Funds
c/o ICC Distributors, Inc.
P.O. Box 7558
Portland, Maine 04101
Attn: Dealer Services
ICC Distributors, Inc.
By: Richard C. Butt
Vice President
- B4 -
<PAGE>
Confirmed and accepted:
Firm Name:
-----------------------------------------------------------
By:
------------------------------------------------------------------
Signature
- ------------------------------------------------------------------------------
Printed Name and Title
Date:
----------------------------------------------------------------
Address:
-------------------------------------------------------------
Clears Through:
------------------------------------------------------
Phone No.:
-----------------------------------------------------------
- B5 -
<PAGE>
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
DISTRIBUTION AGREEMENT
Appendix C
[Form of Shareholder Services Agreement]
FLAG INVESTORS FAMILY OF FUNDS
SHAREHOLDER SERVICING AGREEMENT
[Date]
Ladies and Gentlemen:
We wish to enter into this Shareholder Servicing Agreement with you
concerning the provision of support services to your clients and customers
("Customers") who may from time to time beneficially own shares of our common
stock ("Shares").
The terms and conditions of this Servicing Agreement are as follows:
Section 1.
(a) You agree to provide the following services to Customers who may from
time to time beneficially own Shares: (i) aggregating and processing purchase
and redemption requests for Shares from Customers and placing net purchase and
redemption orders with our distributor; (ii) processing dividend payments from
us on behalf of Customers; (iii) providing information periodically to Customers
showing their positions in Shares; (iv) arranging for bank wires; (v) responding
to Customer inquiries relating to the services performed by you; (vi) providing
subaccounting with respect to Shares beneficially owned by Customers; (vii) as
required by law, forwarding shareholder communications from us (such as proxies,
shareholder reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to Customers; and (viii)
- C1 -
<PAGE>
providing such other similar services as we may reasonably request to the extent
you are permitted to do so under applicable statutes, rules or regulations. You
will provide to Customers a schedule of any fees that you may charge directly to
them for such services. You hereby represent that such fees are not unreasonable
or excessive. Shares purchased by you on behalf of Customers will be registered
with our transfer agent in your name or in the name of your nominee. The
Customer will be the beneficial owner of Shares purchased and held by you in
accordance with the Customer's instructions ("Customers' Shares") and the
Customer may exercise all rights of a shareholder of the Fund.
(b) You agree that you will (i) maintain all records required by law
relating to transactions in Shares and, upon our request, promptly make such of
these records available to us as we may reasonably request in connection with
our operations, and (ii) promptly notify us if you experience any difficulty in
maintaining the records described in the foregoing clauses in an accurate and
complete manner.
Section 2. You will provide such office space and equipment, telephone
facilities and personnel (which may be a part of the space, equipment and
facilities currently used in your business, or any personnel employed by you) as
may be reasonably necessary or beneficial in order to provide the aforementioned
services to Customers.
Section 3. Neither you nor any of your officers, employees, agents or
assignees are authorized to make any representations concerning us or Shares
except those contained in our then current prospectus for such Shares, copies of
which will be supplied by us to you, or in such supplemental literature or
advertising as may be authorized by us in writing.
Section 4. For all purposes of this Agreement, you will be deemed to be an
independent contractor and will have no authority to act as agent for us in any
matter or in any respect. You may, upon prior written notice to us, delegate
your responsibilities hereunder to another person or persons; provided, however,
that notwithstanding any such delegation, you will remain responsible for the
performance of all your responsibilities under this Agreement. By your written
acceptance of this Agreement, you agree and do release, indemnify and hold us
harmless from and against any and all direct or indirect liabilities or losses
resulting from requests, directions, actions or inactions of or by you and your
offices, employees, agents or assigns regarding your responsibilities hereunder
or the purchase, redemption, transfer or registration of Shares by or on behalf
of Customers. You and your
- C2 -
<PAGE>
employees will, upon request, be available during normal business hours to
consult with us or our designees concerning the performance of your
responsibilities under this Agreement.
Section 5. In consideration of the services and facilities provided by you
hereunder, we will cause our distributor to pay you, and you will accept as full
payment therefore, a fee (as we may determine from time to time in writing)
computed as a percentage of the average daily net assets of the Customers'
Shares held of record by you from time to time, which fee will be computed daily
and payable no less often than annually. For purposes of determining the fees
payable under this Section 5, the average daily net assets of the Customer's
Shares will be computed in the manner specified in our registration statement
(as the same is in effect from time to time) in connection with the computation
of the net asset value of Shares for purposes of purchases and redemptions. The
fee rate stated above may be prospectively increased or decreased by us or by
our distributor, at any time upon notice to you. Further, we may, in our
discretion and without notice, suspend or withdraw the sale of Shares, including
the sale of such shares to you for the account of any Customer or Customers.
Section 6. You will furnish us or our designees with such information
relating to your performance under this Agreement as we or they may reasonably
request (including, without limitation, periodic certifications confirming the
provision to Customers of the services described herein), and shall otherwise
cooperate with us and our designees (including, without limitation, any auditors
designated by us), in connection with the preparation of reports to our Board of
Directors concerning this Agreement and the monies paid or payable by us
pursuant hereto, as well as any other reports or filings that may be required by
law.
Section 7. We may enter into other similar services agreements with any
other person or persons without your consent.
Section 8. This Agreement will become effective on the date a fully
executed copy of this Agreement is received by us or by our distributor, and is
terminable, without penalty, at any time by us or by you upon ten days' notice
to the other party hereto and shall automatically terminate in the event of its
assignment, as that term is defined in the Investment Company Act of 1940, as
amended.
Section 9. This Agreement will be construed in accordance with the laws of
the State of Maryland.
- C3 -
<PAGE>
Section 10. All notices and other communications to either you or us will
be duly given if mailed, telegraphed, telexed, or transmitted by similar
telecommunications device, if to us at the address below, and if to you, at the
address specified by you after your signature below:
ICC Distributors, Inc.
P.O. Box 7558
Portland, Maine 04101
Attention: Dealer Services
If you agree to be legally bound by the provisions of this Agreement,
please sign a copy of this letter where indicated below and promptly return it
to us at the address set forth in Section 10 above.
Very truly yours,
ICC DISTRIBUTORS, INC.
By:
--------------------------------
Richard C. Butt, Vice President
Confirmed and Accepted:
Firm Name:
-----------------------------------------------------------
By:
-----------------------------------------------------------------
Name:
---------------------------------------------------------------
Address:
------------------------------------------------------------
Date:
-------------------------------
- C4 -
<PAGE>
EX-99.B(6)(b)
FLAG INVESTORS FUNDS
SUB-DISTRIBUTION AGREEMENT
August 12, 1997
Ladies and Gentlemen:
ICC Distributors, Inc. ("ICC"), a Delaware corporation, serves as
Distributor (the "Distributor") of the Flag Investors Funds (collectively, the
"Funds", individually, a "Fund"). The Funds are open-end investment companies
(or series thereof) 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" as used herein refers to each
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
the Shares.
- 1 -
<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 $25,000 in the fund family 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 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 Conduct Rules (formerly the
Rules of Fair Practice) of the NASD, including, without limitation, the
provisions of Rule 2830 (formerly Section 26) of such Rules. You agree that you
will not combine customer orders to reach breakpoints in commission for any
purposes whatsoever unless authorized by the then current Prospectus in respect
of a particular class of Shares 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 relevant prospectus and provisions of
the Agreement.
- 2 -
<PAGE>
6. Blue Sky. The Funds have registered an indefinite number of Shares under
the Securities Act. The Funds intend to make appropriate notice filings in
certain states where such filing is required. We will inform you as to the
states or other jurisdictions in which we believe the Shares are eligible for
sale under the respective securities laws of such states. You agree that you
will offer Shares to your customers only in those states where such Shares are
eligible to be sold. We assume no responsibility or obligation as to your right
to sell Shares in any jurisdiction.
7. Authority of Fund. Each Fund 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 provisions 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 such
phrase is 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.
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11. Communications. All communications to us should be sent to the address
listed below. 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 both copies of this Agreement to:
Flag Investors Funds
c/o ICC Distributors, Inc.
P.O. Box 7558
Portland, Maine 04101
Attn: Dealer Services
----------------------------
ICC Distributors, Inc.
By: Richard C. Butt
Vice President
Confirmed and accepted:
Firm Name:
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By:
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Signature
---------------------------------------------------------------------
Printed Name and Title
Date:
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Address:
-------------------------------------------------------------
Clears Through:
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Phone No.:
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EX-99.B(6)(c)
FLAG INVESTORS FUNDS
One South Street
Baltimore, Maryland 21202-3220
SHAREHOLDER SERVICING AGREEMENT
______________, 19__
Gentlemen:
We wish to enter into this Shareholder Servicing Agreement with you
concerning the provision of support services to your clients and customers
("Customers") who may from time to time beneficially own shares of our common
stock ("Shares").
The terms and conditions of this Servicing Agreement are as follows:
Section 1. (a) You agree to provide the following services to Customers
who may from time to time beneficially own Shares: (i) aggregating and
processing purchase and redemption requests for Shares from Customers and
placing net purchase and redemption orders with our distributor; (ii) processing
dividend payments from us on behalf of Customers; (iii) providing information
periodically to Customers showing their positions in Shares; (iv) arranging for
bank wires; (v) responding to Customer inquiries relating to the services
performed by you; (vi) providing subaccounting with respect to Shares
beneficially owned by Customers; (vii) as required by law, forwarding
shareholder communications from us (such as proxies, shareholder reports, annual
and semi-annual financial statements and dividend, distribution and tax notices)
to Customers; and (viii) providing such other similar services as we may
reasonably request to the extent you are permitted to do so under applicable
statutes, rules or regulations. You will provide to Customers a schedule of any
fees that you may charge directly to them for such services. You hereby
represent that such fees are not unreasonable or excessive. Shares purchased by
you on behalf of Customers will be registered with our transfer agent in your
name or in the name of your nominee. The Customer will be the beneficial owner
of Shares purchased and held by you in accordance with the Customer's
instructions ("Customers' Shares") and the Customer may exercise all rights of a
shareholder of the Fund.
(b) You agree that you will (i) maintain all records
required by law relating to transactions in Shares and, upon our request,
promptly make such of these records available to us as we may reasonably request
in connection with our operations, and (ii) promptly notify us if you experience
any difficulty in maintaining the records described in the foregoing clauses in
an accurate and complete manner.
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<PAGE>
Section 2. You will provide such office space and equipment, telephone
facilities and personnel (which may be a part of the space, equipment and
facilities currently used in your business, or any personnel employed by you) as
may be reasonably necessary or beneficial in order to provide the aforementioned
services to Customers.
Section 3. Neither you nor any of your officers, employees, agents or
assignees are authorized to make any representations concerning us or Shares
except those contained in our then current prospectus for such Shares, copies of
which will be supplied by us to you, or in such supplemental literature or
advertising as may be authorized by us in writing.
Section 4. For all purposes of this Agreement, you will be deemed to be
an independent contractor and will have no authority to act as agent for us in
any matter or in any respect. You may, upon prior written notice to us, delegate
your responsibilities hereunder to another person or persons; provided, however,
that notwithstanding any such delegation, you will remain responsible for the
performance of all your responsibilities under this Agreement. By your written
acceptance of this Agreement, you agree and do release, indemnify and hold us
harmless from and against any and all direct or indirect liabilities or losses
resulting from requests, directions, actions or inactions of or by you and your
offices, employees, agents or assigns regarding your responsibilities hereunder
or the purchase, redemption, transfer or registration of Shares by or on behalf
of Customers. You and your employees will, upon request, be available during
normal business hours to consult with us or our designees concerning the
performance of your responsibilities under this Agreement.
Section 5. In consideration of the services and facilities provided by
you hereunder, we will cause our distributor to pay you, and you will accept as
full payment therefore, a fee (as we may determine from time to time in writing)
computed as a percentage of the average daily net assets of the Customers'
Shares held of record by you from time to time, which fee will be computed daily
and payable no less often than annually. For purposes of determining the fees
payable under this Section 5, the average daily net assets of the Customer's
Shares will be computed in the manner specified in our registration statement
(as the same is in effect from time to time) in connection with the computation
of the net asset value of Shares for purposes of purchases and redemptions. The
fee rate stated above may be prospectively increased or decreased by us or by
our distributor, at any time upon notice to you. Further, we may, in our
discretion and without notice, suspend or withdraw the sale of Shares, including
the sale of such shares to you for the account of any Customer or Customers.
Section 6. You will furnish us or our designees with such information
relating to your performance under this Agreement as we or they may reasonably
request (including, without limitation, periodic certifications confirming the
provision to Customers of the services described herein), and shall otherwise
cooperate with us and our designees (including, without limitation, any auditors
designated by us), in connection with the preparation of reports to our
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Board of Directors concerning this Agreement and the monies paid or payable by
us pursuant hereto, as well as any other reports or filings that may be required
by law.
Section 7. We may enter into other similar services agreements with any
other person or persons without your consent.
Section 8. This Agreement will become effective on the date a fully
executed copy of this Agreement is received by us or by our distributor, and is
terminable, without penalty, at any time by us or by you upon ten days' notice
to the other party hereto and shall automatically terminate in the event of its
assignment, as that term is defined in the Investment Company Act of 1940, as
amended.
Section 9. This Agreement will be construed in accordance with the laws
of the State of Maryland.
Section 10. All notices and other communications to either you or us
will be duly given if mailed, telegraphed, telexed, or transmitted by similar
telecommunications device, if to us at the address below, and if to you, at the
address specified by you after your signature below:
ICC Distributors, Inc.
P.O. Box 7558
Portland, Maine 04101
Attention: Dealer Services
If you agree to be legally bound by the provisions of this Agreement,
please sign a copy of this letter where indicated below and promptly return it
to us at the address set forth in Section 10 above.
Very truly yours,
ICC DISTRIBUTORS, INC.
By:
--------------------------------
Richard C. Butt, Vice President
Confirmed and Accepted:
Firm Name:
-------------------------
By:
-------------------------
Address:
-------------------------
-------------------------
Date:
-------------------------
- 3 -
<PAGE>
EX-99.B(8)
CUSTODIAN AGREEMENT
AGREEMENT dated as of , 199 between
BANKERS TRUST COMPANY (the "Custodian") and FLAG INVESTORS TELEPHONE INCOME
FUND, INC. (the "Customer").
WHEREAS, the Customer may be organized with one or more series of
shares, each of which shall represent an interest in a separate portfolio of
Securities and Cash (each as hereinafter defined) (all such existing and
additional series now or hereafter listed on Exhibit A being hereafter referred
to individually as a "Portfolio" and collectively, as the "Portfolios"); and
WHEREAS, the Customer desires to appoint the Custodian as custodian on
behalf of the Portfolios under the terms and conditions set forth in this
Agreement, and the Custodian has agreed to so act as custodian.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
1. Employment of Custodian. The Customer hereby employs the Custodian
as custodian of all assets of each Portfolio which are delivered to and accepted
by the Custodian or any Subcustodian (as that term is defined in Section 4) (the
"Property") pursuant to the terms and conditions set forth herein. Without
limitation, such Property shall include stocks and other equity interests of
every type, evidences of indebtedness, other instruments representing same or
rights or obligations to receive, purchase, deliver or sell same and other
noncash investment property of a Portfolio which is acceptable for deposit
("Securities") and cash from any source and in any currency ("Cash"). The
Custodian shall not be responsible for any property of a Portfolio held or
received by the Customer or others and not delivered to the Custodian or any
Subcustodian.
2. Maintenance of Securities and Cash at Custodian and Subcustodian
Locations. Pursuant to Instructions, the Customer shall direct the Custodian to
(a) settle Securities transactions and maintain cash in the country or other
jurisdiction in which the principal trading market for such Securities is
located, where such Securities are to be presented for payment or where such
Securities are acquired and (b) maintain cash and cash equivalents in such
countries in amounts reasonably necessary to effect the Customer's transactions
in such Securities. Instructions to settle Securities transactions in any
country shall be deemed to authorize the holding of such Securities and Cash in
that country.
3. Custody Account. The Custodian agrees to establish and maintain one
or more custody accounts on its books each in the name of a Portfolio (each, an
"Account") for any and all Property from time to time received and accepted by
the Custodian or any Subcustodian for the account of such Portfolio. Upon
delivery by the Customer to the Custodian of any Property belonging to a
Portfolio,
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the Customer shall, by Instructions (as herein defined in Section 14),
specifically indicate which Portfolio such Property belongs or if such Property
belongs to more than one Portfolio shall allocate such Property to the
appropriate Portfolio. The Custodian shall allocate such Property to the
Accounts in accordance with the Instructions; provided that the Custodian shall
have the right, in its sole discretion, to refuse to accept any Property that is
not in proper form for deposit for any reason. The Customer on behalf of each
Portfolio, acknowledges its responsibility as a principal for all of its
obligations to the Custodian arising under or in connection with this Agreement
warrants its authority to deposit in the appropriate Account any Property
received therefor by the Custodian or a Subcustodian and to give, and authorize
others to give, instructions relative thereto. The Custodian may deliver
securities of the same class in place of those deposited in the Account.
The Custodian shall hold, keep safe and protect as custodian for each
Account, on behalf of the Customer, all Property in such Account. All
transactions, including, but not limited to, foreign exchange transactions,
involving the Property shall be executed or settled solely in accordance with
Instructions (which shall specifically reference the Account for which such
transaction is being settled), except that until the Custodian receives
Instructions to the contrary, the Custodian will:
(a) collect all interest and dividends and all other income and
payments, whether paid in cash or in kind, on the Property, as
the same become payable and credit the same to the appropriate
Account;
(b) present for payment all Securities held in an Account which
are called, redeemed or otherwise become payable and all
coupons and other income items which call for payment upon
presentation to the extent that the Custodian or Subcustodian
is actually aware of such opportunities and hold the cash
received in such Account pursuant to this Agreement;
(c) (i) exchange Securities where the exchange is purely
ministerial (including, without limitation, the exchange of
temporary securities for those in definitive form and the
exchange of warrants, or other documents of entitlement to
securities, for the Securities themselves) and (ii) when
notification of a tender or exchange offer (other than
ministerial exchanges described in (i) above) is received for
an Account, endeavor to receive Instructions, provided that if
such Instructions are not received in time for the Custodian
to take timely action, no action shall be taken with respect
thereto;
(d) whenever notification of a rights entitlement or a fractional
interest resulting from a rights issue, stock dividend or
stock split is received for an Account and such rights
entitlement or fractional interest bears an expiration date,
if after endeavoring to obtain Instructions such Instructions
are not received in time for the Custodian to take timely
action or if actual notice of such actions was received too
late to seek Instructions, sell in the discretion of the
Custodian (which sale the Customer hereby
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authorizes the Custodian to make) such rights entitlement or
fractional interest and credit the Account with the net
proceeds of such sale:
(e) execute in the Customer's name for an Account whenever the
Custodian deems it appropriate, such ownership and other
certificates as may be required to obtain the payment of
income from the Property in such Account;
(f) pay for each Account, any and all taxes and levies in the
nature of taxes imposed on interest, dividends or other
similar income on the Property in such Account by any
governmental authority. In the event there is insufficient
Cash available in such Account to pay such taxes and levies,
the Custodian shall notify the Customer of the amount of the
shortfall and the Customer, at its option, may deposit
additional Cash in such Account or take steps to have
sufficient Cash available. The Customer agrees, when and if
requested by the Custodian and required in connection with the
payment of any such taxes to cooperate with the Custodian in
furnishing information, executing documents or otherwise; and
(g) appoint brokers and agents for any of the ministerial
transactions involving the Securities described in (a) - (f),
including, without limitation, affiliates of the Custodian or
any Subcustodian.
4. Subcustodians and Securities Systems. The Customer authorizes and
instructs the Custodian to hold the Property in each Account in custody accounts
which have been established by the Custodian with (a) one of its U.S. branches
or another U.S. bank or trust company or branch thereof located in the U.S.,
which is itself qualified under the Investment Company Act of 1940, as amended
("1940 Act"), to act as custodian (individually, a "U.S. Subcustodian"), or a
U.S. securities depository or clearing agency or system in which the Custodian
or a U.S. Subcustodian participates (individually, a "U.S. Securities System")
or (b) one of its non-U.S. branches or majority-owned non-U.S. subsidiaries, a
non-U.S. branch or majority-owned subsidiary of a U.S. bank or a non-U.S. bank
or trust company, acting as custodian (individually, a "non-U.S. Subcustodian";
U.S. Subcustodians and non-U.S. Subcustodians, collectively, "Subcustodians"),
or a non-U.S. depository or clearing agency or system in which the Custodian or
any Subcustodian participates (individually, a "non-U.S. Securities System";
U.S. Securities System and non-U.S. Securities System collectively, Securities
System"), provided that in each case in which a U.S. Subcustodian or U.S.
Securities System is employed, each such Subcustodian or Securities System shall
have been approved by Instructions: provided further that in each case in which
a non-U.S. Subcustodian or non-U.S. Securities System is employed, (a) such
Subcustodian or Securities System either is (i) a "qualified U.S. bank" as
defined by Rule 17f-5 under the 1940 Act ("Rule 17f-5") or (ii) an "eligible
foreign custodian" within the meaning of Rule 17f-5 or such Subcustodian or
Securities System is the subject of an order granted by the U.S. Securities and
Exchange Commission ("SEC") exempting such agent or the subcustody arrangements
thereto from all or part of the provisions of Rule 17f-5 and (b) the agreement
between the Custodian and such non-U.S. Subcustodian has been approved by
Instructions; it being understood that the Custodian shall have no liability or
responsibility for determining whether the approval of any
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Subcustodian or Securities System has been proper under the 1940 Act or any rule
or regulation thereunder.
Upon receipt of Instructions, the Custodian agrees to cease the
employment of any Subcustodian or Securities System with respect to the
Customer, and if desirable and practicable, appoint a replacement Subcustodian
or securities system in accordance with the provisions of this Section. In
addition, the Custodian may, at any time in its discretion, upon written
notification to the Customer, terminate the employment of any Subcustodian or
Securities System.
Upon request of the Customer, the Custodian shall deliver to the
Customer annually a certificate stating: (a) the identity of each non-U.S.
Subcustodian and non-U.S. Securities System then acting on behalf of the
Custodian and the name and address of the governmental agency or other
regulatory authority that supervises or regulates such non-U.S. Subcustodian and
non-U.S. Securities System; (b) the countries in which each non-U.S.
Subcustodian or non-U.S. Securities System is located; and (c) so long as Rule
17f-5 requires the Customer's Board of Trustees to directly approve its foreign
custody arrangements, such other information relating to such non-U.S.
Subcustodians and non-U.S. Securities as may reasonably be requested by the
Customer to ensure compliance with Rule 17f-5. So long as Rule 17f-5 requires
the Customer's Board of Trustees to directly approve its foreign custody
arrangements, the Custodian also shall furnish annually to the Customer
information concerning such non-U.S. Subcustodians and non-U.S. Securities
Systems similar in kind and scope as that furnished to the Customer in
connection with the initial approval of this Agreement. Custodian agrees to
promptly notify the Customer if, in the nominal course of its custodial
activities, the Custodian has reason to believe that any non-U.S. Subcustodian
or non-U.S. Securities System has ceased to be a qualified U.S. bank or an
eligible foreign custodian each within the meaning of Rule 17f-5 or has ceased
to be subject to an exemptive order from the SEC.
5. Use of Subcustodian. With respect to Property in an Account which is
maintained by the Custodian in the custody of a Subcustodian employed pursuant
to Section 4:
(a) The Custodian will identify on its books as belonging to the
Customer on behalf of a Portfolio, any Property held by such Subcustodian.
(b) Any Property in the Account held by a Subcustodian will be subject
only to the instructions of the Custodian or its agents.
(c) Property deposited with a Subcustodian will be maintained in an
account holding only assets for customers of the Custodian.
(d) Any agreement the Custodian shall enter into with a non-U.S.
Subcustodian with respect to the holding of Property shall require that (i) the
Account will be adequately indemnified or its losses adequately insured; (ii)
the Securities are not subject to any right, charge, security interest, lien or
claim of any kind in favor of such Subcustodian or its creditors except a claim
for payment in accordance with such agreement for their safe custody or
administration and expenses
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related thereto, (iii) beneficial ownership of such Securities be freely
transferable without the payment of money or value other than for safe custody
or administration and expenses related thereto, (iv) adequate records will be
maintained identifying the Property held pursuant to such Agreement as belonging
to the Custodian, on behalf of its customers and (v) to the extent permitted by
applicable law, officers of or auditors employed by, or other representatives of
or designated by, the Custodian, including the independent public accountants of
or designated by, the Customer be given access to the books and records of such
Subcustodian relating to its actions under its agreement pertaining to any
Property held by it thereunder or confirmation of or pertinent information
contained in such books and records be furnished to such persons designated by
the Custodian.
6. Use of Securities System. With respect to Property in the Account(s)
which are maintained by the Custodian or any Subcustodian in the custody of a
Securities System employed pursuant to Section 4:
(a) The Custodian shall, and the Subcustodian will be required by
its agreement with the Custodian to, identify on its books
such Property as being held for the account of the Custodian
or Subcustodian for its customers.
(b) Any Property held in a Securities System for the account of
the Custodian or a Subcustodian will be subject only to the
instructions of the Custodian or such Subcustodian, as the
case may be.
(c) Property deposited with a Securities System will be maintained
in an account holding only assets for customers of the
Custodian or Subcustodian, as the case may be, unless
precluded by applicable law, rule, or regulation.
(d) The Custodian shall provide the Customer with any report
obtained by the Custodian on the Securities System's
accounting system, internal accounting control and procedures
for safeguarding securities deposited in the Securities
System.
7. Agents. The Custodian may at any time or times in its sole
discretion appoint (or remove) any other U.S. bank or trust company which is
itself qualified under the 1940 Act to act as custodian, as its agent to carry
out such of the provisions of this Agreement as the Custodian may from time to
time direct; provided, however, that the appointment of any agent shall not
relieve the Custodian of its responsibilities or liabilities hereunder.
8. Records, Ownership of Property, Statements, Opinions of Independent
Certified Public Accountants.
(a) The ownership of the Property whether Securities, Cash and/or
other property, and whether held by the Custodian or a
Subcustodian or in a Securities System as authorized herein,
shall be clearly recorded on the Custodian's books as
belonging to the appropriate Account and not for the
Custodian's own interest. The Custodian
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<PAGE>
shall keep accurate and detailed accounts of all investments,
receipts, disbursements and other transactions for each
Account. All accounts, books and records of the Custodian
relating thereto shall be open to inspection and audit at all
reasonable times during normal business hours by any person
designated by the Customer. All such accounts shall be
maintained and preserved in the form reasonably requested by
the Customer. The Custodian will supply to the Customer from
time to time, as mutually agreed upon, a statement in respect
to any Property in an Account held by the Custodian or by a
Subcustodian. In the absence of the filing in writing with the
Custodian by the Customer of exceptions or objections to any
such statement within sixty (60) days of the mailing thereof,
the Customer shall be deemed to have approved such statement
and in such case or upon written approval of the Customer of
any such statement, such statement shall be presumed to be for
all purposes correct with respect to all information set forth
therein.
(b) The Custodian shall take all reasonable action as the Customer
may request to obtain from year to year favorable opinions
from the Customer's independent certified public accountants
with respect to the Custodian's activities hereunder in
connection with the preparation of the Customer's Form N1-A
and the Customer's Form N-SAR or other periodic reports to the
SEC and with respect to any other requirements of the SEC.
(c) At the request of the Customer, the Custodian shall deliver to
the Customer a written report prepared by the Custodian's
independent certified public accountants with respect to the
services provided by the Custodian under this Agreement,
including, without limitation, the Custodian's accounting
system, internal accounting control and procedures for
safeguarding Cash and Securities, including Cash and
Securities deposited and/or maintained in a securities system
or with a Subcustodian. Such report shall be of sufficient
scope and in sufficient detail as may reasonably be required
by the Customer and as may reasonably be obtained by the
Custodian.
(d) The Customer may elect to participate in any of the electronic
on-line service and communications systems offered by the
Custodian which can provide the Customer, on a daily basis,
with the ability to view on-line or to print on hard copy
various reports of Account activity and of Securities and/or
Cash being held in any Account. To the extent that such
service shall include market values of Securities in an
Account, the Customer hereby acknowledges that the Custodian
now obtains and may in the future obtain information on such
values from outside sources that the Custodian considers to be
reliable and the Customer agrees that the Custodian (i) does
not verify or represent or warrant either the reliability of
such service nor the accuracy or completeness of any such
information furnished or obtained by or through such service
and (ii) shall be without liability in selecting and utilizing
such service or furnishing any information derived therefrom.
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9. Holding of Securities, Nominees, etc. Securities in an Account which
are held by the Custodian or any Subcustodian may be held by such entity in the
name of the Customer, on behalf of a Portfolio, in the Custodian's or
Subcustodian's name, in the name of the Custodian's or Subcustodian's nominee,
or in bearer form. Securities that are held by a Subcustodian or which are
eligible for deposit in a Securities System as provided above may be maintained
with the Subcustodian or the Securities System in an account for the Custodian's
or Subcustodian's customers, unless prohibited by law, rule, or regulation. The
Custodian or Subcustodian, as the case may be, may combine certificates
representing Securities held in an Account with certificates of the same issue
held by it as fiduciary or as a custodian. In the event that any Securities in
the name of the Custodian or its nominee or held by a Subcustodian and
registered in the name of such Subcustodian or its nominee are called for
partial redemption by the issuer of such Security, the Custodian may, subject to
the rules or regulations pertaining to allocation of any Securities System in
which such Securities have been deposited, allot, or cause to be allotted, the
called portion of the respective beneficial holders of such class of security in
any manner the Custodian deems to be fair and equitable.
10. Proxies, etc. With respect to any proxies, notices, reports or
other communications relative to any of the Securities in any Account, the
Custodian shall perform such services and only such services relative thereto as
are (i) set forth in Section 3 of this Agreement, (ii) described in Exhibit B
attached hereto (as such service therein described may be in effect from time to
time) (the "Proxy Service") and (iii) as may otherwise be agreed upon between
the Custodian and the Customer. The liability and responsibility of the
Custodian in connection with the Proxy Service referred to in (ii) of the
immediately preceding sentence and in connection with any additional services
which the Custodian and the Customer may agree upon as provided in (iii) of the
immediately preceding sentence shall be as set forth in the description of the
Proxy Service and as may be agreed upon by the Custodian and the Customer in
connection with the furnishing of any such additional service and shall not be
affected by any other term of this Agreement. Neither the Custodian nor its
nominees or agents shall vote upon or in respect of any of the Securities in an
Account, execute any form of proxy to vote thereon, or give any consent or take
any action (except as provided in Section 3) with respect thereto except upon
the receipt of Instructions relative thereto.
11. Segregated Account. To assist the Customer in complying with the
requirements of the 1940 Act and the rules and regulations thereunder, the
Custodian shall, upon receipt of Instructions, establish and maintain a
segregated account or accounts on its books for and on behalf of a Portfolio.
12. Settlement Procedures. Securities will be transferred, exchanged or
delivered by the Custodian or a Subcustodian upon receipt by the Custodian of
Instructions which include all information required by the Custodian. Settlement
and payment for Securities received for an Account and delivery of Securities
out of such Account may be effected in accordance with the customary or
established securities trading or securities processing practices and procedures
in the Jurisdiction or market in which the transaction occurs, including,
without limitation, delivering Securities to the purchaser thereof or to a
dealer therefor (or an agent for such purchaser or dealer) against a receipt
with the expectation of receiving later payment for such Securities from such
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purchaser or dealer, as such practices and procedures may be modified or
supplemented in accordance with the standard operating procedures of the
Custodian in effect from time to time for that jurisdiction or market. The
Custodian shall not be liable for any loss which results from effecting
transactions in accordance with the customary or established securities trading
or securities processing practices and procedures in the applicable jurisdiction
or market.
Notwithstanding that the Custodian may settle purchases and sales
against, or credit income to, an Account, on a contractual basis, as outlined in
the Global Guide provided to the Customer by the Custodian, the Custodian may,
at its sole option, reverse such credits or debits to the appropriate Account in
the event that the transaction does not settle, or the income is not received in
a timely manner, and the Customer agrees to hold the Custodian harmless from any
losses which may result therefrom.
13. Conditional Credits.
(a) Notwithstanding any other provision of this Agreement, the
Custodian shall not be required to comply with any
Instructions to settle the purchase of any securities for the
Account, unless there are sufficient immediately available
funds in the relevant currency in the Account, provided that
if, after all expenses, debits and withdrawals of Cash in the
relevant currency ("Debits") applicable to the Account have
been made and if after all Conditional Credits, as defined
below, applicable to the Account have been made final entries
as set forth in (c) below, the amount of immediately available
funds of the relevant currency in such Account is at least
equal to the aggregate purchase price of all securities for
which the Custodian has received Instructions to settle on
that date ("Settlement Date"), the Custodian, upon settlement,
shall credit the Securities to the Account by making a final
entry on its books and records.
(b) Notwithstanding the foregoing, if after all Debits applicable
to the Account have been made, there remains outstanding any
Conditional Credit (as defined below) applicable to the
Account or the amount of immediately available funds in a
given currency in such Account are less than the aggregate
purchase price in such currency of all securities for which
the Custodian has received Instructions to settle on the
Settlement Date, the Custodian, upon settlement, may credit
the securities to the Account by making a conditional entry on
its books and records ("Conditional Credit"), pending receipt
of sufficient immediately available funds in the relevant
currency in the Account.
(c) If, within a reasonable time from the posting of a Conditional
Credit and after all Debits applicable to the Account have
been made, immediately available funds in the relevant
currency at least equal to the aggregate purchase price in
such currency of all securities subject to a Conditional
Credit on a Settlement Date are deposited into the Account,
the Custodian shall make the Conditional Credit a final entry
on its books and records. In such case, the Customer shall be
liable to the Custodian only for late
8
<PAGE>
charges at a rate which the Custodian customary charges for
similar extensions of credit.
(d) If, within a reasonable time from the posting of a Conditional
Credit and after all Debits applicable to the Account have
been made, immediately available funds in the relevant
currency at least equal to the aggregate purchase price in
such currency of all securities subject to a Conditional
Credit on a Settlement Date are not deposited into the
Account, the Customer authorizes the Custodian, as agent, to
sell the securities and credit the Account with the proceeds
of such sale. In such case, the Customer shall be liable to
the Custodian for any deficiencies, out-of-pocket costs and
expenses associated with the sale of the securities, including
but not limited to, shortfalls in the sales proceeds and the
Custodian is hereby authorized to sell such other securities
to the extent necessary to satisfy such shortfalls with the
net proceeds of such sales.
(e) The Customer agrees that it will not use the Account to
facilitate the purchase of securities without sufficient funds
in the Account (which funds shall not include the expected
proceeds of the sale of the purchased securities).
14. Permitted Transactions. The Customer agrees that it will cause
transactions to be made pursuant to this Agreement only upon Instructions in
accordance with Section 15 and only for the purposes listed below.
(a) In connection with the purchase or sale of Securities at
prices as confirmed by Instructions.
(b) When Securities are called, redeemed or retired, or otherwise
become payable.
(c) In exchange for or upon conversion into other securities alone
or other securities and cash pursuant to any plan or merger,
consolidation, reorganization, recapitalization or
readjustment.
(d) Upon conversion of Securities pursuant to their terms into
other securities.
(e) Upon exercise of subscription, purchase or other similar
rights represented by Securities.
(f) For the payment of interest, taxes, management or supervisory
fees, distributions or operating expenses.
(g) In connection with any borrowings by the Customer requiring a
pledge of Securities, but only against receipt of amounts
borrowed.
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<PAGE>
(h) In connection with any loans, but only against receipt of
collateral as specified in Instructions which shall reflect
any restrictions applicable to the Customer.
(i) For the purpose of redeeming shares of the capital stock of
the Customer against delivery of the shares to be redeemed to
the Custodian, a Subcustodian or the Customer's transfer
agent.
(j) For the purpose of redeeming in kind shares of the Customer
against delivery of the shares to be redeemed to the
Custodian, a Subcustodian or the Customer's transfer agent.
(k) For delivery in accordance with the provisions of any
agreement among the Customer, on behalf of a Portfolio, the
Custodian and a broker-dealer registered under the Securities
Exchange Act of 1934 and a member of the National Association
of Securities Dealers, Inc., relating to compliance with the
rules of The Options Clearing Corporation, the Commodities
Futures Trading Commission and of any registered national
securities exchange, or of any similar organization or
organizations, regarding escrow or other arrangements in
connection with transactions by the Customer.
(l) For release of Securities to designated brokers under covered
call options, provided, however, that such Securities shall be
released only upon payment to the Custodian of monies for the
premium due and a receipt for the Securities which are to be
held in escrow. Upon exercise of the option, or at expiration,
the Custodian will receive the Securities previously deposited
from broker. The Custodian will act strictly in accordance
with Instructions in the delivery of Securities to be held in
escrow and will have no responsibility or liability for any
such Securities which are not returned promptly when due other
than to make proper request for such return.
(m) For spot or forward foreign exchange transactions to
facilitate security trading or receipt of income from
Securities related transactions.
(n) Upon the termination of this Agreement as set forth in Section
20.
(o) For other proper purposes.
The Customer agrees that the Custodian shall have no obligation to
verify the purpose for which a transaction is being effected.
15. Instructions. The term "Instructions" means instructions from the
Customer in respect of any of the Custodian's duties hereunder which have been
received by the Custodian at its address set forth in Section 22 below (i) in
writing (including, without limitation, facsimile transmission) or by tested
telex signed or given by such one or more person or persons as the Customer
shall have from time to time authorized in writing to give the particular class
of Instructions in question and whose
10
<PAGE>
name and (if applicable) signature and office address have been filed with the
Custodian, or (ii) which have been transmitted electronically through an
electronic on-line service and communications system offered by the Custodian or
other electronic instruction system acceptable to the Custodian, or (iii) a
telephonic or oral communication by one or more persons as the Customer shall
have from time to time authorized to give the particular class of Instructions
in question and whose name has been filed with the Custodian; or (iv) upon
receipt of such other form of instructions as the Customer may from time to time
authorize in writing and which the Custodian has agreed in writing to accept.
Instructions in the form of oral communications shall be confirmed by the
Customer by tested telex or writing in the manner set forth in clause (i) above,
but the lack of such confirmation shall in no way affect any action taken by the
Custodian in reliance upon such oral instructions prior to the Custodian's
receipt of such confirmation. Instructions may relate to specific transactions
or to types or classes of transactions, and may be in the form of standing
instructions.
The Custodian shall have the night to assume in the absence of notice
to the contrary from the Customer that any person whose name is on file with the
Custodian pursuant to this Section has been authorized by the Customer to give
the Instructions in question and that such authorization has not been revoked.
The Custodian may act upon and conclusively rely on, without any liability to
the Customer or any other person or entity for any losses resulting therefrom,
any Instructions reasonably believed by it to be furnished by the proper person
or persons as provided above.
16. Standard of Care. The Custodian shall be responsible for the
performance of only such duties as are set forth herein or contained in
Instructions given to the Custodian which are not contrary to the provisions of
this Agreement. The Custodian will use reasonable care with respect to the
safekeeping of Property in each Account and, except as otherwise expressly
provided herein, in carrying out its obligations under this Agreement. So long
as and to the extent that it has exercised reasonable care, the Custodian shall
not be responsible for the title, validity or genuineness of any Property or
other property or evidence of title thereto received by it or delivered by it
pursuant to this Agreement and shall be held harmless in acting upon, and may
conclusively rely on, without liability for any loss resulting therefrom, any
notice, request consent, certificate or other instrument reasonably believed by
it to be genuine and to be signed or furnished by the proper party or parties,
including, without limitation, Instructions, and shall be indemnified by the
Customer for any losses, damages, costs and expenses (including, without
limitation, the fees and expenses of counsel) incurred by the Custodian and
arising out of action taken or omitted with reasonable care by the Custodian
hereunder or under any Instructions. The Custodian shall be liable to the
Customer for any act or omission to act of any Subcustodian to the same extent
as if the Custodian committed such act itself. With respect to a Securities
System, the Custodian shall only be responsible or liable for losses arising
from employment of such Securities System caused by the Custodian's own failure
to exercise reasonable care. In the event of any loss to the Customer by reason
of the failure of the Custodian or a Subcustodian to utilize reasonable care,
the Custodian shall be liable to the Customer to the extent of the Customer's
actual damages at the time such loss was discovered without reference to any
special conditions or circumstances. In no event shall the Custodian be liable
for any consequential or special damages. The Custodian shall be entitled to
rely, and may act, on advice of counsel (who may be
11
<PAGE>
counsel for the Customer) on all matters and shall be without liability for any
action reasonably taken or omitted pursuant to such advice.
In the event the Customer subscribes to an electronic on-line service
and communications system offered by the Custodian, the Customer shall be fully
responsible for the security of the Customer's connecting terminal, access
thereto and the proper and authorized use thereof and the initiation and
application of continuing effective safeguards with respect thereto and agree to
defend and indemnify the Custodian and hold the Custodian harmless from and
against any and all losses, damages, costs and expenses (including the fees and
expenses of counsel) incurred by the Custodian as a result of any improper or
unauthorized use of such terminal by the Customer or by any others.
All collections of funds or other property paid or distributed in
respect of Securities in an Account, including funds involved in third-party
foreign exchange transactions, shall be made at the risk of the Customer.
Subject to the exercise of reasonable care, the Custodian shall have no
liability for any loss occasioned by delay in the actual receipt of notice by
the Custodian or by a Subcustodian of any payment, redemption or other
transaction regarding Securities in each Account in respect of which the
Custodian has agreed to take action as provided in Section 3 hereof. The
Custodian shall not be liable for any loss resulting from, or caused by, or
resulting from acts of governmental authorities (whether de jure or de facto),
including, without limitation, nationalization, expropriation, and the
imposition of currency restrictions; devaluations of or fluctuations in the
value of currencies; changes in laws and regulations applicable to the banking
or securities industry; market conditions that prevent the orderly execution of
securities transactions or affect the value of Property; acts of war, terrorism,
insurrection or revolution, strikes or work stoppages; the inability of a local
clearing and settlement system to settle transactions for reasons beyond the
control of the Custodian; hurricane, cyclone, earthquake, volcanic eruption,
nuclear fusion, fission or radioactivity, or other acts of God.
The Custodian shall have no liability in respect of any loss, damage or
expense suffered by the Customer, insofar as such loss, damage or expense arises
from the performance of the Custodian's duties hereunder by reason of the
Custodian's reliance upon records that were maintained for the Customer by
entities other than the Custodian prior to the Custodian's employment under this
Agreement.
The provisions of this Section shall survive termination of this
Agreement.
17. Investment Limitations and Legal or Contractual Restrictions or
Regulations. The Custodian shall not be liable to the Customer and the Customer
agrees to indemnify the Custodian and its nominees, for any loss, damage or
expense suffered or incurred by the Custodian or its nominees arising out of any
violation of any investment restriction or other restriction or limitation
applicable to the Customer or any Portfolio pursuant to any contract or any law
or regulation. The provisions of this Section shall survive termination of this
Agreement.
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<PAGE>
18. Fees and Expenses. The Customer agrees to pay to the Custodian such
compensation for its services pursuant to this Agreement as may be mutually
agreed upon in writing from time to time and the Custodian's reasonable
out-of-pocket or incidental expenses in connection with the performance of this
Agreement, including (but without limitation) legal fees as described herein
and/or deemed necessary in the judgment of the Custodian to keep safe or protect
the Property in the Account. The initial fee schedule is attached hereto as
Exhibit C. The Customer hereby agrees to hold the Custodian harmless from any
liability or loss resulting from any taxes or other governmental charges, and
any expense related thereto, which may be imposed, or assessed with respect to
any Property in an Account and also agrees to hold the Custodian, its
Subcustodians, and their respective nominees harmless from any liability as a
record holder of Property in such Account. The Custodian is authorized to charge
the applicable Account for such items and the Custodian shall have a lien on the
Property in the applicable Account for any amount payable to the Custodian under
this Agreement, including but not limited to amounts payable pursuant to Section
13 and pursuant to indemnities granted by the Customer under this Agreement. The
provisions of this Section shall survive the termination of this Agreement.
19. Tax Reclaims. With respect to withholding taxes deducted and which
may be deducted from any income received from any Property in an Account, the
Custodian shall perform such services with respect thereto as are described in
Exhibit D attached hereto and shall in connection therewith be subject to the
standard of care set forth in such Exhibit D. Such standard of care shall not be
affected by any other term of this Agreement.
20. Amendment, Modifications, etc. No provision of this Agreement may
be amended, modified or waived except in a writing signed by the parties hereto.
No waiver of any provision hereto shall be deemed a continuing waiver unless it
is so designated. No failure or delay on the part of either party in exercising
any power or right under this Agreement operates as a waiver, nor does any
single or partial exercise of any power or right preclude any other or further
exercise thereof or the exercise of any other power or right.
21. Termination.
(a) Termination of Entire Agreement. This Agreement may be
terminated by the Customer or the Custodian by ninety (90)
days' written notice to the other; provided that notice by the
Customer shall specify the names of the persons to whom the
Custodian shall deliver the Securities in each Account and to
whom the Cash in such Account shall be paid. If notice of
termination is given by the Custodian, the Customer shall,
within ninety (90) days following the giving of such notice,
deliver to the Custodian a written notice specifying the names
of the persons to whom the Custodian shall deliver the
Securities in each Account and to whom the Cash in such
Account shall be paid. In either case, the Custodian will
deliver such Securities and Cash to the persons so specified,
after deducting therefrom any amounts which the Custodian
determines to be owed to it under Sections 13, 18, and 24. In
addition, the Custodian may in its discretion withhold from
such delivery such Cash and Securities as may be necessary
13
<PAGE>
to settle transactions pending at the time of such delivery.
The Customer grants to the Custodian a lien and right of
setoff against the Account and all Property held therein from
time to time in the full amount of the foregoing obligations.
If within ninety (90) days following the giving of a notice of
termination by the Custodian, the Custodian does not receive
from the Customer a written notice specifying the names of the
persons to whom the Custodian shall deliver the Securities in
each Account and to whom the Cash in such Account shall be
paid, the Custodian, at its election, may deliver such
Securities and pay such Cash to a bank or trust company doing
business in the State of New York to be held and disposed of
pursuant to the provisions of this Agreement, or may continue
to hold such Securities and Cash until a written notice as
aforesaid is delivered to the Custodian, provided that the
Custodian's obligations shall be limited to safekeeping.
(b) Termination as to One or More Portfolios. This Agreement may
be terminated by the Customer or the Custodian as to one or
more Portfolios (but less than all of the Portfolios) by
delivery of an amended Exhibit A deleting such Portfolios, in
which case termination as to such deleted Portfolios shall
take effect ninety (90) days after the date of such delivery,
or such earlier time as mutually agreed. The execution and
delivery of an amended Exhibit A which deletes one or more
Portfolios shall constitute a termination of this Agreement
only with respect to such deleted Portfolio(s), shall be
governed by the preceding provisions of Section 21 as to the
identification of a successor custodian and the delivery of
Cash and Securities of the Portfolio(s) so deleted to such
successor custodian and shall not affect the obligations of
the Custodian and the Customer hereunder with respect to the
other Portfolios set forth in Exhibit A, as amended from time
to time.
22. Notices. Except as otherwise provided in this Agreement, all
requests, demands or other communications between the parties or notices in
connection herewith (a) shall be in writing, hand delivered or sent by
registered mail, telex or facsimile addressed to such other address as shall
have been furnished by the receiving party pursuant to the provisions hereof and
(b) shall be deemed effective when received, or, in the case of a telex, when
sent to the proper number and acknowledged by a proper answer back.
23. Several Obligations of the Portfolios. With respect to any
obligations of the Customer on behalf of each Portfolio and each of its related
Accounts arising out of this Agreement, the Custodian shall look for payment or
satisfaction of any obligation solely to the assets and property of the
Portfolio and such Accounts to which such obligation relates as though the
Customer had separately contracted with the Custodian by separate written
instrument with respect to each Portfolio and its related Accounts.
24. Security for Payment. To secure payment of all obligations due
hereunder, the Customer hereby grants to Custodian a continuing security
interest in and right of setoff against each Account and all Property held
therein from time to time in the full amount of such obligations;
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<PAGE>
provided that, if there is more than one Account and the obligations secured
pursuant to this Section can be allocated to a specific Account or the Portfolio
related to such Account, such security interest and right of setoff will be
limited to Property held for that Account only and its related Portfolio. Should
the Customer fail to pay promptly any amounts owed hereunder, Custodian shall be
entitled to use available Cash in the Account or applicable Account, as the case
may be, and to dispose of Securities in the Account or such applicable Account
as is necessary. In any such case and without limiting the foregoing, Custodian
shall be entitled to take such other action(s) or exercise such other options,
powers and rights as Custodian now or hereafter has as a secured creditor under
the New York Uniform Commercial Code or any other applicable law.
25. Representations and Warranties.
(a) The Customer hereby represents and warrants to the Custodian
that:
(i) the employment of the Custodian and the allocation of
fees, expenses and other charges to any Account as
herein provided, is not prohibited by law or any
governing documents or contracts to which the
Customer is subject;
(ii) the terms of this Agreement do not violate any
obligation by which the Customer is bound, whether
arising by contract, operation of law or otherwise;
(iii) this Agreement has been duly authorized by
appropriate action and when executed and delivered
will be binding upon the Customer and each Portfolio
in accordance with its terms; and
(iv) the Customer will deliver to the Custodian a duly
executed Secretary's Certificate in the form of
Exhibit E hereto or such other evidence of such
authorization as the Custodian may reasonably
require, whether by way of a certified resolution or
otherwise.
(b) The Custodian hereby represents and warrants to the Customer that:
(i) the terms of this Agreement do not violate any
obligation by which the Custodian is bound, whether
arising by contract, operation of law or otherwise;
(ii) this Agreement has been duly authorized by
appropriate action and when executed and delivered
will be binding upon the Custodian in accordance with
its terms;
(iii) the Custodian will deliver to the Customer such
evidence of such authorization as the Customer may
reasonably require, whether by way of a certified
resolution or otherwise; and
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<PAGE>
(iv) Custodian is qualified as a custodian under Section
26(a) of the 1940 Act and warrants that it will
remain so qualified or upon ceasing to be so
qualified shall promptly notify the Customer in
writing.
26. Governing Law and Successors and Assigns. This Agreement shall be
governed by the law of the State of New York and shall not be assignable by
either party, but shall bind the successors in interest of the Customer and the
Custodian.
27. Publicity. Customer shall furnish to Custodian at its office
referred to in Section 22 above, prior to any distribution thereof, copies of
any material prepared for distribution to any persons who are not parties hereto
that refer in any way to the Custodian. Customer shall not distribute or permit
the distribution of such materials if Custodian reasonably objects in writing
within ten (10) business days of receipt thereof (or such other time as may be
mutually agreed) after receipt thereof. The provisions of this Section shall
survive the termination of this Agreement.
28. Representative Capacity and Binding Obligation. A copy of the
[Declaration of Trust/Trust Instrument] of the Customer is on file with The
Secretary of the [Commonwealth of Massachusetts/State of Delaware], and notice
is hereby given that this Agreement is not executed on behalf of the Trustees of
the Customer as individuals, and the obligations of this Agreement are not
binding upon any of the Trustees, officers or shareholders of the Customer
individually but are binding only upon the assets and property of the
Portfolios.
The Custodian agrees that no shareholder, trustee or officer of the
Customer may be held personally liable or responsible for any obligations of the
Customer arising out of this Agreement.
29. Submission to Jurisdiction. Any suit, action or proceeding arising
out of this Agreement may be instituted in any State or Federal court sitting in
the City of New York, State of New York, United States of America, and the
Customer irrevocably submits to the non-exclusive jurisdiction of any such court
in any such suit, action or proceeding and waives, to the fullest extent
permitted by law, any objection which it may now or hereafter have to the laying
of venue of any such suit, action or proceeding brought in such a court and any
claim that such suit, action or proceeding was brought in an inconvenient forum.
30. Confidentiality. The parties hereto agree that each shall treat
confidentially the terms and conditions of this Agreement and all information
provided by each party to the other regarding its business and operations. All
confidential information provided by a party hereto shall be used by any other
party hereto solely for the purpose of rendering services pursuant to this
Agreement and, except as may be required in carrying out this Agreement, shall
not be disclosed to any third party without the prior consent of such providing
party. The foregoing shall not be applicable to any information that is publicly
available when provided or thereafter becomes publicly available other than
through a breach of this Agreement, or that is required or requested to be
disclosed by any bank or other regulatory examiner of the Custodian, Customer,
or any Subcustodian, any auditor of the
16
<PAGE>
parties hereto, by judicial or administrative process or otherwise by applicable
law or regulation. The provisions of this Section shall survive the termination
of this Agreement.
31. Severability. If any provision of this Agreement is determined to
be invalid or unenforceable, such determination shall not affect the validity or
enforceability of any other provision of this Agreement.
32. Entire Agreement. This Agreement together with any exhibits
attached hereto, contains the entire agreement between the parties relating to
the subject matter hereof and supersedes any oral statements and prior writings
with respect thereto.
33. Headings. The headings of the paragraphs hereof are included for
convenience of reference only and do not form a part of this Agreement.
34. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original. This Agreement shall
become effective when one or more counterparts have been signed and delivered by
each of the parties hereto.
IN WITNESS WHEREOF, each of the parties has caused its duly authorized
signatories to execute this Agreement as of the date first written above.
[NAME OF CUSTOMER]
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
BANKERS TRUST COMPANY
By:
----------------------------
Name:
--------------------------
Title:
-------------------------
17
<PAGE>
EXHIBIT A
To Custodian Agreement dated as of ______________,199__ between Bankers
Trust Company and _______________________.
LIST OF PORTFOLIOS
The following is a list of Portfolios referred to in the first WHEREAS
clause of the above-referred to Custodian Agreement. Terms used herein as
defined terms unless otherwise defined shall have the meanings ascribed to them
in the above-referred to Custodian Agreement.
Dated as of:
[NAME OF CUSTOMER]
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
BANKERS TRUST COMPANY
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
<PAGE>
EXHIBIT B
To Custodian Agreement dated as of ________________, 199__ between
Bankers Trust Company and __________________.
PROXY SERVICE
The following is a description of the Proxy Service referred to in
Section 10 of the above referred to Custodian Agreement. Terms used herein as
defined terms shall have the meanings ascribed to them therein unless otherwise
defined below.
The Custodian provides a service, described below, for the transmission
of corporate communications in connection with shareholder meetings relating to
Securities held in the countries specified in the Global Guide]. For the United
States and Canada, the term "corporate communications" means the proxy
statements or meeting agenda, proxy cards, annual reports and any other meeting
materials received by the Custodian. For countries other then the United States
and Canada, the term "corporate communications" means the meeting agenda only
and does not include any meeting circulars, proxy statements or any other
corporate communications furnished by the issuer in connection with such
meeting. Non-meeting related corporate communications are not included in the
transmission service to be provided by the Custodian except upon request as
provided below.
The Custodian's process for transmitting and translating meeting
agendas will be as follows:
1) If the meeting agenda is not provided by the issuer in the
English language, and if the language of such agenda is in the
official language of the country in which the related security
is held, the Custodian will as soon as practicable after
receipt of the original meeting agenda by a Subcustodian
provide an English translation prepared by that Subcustodian.
2) If an English translation of the meeting agenda is furnished,
the local language agenda will not be furnished unless
requested.
Translations will be free translations and neither the Custodian nor
any Subcustodian will be liable or held responsible for the accuracy thereof or
any direct or indirect consequences arising therefrom, including without
limitation arising out of any action taken or omitted to be taken based thereon.
<PAGE>
If requested, the Custodian will, on a reasonable efforts basis,
endeavor to obtain any additional corporate communication such as annual or
interim reports, proxy statements, meeting circulars, or local language agendas,
and provide them in the form obtained.
Timing in the voting process is important and, in that regard, upon
receipt by the Custodian of notice from a Subcustodian, the Custodian will
provide a notice to the Customer indicating the deadline for receipt of its
instructions to enable the voting process to take place effectively and
efficiently. As voting procedures will vary from market to market, attention to
any required procedures will be very important. Upon timely receipt of voting
instructions, the Custodian will promptly forward such instructions to the
applicable Subcustodian. If voting instructions are not timely received, the
Custodian shall have no liability or obligation to take any action.
For Securities held in markets other than those set forth in the first
paragraph, the Custodian wall not furnish the material described above or seek
voting instructions. However, if requested to exercise voting rights at a
specific meeting, the Custodian will endeavor to do so on a reasonable efforts
basis without any assurance that such rights will be so exercised at such
meeting.
If the Custodian or any Subcustodian incurs extraordinary expenses in
exercising voting rights related to any Securities pursuant to appropriate
instructions or direction (e.g., by way of illustration only and not by way of
limitation, physical presence is required at a meeting and/or travel expenses
are incurred), such expenses will be reimbursed out of the Account containing
such Securities unless other arrangements have been made for such reimbursement.
It is the intent of the Custodian to expand the Proxy Service to
include jurisdictions which are not currently included as set forth in the
Global Guide. The Custodian will notify the Customer as
<PAGE>
to the inclusion of additional countries or deletion of existing countries after
their inclusion or deletion and this Exhibit B will be deemed to be
automatically amended to include or delete such countries as the case may be.
Dated as of [NAME OF CUSTOMER]
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
By:
--------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
BANKERS TRUST COMPANY
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
<PAGE>
EXHIBIT C
To Custodian Agreement dated as of _____________, 199__ between Bankers
Trust Company and ________________.
CUSTODY FEE SCHEDULE
This Exhibit C shall be amended upon delivery by the Custodian of a new Exhibit
C to the Customer and acceptance thereof by the Customer and shall be effective
as of the date of acceptance by the Customer or a date agreed upon between the
Custodian and the Customer.
<PAGE>
EXHIBIT D
To Custodian Agreement dated as of _____________, 199__ between Bankers
Trust Company and ______________.
TAX RECLAIMS
Pursuant to Section 18 of the above referred to Custodian Agreement,
the Custodian shall perform the following services with respect to withholding
taxes imposed or which may be imposed on income from Property in any Account.
Terms used herein as defined terms shall unless otherwise defined have the
meanings ascribed to them in the above referred to Custodian Agreement.
When Withholding tax has been deducted with respect to income from any
Property in an Account, the Custodian will actively pursue on a reasonable
efforts basis the reclaim process, provided that the Custodian shall not be
required to institute any legal or administrative proceeding against any
Subcustodian or other person. The Custodian will provide fully detailed
advices/vouchers to support reclaims submitted to the local authorities by the
Custodian or its designee. In all cases of withholding, the Custodian will
provide full details to the Customer. If exemption from withholding at the
source can be obtained in the future, the Custodian will notify the Customer and
advise what documentation, if any, is required to obtain the exemption. Upon
receipt of such documentation from the Customer, the Custodian will file for
exemption on the Customer's behalf and notify the Customer when it has been
obtained.
In connection with providing the foregoing service, the Custodian shall
be entitled to apply categorical treatment of the Customer according to the
Customer's nationality, the particulars of its organization and other relevant
details that shall be supplied by the Customer. It shall be the duty of the
Customer to inform the Custodian of any change in the organization, domicile or
other relevant fact concerning tax treatment of the Customer and further to
inform the Custodian if the Customer is or becomes the beneficiary of any
special ruling or treatment not applicable to the general nationality and
category or entity of which the Customer is a part under general laws and treaty
provisions. The Custodian may rely on any such information provided by the
Customer.
In connection with providing the foregoing service, the Custodian may
also rely on professional tax services published by a major international
accounting firm and/or advice received from a Subcustodian in the jurisdictions
in question. In addition, the Custodian may seek the advice of counsel or other
professional tax advisers in such jurisdictions. The Custodian is entitled to
rely, and may act, on information set forth in such services and on advice
received from a Subcustodian,
<PAGE>
counsel or other professional tax advisers and shall be without liability to the
Customer for any action reasonably taken or omitted pursuant to information
contained in such services or such advice.
Dated as of [NAME OF CUSTOMER]
By:
--------------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
BANKERS TRUST COMPANY
By:
-------------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
<PAGE>
EXHIBIT E
[Name of Entity]
Certificate of the Secretary
I, [Name of Secretary], hereby certify that I am the Secretary of
[Name of Entity], a [type of entity] organized under the laws of [jurisdiction]
(the "Company"), and as such I am duly authorized to, and do hereby, certify
that:
1. Organizational Documents. The Company's organizational documents,
and all amendments thereto, have been filed with the appropriate governmental
officials of [jurisdiction], the Company continues to be in existence and is in
good standing, and no action has been taken to repeal such organizational
documents, the same being in full force and effect on the date hereof.
2. By-Laws. The Company's By-Laws have been duly adopted and no action
has been taken to repeal such By-Laws, the same being in full force and effect.
3. Resolutions. Resolutions have been duly adopted on behalf of the
Company, which resolutions (i) have not in any way been revoked or rescinded,
(ii) have been in full force and effect since their adoption, to and including
the date hereof, and are now in full force and effect, and (iii) are the only
corporate proceedings of the Company now in force relating to or affecting the
matters referred to therein, including, without limitation, confirming that the
Company is duly authorized to enter into a certain custody agreement with
Bankers Trust Company (the "Agreement"), and that certain designated officers,
including those identified in paragraph 4 of this Certificate, are authorized to
execute said Agreement on behalf of the Company, in conformity with the
requirements of the Company's organizational documents, Bylaws, and other
pertinent documents to which the Company may be bound.
4. Incumbency. The following named individuals are duly elected (or
appointed), qualified, and acting officers of the Company holding those offices
set forth opposite their respective names as of the date hereof, each having
full authority, acting individually, to bind the Company as a legal matter, with
respect to all matters pertaining to the Agreement, and to execute and deliver
said Agreement on behalf of the Company, and the signatures set forth opposite
the respective names and titles of said officers are their true, authentic
signatures:
Name Title Signature
[Name] [Position]
----------------------------------
[Name] [Position]
----------------------------------
[Name] [Position]
----------------------------------
<PAGE>
IN WITNESS WHEREOF, I have hereunto set my hand this _______ day of
[Date], 19__.
By:
------------------------------------
Name:
----------------------------------
Title: Secretary
I, [Name of Confirming Officer], [Title] of the Company, hereby certify
that on this ___ day of [Date], 19__, [Name of Secretary] is the duly elected
Secretary of the Company and that the signature above is his genuine signature.
By:
------------------------------------
Name:
---------------------------------
Title:
--------------------------------
<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 January 29, 1998 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 Post-Effective Amendment No. 21 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 Prospectuses 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
February 24, 1998
<PAGE>
EX-99.B(15)(d)
Amended
August 4, 1997
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
FLAG INVESTORS CLASS A SHARES
DISTRIBUTION PLAN
1. The Plan. This Plan (the "Plan") is a written plan as described in
Rule 12b-1 (the "Rule") under the Investment Company Act of 1940, as amended
(the "1940 Act") of the Flag Investors Class B Shares (the "Shares") of Flag
Investors Telephone Income Fund, Inc. (the "Fund"). Other capitalized terms
herein have the meaning given to them in the Fund's prospectus.
2. Payments Authorized. (a) The Fund's Distributor (the "Distributor")
is authorized, pursuant to the Plan, to make payments to any Participating
Dealer under a Sub-Distribution Agreement, to accept payments made to it under
the Distribution Agreement and to make payments on behalf of the Fund to
Shareholder Servicing Agents under Shareholder Servicing Agreements.
(b) The Distributor may make payments in any amount, provided
that the total amount of all payments made during a fiscal year of the Fund do
not exceed, in any fiscal year of the Fund, the amount paid to the Distributor
under the Distribution Agreement with respect to distribution of the Shares
which is an annual fee, calculated on an average daily net basis and paid
monthly, equal to .75% of the average daily net assets of the Shares of the
Fund.
3. Expenses Authorized. The Distributor is authorized, pursuant to the
Plan, from sums paid to it under the Distribution Agreement, to purchase
advertising for the Shares, to pay for promotional or sales literature and to
make payments to sales personnel affiliated with it for their efforts in
connection with sales of Shares. Any such advertising and sales material may
include references to other open-end investment companies or other investments,
provided that expenses relating to such advertising and sales material will be
allocated among such other investment companies or investments in an equitable
manner, and any sales personnel so paid are not required to devote their time
solely to the sale of Shares.
4. Certain Other Payments Authorized. As set forth in the Distribution
Agreement, the Fund assumes certain expenses, which the Distributor is
authorized to pay or cause to be paid on its behalf and such payments shall not
be included in the limitations contained in this Plan. These expenses include:
the fees of the Fund's investment advisor and the Distributor; 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 maintenance of registration of the Fund and its shares with the
Securities and Exchange Commission and various states and other jurisdictions
(including filing fees and 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 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
<PAGE>
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.
5. Other Distribution Resources. The Distributor and Participating
Dealers may expend their own resources separate and apart from amounts payable
under the Plan to support the Fund's distribution effort. The Distributor will
report to the Board of Directors on any such expenditures as part of its regular
reports pursuant to Section 6 of this Plan.
6. Reports. While this Plan is in effect, the Distributor shall report
in writing at least quarterly to the Fund's Board of Directors, and the Board
shall review, the following: (i) the amounts of all payments under the Plan, the
identity of the recipients of each such payment; (ii) the basis on which the
amount of the payment to such recipient was made; (iii) the amounts of expenses
authorized under this Plan and the purpose of each such expense; and (iv) all
costs of each item specified in Section 4 of this Plan (making estimates of such
costs where necessary or desirable), in each case during the preceding calendar
or fiscal quarter.
7. Effectiveness, Continuation, Termination and Amendment. (a) This
Plan has been approved by a vote of the Board of Directors of the Fund and of a
majority of the Directors who are not interested persons (as defined in the 1940
Act), cast in person at a meeting called for the purpose of voting on this Plan.
This Plan shall, unless terminated as hereinafter provided, continue in effect
from year to year only so long as such continuance is specifically approved at
least annually by the vote of the Fund's Board of Directors and by the vote of a
majority of the Directors of the Fund who are not interested persons (as defined
in the 1940 Act), cast in person at a meeting called for the purpose of voting
on such continuance.
(b) This Plan may be terminated at any time by a vote of a
majority of the Directors who are not interested persons (as defined in the 1940
Act) or by the vote of the holders of a majority of the Fund's outstanding
voting securities (as defined in the 1940 Act).
(c) This Plan may not be amended to increase materially the
amount of payments to be made without approval by a vote of the holders of at
least a majority of the Fund's outstanding voting securities (as defined in the
1940 Act) and all amendments must be approved by the Board of Directors in the
manner set forth under (a) above.
<PAGE>
NEW CLASS B SHARES
EX-99.B(15)(e)
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
FLAG INVESTORS CLASS B SHARES
Amend
August 4, 1997
DISTRIBUTION PLAN
1. The Plan. This Plan (the "Plan") is a written plan as described in
Rule 12b-1 (the "Rule") under the Investment Company Act of 1940, as amended
(the "1940 Act") of the Flag Investors Class B Shares (the "Shares") of Flag
Investors Telephone Income Fund, Inc. (the "Fund"). Other capitalized terms
herein have the meaning given to them in the Fund's prospectus.
2. Payments Authorized. (a) The Fund's Distributor (the "Distributor")
is authorized, pursuant to the Plan, to make payments to any Participating
Dealer under a Sub-Distribution Agreement, to accept payments made to it under
the Distribution Agreement and to make payments on behalf of the Fund to
Shareholder Servicing Agents under Shareholder Servicing Agreements.
(b) The Distributor may make payments in any amount, provided
that the total amount of all payments made during a fiscal year of the Fund do
not exceed, in any fiscal year of the Fund, the amount paid to the Distributor
under the Distribution Agreement with respect to distribution of the Shares
which is an annual fee, calculated on an average daily net basis and paid
monthly, equal to .75% of the average daily net assets of the Shares of the
Fund.
3. Expenses Authorized. The Distributor is authorized, pursuant to the
Plan, from sums paid to it under the Distribution Agreement, to purchase
advertising for the Shares, to pay for promotional or sales literature and to
make payments to sales personnel affiliated with it for their efforts in
connection with sales of Shares. Any such advertising and sales material may
include references to other open-end investment companies or other investments,
provided that expenses relating to such advertising and sales material will be
allocated among such other investment companies or investments in an equitable
manner, and any sales personnel so paid are not required to devote their time
solely to the sale of Shares.
4. Certain Other Payments Authorized. As set forth in the Distribution
Agreement, the Fund assumes certain expenses, which the Distributor is
authorized to pay or cause to be paid on its behalf and such payments shall not
be included in the limitations contained in this Plan. These expenses include:
the fees of the Fund's investment advisor and the Distributor; 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 maintenance of registration of the Fund and its shares with the
Securities and Exchange Commission and various states and other jurisdictions
(including filing fees and 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 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
<PAGE>
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.
5. Other Distribution Resources. The Distributor and Participating
Dealers may expend their own resources separate and apart from amounts payable
under the Plan to support the Fund's distribution effort. The Distributor will
report to the Board of Directors on any such expenditures as part of its regular
reports pursuant to Section 6 of this Plan.
6. Reports. While this Plan is in effect, the Distributor shall report
in writing at least quarterly to the Fund's Board of Directors, and the Board
shall review, the following: (i) the amounts of all payments under the Plan, the
identity of the recipients of each such payment; (ii) the basis on which the
amount of the payment to such recipient was made; (iii) the amounts of expenses
authorized under this Plan and the purpose of each such expense; and (iv) all
costs of each item specified in Section 4 of this Plan (making estimates of such
costs where necessary or desirable), in each case during the preceding calendar
or fiscal quarter.
7. Effectiveness, Continuation, Termination and Amendment. (a) This
Plan has been approved by a vote of the Board of Directors of the Fund and of a
majority of the Directors who are not interested persons (as defined in the 1940
Act), cast in person at a meeting called for the purpose of voting on this Plan.
This Plan shall, unless terminated as hereinafter provided, continue in effect
from year to year only so long as such continuance is specifically approved at
least annually by the vote of the Fund's Board of Directors and by the vote of a
majority of the Directors of the Fund who are not interested persons (as defined
in the 1940 Act), cast in person at a meeting called for the purpose of voting
on such continuance.
(b) This Plan may be terminated at any time by a vote of a
majority of the Directors who are not interested persons (as defined in the 1940
Act) or by the vote of the holders of a majority of the Fund's outstanding
voting securities (as defined in the 1940 Act).
(c) This Plan may not be amended to increase materially the
amount of payments to be made without approval by a vote of the holders of at
least a majority of the Fund's outstanding voting securities (as defined in the
1940 Act) and all amendments must be approved by the Board of Directors in the
manner set forth under (a) above.
<PAGE>
EX-99.B(15)(f)
Amended
August 4, 1997
FLAG INVESTORS TELEPHONE INCOME FUND, INC.
FLAG INVESTORS CLASS D SHARES
DISTRIBUTION PLAN
1. The Plan. This Plan (the "Plan") is a written plan as described in Rule 12b-1
(the "Rule") under the Investment Company Act of 1940, as amended (the "1940
Act") of the Flag Investors Class D Shares (the "Shares") of Flag Investors
Telephone Income Fund, Inc. (the "Fund"). Other capitalized terms herein have
the meaning given to them in the Fund's prospectus.
2. Payments Authorized. (a) The Fund's Distributor (the "Distributor") is
authorized, pursuant to the Plan, to make payments to any Participating Dealer
under a Sub-Distribution Agreement, to accept payments made to it under the
Distribution Agreement and to make payments on behalf of the Fund to Shareholder
Servicing Agents under Shareholder Servicing Agreements.
(b) The Distributor may make payments in any amount, provided
that the total amount of all payments made during a fiscal year of the Fund do
not exceed, in any fiscal year of the Fund, the amount paid to The Distributor
under the Distribution Agreement with respect to distribution of the Shares
which is an annual fee, calculated on an average daily net basis and paid
monthly, equal to .60% of the average daily net assets of the Shares of the
Fund.
3. Expenses Authorized. The Distributor is authorized, pursuant to the Plan,
from sums paid to it under the Distribution Agreement, to purchase advertising
for the Shares, to pay for promotional or sales literature and to make payments
to sales personnel affiliated with it for their efforts in connection with sales
of Shares. Any such advertising and sales material may include references to
other open-end investment companies or other investments, provided that expenses
relating to such advertising and sales material will be allocated among such
other investment companies or investments in an equitable manner, and any sales
personnel so paid are not required to devote their time solely to the sale of
Shares.
4. Certain Other Payments Authorized. As set forth in the Distribution
Agreement, the Fund assumes certain expenses, which the Distributor is
authorized to pay or cause to be paid on its behalf and such payments shall not
be included in the limitations contained in this Plan. These expenses include:
the fees of the Fund's investment advisor and the Distributor; 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 maintenance of registration of the Fund and its shares with the
Securities and Exchange Commission and various states and other jurisdictions
(including filing fees and 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 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
<PAGE>
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.
5. Other Distribution Resources. The Distributor and Participating Dealers may
expend their own resources separate and apart from amounts payable under the
Plan to support the Fund's distribution effort. The Distributor will report to
the Board of Directors on any such expenditures as part of its regular reports
pursuant to Section 6 of this Plan.
6. Reports. While this Plan is in effect, the Distributor shall report in
writing at least quarterly to the Fund's Board of Directors, and the Board shall
review, the following: (i) the amounts of all payments under the Plan, the
identity of the recipients of each such payment; (ii) the basis on which the
amount of the payment to such recipient was made; (iii) the amounts of expenses
authorized under this Plan and the purpose of each such expense; and (iv) all
costs of each item specified in Section 4 of this Plan (making estimates of such
costs where necessary or desirable), in each case during the preceding calendar
or fiscal quarter.
7. Effectiveness, Continuation, Termination and Amendment. (a) This Plan has
been approved by a vote of the Board of Directors of the Fund and of a majority
of the Directors who are not interested persons (as defined in the 1940 Act),
cast in person at a meeting called for the purpose of voting on this Plan. This
Plan shall, unless terminated as hereinafter provided, continue in effect from
year to year only so long as such continuance is specifically approved at least
annually by the vote of the Fund's Board of Directors and by the vote of a
majority of the Directors of the Fund who are not interested persons (as defined
in the 1940 Act), cast in person at a meeting called for the purpose of voting
on such continuance.
(b) This Plan may be terminated at any time by a vote of a
majority of the Directors who are not interested persons (as defined in the 1940
Act) or by the vote of the holders of a majority of the Fund's outstanding
voting securities (as defined in the 1940 Act).
(c) This Plan may not be amended to increase materially the
amount of payments to be made without approval by a vote of the holders of at
least a majority of the Fund's outstanding voting securities (as defined in the
1940 Act) and all amendments must be approved by the Board of Directors in the
manner set forth under (a) above.
<PAGE>
EX-99.B(18)(c)
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 August 4, 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. This Plan must be amended to properly describe (through
additional exhibits hereto or otherwise) each additional class of shares
approved by the Fund's Board of Directors after the date hereof. Before any
material 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.
<PAGE>
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.
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.
- --------
(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>
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 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
<PAGE>
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.
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:
<TABLE>
<CAPTION>
Total # of Shares Class A Class B Class D Unclassified
- ----------------- ------- ------- ------- ------------
<S> <C> <C> <C> <C>
70,000,000 60,000,000 5,000,000 3,000,000 2,000,000
</TABLE>
<PAGE>
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.
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.
Date Approved: August 4, 1997
Resolutions Approving New Distribution
Agreement for Flag Investors Shares
RESOLVED, that ICC Distributors, Inc. ("ICC ") be, and it hereby is,
appointed distributor for all classes of Alex. Brown Cash Reserve Fund, Inc.,
Flag Investors Telephone Income Fund, Inc., Flag Investors International Fund,
Inc., Flag Investors Emerging Growth Fund, Inc., Flag Investors
Short-Intermediate 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.,
and for the Flag Investors classes of each of Managed Municipal Fund, Inc. and
Total Return U.S. Treasury Fund, Inc., such appointment to be effective upon the
consummation of the merger of Alex. Brown Incorporated with and into a
subsidiary of Bankers Trust New York Corporation (the "Merger"), or at such
other time as the proper officers of the Fund shall determine.
FURTHER RESOLVED, that the proposed Distribution Agreement
between Alex. Brown Cash Reserve Fund, Inc. and ICC Distributors, Inc. with
respect to all shares except the Flag Investors 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 negotiate, enter into and execute such Distribution Agreement with
such modifications as said officers in consultation with counsel shall deem
necessary or appropriate or as may be required to conform with the requirements
of any applicable statute, regulation or regulatory body;
<PAGE>
FURTHER RESOLVED, that the proposed Distribution Agreement
between Alex. Brown Cash Reserve Fund, Inc., Flag Investors Telephone Income
Fund, Inc., Flag Investors International Fund, Inc., Flag Investors Emerging
Growth Fund, Inc., Total Return U.S. Treasury Fund, Inc. (for Flag Investors
Shares), Managed Municipal Fund, Inc. (for the Flag Investors Shares), Flag
Investors Short-Intermediate 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
Partner Fund, Inc., and ICC Distributors, Inc. be, and the same hereby is,
approved in substantially the form presented to this meeting and that the
appropriate officers of the Funds be, and they hereby are, authorized and
directed to negotiate, enter into and execute such Distribution Agreement with
such modifications as said officers in consultation with counsel shall deem
necessary or appropriate or as may be required to conform with the requirements
of any applicable statute, regulation or regulatory body.
Date Approved: August 4, 1997
Resolutions Approving New Plan
of Distribution for Class A Shares
RESOLVED, that the Plan of Distribution for the Flag Investors Class A
Shares of Flag Investors Telephone Income Fund, Inc. be, and hereby is, amended
to reflect the change in distributor effected at this meeting, such amendment to
be effective upon the consummation of the Merger, or such other time as the
proper officers of the Fund shall determine;
FURTHER RESOLVED, that the amended Plan is determined to be
reasonably likely to benefit such 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 continuation of said Plan, as
amended, be, and the same hereby is, approved.
Date Approved: August 4, 1997
Resolutions Approving New Plan
of Distribution for Class B Shares
FURTHER RESOLVED, that the Plan of Distribution for the Flag Investors
Class B Shares of said Fund be, and hereby is, amended to reflect the change in
distributor effected at this meeting, such amendment to be effective upon the
consummation of the Merger, or such other time as the proper officers of the
Fund shall determine;
FURTHER RESOLVED, that the amended Plan is determined to be
reasonably likely to benefit such class 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 continuation of said Plan, as
amended, be, and the same hereby is, approved.
Date Approved: August 4, 1997
Resolutions Approving New Plan
of Distribution for Class D Shares
<PAGE>
FURTHER RESOLVED, that the Plan of Distribution for the Flag Investors
Class D Shares of said Fund be, and hereby is, amended to reflect the change in
distributor effected at this meeting, such amendment to be effective upon the
consummation of the Merger, or such other time as the proper officers of the
Fund shall determine;
FURTHER RESOLVED, that the amended Plan is determined to be
reasonably likely to benefit such class 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; and
FURTHER RESOLVED, that the continuation of said Plan, as
amended, be, and the same hereby is, approved.
<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
Post-Effective Amendment No. 20 to Registrant's Registration Statement on Form
N-1A (File No. 2-87336), filed with the Securities and Exchange Commission via
EDGAR (Accession No. 0000950116-97-000792) on April 28, 1997 are herein
incorporated by reference.
4. Distribution Agreement dated August 31, 1997 between Registrant and ICC
Distributors, Inc. with respect to Flag Investors Shares filed as Exhibit (6)(a)
to this Post-Effective Amendment No. 21 to Registrant's Registration Statement
on Form N-1A (File No. 2-87336), filed herewith and is herein incorporated by
reference.
5. Distribution Plan with respect to Class A Shares filed as Exhibit (15)(d) to
this Post-Effective Amendment No. 21 to Registrant's Registration Statement on
Form N-1A (File No. 2-87336), filed herewith and is herein incorporated by
reference.
8. Distribution Plan with respect to Class D Shares filed as Exhibit (15)(f) to
this Post-Effective Amendment No. 21 to Registrant's Registration Statement on
Form N-1A (File No. 2-87336), filed herewith and is herein incorporated by
reference.
9. Distribution Plan with respect to Class B Shares filed as Exhibit (15)(e) to
this Post-Effective Amendment No. 21 to Registrant's Registration Statement on
Form N-1A (File No. 2-87336), filed herewith and is herein incorporated by
reference.
10. Form of Sub-Distribution Agreement between ICC Distributors and
Participating Dealers filed as Exhibit (6)(b) to this Post-Effective Amendment
No. 21 to Registrant's Registration Statement on Form N-1A (File No. 2- 87336),
filed herewith and 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>
EX-99.B(24)
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 Amy M. Olmert, 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: February 27, 1998
<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 Amy M. Olmert, 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: February 27, 1998
<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 Amy M.
Olmert, 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: February 27, 1998
<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 Amy M. Olmert, 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: February 27, 1998
<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 Amy M. Olmert, 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: February 27, 1998
<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 Amy M. Olmert, 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: February 27, 1998
<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 Amy M. Olmert, 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: February 27, 1998
<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 Amy M. Olmert, 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: February 27, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000731129
<NAME> TELEPHONE INCOME FUND
<SERIES>
<NUMBER> 001
<NAME> TELEPHONE A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 360,235,814
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