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STATEMENT OF ADDITIONAL INFORMATION
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FLAG INVESTORS COMMUNICATIONS FUND, INC.
One South Street
Baltimore, Maryland 21202
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THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A
PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH A
PROSPECTUS WHICH MAY BE OBTAINED FROM YOUR
SECURITIES 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, 1999, as Supplemented
through October 25, 1999
relating to the Prospectuses Dated
May 1, 1999, as Supplemented through October 11, 1999
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TABLE OF CONTENTS
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Page
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1. General Information and History......................................................... 1
2. Investment Objective and Policies....................................................... 1
3. Valuation of Shares and Redemption...................................................... 7
4. Federal Tax Treatment of Dividends and Distributions.................................... 7
5. Management of the Fund.................................................................. 10
6. Investment Advisory and Other Services.................................................. 16
7. Distribution of Fund Shares............................................................. 17
8. Brokerage............................................................................... 21
9. Capital Stock........................................................................... 23
10. Semi-Annual Reports..................................................................... 23
11. Custodian, Transfer Agent and Accounting Services....................................... 23
12. Independent Accountants................................................................. 24
13. Legal Matters........................................................................... 24
14. Performance Information................................................................. 24
15. Control Persons and Principal Holders of Securities..................................... 27
16. Financial Statements ................................................................... 27
Appendix................................................................................ A-1
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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.
The Fund currently offers four classes of shares: Flag Investors
Communications Fund Class A Shares ("Class A Shares"), Flag Investors
Communications Fund Class B Shares ("Class B Shares"), Flag Investors
Communications Fund Class C Shares ("Class C Shares") and Flag Investors
Communications Fund Institutional Shares ("Institutional Shares") (collectively,
the "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 to
prospective investors. 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
began 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 began
offering the Class B Shares on January 3, 1995, the Institutional Shares on
February 26, 1998 and the Class C Shares on October 19, 1998.
Under a license agreement dated January 19, 1989 between the Fund and
Alex. Brown & Sons Incorporated (predecessor to BT Alex. Brown Incorporated),
Alex. Brown & Sons Incorporated licenses to the Fund the "Flag Investors" name
and logo but retains rights to the name and logo, including the right to permit
other investment companies to use them.
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. 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. Companies would be considered to be
"engaged" in the research, development, manufacture or sale of communications
services, technology, equipment or products if they derived at least 50% of
their revenues from such activities.
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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. 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. 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.
There can be no assurance 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.
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.
Investments in Investment Grade 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 Advisors will review the situation and take appropriate action,
but will not be automatically required to sell the 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.)
Below Investment Grade Securities
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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 of both income and capital gains. 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.
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.
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 also 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 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.
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 Advisors believe that such investments
provide good opportunities for achieving income and capital gains without undue
risk.
Restricted Securities
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The Fund may 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.
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 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 Fund'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 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 while 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.
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 belong to
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 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
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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 eliminating outstanding contracts.
When the Fund writes a call option on securities that it owns, it gives
the purchaser of the option the right to buy the securities at the price
specified in the option (the "Exercise Price") at any time prior to the
expiration of the option. In the strategy to be employed by the Fund, the
Exercise Price, plus the option premium paid by the purchaser, is almost always
greater than the market price of the underlying security at the time the option
is written. If any option is exercised, the Fund will realize the long-term or
short-term gain or loss from the sale of the underlying security and the
proceeds of the sale will be increased by the net premium originally received.
By writing a covered option, the Fund may forego, in exchange for the net
premium, the opportunity to profit from an increase in value of the underlying
security above the Exercise Price. Thus, options will be written when the
Advisors believe the security should be held for the long term but expect no
appreciation or only moderate appreciation within the option period. The Fund
also may write covered options on securities that have a current value above the
original purchase price but which, if then sold, would not normally qualify for
a long-term capital gains treatment. Such activities will normally take place
during periods when market volatility is expected to be high.
Only call options that are traded on a national securities exchange will
be written. Call options are issued by the Options Clearing Corporation, which
also serves as the clearing house for transactions with respect to options. The
price of a call option is paid to the writer without refund on expiration or
exercise, and no portion of the price is retained by The Options Clearing
Corporation or the exchanges. 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 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
existing call option. 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 Board of Directors believes 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.
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Investment Restrictions
The Fund's investment program is subject to a number of investment
restrictions that reflect self-imposed standards as well as federal and state
regulatory limitations. The 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. The Fund will not:
1. Invest less than 65% of its total assets in the communications field,
except as described in the Prospectus, (otherwise the Fund will not concentrate
more than 25% of its total assets in securities of issuers in any industry);
2. Invest in the securities of any single issuer if, as a result, the Fund
would hold more than 10% of the outstanding voting securities of such issuer;
3. Borrow money, except as a temporary measure for extraordinary or
emergency purposes in an amount not exceeding 10% of the value of the total
assets of the Fund at the time of such borrowing;
4. Invest in real estate or mortgages on real estate;
5. Purchase or sell commodities or commodities contracts, provided that
the Fund may invest in financial futures and options on such futures;
6. 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;
7. Issue senior securities; or
8. 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.
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
1940 Act, except as permitted by federal law; and
2. Invest more than 10% of the value of its net assets in illiquid
securities (as defined under federal and state securities laws).
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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 (or the days on which they are observed): 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.
Under normal circumstances, the Fund will redeem Shares by check or by
wire transfer of funds, as described in the Prospectuses. However, if the Board
of Directors determines that it would be in the best interests of the remaining
shareholders, the Fund will make payment of the redemption price in whole or in
part by a distribution of readily marketable securities from the portfolio of
the Fund in lieu of cash, in conformity with applicable rules of the SEC. If
Shares are redeemed in kind, the redeeming shareholder will incur brokerage
costs in later converting the assets into cash. The method of valuing portfolio
securities is described under "Valuation of Shares," and such valuation will be
made as of the same time the redemption price is determined. The Fund, however,
has elected to be governed by Rule 18f-1 under the 1940 Act pursuant to which it
is obligated to redeem Shares solely in cash up to the lesser of $250,000 or 1%
of its net asset value during any 90-day period for any one shareholder.
4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
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 Prospectuses. 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 Prospectuses is not intended as a substitute
for careful tax planning. For example, under certain specified circumstances,
state income tax laws may exempt from taxation distributions of a regulated
investment company to the extent that such distributions are derived from
interest on federal obligations. Investors are urged to consult with their tax
advisor regarding whether such exemption is available.
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The following general discussion of certain federal income tax
consequences is based on the Internal Revenue Code of 1986, as amended (the
"Code") and the regulations issued thereunder as in effect on the date of this
Statement of Additional Information. New legislation, as well as administrative
changes or court decisions, may significantly change the conclusions expressed
herein, and may have a retroactive effect with respect to the transactions
contemplated herein.
Qualification as a Regulated Investment Company
The Fund intends to qualify and elect to be treated for each taxable year
as a regulated investment company ("RIC") under Subchapter M of the Code.
Accordingly, the Fund must, among other things, (a) derive at least 90% of its
gross income each taxable year from dividends, interest, payments with respect
to securities loans, gains from the sale or other disposition of stock,
securities or foreign currencies, and certain other related income, including,
generally, certain gains from options, futures and forward contracts; and (b)
diversify its holdings so that, at the end of each fiscal quarter of the Fund's
taxable year, (i) at least 50% of the market value of the Fund's total assets is
represented by cash and cash items, United States Government securities,
securities of other RICs, and other securities, with such other securities
limited, in respect to any one issuer, to an amount not greater than 5% of the
value of the Fund's total assets or 10% of the outstanding voting securities of
such issuer, and (ii) not more than 25% of the value of its total assets is
invested in the securities (other than United States Government securities or
securities of other RICs) of any one issuer or two or more issuers that the Fund
controls and which are engaged in the same, similar, or related trades or
business. For purposes of the 90% gross income requirement described above,
foreign currency gains that are not directly related to the Fund's principal
business of investing in stock or securities (or options or futures with respect
to stock or securities) may be excluded from income that qualifies under the 90%
requirement.
In addition to the requirements described above, in order to qualify as a
RIC, the Fund must distribute at least 90% of its net investment income (that
generally includes dividends, taxable interest, and the excess of net short-term
capital gains over net short-term capital losses less operating expenses) and at
least 90% of its net tax-exempt interest income, for each tax year, if any, to
its shareholders. If the Fund meets all of the RIC requirements, it will not be
subject to federal income tax on any of its net investment income or capital
gains that it distributes to shareholders.
Although the Fund intends to distribute substantially all of its net
investment income and may distribute its 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 the Fund fails to qualify for any taxable year 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 such distributions generally will be taxable to shareholders
as ordinary dividends to the extent of the Fund's current and accumulated
earnings and profits. In this event, such distributions generally will be
eligible for the dividends-received deduction for corporate shareholders.
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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 to the extent of the Fund's
earnings and profits. The Fund anticipates that it will distribute substantially
all of its investment company taxable income for each taxable year.
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
gains"). If such gains are distributed as a capital gains distribution, they are
taxable to shareholders that are individuals at a maximum rate of 20%,
regardless of the length of time the shareholder has held Shares. If any such
gains are retained, the Fund will pay federal income tax thereon, and, if the
Fund makes an election, the shareholders will include such undistributed gains
in their income, will increase their basis in Fund shares by the difference
between the amount of such includable gains and the tax deemed paid by such
shareholder and will be able to claim their share of the tax paid by the Fund as
a refundable credit.
In the case of corporate shareholders, Fund distributions (other than
capital gains distributions) generally qualify for the dividends-received
deduction to the extent of the gross amount of qualifying dividends received by
the Fund for the year. Generally, and subject to certain limitations, a dividend
will be treated as a qualifying dividend if it has been received from a domestic
corporation. Accordingly, distributions from the Fund will qualify for the
corporate dividends-received deduction.
Ordinarily, investors 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 the shareholder and paid by the Fund
in the year in which the dividends were declared.
Investors should be careful to consider the tax implications of purchasing
Shares just prior to the ex-dividend date of any ordinary income dividend or
capital gains distribution. Those investors will be taxable on the entire amount
of the dividend or distribution received, even though some or all of the amount
distributed may have been realized by the Fund prior to the investor's purchase.
The Fund will provide an annual statement to shareholders describing the
federal tax status of distributions paid (or deemed to be paid) by the Fund
during the year, including the amount of dividends eligible for the corporate
dividends-received deduction.
Sale or Exchange of Fund Shares
The sale or exchange of a share is a taxable event for the shareholder.
Generally, gain or loss on the sale or exchange of a Share will be capital gain
or loss that will be long-term if the Share has been held for more than twelve
months and otherwise will be short-term. For individuals, long-term capital
gains are currently taxed at a rate of 20% and short-term capital gains are
currently taxed at ordinary income tax rates. However, if a shareholder realizes
a loss on the sale, exchange or redemption of a Share held for six months or
less and has previously received a capital gains distribution with respect to
the Share (or any undistributed net capital gains of the Fund with respect to
such Share are included in determining the shareholder's long-term capital
gains), the shareholder must treat the loss as a long-term capital loss to the
extent of the amount of the prior capital gains distribution (or any
undistributed net capital gains of the Fund that have been included in
determining such shareholder's long-term capital gains). In addition,
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any loss realized on a sale or other disposition of Shares will be disallowed to
the extent an investor repurchases (or enters into a contract or option to
repurchase) Shares within a period of 61 days (beginning 30 days before and
ending 30 days after the disposition of the Shares). This loss disallowance rule
will apply to Shares received through the reinvestment of dividends during the
61-day period.
In certain cases, the Fund will be required to withhold and remit to the
United States Treasury 31% of distributions payable to any shareholder who (1)
has failed to provide a correct tax identification number, (2) is subject to
backup withholding by the Internal Revenue Service for failure to properly
report receipt of interest or dividends, or (3) has failed to certify to the
Fund that such shareholder is not subject to backup withholding.
Federal Excise Tax; Miscellaneous Considerations; Effect of Future Legislation
If the Fund fails to distribute in a calendar year at least 98% of its
ordinary income for the year and 98% of its capital gain net income (the excess
of short and long term capital gains over short and long term capital losses)
for the one-year period ending on October 31 of that year (and any retained
amount from the prior calendar year), the Fund will be subject to a
nondeductible 4% Federal excise tax on the undistributed amounts. The Fund
intends to make sufficient distributions to avoid imposition of this tax, or to
retain, at most, its net capital gains and pay tax thereon.
State and Local Tax Considerations
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 an investment in the Fund.
5. MANAGEMENT OF THE FUND
Directors and Officers
The overall business and affairs of the Fund are managed by its Board
of Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, sub-advisor, distributor, custodian and
transfer agent.
The Directors and executive officers of the Fund, their respective
dates of birth and their principal occupations during the last five years are
set forth below. Unless otherwise indicated, the address of each Director and
executive officer is One South Street, Baltimore. Maryland 21202.
*TRUMAN T. SEMANS, Chairman and Director (10/27/26)
Brown Investment Advisory & Trust Company, 19 South Street, Baltimore,
Maryland 21202. Vice Chairman, Brown Investment Advisory & Trust Company
(formerly, Alex. Brown Capital Advisory & Trust Company); Director,
Investment Company Capital Corp. (registered investment advisor) and
Virginia Hot Springs Inc. (property management). Formerly, Managing
Director and Vice Chairman, Alex. Brown Incorporated (now BT Alex. Brown
Incorporated) and Director, ISI Family of Funds (registered investment
companies).
-10-
<PAGE>
RICHARD R. BURT, Director (2/3/47)
IEP Advisors, LLP, 1275 Pennsylvania Avenue, NW, 10th Floor, Washington,
DC 20004. Chairman, IEP Advisors, Inc.; Chairman of the Board, Weirton
Steel Corporation; Member of the Board, Archer Daniels Midland Company
(agribusiness operations), Hollinger International, Inc. (publishing),
Homestake Mining (mining and exploration), HCL Technologies (information
technology) and Anchor Technologies (gaming software and equipment),
Director, Mitchell Hutchins family of funds and Deutsche Funds, Inc., and
Trustee, Deutsche Portfolios (registered investment companies); and
Member, Textron Corporation International Advisory Council. Formerly,
partner, McKinsey & Company (consulting), 1991-1994, U.S. Chief Negotiator
in Strategic Arms Reduction Talks (START) with former Soviet Union and
U.S. Ambassador to the Federal Republic of Germany, 1985-1991.
*RICHARD T. HALE, Director (7/17/45)
Managing Director, Deutsche Asset Management Americas; Managing Director,
BT Alex. Brown Incorporated; Director and President, Investment Company
Capital Corp. (registered investment advisor). Formerly, Director, ISI
Family of Funds (registered investment companies). Chartered Financial
Analyst.
JOSEPH R. HARDIMAN, Director (5/27/37)
8 Bowen Mill Road, Baltimore, Maryland 21212. Private Equity Investor and
Capital Markets Consultant; Director, Wit Capital Group (registered
broker-dealer), The Nevis Fund (registered investment company), and ISI
Family of Funds (registered investment companies). Formerly, Director,
Circon Corp. (medical instruments), President and Chief Executive Officer,
The National Association of Securities Dealers, Inc. and The NASDAQ Stock
Market, Inc., 1987-1997; Chief Operating Officer of Alex. Brown & Sons
Incorporated (now BT Alex. Brown Incorporated), 1985-1987; General
Partner, Alex. Brown & Sons Incorporated (now ST Alex. Brown
Incorporated), 1976-1985.
LOUIS E. LEVY, Director (11/16/32)
26 Farmstead Road, Short Hills, New Jersey 07078. Director, Kimberly-Clark
Corporation (personal consumer products), Household International (banking
and finance) and ISI Family of Funds (registered investment companies).
Formerly, Chairman of the Quality Control Inquiry Committee, American
Institute of Certified Public Accountants, 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/l4/32)
Duke Management Company, Erwin Square, Suite 1000, 2200 West Main Street,
Durham, North Carolina 27705. President, Duke Management Company
(investments); Executive Vice President, Duke University (education,
research and health care); Executive Vice Chairman and Director, Central
Carolina Bank & Trust (banking) and Director, Victory Funds (registered
investment companies). Formerly, Director AMBAC Treasurers Trust
(registered investment company), DP Mann Holdings (insurance) and ISI
Family of Funds (registered investment companies).
REBECCA W. RIMEL, Director (4/10/51)
The Pew Charitable Trusts, One Commerce Square, 2005 Market Street, Suite
1700, Philadelphia, Pennsylvania 19103-7017. President and Chief Executive
Officer, The Pew Charitable Trusts (charitable foundation); Director and
Executive Vice President, The Glenmede Trust Company (investment trust and
wealth management). Formerly, Executive Director, The Pew Charitable
Trusts and Director, ISI Family of Funds (registered investment
companies).
-11-
<PAGE>
ROBERT H. WADSWORTH, Director (1/29/40)
4455 E. Camelback Road, Suite 261 E., Phoenix, Arizona 85018. President,
The Wadsworth Group (registered investment advisor), First Fund
Distributors, Inc. (registered broker-dealer) and Guinness Flight
Investments Funds, Inc.: Director, The Germany Fund, Inc., The Central
European Equity Fund, Inc., Deutsche Funds, Inc., Trustee, Deutsche
Portfolios, and Vice President, Professionally Managed Portfolios and
Advisors Series Trust (registered investment companies).
CARL W. VOGT, Esq., President (4/20/36)
Fulbright & Jaworski L.L.P., 801 Pennsylvania Avenue, N.W., Washington,
D.C. 20004-2604. Senior Partner, Fulbright & Jaworski L.L.P. (law);
Director, Yellow Corporation (trucking), American Science & Engineering
(x-ray detection equipment), and ISI Family of Funds (registered
investment companies). Formerly, Chairman and Member, National
Transportation Safety Board; Director, National Railroad Passenger
Corporation (Amtrak); and Member, Aviation System Capacity Advisory
Committee (Federal Aviation Administration). Formerly, Director of each
fund in the Fund Complex.
CHARLES A. RIZZO, Treasurer (8/5/57)
Vice President and Department Head, Deutsche Asset Management Americas,
since 1999; and Vice President and Department Head, BT Alex. Brown
Incorporated, 1998-1999. Formerly, Senior Manager, PricewaterhouseCoopers
LLP, 1993-1998.
AMY M. OLMERT, Secretary (5/14/63)
Vice President, Deutsche Asset Management Americas, since 1999; and Vice
President, BT Alex. Brown Incorporated, 1997-1999. Formerly, Senior
Manager, PricewaterhouseCoopers LLP, 1988-1997.
DANIEL O. HIRSCH, Assistant Secretary (3/27/54)
Director, Deutsche Asset Management Americas, since 1999. Principal, BT
Alex. Brown Incorporated, 1998-1999. Formerly, Assistant General Counsel,
United States Securities and Exchange Commission, 1993-1998,
- ----------------
* Messrs. Semans and Hale are directors who are "interested persons," as defined
in the 1940 Act.
-12-
<PAGE>
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 eight funds in the Flag Investors Funds and Deutsche Banc Alex. Brown
Cash Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr. Semans serves as
Chairman of five funds and as a Director of three other funds in the Fund
Complex. Mr. Hale serves as Chairman of three funds and as Director of four
funds in the Fund Complex. Ms. Rimel serves as Director of seven funds in the
Fund Complex. Messrs. Burt, Hardiman, Levy, McDonald and Wadsworth serve as
Directors of each of the funds in the Fund Complex. Mr. Vogt serves as President
of seven of the funds in the Fund Complex. Mr. Rizzo serves as Treasurer, Ms.
Olmert serves as Secretary, and Mr. Hirsch serves as Assistant Secretary, for
each of the funds in the Fund Complex.
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 or its affiliates 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. Vogt,
the Fund's President, receives an aggregate annual fee (plus reimbursement for
reasonable out-of-pocket expenses incurred in connection with his or her
attendance at board and committee meetings) from each fund in the Fund Complex
for which he or she serves. In addition, the Chairmen of the Fund Complex's
Audit Committee and Executive Committee receive an 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, 1998, Independent Directors' fees attributable to
the assets of the Fund totaled $34,921.
-13-
<PAGE>
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, 1998.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total Compensation
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 for the Fiscal Year
Name of Person, Position Ended December 31, 1998 Payable to Directors Ended December 31, 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Truman T. Semans, Chairman(1) $0 $0 $0
Richard T. Hale, Director(1) $0 $0 $0
James J. Cunnane, Director(8) $4,358(2) (3) $39,000 for service on 13(4)
Boards in the Fund Complex
Joseph R. Hardiman, Director(5) $2,472(2) (3) $19,500 for service on 11(8)
Boards in the Fund Complex
John F. Kroeger, Director(7) $5,475 (3) $49,000 for service on 13(4)
Boards in the Fund Complex
Louis E. Levy, Director $4,960(2) (3) $44,000 for service on 13(4)
Boards In the Fund Complex
Eugene J. McDonald, Director $4,358(2) (3) $39,000 for service on 13(4)
Boards In the Fund Complex
Rebecca W. Rimel, Director $4,429(2) (3) $39,000 for service on 12(4)(8)
Boards in the Fund Complex
Carl W. Vogt. Esq., Director $4,461(2) (3) $39,000 for service on 13(4)(8)
Boards in the Fund Complex
Richard R. Burt, Director(9) N/A N/A N/A
Robert H. Wadsworth, Director(9) N/A N/A N/A
</TABLE>
- ----------------
(1) A Director who is an "interested person" as defined in the 1940 Act.
(2) Of amounts payable to Messrs. Cunnane, Levy, McDonald and Vogt, and to Ms.
Rimel, $4,358, $0, $4,358, $4,461 and $4,429, respectively, was deferred
pursuant to a deferred compensation plan.
(3) 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, 1998 was approximately $12,735.
(4) One of these funds ceased operations on July 29, 1998.
(5) Elected to the Fund's Board of Directors on September 27, 1998.
(6) Ms. Rimel receives and Messrs. Hardiman and Vogt, prior to their appointment
or election as Director to all 12 Funds in the Fund Complex, received
proportionately higher compensation from each fund for which they serve as
Director.
(7) Retired effective September 27, 1998; Deceased. November 26, 1998.
(8) Retired effective October 7, 1999.
(9) Elected to the Fund's board effective October 7, 1999.
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.
The Fund has two Participants, a Director who retired effective December 31,
1994, and another Director who retired effective December 31, 1996, who have
qualified for the Retirement Plan by serving thirteen and fourteen years,
respectively, as Directors in the Fund Complex and each of whom will be paid a
quarterly fee of S4,875 by the Fund Complex for the rest of his life. Such fees
are allocated to each fund in the Fund Complex based upon the relative net
assets of such fund to the Fund Complex. Mr. McDonald has qualified for, but has
not received, benefits.
-14-
<PAGE>
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 eamed by such Participant in his or her last year of
service, as described above. The approximate credited years of service at
December 31, 1998 are as follows: for Mr. Levy, 4 years; for Mr. McDonald, 6
years; for Ms. Rimel, 3 years; for Mr, Vogt, 3 years; for Mr. Hardiman, 1 year;
for Mr. Burt and Mr. Wadsworth, 0 years.
<TABLE>
<CAPTION>
Years of Service Estimated Annual Benefits Payable By Fund Complex Upon Retirement
- ---------------- -----------------------------------------------------------------
Chairmen of Audit and Executive Committees Other Participants
------------------------------------------ ------------------
<S> <C> <C>
6 years $4,900 $3,900
7 years $9,800 $7,800
8 years $14,700 $11,700
9 years $19,600 $15,600
10 years or more $24,500 $19,500
</TABLE>
Any Director who receives fees from the Fund is permitted to defer 50% to
100% of his or her annual compensation pursuant to a Deferred Compensation Plan,
Messrs. Levy, McDonald and Vogt and Ms. Rimel have each executed a Deferred
Compensation Agreement. Currently, the deferring Directors may select from among
various Flag Investors funds, Deutsche Banc Alex. Brown Cash Reserve Fund, Inc.
and BT International Equity Fund 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.
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 preclear any personal securities investments (with
certain exceptions, such as non-volitional purchases or purchases that are part
of an automatic dividend reinvestment plan). The foregoing would apply to any
officer, director or employee of the Distributor that is an access person. 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
-15-
<PAGE>
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 March 30, 1999, 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 October 7,
1999. ICC, the investment advisor, is an indirect subsidiary of Deutsche Bank
AG. 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 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.
-16-
<PAGE>
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: 1998 1997 1996
- --------------------------------------------------------------------------------
ICC $5,927,518 $ 4,172,769 $ 3,562,609
- --------------------------------------------------------------------------------
ABIM $4,132,229 $ 2,944,897 $ 2,430,407
- --------------------------------------------------------------------------------
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.
The Distribution Agreement provides that ICC Distributors shall; (i)
use reasonable efforts to sell Shares upon the terms and conditions contained in
the Distribution Agreement and the Fund's then current Prospectus; (ii) use its
best efforts to conform with the requirements of all federal and state laws
relating to the sale of the Shares; (iii) adopt and follow procedures as may be
necessary to comply with the requirements of the National Association of
Securities Dealers, Inc. and any other applicable self-regulatory organization;
(iv) perform its duties under the supervision of and in accordance with the
directives of the Fund's Board of Directors and the Fund's Articles of
Incorporation and By-Laws; and (v) provide the Fund's Board of Directors with a
written report of the amounts expended in connection with the Distribution
Agreement. ICC Distributors shall devote reasonable time and effort to effect
sales of Shares but shall not be obligated to sell any specific number of
Shares. The services of ICC Distributors are not exclusive and ICC Distributors
shall not be liable to the Fund or its shareholders for any error of judgment or
mistake of law, for any losses arising out of any investment, or for any action
or inaction of ICC Distributors in the absence of bad faith, willful misfeasance
or gross negligence in the performance of its duties or obligations under the
Distribution Agreement or by reason of its reckless disregard of its duties and
obligations under the Distribution Agreement. The Distribution Agreement further
provides that the Fund and ICC Distributors will mutually indemnify each other
for losses relating to disclosures in the Fund's registration statement.
The Distribution Agreement may be terminated at any time upon 60 days'
written notice by the Fund, without penalty, by the vote of a majority of the
Fund's Independent Directors or by a vote of a
-17-
<PAGE>
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 most recently approved by
the Board of Directors, including a majority of the Independent Directors, on
September 27, 1999.
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.
With respect to Class A Shares, Class B Shares and Class C 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 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.
As compensation for providing distribution services as described above,
the Fund will pay ICC Distributors, an annual fee, paid monthly equal to 0.25%
of the average daily net assets of the Class A Shares, 0.75% of the average
daily net assets of the Class B Shares and 0.75% of the average daily net assets
of the Class C 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 and the Class C
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 and the Class C Shares, the Fund will pay ICC
Distributors a shareholder servicing fee at an annual rate of 0.25% of the
average daily net assets of the respective class. (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:
-18-
<PAGE>
----------------------------------------------
Fiscal Year Ended December 31,
- -------------------------------------------------------------------------------
Fees
1998 1997 1996
- --------------------------------------------------------------------------------
12b-1 Fees $2,717,467(1) $ 1,545,188(2) $ 1,350,396(4)
- --------------------------------------------------------------------------------
Shareholder Servicing Fee
(Class B and Class C Shares) $180,687(1) $ 59,629(3,5) $ 32,943(4,5)
- --------------------------------------------------------------------------------
- -------------------------------------------------------
(1) Fees received by ICC Distributors, the Fund's distributor.
(2) 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.
(3) 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.
(4) Fees received by Alex. Brown, the Fund's distributor.
(5) For Class B Shares only.
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 such
purpose. The Plans were most recently approved by the Board of Directors,
including a majority of the Independent Directors, on September 27, 1999.
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 Shares of the related class (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 any 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 a 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 Class A Shares and the Class B
Shares for the last three fiscal years, the Fund's distributor paid the
distribution related expenses of the related
-19-
<PAGE>
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
Shares and contingent deferred sales charges on the Class B and Class C Shares
and from such commissions and sales charges retained the following amounts:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
Class 1998 1997 1996
-------------------------------------------------------------------------------------------------
Received Retained Received Retained Received Retained
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A $2,696,511(1) $ 0(1) $469,945(2) $ 61,823(4) $717,441(4) $255,062(4)
Commissions
- -----------------------------------------------------------------------------------------------------------------------
Class B $3,281,541(1) $ 0(1) $350,133(3) $ 34,414(4) $377,125(4) $377,125(4)
Contingent
Deferred Sales
Charge
- -----------------------------------------------------------------------------------------------------------------------
Class C $ 24,636(1) $ 0(1) N/A N/A N/A N/A
Contingent
Deferred Sales
Charge
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------
(1) By ICC Distributors, the Fund's distributor.
(2) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $307,092 and ICC Distributors, the Fund's distributor
effective August 31, 1997 received $66,419.
(3) Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $202,841 and ICC Distributors, the Fund's distributor
effective August 31, 1997 received $147,292.
(4) By Alex. Brown, the Fund's distributor.
The Fund will pay all costs associated with its organization and
registration under the Securities Act of 1933 and the 1940 Act. 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 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
-20-
<PAGE>
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.
The address of ICC Distributors is Two Portland Square, Portland, Maine
04101.
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
affiliates of the Advisors in any transaction in which affiliates of the
Advisors act as a principal.
If affiliates of the Advisors 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 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. In
over-the-counter transactions, ABIM will not pay any commission or other
remuneration for research services. 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 affiliates of the Advisors) higher
-21-
<PAGE>
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, through affiliates of the
Advisors. 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 affiliates of the Advisors 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.
ABIM directed transactions to broker-dealers and paid related
commissions because of research services in the following amounts:
- --------------------------------------------------------------------------------
Fiscal Year Ended December 31,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Transactions Directed $244,993,558 $312,672,931 $ 191,851,754
- --------------------------------------------------------------------------------
Commissions Paid $ 275,519 $ 406,249 $ 396,046
- --------------------------------------------------------------------------------
For the fiscal year ended December 31, 1998, the Fund paid $4,500 in
brokerage commissions to BT Alex Brown or its affiliates. For the fiscal year
ended December 31, 1997, the Fund paid no brokerage commissions to BT Alex.
Brown or its affiliates. For the fiscal year ended December 31, 1996, the Fund
paid Alex. Brown brokerage commissions in the aggregate amount of $7,000, which
represented 1.9% of the Fund's aggregate brokerage commissions for the period
and which were paid on transactions that represented 2.9% of the aggregate
dollar amount of transactions that incurred commissions paid by the Fund during
the period. 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, 1998, the Fund
held a 4.5% repurchase agreement issued by Goldman Sachs & Co. valued at
$60,306,067. Goldman Sachs & Co. is a "regular broker or dealer" of the Fund.
-22-
<PAGE>
9. CAPITAL STOCK
Under the Fund's Articles of Incorporation, the Fund has 110 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 C
Shares; and Flag Investors Communications Fund Institutional Shares. 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. There are no preemptive, conversion or exchange rights applicable to
any of the Shares. The issued and outstanding Shares are fully paid and
non-assessable. In the event of liquidation or dissolution of the Fund, each
Share is entitled to its portion of the Fund's assets (or the assets allocated
to a separate series of shares if there is more than one series) after all debts
and expenses have been paid.
As used in this Statement of Additional Information, the term "majority
of the outstanding Shares" means the vote of the lesser of (i) 67% or more of
the Shares present at a meeting, if the holders of more than 50% of the
outstanding Shares are present or represented by proxy, or (ii) more than 50% of
the outstanding Shares.
10. SEMI-ANNUAL REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of investments
held in the Fund's portfolio and financial statements. The annual financial
statements are audited by the Fund's independent accountants.
11. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
Bankers Trust Company ("Bankers Trust") 130 Liberty Street, New York,
New York 10006, 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 fiscal year ended December 31, 1998, Bankers Trust was paid $101,903 as
compensation for providing custody services to the Fund. Investment Company
Capital Corp. has been retained to act as transfer and dividend disbursing
agent. As
-23-
<PAGE>
compensation for providing these services, the Fund pays ICC up to
$15.12 per account per year, plus reimbursement for out-of-pocket expenses. For
the fiscal year ended December 31, 1998, ICC received transfer agency fees of
$577,983.
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 0.100%
$ 20,000,000 - $ 30,000,000 0.080%
$ 30,000,000 - $ 40,000,000 0.060%
$ 40,000,000 - $ 50,000,000 0.050%
$ 50,000,000 - $ 60,000,000 0.040%
$ 60,000,000 - $ 70,000,000 0.030%
$ 70,000,000 - $ 100,000,000 0.020%
$100,000,000 - $ 500,000,000 0.015%
$500,000,000 - $ 1,000,000,000 0.005%
over $1,000,000,000 0.001%
In addition, the Fund reimburses ICC for certain out-of-pocket
expenses.
As compensation for providing accounting services to the Fund for the
fiscal year ended December 31, 1998, ICC received fees of $135,622.
12. INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 250 West Pratt Street, Baltimore, Maryland
21201, are independent accountants to the Fund.
13. LEGAL MATTERS
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
14. 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
-24-
<PAGE>
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:
P(l + T)n = 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).
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, 1998 were as follows:
<TABLE>
<CAPTION>
One-Year Period Five-Year Period Ten-Year Period
Ended Ended Ended
December 31, December 31, December 31, Inception Through
1998 1998 1998 December 31, 1998
----- ----- ---- -----------------
Average Average Average
Ending Ending Annual Ending Annual Ending Annual
Redeemable Total Redeemable Total Redeemable Total Redeemable Total
Class Value Return Value Return Value Return Value Return
----- ----- ------ ----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A $1,769 76.96% $3,446 28.08% $7,766 22.75% $1,750* 21.10%*
January 18, 1984+
Class B $1,799 79.91% N/A N/A N/A N/A $3,709 38.87%
January 3, 1995+
Class C N/A N/A N/A N/A N/A N/A $1,410 40.09%
November 1,
1998+
Institutional N/A N/A N/A N/A N/A N/A $1,540 53.99%
May 1, 1998+
</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
-25-
<PAGE>
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 1998 was
14% and in fiscal year 1997 was 26%.
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, 1998.
As of December 31, 1998, Morningstar assigned the Fund a weighted overall
risk-adjusted rating of five stars based on the three-, five- and ten-year
ratings (see explanation below). As of December 31, 1998, the Fund's ratings for
separate periods within its investment category of domestic equity funds, were
five stars among 2,802 funds for three years, five stars among 1,702 funds for
five years and five stars among 732 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%.
-26-
<PAGE>
15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
To Fund management's knowledge, the following persons owned of record
or beneficially 5% or more of the outstanding shares of a class of the Fund, as
of February 1, 1999:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Owned of Beneficially
Name and Address Record Owned Percentage Owned
- --------------------------------------------------------------------------------------------------------
<S> <C>
Brown Investment Advisory X 16.63% of Institutional Shares
FBO 01-01-170-7033070
19 South Street
Baltimore, Maryland 21202
Brown Investment Advisory X 10.16% of Institutional Shares
FBO 01-01-170-7132000
19 South Street
Baltimore, MD 21202
BT Alex. Brown Incorporated X X 73.21% of Institutional Shares
FBO 250-10788-16
Brown Advisory House Acct.
P.O. Box 1346
Baltimore, MD 21203-1346
- --------------------------------------------------------------------------------------------------------
</TABLE>
As of February 1, 1999, the Directors and officers as a group owned
less than 1% of the Fund's total outstanding shares.
16. FINANCIAL STATEMENTS
See next page.
-27-
<PAGE>
FLAG INVESTORS COMMUNICATIONS FUND
- -----------------------------------------------------------------------
STATEMENT OF NET ASSETS December 31, 1998
Shares Security Market Value
- -----------------------------------------------------------------------
COMMON STOCK -- 86.2%
REGIONAL BELL OPERATING COMPANIES -- 22.1%
1,100,000 Ameritech Corp. ......................... $ 69,712,500
833,216 Bell Atlantic Corp. ..................... 47,337,084
3,089,520 SBC Communications, Inc. ................ 165,675,510
573,000 U.S. West Incorporated .................. 37,030,125
------------
319,755,219
------------
INDEPENDENT LOCAL EXCHANGE CARRIERS -- 6.3%
480,000 ALLTEL Corp. ............................ 28,710,000
1,668,000 Cincinnati Bell, Inc. ................... 63,071,250
------------
91,781,250
------------
TELECOMMUNICATION - LONG DISTANCE -- 12.2%
924,200 Frontier ................................ 31,422,800
500,000 General Communication, Inc. * ........... 2,031,250
1,650,080 MCI Worldcom, Inc.* ..................... 118,393,240
150,000 Pacific Gateway Exchange, Inc.* ......... 7,209,375
200,000 Sprint Corp. (FON Group) ................ 16,825,000
------------
175,881,665
------------
SPECIALTY TELECOMMUNICATION SERVICES -- 31.4%
270,408 Airtouch Communications, Inc.* .......... 19,503,177
1,827,000 America Online* ......................... 292,320,000
417,800 Comsat .................................. 15,040,800
470,300 First Data Corp. ........................ 14,902,631
2,055,000 Novell, Inc.* ........................... 37,246,875
645,347 Orbital Sciences Corp.* ................. 28,556,605
514,400 Qwest Communications International, Inc.* 25,720,000
405,000 Skytel Communications* .................. 8,960,625
100,000 Sprint Corp (PCS Group)* ................ 2,312,500
225,000 WinStar Communications, Inc.* ........... 8,775,000
------------
453,338,213
------------
-28-
<PAGE>
FLAG INVESTORS COMMUNICATIONS FUND
- --------------------------------------------------------------------------------
STATEMENT OF NET ASSETS(concluded) December 31, 1998
Shares/
Par (000) Security Market Value
- --------------------------------------------------------------------------------
TELECOMMUNICATION EQUIPMENT -- 8.8%
509,000 3Com Corp.* ................................. $ 22,809,563
733,500 Alcatel Alsthom - ADR* ...................... 17,924,906
666,428 Black Box Corp.* ............................ 25,240,961
345,000 CellStar Corp.* ............................. 2,350,313
530,470 Lucent Technologies, Inc. ................... 58,351,700
--------------
126,677,443
--------------
TOTAL COMMON STOCK (Cost $408,200,797) ....................... 1,245,444,200
--------------
FOREIGN TELEPHONE COMPANIES -- 3.6%
850,000 Clearnet Communications - Class A* .......... 6,906,250
128,000 Telefonica de Espana ADR .................... 17,328,000
285,000 Telefonos de Mexico SA ADR .................. 13,875,937
368,200 Teleglobe, Inc. ............................. 13,255,200
--------------
51,365,387
--------------
NON-TELEPHONE INDUSTRY COMMON STOCK -- 1.8%
626,900 Centertrust Retail Properties ............... 7,679,525
620,548 Conseco, Inc. ............................... 18,965,498
--------------
26,645,023
--------------
REPURCHASE AGREEMENT -- 4.2%
60,305 Goldman Sachs & Co., 4.50% dated 12/31/98,
to be repurchased on 01/04/99, collateralized by
U.S.Treasury Note with a par value of $54,741,000,
coupon rate of 6.50%, due 8/15/05, with a market
value of 60,306,067 (Cost $60,305,000) ........ 60,305,000
--------------
U.S. TREASURY BILL -- 2.1%
30,000 U.S. Treasury Bill, dated 12/31/98, to mature
on 01/21/99, 3.88%
(Cost $29,926,750) ........................... 29,926,750
--------------
-29-
<PAGE>
<TABLE>
<CAPTION>
FLAG INVESTORS COMMUNICATIONS FUND
- ------------------------------------------------------------------------------------
Shares/
Par (000) Security Market Value
- ------------------------------------------------------------------------------------
<S> <C>
COMMERCIAL PAPER -- 6.9%
50,000 American Express Credit Corp., dated 12/31/98,
to mature on 01/07/99, 5.00%..................... $ 49,956,250
50,000 Ford Motor Credit Corp., dated 12/31/98,
to mature on 01/05/99, 5.00%..................... 49,972,222
---------------
TOTAL COMMERCIAL PAPER (Cost $99,928,472)........................... 99,928,472
---------------
TOTAL INVESTMENTS -- 99.4%
(Cost $598,361,019)** ............................................. $1,435,604,422
OTHER ASSETS IN EXCESS OF LIABILITIES-- 0.6%........................ 9,538,753
---------------
TOTAL NET ASSETS-- 100.0% .......................................... $1,445,143,175
===============
NET ASSET VALUE AND REDEMPTION PRICE PER:
Class A Share
($1,275,775,433 divided 37,273,431 shares)..................... $34.23
======
Class B Share
($165,307,878 divided 4,891,128 shares)........................ $33.80***
======
Class C Share
($3,246,874 divided 95,961 shares)............................. $33.84****
======
Institutional Share
($812,990 divided 23,722 shares)............................... $34.27
======
MAXIMUM OFFERING PRICE PER:
Class A Share ($34.23 O 0.955)................................... $35.84
======
Class B Share ................................................... $33.80
======
Class C Share.................................................... $33.84
======
Institutional Share.............................................. $34.27
======
</TABLE>
- -----------
* Non-income producing security.
** Aggregate cost for federal tax purposes was $594,838,164.
*** Redemption value is $32.45 following a 4% maximum contingent deferred sales
charge.
**** Redemption value is $33.50 following a 1% maximum contingent deferred sales
charge.
See Notes to Financial Statements.
-30-
<PAGE>
<TABLE>
<CAPTION>
FLAG INVESTORS COMMUNICATIONS FUND
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the
Year Ended
December 31,
- --------------------------------------------------------------------------------
1998
<S> <C>
Investment Income:
Dividends .................................................... $ 11,274,810
Interest ..................................................... 2,433,424
Less: Foreign taxes withheld ............................... (12,313)
-------------
Total income ........................................ 13,695,921
-------------
Expenses:
Investment advisory fee ...................................... 5,927,518
Distribution fee ............................................. 2,898,154
Transfer agent fee ........................................... 577,983
Professional fees ............................................ 159,337
Printing and postage ......................................... 140,755
Accounting fee ............................................... 135,622
Custodian fee ................................................ 101,903
Registration fees ............................................ 97,337
Directors' fees .............................................. 34,921
Miscellaneous ................................................ 17,193
-------------
Total expenses ...................................... 10,090,723
-------------
Net investment income ........................................ 3,605,198
-------------
Realized and unrealized gain on investments:
Net realized gain from security transactions ................. 109,209,276
Change in unrealized appreciation/depreciation of investments. 510,943,527
-------------
Net gain on investments ...................................... 620,152,803
-------------
Net increase in net assets resulting from operations ............ $ 623,758,001
=============
</TABLE>
See Notes to Financial Statements.
-31-
<PAGE>
<TABLE>
<CAPTION>
FLAG INVESTORS COMMUNICATIONS FUND
- -----------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended December 31,
- -----------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
Increase/(Decrease) in Net Assets:
Operations:
Net investment income ..................... $ 3,605,198 $ 6,150,046
Net realized gain from security
transactions ............................ 109,209,276 53,763,750
Change in unrealized appreciation/
depreciation of investments ............. 510,943,527 132,712,907
--------------- ---------------
Net increase in net assets resulting
from operations ......................... 623,758,001 192,626,703
--------------- ---------------
Distributions to Shareholders from:
Net investment income and short-term gains:
Class A Shares .......................... (13,223,970) (12,292,592)
Class B Shares .......................... (1,158,104) (438,661)
Class C Shares .......................... (8,002) --
Class D Shares .......................... (216,796) (560,042)
Institutional Class ..................... (3,699) --
Net realized mid-term and long-term gains:
Class A Shares .......................... (31,466,328) (45,697,778)
Class B Shares .......................... (3,523,412) (2,233,281)
Class C Shares .......................... (25,235) --
Class D Shares .......................... (397,182) (2,314,208)
Institutional Class ..................... (10,896) --
--------------- ---------------
Total distributions ....................... (50,033,624) (63,536,562)
--------------- ---------------
Capital Share Transactions
Proceeds from sale of shares .............. 298,419,515 32,057,019
Value of shares issued in reinvestment
of dividends ............................ 42,901,943 52,863,614
Cost of shares repurchased ................ (156,173,099) (78,344,677)
--------------- ---------------
Increase in net assets derived from
capital share transactions .............. 185,148,359 6,575,956
--------------- ---------------
Total increase in net assets .............. 758,872,736 135,666,097
Net Assets:
Beginning of period ....................... 686,270,439 550,604,342
--------------- ---------------
End of period ............................. $ 1,445,143,175 $ 686,270,439
=============== ===============
</TABLE>
See Notes to Financial Statements.
-32-
<PAGE>
<TABLE>
<CAPTION>
FLAG INVESTORS COMMUNICATIONS FUND
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
For the
Year Ended
December 31, For the Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of year ........................ $ 19.37 $ 15.59 $ 14.87 $ 12.30 $ 13.70
------------ ----------- ---------- ---------- ---------
Income from Investment Operations:
Net investment income ....................................... 0.12 0.27 0.27 0.40 0.41
Net realized and unrealized gain/(loss) on investments ...... 16.05 5.41 1.67 3.58 (1.27)
------------ ------------ ---------- ---------- ---------
Total from Investment Operations ............................ 16.17 5.68 1.94 3.98 (0.86)
------------ ------------ ---------- ---------- ---------
Less Distributions:
Distributions from net investment income
and net realized short-term gains ......................... (0.40) (0.40) (0.38) (0.41) (0.44)
Distributions from net realized mid-term and long-term gains. (0.91) (1.50) (0.84) (1.00) (0.10)
------------ ------------ ---------- ---------- ---------
Total distributions ......................................... (1.31) (1.90) (1.22) (1.41) (0.54)
------------ ------------ ---------- ---------- ---------
Net asset value at end of year .............................. $ 34.23 $ 19.37 $ 15.59 $ 14.87 $ 12.30
============ ============ ========== ========== =========
Total Return(1)................................................. 85.30% 37.36% 13.46% 33.44% (6.32)%
Ratios to Average Daily Net Assets:
Expenses .................................................... 1.05% 1.11% 1.14% 0.93%(2) 0.92%(2)
Net investment income ....................................... 0.48% 1.07% 1.74% 2.85%(3) 3.14%(3)
Supplemental Data:
Net assets at end of year (000) ............................. $ 1,275,775 $ 622,865 $ 505,371 $ 492,454 $ 435,805
Portfolio turnover rate ..................................... 14% 26% 20% 24% 23%
</TABLE>
- ------------
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% and 0.99% for the years ended December
31, 1995 and 1994, 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% and 3.07% for the
years ended December 31, 1995 and 1994, respectively.
See Notes to Financial Statements.
33 and 34
<PAGE>
<TABLE>
<CAPTION>
FLAG INVESTORS COMMUNICATIONS FUND
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CLASS B SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
For the For the Period
Year Ended For the Years January 3, 1995(1)
December 31, Ended December 31, through December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ......... $ 19.22 $ 15.51 $ 14.83 $ 12.28
-------------- ------------- ------------- ------------
Income from Investment Operations:
Net investment income/(loss) ................... (0.02) 0.18 0.19 0.30
Net realized and unrealized gain on investments. 15.83 5.34 1.63 3.56
-------------- ------------- ------------- ------------
Total from Investment Operations ............... 15.81 5.52 1.82 3.86
-------------- ------------- ------------- ------------
Less Distributions:
Distributions from net investment income
and net realized short-term gains ............ (0.32) (0.31) (0.30) (0.31)
Distributions from net realized long-term gains. (0.91) (1.50) (0.84) (1.00)
-------------- ------------- ------------- ------------
Total distributions ............................ (1.23) (1.81) (1.14) (1.31)
-------------- ------------- ------------- ------------
Net asset value at end of period ............... $ 33.80 $ 19.22 $ 15.51 $ 14.83
============== ============= ============= ============
Total Return(2).................................... 83.91% 36.36% 12.60% 32.42%
Ratios to Average Daily Net Assets:
Expenses ....................................... 1.80% 1.86% 1.92% 1.70%(3,5)
Net investment income/(loss) ................... (0.35)% 0.29% 0.95% 2.13%(4,5)
Supplemental Data:
Net assets at end of period (000) .............. $ 165,308 $ 32,474 $ 17,661 $ 7,504
Portfolio turnover rate ........................ 14% 26% 20% 24%
</TABLE>
- -----------------
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.
See Notes to Financial Statements.
35 and 36
<PAGE>
<TABLE>
<CAPTION>
FLAG INVESTORS COMMUNICATIONS FUND
- -----------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CLASS C SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
For the period
Nov. 1, 1998(1)
Through Dec. 31,
- -----------------------------------------------------------------------------------
1998
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of period .................... $ 25.50
------------
Income from Investment Operations:
Net investment income/(loss) .............................. (0.01)
Net realized and unrealized gain on investments ........... 9.21
------------
Total from Investment Operations .......................... 9.20
------------
Less Distributions:
Distributions from net investment income
and net realized short-term gains ....................... (0.21)
Distributions from net realized long-term gains ........... (0.65)
------------
Total distributions ....................................... (0.86)
------------
Net asset value at end of period .......................... $ 33.84
============
Total Return(2)............................................... 36.70%
Ratios to Average Daily Net Assets:
Expenses .................................................. 1.85%(3)
Net investment income/(loss) .............................. (0.61)%(3)
Supplemental Data:
Net assets at end of year (000) ........................... $ 3,247
Portfolio turnover rate ...................................... 14%
</TABLE>
- --------------
1 Commencement of operations.
2 Total return excludes the effect of sales charge.
3 Annualized.
See Notes to Financial Statements.
37
<PAGE>
This page intentionally left blank.
38
<PAGE>
<TABLE>
<CAPTION>
FLAG INVESTORS COMMUNICATIONS FUND
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CLASS D SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
For the Period
January 1, 1998
through
November 20,(1) For the Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of year .................. $ 19.36 $ 15.59 $ 14.87 $ 12.30 $ 13.67
----------- ------------- ------------- ------------ ----------
Income from Investment Operations:
Net investment income ................................. 0.09 0.23 0.22 0.34 0.37
Net realized and unrealized gain/(loss) on investments. 9.43 5.40 1.67 3.58 (1.20)
----------- ------------- ------------- ------------ ----------
Total from Investment Operations ...................... 9.52 5.63 1.89 3.92 (0.83)
----------- ------------- ------------- ------------ ----------
Less Distributions:
Distributions from net investment income
and net realized short-term gains ................... (0.15) (0.36) (0.33) (0.35) (0.42)
Distributions in excess of net investment income ...... -- -- -- -- (0.02)
Distributions from net realized long-term gains ....... (0.26) (1.50) (0.84) (1.00) (0.10)
----------- ------------- ------------- ------------ ----------
Total distributions ................................... (0.41) (1.86) (1.17) (1.35) (0.54)
----------- ------------- ------------- ------------ ----------
Net asset value at end of period ...................... $ 28.47 $ 19.36 $ 15.59 $ 14.87 $ 12.30
=========== ============= ============= ============ ==========
Total Return(2)........................................... 49.49% 36.94% 13.00% 32.91% (6.13)%
Ratios to Average Daily Net Assets:
Expenses .............................................. 1.44%(5) 1.46% 1.49% 1.28%(3) 1.27%(3)
Net investment income ................................. 0.23%(5) 0.73% 1.40% 2.50%(4) 2.81%(4)
Supplemental Data:
Net assets at end of year (000) ....................... $ -- $ 30,931 $ 27,573 $ 31,317 $ 31,696
Portfolio turnover rate ............................... 14% 26% 20% 24% 23%
</TABLE>
- -------------------
1 Class D shares were converted to Class A Shares on November 20,1998.
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% and 1.34% for the years ended December
31, 1995 and 1994, 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% and 2.74% for the
years ended December 31, 1995 and 1994, respectively.
5 Annualized
See Notes to Financial Statements.
39 and 40
<PAGE>
<TABLE>
<CAPTION>
FLAG INVESTORS COMMUNICATIONS FUND
- -----------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
For the Period
June 4, 1998(1)
through
December 31,
- -----------------------------------------------------------------------------------
1998
<S> <C>
Per Share Operating Performance:
Net asset value at beginning of period ........................ $ 23.26
----------
Income from Investment Operations:
Net investment income ......................................... 0.06
Net realized and unrealized gain on investments ............... 12.17
----------
Total from Investment Operations .............................. 12.23
----------
Less Distributions:
Distributions from net investment income and net realized
short-term gains ............................................ (0.31)
Distributions from net realized long-term gains ............... (0.91)
----------
Total distributions ........................................... (1.22)
----------
Net asset value at end of period .............................. $ 34.27
==========
Total Return(2)................................................... 53.95%
Ratios to Average Net Assets:
Expenses ...................................................... 0.83%(3)
Net investment income ......................................... 0.49%(3)
Supplemental Data:
Net assets at end of period (000) ............................. $ 813
Portfolio turnover rate ....................................... 14%
</TABLE>
- --------------
1 Commencement of operations.
2 Total return excludes the effect of sales charge.
3 Annualized.
See Notes to Financial Statements.
41
<PAGE>
FLAG INVESTORS COMMUNICATIONS FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
NOTE 1--Significant Accounting Policies
Flag Investors Communications Fund, Inc. (the "Fund"), previously named
Flag Investors Telephone Income 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 maximize total return.
The Fund consists of four share classes: Class A Shares, which commenced
January 18, 1984; Class B Shares, which commenced January 3, 1995; Class C
Shares, which commenced November 1, 1998; and Institutional Shares, which
commenced June 4, 1998. Class D Shares were converted to Class A Shares on
November 20, 1998.
The Class A, Class B and Class C Shares are subject to different sales
charges. The Class A Shares have a front-end sales charge and the Class B and
Class C Shares have a contingent deferred sales charge. The Institutional Shares
are not subject to sales charges. In addition, each class has a different
distribution fee.
When preparing the Fund's financial statements, management makes estimates
and assumptions in accordance 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.
42
<PAGE>
FLAG INVESTORS COMMUNICATIONS FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS(CONTINUED)
NOTE 1--continued
At December 31, 1998, 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 requires that the collateral's market value,
including any accrued interest, exceed the brokers repurchase
obligation. 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. Interest income is recorded on an accrual basis and
includes 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.
43
<PAGE>
FLAG INVESTORS COMMUNICATIONS FUND
- --------------------------------------------------------------------------------
NOTE 2--INVESTMENT ADVISORY FEES, TRANSACTIONS WITH AFFILIATES AND OTHER FEES
Investment Company Capital Corp. ("ICC"), an indirect subsidiary of Bankers
Trust Corporation, is the Fund's investment advisor. 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.
For the year ended December 31,1998, ICC's advisory fee was $5,927,518 of
which $687,079 was payable at the end of the period.
ICC also provides accounting services to the Fund for which the Fund pays
ICC an annual fee that is calculated daily and paid monthly based on the Fund's
average daily net assets. For the year ended December 31, 1998 ICC's fee was
$135,622 of which $13,611 was payable at the end of the period.
ICC also provides transfer agency services to the Fund for which the Fund
pays ICC a per account fee that is calculated and paid monthly. For the year
ended December 31, 1998 ICC's fee was $577,983 of which $58,469 was payable at
the end of the period.
Certain officers and directors of the Fund are also officers or directors
of ICC.
Bankers Trust Corporation became the Fund's custodian on September 22,
1997. Prior to September 22, 1997, PNC Bank served as the Fund's custodian. For
the year ended December 31, 1998, custody fees amounted to $101,903, of which
$15,904 was payable at the end of the period.
Alex. Brown Investment Management ("ABIM") is the Fund's sub-advisor. As
compensation for its sub-advisory services, ICC pays ABIM a 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.
44
<PAGE>
FLAG INVESTORS COMMUNICATIONS FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS(continued)
NOTE 2--continued
ICC Distributors, Inc., a member of the Forum Group of companies, provides
distribution services to the Fund for which the Fund pays ICC Distributors an
annual fee pursuant to Rule 12b-1, that is calculated daily and paid monthly at
the following annual rates:0.25% of the Class A Shares' average daily net assets
and 1.00% of the Class B and Class C Shares' average daily net assets. The fees
for the Class B and Class C Shares include a 0.25% shareholder servicing fee.
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.
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, 1998 was $34,921 and the accrued liability was $1,671.
Note 3--Capital Share Transactions
The Fund is authorized to issue up to 110 million shares of $.001 par value
capital stock (63 million Class A Shares, 15 million Class B Shares, 15 million
Class C Shares, 15 million Institutional Shares, and 2 million undesignated).
Transactions in shares of the Fund were as follows:
<TABLE>
<CAPTION>
Class A Shares
-----------------------------
For the For the
Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997
-------------- -------------
<S> <C> <C>
Shares sold ................................... 7,977,108 1,332,424
Shares issued to shareholders on
reinvestment of dividends .................. 1,383,390 2,595,376
Shares redeemed ............................... (4,236,213) (4,200,351)
------------- -------------
Net increase/(decrease) in shares outstanding.. 5,124,285 (272,551)
============= =============
Proceeds from sale of shares .................. $ 208,050,462 $ 23,153,177
Value of reinvested dividends ................. 37,846,228 47,729,473
Cost of shares redeemed ....................... (100,876,700) (71,340,867)
------------- -------------
Net increase/(decrease) from
capital share transactions ................. $ 145,019,990 $ (458,217)
============= =============
</TABLE>
45
<PAGE>
FLAG INVESTORS COMMUNICATIONS FUND
- --------------------------------------------------------------------------------
NOTE 3-continued
Class B Shares
------------------------------
For the For the
Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997
-------------- -------------
Shares sold ................................ 3,461,232 506,254
Shares issued to shareholders on
reinvestment of dividends ............... 162,054 138,015
Shares redeemed ............................ (421,723) (93,315)
------------ ------------
Net increase in shares outstanding ......... 3,201,563 550,954
============ ============
Proceeds from sale of shares ............... $ 86,906,479 $ 8,903,842
Value of reinvested dividends .............. 4,455,460 2,533,345
Cost of shares redeemed .................... (10,210,390) (1,625,592)
------------ ------------
Net increase from capital share
transactions ............................. $ 81,151,549 $ 9,811,595
============ ============
Class C Shares
---------------------
For the period
Nov. 1, 19981 through
Dec. 31, 1998
----------------------
Shares sold ........................................... 96,807
Shares issued to shareholders on
reinvestment of dividends .......................... 1,030
Shares redeemed ....................................... (1,875)
-----------
Net increase in shares outstanding .................... 95,962
===========
Proceeds from sale of shares .......................... $ 2,839,788
Value of reinvested dividends ......................... 29,394
Cost of shares redeemed ............................... (54,186)
-----------
Net increase from capital share transactions .......... $ 2,814,996
===========
- -----------
1 Commencement of operations.
46
<PAGE>
FLAG INVESTORS COMMUNICATIONS FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS(CONCLUDED)
Note 3-concluded
Class D Shares 1
--------------------------------
For the period
Jan. 1,1998 For the
through Year Ended
Nov. 20, 1998 Dec. 31, 1997
--------------- --------------
Shares sold ................................ -- --
Shares issued to shareholders on
reinvestment of dividends ............... 22,620 141,577
Shares redeemed ............................ (1,620,465) (312,350)
------------ ------------
Net decrease in shares outstanding ......... (1,597,845) (170,773)
============ ============
Proceeds from sale of shares ............... $ -- $ --
Value of reinvested dividends .............. 556,267 2,600,796
Cost of shares redeemed .................... (45,031,824) (5,378,218)
------------ ------------
Net decrease from capital share
transactions ............................. $(44,475,557) $ (2,777,422)
============ ============
- ---------------
1 Converted to Class A Shares on November 20, 1998.
<TABLE>
<CAPTION>
Institutional
Shares
---------------------
For the period
June 4, 19981 through
Dec. 31, 1998
---------------------
<S> <C>
Shares sold ................................................... 23,201
Shares issued to shareholders on
reinvestment of dividends .................................. 521
Shares redeemed ............................................... --
--------
Net increase in shares outstanding ............................ 23,722
========
Proceeds from sale of shares .................................. $622,784
Value of reinvested dividends ................................. 14,595
Cost of shares redeemed ....................................... --
--------
Net increase from capital share transactions .................. $637,379
========
</TABLE>
- ---------------
1 Commencement of operations.
47
<PAGE>
FLAG INVESTORS COMMUNICATIONS FUND
- --------------------------------------------------------------------------------
NOTE 4--Investment Transactions
Excluding short-term and U.S. government obligations, purchases of
investment securities aggregated $119,103,526 and sales of investment securities
aggregated $172,504,529 for the year ended December 31, 1998.
At December 31, 1998, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $843,920,462
and aggregate unrealized depreciation for all securities in which there is an
excess of tax cost over value was ($6,677,059).
NOTE 5--Net Assets
On December 31, 1998, net assets consisted of:
Paid-in capital:
Class A Shares ............................................ $ 423,771,671
Class B Shares ............................................ 107,580,197
Class C Shares ............................................ 2,814,996
Institutional Shares ...................................... 637,379
Accumulated net realized gain from security transactions ..... 73,095,529
Net unrealized appreciation of investments ................... 837,243,403
--------------
$1,445,143,175
==============
48
<PAGE>
FLAG INVESTORS COMMUNICATIONS FUND
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
Flag Investors Communications Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Flag Investors Communications Fund, Inc. (the "Fund") at December 31, 1998, and
the results of its operations, the changes in its net assets and the financial
highlights for each of the fiscal periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Baltimore, Maryland
February 5, 1999
49
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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, in
the majority of instances, 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, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the lowest degree of
speculation and C the highest degree of speculation. While such debt will likely
have some quality and protective characteristics, these may be outweighed by
large uncertainties or major risk exposures to adverse conditions.
C -- This rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action taken, but payments on this obligation
are being continued.
D -- In payment default. The D rating category is used when interest
payments on an obligation 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 or the taking of a similar action if payments on an
obligation 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 of
such issues.
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 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-1
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A -- Possess many favorable investment attributes and are to be
considered as 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.
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. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba -- Judged to have speculative elements; their 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
