<PAGE>
[GRAPHIC OMITTED]
Communications Fund, Inc.
(Class A, Class B and Class C Shares)
Prospectus
September 29, 2000
The Securities and Exchange Commission has neither approved nor disapproved
these securities nor has it passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>
[GRAPHIC OMITTED]
This mutual fund (the "Fund") is designed to maximize total return through a
combination of long-term growth of capital and, to a lesser extent, current
income.
The Fund invests substantially all of its assets in the Communications Portfolio
(the "Portfolio"), a separate mutual fund advised by Investment Company Capital
Corp ("ICCC" or the "Advisor") and sub-advised by Alex. Brown Investment
Management ("ABIM" or the "Sub-Advisor"). The Portfolio invests primarily in
common stocks of companies in the communications field.
The Fund offers shares through securities dealers and through financial
institutions that act as shareholder servicing agents. You may also buy shares
through the Fund's Transfer Agent. This Prospectus describes Flag Investors
Class A Shares ("Class A Shares"), Flag Investors Class B Shares ("Class B
Shares") and Flag Investors Class C Shares ("Class C Shares") of the Fund.
These separate classes give you a choice of sales charges and fund expenses.
(Refer to the section on "Sales Charges.")
TABLE OF CONTENTS
-----------------
Investment Summary ........................................ 1
Fees and Expenses of the Fund ............................. 2
Investment Program ........................................ 3
The Fund's Net Asset Value ................................ 4
How to Buy Shares ......................................... 5
How to Redeem Shares ...................................... 5
Telephone Transactions .................................... 6
Sales Charges ............................................. 6
How to Choose the Class
That Is Right for You .................................. 8
Dividends and Taxes ....................................... 9
Organizational Structure .................................. 9
Investment Advisor and Sub-Advisor ........................ 10
Administrator ............................................. 10
Financial Highlights ...................................... 11
Flag Investors Funds
P.O. Box 515
Baltimore, MD 21203
<PAGE>
INVESTMENT SUMMARY
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Objective and Strategies
The Fund seeks to maximize total return. The Fund invests substantially all
of its assets in the Portfolio, a separate mutual fund with the same investment
objective. The Fund, through the Portfolio, seeks to achieve its objective
through a combination of long-term growth of capital and, to a lesser extent,
current income. In selecting investments, the Portfolio's Advisor and
Sub-Advisor (the "Advisors") will choose securities of companies that are
engaged in the research, development, manufacture or sale of communications
services, technology, equipment, or products. The Advisors emphasize both
traditional communications companies and those that engage in new
information-based applications. The Advisors believe that investing in a
portfolio of common stocks, as well as dividend and interest-paying securities,
of companies in the communications field offers an attractive opportunity for
maximizing total return.
Risk Profile
The Fund may be suited for you if you are seeking total return over the
long-term and you are willing to accept the risks and uncertainties of investing
in the common stocks of companies in the communications field.
You should not consider investing in the Fund if you are pursuing a
short-term financial goal, seeking regular income and stability of principal or
cannot tolerate fluctuations in the value of your investments.
The Fund by itself does not constitute a balanced investment program. It
can, however, afford exposure to investment opportunities in the
telecommunications field. Diversifying your investments may improve your
long-term investment return and lower the volatility of your overall investment
portfolio.
General Stock Risk. The value of an investment in the Fund will vary from
day to day based on changes in the prices of the Fund's portfolio securities.
The prices of portfolio securities reflect investor perceptions of the economy,
the markets and the companies represented in the Fund's portfolio.
Market Sector and Non-Diversification Risks. Regulatory or technological
change in the communications field may affect the Fund because it concentrates
its investments in communications companies. The Fund's value may fluctuate more
than less concentrated investment portfolios. In addition, because the Fund
invests in relatively few issuers, the performance of one or a small number of
portfolio holdings can affect overall performance more than if the Fund were
diversified.
If you invest in the Fund, you could lose money. An investment in the Fund
is not a bank deposit and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
Fund Performance
The following bar chart and table show the performance of the Class A
Shares of the Fund both year by year and as an average over different periods of
time. The variability of performance over time provides an indication of the
risks of investing in the Fund. This is an historical record and does not
necessarily indicate how the Fund will perform in the future.
<TABLE>
<CAPTION>
Class A Shares*
For years ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(7.55%) 23.27% 12.45% 18.11% (6.32%) 33.44% 13.46% 37.36% 85.30% 45.47%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
</TABLE>
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* The bar chart does not reflect sales charges that you may pay upon purchase
or redemption of Fund shares. If it did, returns would be less than those
shown. For the period from December 31, 1999 through June 30, 2000, the total
return for Class A Shares was (13.99)%.
During the 10-year period shown in the bar chart, the highest return for a
quarter was 51.19% (quarter ended 12/31/98) and the lowest return for a quarter
was (6.62%) (quarter ended 9/30/99).
1
<PAGE>
Average Annual Total Return (for periods ended December 31, 1999)
<TABLE>
<CAPTION>
Class A Shares(1) S&P 500(2)
----------------- ----------
<S> <C> <C>
Past One Year ............ 37.47% 21.04%
Past Five Years .......... 39.58% 28.56%
Past Ten Years ........... 22.34% 18.17%
Since Inception .......... 22.27%(1/18/84) 18.21%(3)
<CAPTION>
Class B Shares(1) S&P 500(2) Class C Shares(1) S&P 500(2)
----------------- ---------- ----------------- ----------
<S> <C> <C> <C> <C>
Past One Year ............ 37.20% 21.04% 42.89% 21.04%
Past Five Years .......... N/A N/A N/A N/A
Past Ten Years ........... N/A N/A N/A N/A
Since Inception .......... 39.63%(1/3/95) 28.51%(4) 84.14%(10/28/98) 29.87%(5)
</TABLE>
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(1) These figures assume the reinvestment of dividends and capital gains
distributions. For Class A Shares, these figures also include the impact of
the current maximum sales charges, which increased on January 18, 2000.
(2) The Standard & Poor's 500 Index ("S&P 500 Index") is a passive measure of
stock market returns. The S&P 500 Index is a well-known stock market index
that includes common stocks of 500 companies from several industrial sectors
representing a significant portion of the market value of all stocks
publicly traded in the United States, most of which are traded on the New
York Stock Exchange. Stocks in the S&P 500 Index are weighted according to
their market capitalization (the number of shares outstanding multiplied by
the stock's current price). The index does not factor in the costs of
buying, selling, and holding securities -- costs which are reflected in the
Fund's results.
(3) For the period from 1/31/84 through 12/31/99.
(4) For the period from 12/31/94 through 12/31/99.
(5) For the period from 10/31/98 through 12/31/99.
FEES AND EXPENSES OF THE FUND
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This table describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
Initial Sales Deferred Deferred
Charge Sales Charge Sales Charge
Shareholder Fees: Alternative Alternative Alternative
(fees paid directly from your investment) --------------- -------------- ----------------
<S> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a percentage of
offering price) .......................................................... 5.50%(1) None None
Maximum Deferred Sales Charge (Load) (as a percentage of original
purchase price or redemption proceeds, whichever is lower) ............... 1.00%(1) 5.00%(2) 1.00%(3)
Maximum Sales Charge (Load) Imposed on Reinvested Dividends ............... None None None
Redemption Fee ............................................................ None None None
Exchange Fee .............................................................. None None None
Annual Fund Operating Expenses:
(expenses that are deducted from Fund assets)(4)
Management Fees ........................................................... 0.73% 0.73% 0.73%
Distribution and/or Service (12b-1) Fees .................................. 0.25% 0.75% 0.75%
Other Expenses (including a 0.25% shareholder servicing fee for Class B and
Class C Shares) .......................................................... 0.28% 0.53% 0.52%
------- ------- -------
Total Annual Fund Operating Expenses ...................................... 1.26% 2.01% 2.00%
------- ------- -------
Less: Fee Waivers(5) ...................................................... (0.15)% (0.15)% (0.15)%
------- ------- -------
Net Expenses .............................................................. 1.11% 1.86% 1.85%
======= ======= =======
</TABLE>
<PAGE>
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(1) You will pay no sales charge on purchases of $1 million or more of Class A
Shares, but you may pay a deferred sales charge if you redeem your shares
within two years after your purchase unless you are otherwise eligible for a
sales charge waiver or reduction. (See "Sales Charges - Redemption Price")
(2) You will pay a deferred sales charge if you redeem your shares within six
years after your purchase. The amount of the charge declines over time and
eventually reaches zero. Seven years after your purchase, your Class B
Shares will automatically convert to Class A Shares. (See "Sales Charges -
Redemption Price.")
(3) You will pay a deferred sales charge if you redeem your shares within one
year after your purchase. (See "Sales Charges - Redemption Price.")
(4) Information on the annual operating expenses reflects the expenses of both
the Fund and the Portfolio, the master fund in which the Fund invests its
assets. The Fund's fees for the period ended 12/31/99 have been restated to
reflect current fees.
(5) ICCC, the Advisor and Administrator to the Portfolio, has contractually
agreed to waive 0.15% of its aggregate fees until at least September 30,
2002.
2
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Example:*
This Example is intended to help you compare the cost of investing in each
class of the Fund with the cost of investing in other mutual funds. This is a
hypothetical example only, and is not intended to suggest that the Fund's future
performance will match the assumptions used in the example.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each
year, the Fund's operating expenses remain the same, the fee waiver
applies during the first two years only and all expenses reflect the maximum
applicable sales charge. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Class A Shares ....................................................... $657 $899 $1,176 $1,963
Class B Shares ....................................................... $689 $901 $1,255 $2,028
Class C Shares ....................................................... $288 $598 $1,049 $2,302
You would pay the following expenses if you did not redeem your shares:
Class A Shares ....................................................... $657 $899 $1,176 $1,963
Class B Shares ....................................................... $189 $601 $1,055 $2,028
Class C Shares ....................................................... $188 $598 $1,049 $2,302
</TABLE>
* Reflects expenses of both the Fund and the Portfolio, the master fund in
which the Fund invests its assets.
Federal regulations require that the table above reflects the maximum sales
charge. However, you may qualify for reduced sales charges or no sales charge
at all. (Refer to the section entitled "Sales Charges".) If you hold your shares
for a long time, the combination of the initial sales charge you paid and the
recurring 12b-1 fees may exceed the maximum sales charges permitted by the
Conduct Rules of the National Association of Securities Dealers, Inc.
<PAGE>
INVESTMENT PROGRAM
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Investment Objective and Policies
The Fund is designed to maximize total return. While the Advisors give
priority to seeking total return, they cannot offer assurance of achieving this
objective. The investment objective of the Portfolio, unlike that of the Fund,
is not a fundamental policy and may be changed without shareholder approval.
The Fund, through its investment in the Portfolio, will seek to achieve
this objective through a combination of long-term growth of capital and, to a
lesser extent, current income. The Fund invests primarily in common stocks of
companies in the communications field.
The Advisors are responsible for managing the Portfolio's investments.
(Refer to the section entitled "Investment Advisor and Sub-Advisor".) The
Advisors choose securities of companies that are engaged in the research,
development, manufacture or sale of communications services, technology,
equipment or products. The Advisors emphasize investment in companies offering
products and services that both support traditional communications and
facilitate new information-based applications. Examples of such companies are
companies that offer outsourced communications billing and tele-services
products, or network computing technology that supports basic Internet
functionality such as web-site operations for electronic commerce and other
Internet-based applications. The Advisors believe that the expansion of the
worldwide telecommunications market will create new opportunities for both
established and emerging providers of telecommunications products and services.
As a result, they believe that investing in a portfolio of common stocks, as
well as dividend and interest-paying securities, of companies in the
communications field offers an attractive opportunity for maximizing total
return.
The Fund may also invest in convertible securities rather than investing in
a company's common stock, and in bonds and short-term cash equivalents.
Convertible securities are bonds or preferred stocks that give holders the right
to exchange the convertible security for a specified number of shares of a
company's common stock at specified prices within a certain period of time.
Holders receive regular interest payments until they exercise their exchange
right. The Fund may also invest up to 10% of its assets in stocks and other
securities of companies not publicly traded in the United States.
The Advisors follow an investment philosophy referred to as "flexible
value". They look for attractive price to value relationships in undervalued
stocks of strong companies with good management. The emphasis is on individual
stock selection, fundamental research and valuation flexibility, without rigid
constraints.
The Advisors believe the communications industry offers significant
long-term opportunity for a broad variety of companies to focus on unique
sectors and strategies to create and grow attractive businesses. Beyond
recognizing the potential for profitable business segments within the overall
communications industry, they tend to focus on individual companies.
The Advisors consider various factors in assessing a potential candidate
for investment, including the management team; market position; business
strategy; existence of a catalyst for change; and an attractive valuation.
<PAGE>
The Advisors concentrate investments in those stocks that they believe
offer the best potential return relative to possible risks. The Advisors also
retain investment positions for as long as the business fundamentals remain
favorable and the valuations do not become excessive. The Advisors will sell or
reduce holdings if business fundamentals deteriorate or if the price-to-value
relationship becomes unattractive.
Risk Considerations
There are risks associated with investing in general and with investing in
the telecommunications field in particular. Below are some of the risks.
Market Risk. Deteriorating market conditions might cause an overall
weakness in the market that reduces the absolute level of stock prices,
including stocks held by the Fund.
Concentration Risk. The Fund concentrates its investments in common stocks
of companies in the communications field. As a result, market price movements,
regulatory or technological changes, or economic conditions affecting companies
in this field will have a significant impact on the Fund's performance.
Diversification Risk. The Fund is non-diversified. This means that it may
invest in securities of a relatively limited number of issuers. Thus, the
performance of one or a small number of portfolio holdings can affect overall
performance more than if the Fund was diversified.
Foreign Investment Risk. To the extent that it holds companies based
outside the United States, the Fund faces the risks inherent in foreign
investing. Adverse political, economic or social developments could undermine
the value of the Fund's investments or prevent the Fund from realizing their
full value. Financial reporting standards for companies based in foreign markets
differ from those in the United States. Finally, the currency of the country in
which the Fund has invested could decline relative to the value of the U.S.
dollar, which would decrease the value of the investment to U.S. investors.
To reduce the Fund's risk under adverse market conditions, the Advisors may
make temporary defensive investments in money market instruments and other
investment grade income-producing securities, investments that would not
ordinarily be consistent with the Fund's objective. While engaged in a temporary
defensive strategy, the Fund may not achieve its investment objective. The
Advisors would follow such a strategy only if they believed the risk of loss in
pursuing the Fund's primary investment strategies outweighed the opportunity for
gain.
3
<PAGE>
THE FUND'S NET ASSET VALUE
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The price you pay when you buy shares or receive when you redeem shares
is based on the Fund's net asset value per share. When you buy Class A Shares,
the price you pay may be increased by a sales charge. When you redeem any class
of shares, the amount you receive may be reduced by a sales charge. Read the
section entitled "Sales Charges" for details on how and when these charges may
or may not be imposed.
The net asset value per share of the Fund is determined at the close of
regular trading on the New York Stock Exchange on each day the Exchange is open
for business. While regular trading ordinarily closes at 4:00 p.m. (Eastern
Time), it could be earlier, particularly on the day before a holiday. Contact
the Transfer Agent for information about whether the Fund will close early
before a particular holiday. The net asset value per share is calculated by
subtracting the liabilities attributable to that class from its proportionate
share of the Fund's assets and dividing the result by the number of outstanding
shares of the class. Because the different classes have different distribution
or service fees, their net asset values may differ.
In valuing its assets, the Fund's investments are priced at their market
value. When price quotes for a particular security are either not readily
available or unreliable, the security is priced at its "fair value" using
procedures approved by the Fund's Board of Directors.
You may buy or redeem shares on any day the New York Stock Exchange is
open for business (a "Business Day"). If your order is entered before the net
asset value per share is determined for that day, the price you pay or receive
will be based on that day's net asset value per share. If your order is entered
after the net asset value per share is determined for that day, the price you
pay or receive will be based on the next Business Day's net asset value per
share.
The following sections describe how to buy and redeem shares.
HOW TO BUY SHARES
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You may buy any class of the Fund's shares through your securities dealer
or through any financial institution that is authorized to act as a shareholder
servicing agent. Contact them for details on how to enter and pay for your
order. You may also buy shares by sending your check (along with a completed
Application Form) directly to the Fund.
You may invest in Class A Shares unless you are a defined contribution
plan with assets of $75 million or more.
Your purchase order may not be accepted if the sale of Fund shares has
been suspended or if it is determined that your purchase would be detrimental
to the interests of the Fund's shareholders.
Investment Minimums
Your initial investment must be at least $2,000. Subsequent investments
must be at least $100. The following are exceptions to these minimums:
o If you are investing in an IRA account, your initial investment may be
as low as $1,000.
o If you are a shareholder of any other Flag Investors fund, your initial
investment may be as low as $500.
o If you are a participant in the Fund's Automatic Investing Plan, your
initial investment may be as low as $250. If you participate in the
monthly plan, your subsequent investments may be as low as $100. If you
participate in the quarterly plan, your subsequent investments may be
as low as $250. Refer to the section on the Fund's Automatic Investing
Plan for details.
o There is no minimum investment requirement for qualified retirement
plans such as 401(k), pension, or profit sharing plans.
Investing Regularly
You may make regular investments in the Fund through any of the following
methods. If you wish to enroll in any of these programs or if you need any
additional information, complete the appropriate section of the Application
Form or contact your securities dealer, your servicing agent, or the Transfer
Agent.
Automatic Investing Plan. You may elect to make a regular monthly or
quarterly investments in any class of shares. The amount you decide upon will be
withdrawn from your checking account using a pre-authorized check. When the
money is received by
4
<PAGE>
the Transfer Agent, it will be invested in the class of shares selected at that
day's offering price. Either you or the Fund may discontinue your participation
upon 30 days' notice.
Dividend Reinvestment Plan. Unless you elect otherwise, all income and
capital gains distributions will be reinvested in additional Fund shares at net
asset value. You may elect to receive your distributions in cash or to have
your distributions invested in shares of other Flag Investors funds. To make
either of these elections or to terminate automatic reinvestment, complete the
appropriate section of the Application Form or notify the Transfer Agent, your
securities dealer, or your servicing agent at least five days before the date
on which the next dividend or distribution will be paid.
Systematic Purchase Plan. You may also purchase any class of shares
through a Systematic Purchase Plan. Contact your securities dealer or servicing
agent for details.
HOW TO REDEEM SHARES
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You may redeem any class of the Fund's shares through your securities
dealer or servicing agent. Contact them for details on how to enter your order
and for information as to how you will be paid. If you have an account with the
Fund that is in your name, you may also redeem shares by contacting the Transfer
Agent by mail or (if you are redeeming less than $50,000) by telephone. The
Transfer Agent will mail your redemption check within seven days after it
receives your order in proper form. Refer to the section entitled "Telephone
Transactions" for more information on this method of redemption.
Your securities dealer, your servicing agent, or the Transfer Agent may
require the following documents before they redeem your shares:
1) A letter of instructions specifying your account number and the number
of shares or dollar amount you wish to redeem. The letter must be signed by all
owners of the shares exactly as their names appear on the account.
2) If you are redeeming more than $50,000, a guarantee of your signature.
You can obtain one from most banks or securities dealers.
3) Any stock certificates representing the shares you are redeeming. The
certificates must be either properly endorsed or accompanied by a duly executed
stock power.
4) Any additional documents that may be required if your account is in
the name of a corporation, partnership, trust, or fiduciary.
Other Redemption Information
Any dividends payable on shares you redeem will be paid on the next
dividend payable date. If you have redeemed all of your shares by that time,
the dividend will be paid to you in cash whether or not that is the payment
option you have selected.
If you redeem sufficient shares to reduce your investment to $500 or
less, the Fund has the power to redeem the remaining shares after giving you 60
days' notice. The Fund reserves the right to redeem shares in kind under
certain circumstances.
If you own Fund shares having a value of at least $10,000, you may
arrange to have some of your shares redeemed monthly or quarterly under the
Fund's Systematic Withdrawal Plan. Each redemption under this plan involves all
the tax and sales charge implications normally associated with Fund
redemptions. Contact your securities dealer, your servicing agent, or the
Transfer Agent for information on this plan.
TELEPHONE TRANSACTIONS
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If your shares are in an account with the Transfer Agent, you may redeem
them in any amount up to $50,000 or exchange them for shares in another Flag
Investors fund by calling the Transfer Agent on any Business Day between the
hours of 8:30 a.m. and 7:00 p.m. (Eastern Time). You are automatically entitled
to telephone transaction privileges, but you may specifically request that no
telephone redemptions or exchanges be accepted for your account. You may make
this election when you complete the Application Form or at any time thereafter
by completing and returning documentation supplied by the Transfer Agent.
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that telephoned instructions are genuine. These procedures include
requiring you to provide certain personal identification information when you
open your account and
5
<PAGE>
before you effect each telephone transaction. You may be required to provide
additional written instructions. If these procedures are employed, neither the
Fund nor the Transfer Agent will bear any liability for following telephone
instructions that either reasonably believes to be genuine. Your telephone
transaction request will be recorded.
During periods of economic or market volatility, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by mail. If you hold your shares in certificate form,
you may not exchange or redeem them by telephone.
SALES CHARGES
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Purchase Price
The price you pay to buy shares will be the Fund's offering price; this
is calculated by adding any applicable sales charges to the net asset value per
share of the class you are buying. The amount of any sales charge included in
your purchase price will be according to the following schedule:
<TABLE>
<CAPTION>
Class A
Sales Charge
as a % of
------------------------- Class B Class C
Offering Net Amount Sales Sales
Amount of Purchase Price Invested Charge Charge
------------------------------- ---------- ------------ --------- --------
<S> <C> <C> <C> <C>
Less than $ 50,000 ......... 5.50% 5.82% None None
$ 50,000 - $ 99,999 ......... 4.50% 4.71% None None
$ 100,000 - $249,999 ......... 3.50% 3.63% None None
$ 250,000 - $499,999 ......... 2.50% 2.56% None None
$ 500,000 - $999,999 ......... 2.00% 2.04% None None
$1,000,000 and over ........... None None None None
</TABLE>
Although you do not pay an initial sales charge when you invest $1,000,000
or more in Class A Shares or when you buy any amount of Class B or Class C
Shares, you may pay a sales charge when you redeem your shares. Refer to the
section entitled "Redemption Price" for details. Your securities dealer may be
paid a commission at the time of your purchase.
The sales charge you pay on your current purchase of Class A Shares may
be reduced under the circumstances listed below.
Rights of Accumulation. If you are purchasing additional Class A Shares
of this Fund or Class A shares of any other Flag Investors fund or if you
already have investments in Class A shares, you may combine the value of your
purchases with the value of your existing investments to determine whether you
qualify for reduced sales charges. (For this purpose your existing investments
will be valued at the higher of cost or current value.) You may also combine
your purchases and investments with those of your spouse and your children
under the age of 21 for this purpose. You must be able to provide sufficient
information to verify that you qualify for this right of accumulation.
<PAGE>
Letter of Intent. If you anticipate making additional purchases of Class
A Shares over the next 13 months, you may combine the value of your current
purchase with the value of your anticipated purchases to determine whether you
qualify for a reduced sales charge. You will be required to sign a letter of
intent specifying the total value of your anticipated purchases and to
initially purchase at least 5% of the total. When you make each purchase during
the period, you will pay the sales charge applicable to their combined value.
If, at the end of the 13-month period, the total value of your purchases is
less than the amount you indicated, you will be required to pay the difference
between the sales charges you paid and the sales charges applicable to the
amount you actually did purchase. Some of your Class A Shares will be redeemed
to pay this difference.
Purchases at Net Asset Value. You may buy Class A Shares without paying a
sales charge under the following circumstances:
1) If you are reinvesting some or all of the proceeds of a redemption of Class
A Shares made within the last 90 days.
2) If you are exchanging an investment in another Flag Investors fund for an
investment in this Fund (See "Purchases by Exchange" for a description of
the conditions).
3) If you are a current or retired Director of this or any affiliated Fund, a
director, an employee, or a member of the immediate family of an employee
of any of the following (or their respective affiliates): the Fund's
distributor, the Investment Advisors, or a broker-dealer authorized to sell
shares of the Fund.
4) If you are buying shares in any of the following types of accounts:
(i) A qualified retirement plan;
(ii) A Flag Investors fund payroll savings plan
program;
(iii) A fiduciary or advisory account with a bank, bank trust department,
registered investment advisory company, financial planner, or
securities dealer purchasing shares on your behalf.
6
<PAGE>
To qualify for this provision, you must be paying an account
management fee for the fiduciary or advisory services. You may be
charged an additional fee by your securities dealer or servicing
agent if you buy shares in this manner.
Purchases by Exchange
You may exchange Class A, B, or C shares of any other Flag Investors fund
for an equal dollar amount of Class A, B, or C Shares, respectively, without
payment of the sales charges described above or any other charge, up to four
times a year. You may not exchange shares of Flag Investors Cash Reserve Prime
Shares for shares of the Fund unless you acquired those shares through a prior
exchange from shares of another Flag Investors fund. You may enter both your
redemption and purchase orders on the same Business Day or, if you have already
redeemed the shares of the other fund, you may enter your purchase order within
90 days of the redemption. The Fund may modify or terminate these offers of
exchange upon 60 days' notice.
You may request an exchange through your securities dealer or servicing
agent. Contact them for details on how to enter your order. If your shares are
in an account with the Fund's Transfer Agent, you may also request an exchange
directly through the Transfer Agent by mail or by telephone.
Redemption Price
The amount of any sales charge deducted from your redemption price will
be determined according to the following schedule.
Sales Charge as a Percentage
of the Dollar Amount
Subject to Charge
(as a % of Cost or Value)
---------------------------------------------------
Class A Shares Class B Shares Class C Shares
Year Since Purchase Sales Charge Sales Charge Sales Charge
---------------------------------------------------------------------------
First ................ 1.00%* 5.00% 1.00%
Second ............... 0.50%* 4.00% None
Third ................ None 3.00% None
Fourth ............... None 3.00% None
Fifth ................ None 2.00% None
Sixth ................ None 1.00% None
Thereafter ........... None None None
---------------------------------------------------------------------------
-------------------
* You will pay a sales charge when you redeem Class A Shares within two years of
purchase only if your shares were purchased at net asset value because they
were part of an investment of $1 million or more.
Determination of Sales Charge. The sales charge applicable to your
redemption is calculated in a manner that results in the lowest possible rate:
1) No sales charge will be applied to shares you own as a result of reinvesting
dividends or distributions.
<PAGE>
2) If you have purchased shares at various times, the sales charge will be
applied first to shares you have owned for the longest period of time.
3) If you acquired your shares through an exchange of shares of another Flag
Investors fund, the period of time you held the original shares will be
combined with the period of time you held the shares being redeemed to
determine the years since purchase. If you bought your shares prior to
January 18, 2000, you will pay the sales charge that was in effect at the
time of your original purchase.
4) The sales charge is applied to the lesser of the cost of the shares or their
value at the time of your redemption.
Waiver of Sales Charge. You may redeem shares without paying a sales
charge under any of the following circumstances:
1) If you are exchanging your shares for shares of another Flag Investors fund
of the same class.
2) If your redemption represents the minimum required distribution from an
individual retirement account or other retirement plan.
3) If your redemption represents a distribution from a Systematic Withdrawal
Plan. This waiver applies only if the annual withdrawals under your Plan
are 12% or less of your share balance.
4) If shares are being redeemed in your account following your death or a
determination that you are disabled. This waiver applies only under the
following conditions:
(i) The account is registered in your name either individually, as a
joint tenant with rights of survivorship, as a participant in
community property, or as a minor child under the Uniform Gifts or
Uniform Transfers to Minors Acts.
(ii) Either you or your representative notifies your securities dealer,
servicing agent, or the Transfer Agent that such circumstances
exist.
5) If you are redeeming Class A Shares, your original investment was at least
$3,000,000, and your securities dealer has agreed to return to the Fund's
distributor any payments it received when you bought your shares.
Automatic Conversion of Class B Shares. Your Class B Shares, along with
any reinvested dividends or distributions associated with those shares, will be
automatically converted to Class A Shares seven years after your purchase. If
you purchased your shares
7
<PAGE>
prior to January 18, 2000, your Class B Shares will be converted to Class A
Shares six years after your purchase. This conversion will be made on the basis
of the relative net asset values of the classes and will not be a taxable event
to you.
HOW TO CHOOSE THE CLASS THAT IS RIGHT FOR YOU
--------------------------------------------------------------------------------
Your decision as to which class of the Fund's shares is best for you
should be based upon a number of factors including the amount of money you
intend to invest and the length of time you intend to hold your shares.
If you choose Class A Shares, you will pay a sales charge when you buy
your shares, but the amount of the charge declines as the amount of your
investment increases. You will pay lower expenses while you hold the shares
and, except in the case of investments of $1,000,000 or more, no sales charge
if you redeem them.
If you choose Class B Shares, you will pay no sales charge when you buy
your shares, but your annual expenses will be higher than Class A Shares. You
will pay a sales charge if you redeem your shares within six years of purchase,
but the amount of the charge declines the longer you hold your shares and, at
the end of seven years, your shares convert to Class A Shares, thus eliminating
the higher expenses.
If you choose Class C Shares, you will pay no sales charge when you buy
your shares or if you redeem them after holding them for at least a year. On
the other hand, expenses on Class C Shares are the same as those on Class B
Shares and, since there is no conversion to Class A Shares at the end of seven
years, the higher expenses continue for as long as you own your shares.
Your securities dealer is paid a fee when you buy shares and an annual fee
as long as you hold your shares. For Class A and Class B Shares, the annual fee
begins when you purchase your shares. For Class C Shares, their fee begins one
year after you purchase your shares. In addition to these payments, the Fund's
investment advisor may provide significant compensation to securities dealers
and servicing agents for distribution, administrative and promotional services.
Your securities dealer or servicing agent may receive different levels of
compensation depending upon which class of shares you buy.
Distribution Plans and Shareholder Servicing
The Fund has adopted plans under Rule 12b-1 that allow it to pay your
securities dealer or shareholder servicing agent distribution and other fees for
the sale of its shares. In addition, the Fund may pay shareholder servicing fees
on Class B and Class C Shares. Class A Shares pay an annual distribution fee
equal to 0.25% of average daily net assets. Class B and Class C Shares pay an
annual distribution fee equal to 0.75% of average daily net assets and an annual
shareholder servicing fee equal to 0.25% of average daily net assets. Because
these fees are paid out of net assets on an on-going basis, they will, over
time, increase the cost of your investment and may cost you more than paying
other types of sales charges.
DIVIDENDS AND TAXES
--------------------------------------------------------------------------------
Dividends and Distributions
The Fund's policy is to distribute to shareholders substantially all of
its net investment income in the form of quarterly dividends and to distribute
net capital gains at least annually.
Certain Federal Income Tax Consequences
The following summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income
and net realized capital gains at least annually. The dividends and
distributions you receive are subject to federal, state and local taxation,
depending upon your tax situation. If so, they are taxable whether or not you
reinvest them. Income distributions are generally taxable at ordinary income tax
rates. Capital gains distributions are generally taxable at the rates applicable
to long-term capital gains. Each sale or exchange of the Fund's shares is
generally a taxable event. For tax purposes, an exchange of your Fund shares for
shares of a different Flag Investors fund is the same as a sale.
More information about taxes is in the Statement of Additional
Information. Please contact your tax advisor if you have specific questions
about federal, state and local income taxes.
<PAGE>
ORGANIZATIONAL STRUCTURE
--------------------------------------------------------------------------------
The Fund is a "feeder fund" that invests substantially all of its
assets in the Communications Portfolio. The Fund and the Portfolio have the same
investment objective. The Portfolio is advised by Investment Company Capital
Corp. and sub-advised by Alex. Brown Investment Management. (See the section on
"Investment Advisor and Sub-Advisor.")
The Portfolio may accept investments from other feeder funds. A feeder
fund bears the Portfolio's expenses in proportion to its assets. Each feeder
fund can set its own transaction minimums, fund-specific expenses and other
conditions. This arrangement allows the Fund's Directors to withdraw the Fund's
assets from the Portfolio if they believe doing so is in the shareholder's best
interests. If the Directors withdraw the Fund's assets, they would then consider
whether the Fund should hire its own investment advisor, invest in a different
master portfolio or take other action.
8
<PAGE>
INVESTMENT ADVISOR AND SUB-ADVISOR
--------------------------------------------------------------------------------
Investment Company Capital Corp. is the Portfolio's investment advisor and
Alex. Brown Investment Management is the Portfolio's sub-advisor. ICCC is also
the investment advisor to other mutual funds in the Flag Investors family of
funds and to Deutsche Banc Alex. Brown Cash Reserve Fund, Inc. These funds,
together with the Fund, had approximately $12.8 billion of net assets as of
August 31, 2000.
ICCC is an indirect, wholly owned subsidiary of Deutsche Bank, AG.
Deutsche Bank is a major global banking institution that is engaged in a wide
range of financial services, including investment management, mutual funds,
retail and commercial banking, investment banking, and insurance.
ABIM is a registered investment advisor with approximately $10.8 billion
under management as of August 31, 2000. ABIM is a limited partnership affiliated
with the Advisor. Buppert, Behrens & Owen, Inc., a company organized and owned
by three employees of ABIM, owns a 49% limited partnership interest and a 1%
general partnership interest in ABIM. DB Alex. Brown LLC, an affiliate of ICCC,
owns the remaining 50% general partnership interest in ABIM.
ICCC is responsible for supervising and managing all of the Portfolio's
operations, including overseeing the performance of ABIM. ABIM is responsible
for decisions to buy and sell securities for the Portfolio, for broker-dealer
selection, and for negotiation of commission rates.
Prior to September 29, 2000, ICCC served as investment advisor and ABIM
served as investment sub-advisor to the Fund. As compensation for its services
for the fiscal year ended December 31, 1999, ICCC received from the Fund a fee
equal to 0.58% of the Fund's average daily net assets. A Special Meeting of
Shareholders was held on August 31, 2000, at which time Fund shareholders voted
to approve a new investment advisory agreement (the "Advisory Agreement")
between the Portfolio and ICCC and a new sub-advisory agreement (the
"Sub-Advisory Agreement") among the Portfolio, ICCC and ABIM. Under the Advisory
Agreement, the investment advisor is entitled to receive a fee, calculated daily
and paid monthly, at the following annual rates based upon the Portfolio's
average daily net assets: 1.00% of the first $100 million, 0.90% of the next
$100 million, 0.85% of the next $100 million, 0.80% of the next $200 million,
0.73% of the next $500 million, 0.68% of the next $500 million and 0.65% of that
portion exceeding $1.5 billion.
ICCC, the Advisor and Administrator to the Portfolio, has contractually
agreed to waive 0.15% of its aggregate fees until at least September 30, 2002.
ICCC compensates ABIM out of its advisory fee.
<PAGE>
Portfolio Managers
Messrs. Bruce E. Behrens and Liam D. Burke have shared primary
responsibility for managing the Fund's assets since May 1, 1997. Prior to May
1, 1997, Mr. Behrens shared primary responsibility with Mr. Hobart C. Buppert.
Mr. Behrens, who has 32 years of investment experience, has been a Vice
President and Principal of ABIM since 1981. Prior to joining ABIM, he was a
Senior Vice President and Principal of Corbyn Associates from 1978 to 1981 and
a Vice President at Investment Counselors of Maryland from 1972 to 1978. Prior
thereto, he was a Securities Analyst at Citibank from 1968 to 1972. Mr. Behrens
received his B.A. from Denison University in 1966 and an M.B.A. from the
University of Michigan in 1968. He is a member and past president of the
Baltimore Security Analysts Society and a member of the Financial Analysts
Federation.
Mr. Burke, who has 11 years of investment experience, has been a Vice
President since 1994. He joined ABIM in 1994 with primary responsibility as a
telecommunications analyst for the Fund. Prior to joining ABIM, he worked as a
telecommunications industry analyst at a regional broker-dealer, Ferris, Baker,
Watts, Inc. from 1992 to 1994 and as a managing director of Frey & Co., a
Baltimore-based private investment bank, from 1989 to 1992. Mr. Burke began his
professional career at AT&T and spent eight years in positions that included
operations, regional staff management, and national account sales. He is a
graduate of Georgetown University and received his M.B.A. from The George
Washington University.
ADMINISTRATOR
Investment Company Capital Corp. provides administration services to the
Fund. ICCC supervises the day-to-day operations of the Fund, including the
preparation of registration statements, proxy materials, shareholder reports,
compliance with all requirements of securities laws in the states in which
shares are distributed and, subject to the supervision of the Fund's Board of
Directors, oversight of the relationship between the Fund and its other service
providers. ICCC is also the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund.
9
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand the
Fund's financial performance for the past five fiscal years for Class A Shares
and since the commencement of operations for Class B and Class C Shares. Certain
information reflects financial results for a single Fund share. The total
returns in the tables represent the rate that an investor would have earned on
an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information (except for the six-month period ended June 30,
2000) has been audited by PricewaterhouseCoopers LLP, whose report, along with
the Fund's financial statements, is included in the Fund's Annual Report, which
is available upon request.
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
Class A Shares
For the ------------------------------------------------------------------------
Six Months For the Year Ended December 31,
Ended June 30, ------------------------------------------------------------------------
2000(4) 1999 1998 1997 1996 1995
-------------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of
period ........................... $ 43.65 $ 34.23 $ 19.37 $ 15.59 $ 14.87 $ 12.30
----------- ----------- --------- --------- --------- ---------
Income from Investment Operations:
Net investment income ............. 0.07 0.23 0.12 0.27 0.27 0.40
Net realized and unrealized
gain/(loss) on investments ....... (6.15) 14.83 16.05 5.41 1.67 3.58
----------- ----------- --------- --------- --------- ---------
Total from Investment
Operations ....................... (6.08) 15.06 16.17 5.68 1.94 3.98
----------- ----------- --------- --------- --------- ---------
Less Distributions From:
Net investment income and net
realized short-term gains ........ (0.03) (0.33) (0.40) (0.40) (0.38) (0.41)
Net realized long-term gains ...... (0.25) (5.31) (0.91) (1.50) (0.84) (1.00)
------------ ------------ --------- --------- --------- ---------
Total distributions ............... (0.28) (5.64) (1.31) (1.90) (1.22) (1.41)
----------- ----------- --------- --------- --------- ---------
Net asset value at end of period .. $ 37.29 $ 43.65 $ 34.23 $ 19.37 $ 15.59 $ 14.87
=========== =========== ========= ========= ========= =========
Total Return(1)..................... (13.99)% 45.47% 85.30% 37.36% 13.46% 33.44%
Ratios to Average Daily Net
Assets:
Expenses .......................... 0.89%(5) 0.96% 1.05% 1.11% 1.14% 0.93%(2)
Net investment income ............. 0.33%(5) 0.62% 0.48% 1.07% 1.74% 2.85%(3)
Supplemental Data:
Net assets at end of
period (000) ..................... $ 1,793,748 $ 2,115,885 $1,275,775 $ 622,865 $ 505,371 $ 492,454
Portfolio turnover rate ........... 9% 17% 14% 26% 20% 24%
</TABLE>
-----------
(1) Total return excludes the effect of sales charge.
(2) Without the waiver of advisory fees, the ratio of expenses to average daily
net assets would have been 0.99% for the year ended December 31, 1995.
(3) Without the waiver of advisory fees, the ratio of net investment income to
average daily net assets would have been 2.79%.
(4) Unaudited.
(5) Annualized.
10
<PAGE>
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares
------------------------------------------------------------------------------------------------------------------------------------
For the Period
January 3, 1995(1)
For the through
Six Months For the Year Ended December 31, December 31,
Ended June 30, ---------------------------------------------------- ---------------
2000(5) 1999 1998 1997 1996 1995
-------------- ----------- ----------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at beginning of
period ........................... $ 42.85 $ 33.80 $ 19.22 $ 15.51 $ 14.83 $ 12.28
-------- -------- -------- -------- ------- -------
Income from Investment
Operations:
Net investment income/(expenses in
excess of income)................. (0.08) (0.03) (0.02) 0.18 0.19 0.30
Net realized and unrealized
gain/(loss) on investments ....... (6.03) 14.58 15.83 5.34 1.63 3.56
-------- -------- -------- -------- ------- -------
Total from Investment
Operations ....................... (6.11) 14.55 15.81 5.52 1.82 3.86
-------- -------- -------- -------- ------- -------
Less Distributions From:
Net investment income and net
realized short-term gains ........ 0.00(6) (0.19) (0.32) (0.31) (0.30) (0.31)
Net realized long-term gains ...... (0.25) (5.31) (0.91) (1.50) (0.84) (1.00)
-------- -------- -------- -------- ------- -------
Total distributions ............... (0.25) (5.50) (1.23) (1.81) (1.14) (1.31)
-------- -------- -------- -------- ------- -------
Net asset value at end of
period ........................... $ 36.49 $ 42.85 $ 33.80 $ 19.22 $ 15.51 $ 14.83
======== ======== ======== ======== ======= =======
Total Return(2) .................... (14.31)% 44.42% 83.91% 36.36% 12.60% 32.42%
Ratios to Average Daily Net
Assets:
Expenses .......................... 1.65%(4) 1.71% 1.80% 1.86% 1.92% 1.70%(3,4)
Net investment income/(expenses in
excess of income)................. (0.43)%(4) (0.15)% (0.35%) 0.29% 0.95% 2.13%(7)
Supplemental Data:
Net assets at end of
period (000) ..................... $557,521 $592,520 $165,308 $ 32,474 $17,661 $ 7,504
Portfolio turnover rate ........... 9% 17% 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, the ratio of expenses to average daily
net assets would have been 1.74% (annualized) for the period ended December
31, 1995.
(4) Annualized.
(5) Unaudited.
(6) Represents distributions less than $0.01 per share.
(7) Without the waiver of advisory fees, the ratio of net investment income to
average daily net assets would haven been 2.09% (annualized) for the period
ended December 31, 1995.
<PAGE>
<TABLE>
<CAPTION>
Class C Shares
-------------------------------------------
For the Period
For the For the Year November 1, 1998(1)
Six Months Ended December 31, through December 31,
Ended June 30, -------------------- ---------------------
2000(4) 1999 1998
-------------- -------------------- ---------------------
<S> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at beginning of
period ........................... $ 42.88 $ 33.84 $ 25.50
------- ------- -------
Income from Investment
Operations:
Net investment income/(expenses in
excess of income)................. (0.07) (0.02) (0.01)
Net realized and unrealized
gain/(loss) on investments ....... (6.04) 14.56 9.21
------- ------- -------
Total from Investment
Operations ....................... (6.11) 14.54 9.20
------- ------- -------
Less Distributions From:
Net investment income and net
realized short-term gains ........ -- (0.19) (0.21)
Net realized long-term gains ...... (0.25) (5.31) (0.65)
------- ------- -------
Total distributions ............... (0.25) (5.50) (0.86)
------- ------- -------
Net asset value at end of
period ........................... $ 36.52 $ 42.88 $ 33.84
======= ======= =======
Total Return(2) .................... (14.30)% 44.33% 36.70%
Ratios to Average Daily Net
Assets:
Expenses .......................... 1.65%(3) 1.70% 1.85%(3)
Net investment income/(expenses in
excess of income)................. (0.44)%(3) (0.20)% (0.61)%(3)
Supplemental Data:
Net assets at end of
period (000) ..................... $103,214 $91,176 $ 3,247
Portfolio turnover rate ........... 9% 17% 14%
</TABLE>
-----------
(1) Commencement of operations.
(2) Total return excludes the effect of sales charge.
(3) Annualized.
(4) Unaudited.
11
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
Investment Advisor of the Portfolio
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
Investment Sub-Advisor of the Portfolio
ALEX. BROWN INVESTMENT MANAGEMENT
One South Street
Baltimore, Maryland 21202
Distributor
ICC DISTRIBUTORS, INC.
Administrator and Transfer Agent
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
1-800-553-8080
Independent Accountants
PRICEWATERHOUSECOOPERS LLP
250 West Pratt Street
Baltimore, Maryland 21201
Custodian
BANKERS TRUST COMPANY
130 Liberty Street
New York, New York 10006
Fund Counsel
MORGAN, LEWIS & BOCKIUS LLP
1701 Market Street
Philadelphia, Pennsylvania 19103
<PAGE>
[GRAPHIC OMITTED]
Flag Investors o P.O. Box 515 o Baltimore, MD 21203 o (800) 767-FLAG
www.flaginvestors.com
--------------------------------------------------------------------------------
You may obtain the following additional information about the Fund, free of
charge, from your securities dealer or servicing agent or by calling (800)
767-FLAG:
o A statement of additional information (SAI) about the Fund that is
incorporated by reference into the Prospectus.
o The Fund's most recent annual and semi-annual reports containing detailed
financial information and, in the case of the annual report, a discussion of
market conditions and investment strategies that significantly affected the
Fund's performance during its last fiscal year.
In addition, you may review information about the Fund (including the SAI) at
the Securities and Exchange Commission's Public Reference Room in Washington,
D.C. (Call 202-942-8090 to find out about the operation of the Public
Reference Room.) The EDGAR Database on the Commission's Internet site at
http://www.sec.gov has reports and other information about the Fund. Copies of
this information may be obtained, upon payment of a duplicating fee, by
electronic request at the following email address: [email protected], or by
writing the Public Reference Section of the Commission, Washington, D.C.
20549-0102.
For other shareholder inquiries, contact the Transfer Agent at (800) 553-8080.
For Fund information, call (800) 767-FLAG or your securities dealer or servicing
agent.
Investment Company Act File No. 811-3883 COMMPRS (9/00)
<PAGE>
[GRAPHIC OMITTED]
Communications Fund, Inc.
(Institutional Shares)
Prospectus
September 29, 2000
The Securities and Exchange Commission has neither approved nor disapproved
these securities nor has it passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>
[GRAPHIC OMITTED]
This mutual fund (the "Fund") is designed to maximize total return through a
combination of long-term growth of capital and, to a lesser extent, current
income.
The Fund invests substantially all of its assets in the Communications Portfolio
(the "Portfolio"), a separate mutual fund advised by Investment Company Capital
Corp. ("ICCC" or the "Advisor") and sub-advised by Alex. Brown Investment
Management ("ABIM" or the "Sub-Advisor"). The Portfolio invests primarily in
common stocks of companies in the communications field.
The Fund offers shares through securities dealers and through financial
institutions that act as shareholder servicing agents. You may also buy shares
through the Fund's Transfer Agent. This Prospectus describes Flag Investors
Institutional Shares (the "Institutional Shares") of the Fund. Institutional
Shares may be purchased only by eligible institutions, by certain qualified
retirement plans, or by investment advisory affiliates of DB Alex. Brown LLC or
the Flag Investors family of funds on behalf of their clients.
TABLE OF CONTENTS
Investment Summary ........................................................... 1
Fees and Expenses of the
Institutional Shares ...................................................... 2
Investment Program ........................................................... 3
The Fund's Net Asset Value ................................................... 4
How to Buy Institutional Shares .............................................. 4
How to Redeem Institutional Shares ........................................... 5
Telephone Transactions ....................................................... 5
Dividends and Taxes .......................................................... 5
Organizational Structure ..................................................... 6
Investment Advisor and Sub-Advisor ........................................... 6
Administrator ................................................................ 7
Financial Highlights ......................................................... 8
Flag Investors Funds
P.O. Box 515
Baltimore, MD 21203
<PAGE>
INVESTMENT SUMMARY
--------------------------------------------------------------------------------
Objective and Strategies
The Fund seeks to maximize total return. The Fund invests substantially all
of its assets in the Portfolio, a separate mutual fund with the same investment
objective. The Fund, through the Portfolio, seeks to achieve its objective
through a combination of long-term growth of capital and, to a lesser extent,
current income. In selecting investments, the Portfolio's Advisor and
Sub-Advisor (the "Advisors") will choose securities of companies that are
engaged in the research, development, manufacture or sale of communications
services, technology, equipment or products. The Advisors emphasize both
traditional communications companies and those that engage in new
information-based applications. The Advisors believe that investing in a
portfolio of common stocks, as well as dividend and interest-paying securities,
of companies in the communications field offers an attractive opportunity for
maximizing total return.
Risk Profile
The Fund may be suited for you if you are seeking total return over the
long-term and you are willing to accept the risks and uncertainties of investing
in the common stocks of companies in the communications field.
You should not consider investing in the Fund if you are pursuing a
short-term financial goal, seeking regular income and stability of principal or
cannot tolerate fluctuations in the value of your investments.
The Fund by itself does not constitute a balanced investment program. It
can, however, afford exposure to investment opportunities in the
telecommunications field. Diversifying your investments may improve your
long-term investment return and lower the volatility of your overall investment
portfolio.
General Stock Risk. The value of an investment in the Fund will vary from
day to day based on changes in the prices of the Fund's portfolio securities.
The prices of portfolio securities reflect investor perceptions of the economy,
the markets and the companies represented in the Fund's portfolio.
Market Sector and Non-Diversification Risks. Regulatory or technological
change in the communications field may affect the Fund because it concentrates
its investments in communications companies. The Fund's value may fluctuate more
than less concentrated investment portfolios. In addition, because the Fund
invests in relatively few issuers, the performance of one or a small number of
portfolio holdings can affect overall performance more than if the Fund were
diversified.
If you invest in the Fund, you could lose money. An investment in the Fund
is not a bank deposit and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
Fund Performance
The following bar chart and table show the performance of the Fund both for
the calendar year ended December 31, 1999 and as an average over different
periods of time. The variability of performance over time provides an indication
of the risks of investing in the Fund. This is an historical record and does not
necessarily indicate how the Fund will perform in the future.
Institutional Shares*
For the year ended December 31,
45.89%
1999
-----------
* For the period from December 31, 1999 through June 30, 2000, the total return
for Institutional Shares was (13.89)%.
During the 1-year period shown in the bar chart, the highest return for a
quarter was 27.32% (quarter ended 12/31/99) and the lowest return for a quarter
was (6.55)% (quarter ended 9/30/99).
1
<PAGE>
Average Annual Total Return (for periods ended December 31, 1999)
Institutional Shares(1) S&P 500(2)
-------------------------- -----------
Past One Year ............ 45.89% 21.04%
Since Inception .......... 67.19% (6/4/98) 22.20%(3)
------------------------
(1) These figures assume the reinvestment of dividends and capital gains
distributions.
(2) The Standard & Poor's 500 Index ("S&P 500 Index") is a passive measure of
Stock Market returns. The S&P 500 Index is a well-known stock market index
that includes common stocks of 500 companies from several industrial sectors
representing a significant portion of the market value of all stocks
publicly traded in the United States, most of which are traded on the New
York Stock Exchange. Stocks in the S&P 500 Index are weighted according to
their market capitalization (the number of shares outstanding multiplied by
the stock's current price). The index does not factor in the costs of
buying, selling and holding securities -- costs that are reflected in the
Fund's results.
(3) For the period from 5/31/98 through 12/31/99.
FEES AND EXPENSES OF THE INSTITUTIONAL SHARES
--------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and
hold Institutional Shares.
<TABLE>
<CAPTION>
Shareholder Fees (fees paid directly from your investment):
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases ............................... None
Maximum Deferred Sales Charge (Load) ........................................... None
Maximum Sales Charge (Load) Imposed on Reinvested Dividends .................... None
Redemption Fee ................................................................. None
Exchange Fee ................................................................... None
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)(1):
Management Fees ................................................................ 0.73%
Distribution and/or Service (12b-1) Fees ....................................... None
Other Expenses ................................................................. 0.29%
------
Total Annual Fund Operating Expenses ........................................... 1.02%
------
Less: Fee Waivers(2) ........................................................... (0.15)%
------
Net Expenses ................................................................... 0.87%
======
(1) Information on the annual operating expenses reflects the expenses of both
the Fund and the Portfolio, the master fund in which the Fund invests its
assets. The Fund's fees for the period ended 12/31/99 have been
restated to reflect current fees.
(2) ICCC, the Advisor and Administrator to the Portfolio, has contractually
agreed to waive 0.15% of its aggregate fees until at least September 30,
2002.
</TABLE>
Example:*
This Example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds. This is a hypothetical
example only, and is not intended to suggest that the Fund's performance will
match the assumptions used in the example.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each
year, the Fund's operating expenses remain the same and the fee waiver applies
during the first two years only. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Institutional Shares .......... $89 $294 $533 $1,220
----------------------------
* Reflects expenses of both the Fund and the Portfolio, the master fund in
which the Fund invests its assets.
<PAGE>
INVESTMENT PROGRAM
--------------------------------------------------------------------------------
Investment Objective and Policies
The Fund is designed to maximize total return. While the Advisors give
priority to seeking total return, they cannot offer assurance of achieving this
objective. The investment objective of the Portfolio, unlike that of the Fund,
is not a fundamental policy and may be changed without shareholder approval.
The Fund, through its investment in the Portfolio, will seek to achieve
this objective through a combination of long-term growth of capital and, to a
lesser extent, current income. The Fund invests primarily in common stocks of
companies in the communications field.
The Advisors are responsible for managing the Portfolio's investments.
(Refer to the section entitled "Investment Advisor and Sub-Advisor.") The
Advisors choose securities of companies that are engaged in the research,
development, manufacture or sale of communications services, technology,
equipment or products. The Advisors emphasize investment in companies offering
products and services that both support traditional communications and
facilitate new information-based applications. Examples of such companies are
companies that offer outsourced communications billing and tele-services
products, or network computing technology that supports basic Internet
functionality such as web-site operations for electronic commerce and other
Internet-based applications. The Advisors believe that the expansion of the
worldwide telecommunications market will create new opportunities for both
established and emerging providers of telecommunications products and services.
As a result, they believe that investing in a portfolio of common stocks, as
well as dividend and interest-paying securities, of companies in the
communications field offers an attractive opportunity for maximizing total
return.
The Fund may also invest in convertible securities rather than investing
in a company's common stock, and in bonds and short-term cash equivalents.
Convertible securities are bonds or preferred stocks that give holders the right
to exchange the convertible security for a specified number of shares of a
company's common stock at specified prices within a certain period of time.
Holders receive regular interest payments until they exercise their exchange
right. The Fund may also invest up to 10% of its assets in stocks and other
securities of companies not publicly traded in the United States.
The Advisors follow an investment philosophy referred to as "flexible
value". They look for attractive price to value relationships in undervalued
stocks of strong companies with good management. The emphasis is on individual
stock selection, fundamental research and valuation flexibility, without rigid
constraints.
The Advisors believe the communications industry offers significant
long-term opportunity for a broad variety of companies to focus on unique
sectors and strategies to create and grow attractive businesses. Beyond
recognizing the potential for profitable business segments within the overall
communications industry, they tend to focus on individual companies.
The Advisors consider various factors in assessing a potential candidate
for investment, including the management team; market position; business
strategy; existence of a catalyst for change; and an attractive valuation.
2
<PAGE>
The Advisors concentrate investments in those stocks that they believe
offer the best potential return relative to possible risks. The Advisors retain
investment positions for as long as the business fundamentals remain favorable
and the valuations do not become excessive. The Advisors will sell or reduce
holdings if business fundamentals deteriorate or if the price-to-value
relationship becomes unattractive.
Risk Considerations
There are risks associated with investing in general and with investing in
the telecommunications field in particular. Below are some of the risks.
Market Risk. Deteriorating market conditions might cause an overall
weakness in the market that reduces the absolute level of stock prices,
including stocks held by the Fund.
Concentration Risk. The Fund concentrates its investments in common stocks
of companies in the communications field. As a result, market price movements,
regulatory or technological changes, or economic conditions affecting companies
in this field will have a significant impact on the Fund's performance.
Diversification Risk. The Fund is non-diversified. This means that it may
invest in securities of a relatively limited number of issuers. Thus, the
performance of one or a small number of portfolio holdings can affect overall
performance more than if the Fund was diversified.
Foreign Investment Risk. To the extent that it holds companies based
outside the United States, the Fund faces the risks inherent in foreign
investing. Adverse political, economic or social developments could undermine
the value of the Fund's investments or prevent the Fund from realizing their
full value. Financial reporting standards for companies based in foreign markets
differ from those in the United States. Finally, the currency of the country in
which the Fund has invested could decline relative to the value of the U.S.
dollar, which would decrease the value of the investment to U.S. investors.
To reduce the Fund's risk under adverse market conditions, the Advisors
may make temporary defensive investments in money market instruments and other
investment grade income-producing securities, investments that would not
ordinarily be consistent with the Fund's objective. While engaged in a temporary
defensive strategy, the Fund may not achieve its investment objective. The
Advisors would follow such a strategy only if they believed the risk of loss in
pursuing the Fund's primary investment strategies outweighted the opportunity
for gain.
<PAGE>
THE FUND'S NET ASSET VALUE
--------------------------------------------------------------------------------
The price you pay when you buy shares or receive when you redeem shares is
based on the Fund's net asset value per share. The net asset value per share of
the Fund is determined at the close of regular trading on the New York Stock
Exchange on each day the Exchange is open for business. While regular trading
ordinarily closes at 4:00 p.m. (Eastern Time), it could be earlier, particularly
on a day before a holiday. Contact the Transfer Agent for information about
whether the Fund will close early before a particular holiday. The net asset
value per share is calculated by subtracting the liabilities attributable to the
Institutional Shares from its proportionate share of the Fund's assets and
dividing the result by the number of outstanding Institutional Shares.
In valuing its assets, the Fund's investments are priced at their market
value. When price quotes for a particular security are either not readily
available or unreliable, the security is priced at its "fair value" using
procedures approved by the Fund's Board of Directors.
You may buy or redeem Institutional Shares on any day the New York Stock
Exchange is open for business (a "Business Day"). If your order is entered
before the net asset value per share is determined for that day, the price you
pay or receive will be based on that day's net asset value per share. If your
order is entered after the net asset value per share is determined for that
day, the price you pay or receive will be based on the next Business Day's net
asset value per share.
The following sections describe how to buy and redeem Institutional
Shares.
HOW TO BUY INSTITUTIONAL SHARES
--------------------------------------------------------------------------------
You may buy Institutional Shares if you are any of the following:
o An eligible institution (e.g., a financial institution, corporation,
investment counselor, trust, estate or educational, religious or
charitable institution or a qualified retirement plan other than a
defined contribution plan).
o A defined contribution plan with assets of at least $75 million.
o An investment advisory affiliate of DB Alex. Brown LLC or the Flag
Investors family of funds purchasing shares for the accounts of your
investment advisory clients.
You may buy Institutional shares through your securities dealer or
through any financial institution that is authorized to act as a shareholder
servicing agent. Contact them for details on how to enter and pay for your
order. You may also buy Institutional Shares by sending your check (along with
a completed Application Form) directly to the Fund.
Your purchase order may not be accepted if the sale of Fund shares has
been suspended or if it is determined that your purchase would be detrimental
to the interests of the Fund's shareholders.
3
<PAGE>
Investment Minimums
Your initial investment must be at least $500,000.
The following are exceptions to this minimum:
o There is no minimum initial investment for investment advisory
affiliates of DB Alex. Brown LLC or the Flag Investors family of funds
purchasing shares for the accounts of their investment advisory clients.
o There is no minimum initial investment for defined contribution plans
with assets of at least $75 million.
o The minimum initial investment for all other qualified retirement plans
is $1 million.
There are no minimums for subsequent investments.
Purchases by Exchange
You may exchange Institutional shares of any other Flag Investors fund
for an equal dollar amount of Institutional Shares of the Fund up to four times
a year. The Fund may modify or terminate this offer of exchange upon 60 days'
notice.
You may request an exchange through your securities dealer or servicing
agent. Contact them for details on how to enter your order. If your shares are
in an account with the Fund's Transfer Agent, you may also request an exchange
directly through the Transfer Agent by mail or by telephone.
HOW TO REDEEM INSTITUTIONAL SHARES
--------------------------------------------------------------------------------
You may redeem Institutional Shares through your securities dealer or
servicing agent. Contact them for details on how to enter your order and for
information as to how you will be paid. If your shares are in an account with
the Fund, you may also redeem them by contacting the Transfer Agent by mail or
(if you are redeeming less than $500,000) by telephone. You will be paid for
redeemed shares by wire transfer of funds to your securities dealer, servicing
agent or bank upon receipt of a duly authorized redemption request as promptly
as feasible and, under most circumstances, within three Business Days.
Any dividends payable on shares you redeem will be paid on the next
dividend payable date. If you have redeemed all of your shares by that time,
the dividend will be paid to you in cash whether or not that is the payment
option you have selected.
If you redeem sufficient shares to reduce your investment to $500 or
less, the Fund has the power to redeem the remaining shares after giving you 60
days' notice. The Fund reserves the right to redeem shares in kind under
certain circumstances.
TELEPHONE TRANSACTIONS
--------------------------------------------------------------------------------
If your shares are in an account with the Transfer Agent, you may redeem
them in any amount up to $500,000 or exchange them for Institutional shares of
another Flag Investors fund by calling the Transfer Agent on any Business Day
between the hours of 8:30 a.m. and 7:00 p.m. (Eastern Time). You are
automatically entitled to telephone transaction privileges but you may
specifically request that no telephone redemptions or exchanges be accepted for
your account. You may make this election when you complete the Application Form
or at any time thereafter by completing and returning documentation supplied by
the Transfer Agent.
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that telephoned instructions are genuine. These procedures include
requiring you to provide certain personal identification information when you
open your account and before you effect each telephone transaction. You may be
required to provide additional written instructions. If these procedures are
employed, neither the Fund nor the Transfer Agent will bear any liability for
following telephone instructions that either reasonably believes to be genuine.
Your telephone transaction request will be recorded.
During periods of economic or market volatility, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by mail.
4
<PAGE>
DIVIDENDS AND TAXES
--------------------------------------------------------------------------------
Dividends and Distributions
The Fund's policy is to distribute to shareholders substantially all of
its net investment income in the form of quarterly dividends and to distribute
net capital gains at least annually.
Dividend Reinvestment
Unless you elect otherwise, all income and capital gains distributions
will be reinvested in additional Institutional Shares at net asset value. You
may elect to receive your distributions in cash or to have your distributions
invested in Institutional Shares of other Flag Investors funds. To make either
of these elections or to terminate automatic reinvestment, complete the
appropriate section of the Application Form or notify the Transfer Agent, your
securities dealer, or your servicing agent at least five days before the date on
which the next dividend or distribution will be paid.
Certain Federal Income Tax Consequences
The following summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income
and net realized capital gains at least annually. The dividends and
distributions you receive are subject to federal, state and local taxation,
depending upon your tax situation. If so, they are taxable whether or not you
reinvest them. Income distributions are generally taxable at ordinary income tax
rates. Capital gains distributions are generally taxable at the rates applicable
to long-term capital gains. However, distributions by the Fund to retirement
plans that qualify for tax-exempt treatment under U.S. tax laws will not be
taxable. Each sale or exchange of the Fund's shares is generally a taxable
event, except for a sale or exchange by a retirement plan that qualifies for
tax-exempt treatment under U.S. tax laws.
More information about taxes is in the Statement of Additional
Information. Please contact your tax advisor if you have specific questions
about federal, state and local income taxes.
<PAGE>
ORGANIZATIONAL STRUCTURE
--------------------------------------------------------------------------------
The Fund is a "feeder fund" that invests substantially all of its
assets in the Communications Portfolio. The Fund and the Portfolio have the same
investment objective. The Portfolio is advised by Investment Company Capital
Corp. and sub-advised by Alex. Brown Investment Management. (See the section on
"Investment Advisor and Sub-Advisor.")
The Portfolio may accept investments from other feeder funds. A feeder
fund bears the Portfolio's expenses in proportion to its assets. Each feeder
fund can set its own transaction minimums, fund-specific expenses and other
conditions. This arrangement allows the Fund's Directors to withdraw the Fund's
assets from the Portfolio if they believe doing so is in the shareholder's best
interests. If the Directors withdraw the Fund's assets, they would then consider
whether the Fund should hire its own investment advisor, invest in a different
master portfolio or take other action.
INVESTMENT ADVISOR AND SUB-ADVISOR
--------------------------------------------------------------------------------
Investment Company Capital Corp. is the Portfolio's investment advisor
and Alex. Brown Investment Management is the Portfolio's sub-advisor. ICCC is
also the investment advisor to other mutual funds in the Flag Investors family
of funds and to Deutsche Banc Alex. Brown Cash Reserve Fund, Inc. These funds,
together with the Fund, had approximately $12.8 billion of net assets as of
August 31, 2000.
ICCC is an indirect, wholly owned subsidiary of Deutsche Bank, AG.
Deutsche Bank is a major global banking institution that is engaged in a wide
range of financial services, including investment management, mutual funds,
retail and commercial banking, investment banking, and insurance.
ABIM is a registered investment advisor with approximately $10.8
billion under management as of August 31, 2000. ABIM is a limited partnership
affiliated with the Advisor. Buppert, Behrens & Owen, Inc., a company organized
and owned by three employees of ABIM, owns a 49% limited partnership interest
and a 1% general partnership interest in ABIM. DB Alex. Brown LLC, an affiliate
of ICCC, owns the remaining 50% general partnership interest in ABIM.
ICCC is responsible for supervising and managing all of the Portfolio's
operations, including overseeing the performance of ABIM. ABIM is responsible
for decisions to buy and sell securities for the Portfolio, for broker-dealer
selection and for negotiation of commission rates.
<PAGE>
Prior to September 29, 2000, ICCC served as investment advisor and ABIM
served as investment sub-advisor to the Fund. As compensation for its services
for the fiscal year ended December 31, 1999, ICCC received from the Fund a fee
equal to 0.58% of the Fund's average daily net assets. A Special Meeting of
Shareholders was held on August 31, 2000, at which time Fund shareholders voted
to approve a new investment advisory agreement (the "Advisory Agreement")
between the Portfolio and ICCC and a new sub-advisory agreement (the
"Sub-Advisory Agreement") among the Portfolio, ICCC and ABIM. Under the Advisory
Agreement, the investment advisor is entitled to receive a fee, calculated daily
and paid monthly, at the following annual rates based upon the Portfolio's
average daily net assets: 1.00% of the first $100 million, 0.90% of the next
$100 million, 0.85% of the next $100 million, 0.80% of the next $200 million,
0.73% of the next $500 million, 0.68% of the next $500 million and 0.65% of that
portion exceeding $1.5 billion.
ICCC, the Advisor and Administrator to the Portfolio, has contractually
agreed to waive 0.15% of its aggregate fees until at least September 30, 2002.
ICCC compensates ABIM out of its advisory fee. ICCC also may provide significant
compensation to securities dealers and servicing agents for distribution,
administrative and promotional services.
5
<PAGE>
Portfolio Managers
Messrs. Bruce E. Behrens and Liam D. Burke have shared primary
responsibility for managing the Fund's assets since May 1, 1997. Prior to May 1,
1997, Mr. Behrens shared primary responsibility with Mr. Hobart C. Buppert.
Mr. Behrens, who has 32 years of investment experience, has been a Vice
President and Principal of ABIM since 1981. Prior to joining ABIM, he was a
Senior Vice President and Principal of Corbyn Associates from 1978 to 1981 and
a Vice President at Investment Counselors of Maryland from 1972 to 1978. Prior
thereto, he was a Securities Analyst at Citibank from 1968 to 1972. Mr. Behrens
received his B.A. from Denison University in 1966 and an M.B.A. from the
University of Michigan in 1968. He is a member and past president of the
Baltimore Security Analysts Society and a member of the Financial Analysts
Federation.
Mr. Burke, who has 11 years of investment experience, has been a Vice
President of ABIM since 1994. He joined ABIM in 1994 with primary responsibility
as a telecommunications analyst for the Fund. Prior to joining ABIM, he worked
as a telecommunications industry analyst at a regional broker-dealer, Ferris,
Baker, Watts, Inc. from 1992 to 1994 and as a managing director of Frey & Co., a
Baltimore-based private investment bank, from 1989 to 1992. Mr. Burke began his
professional career at AT&T and spent eight years in positions that included
operations, regional staff management and national account sales. He is a
graduate of Georgetown University and received his M.B.A. from The George
Washington University.
ADMINISTRATOR
Investment Company Capital Corp. provides administration services to the
Fund. ICCC supervises the day-to-day operations of the Fund, including the
preparation of registration statements, proxy materials, shareholder reports,
compliance with all requirements of securities laws in the states in which
shares are distributed and, subject to the supervision of the Fund's Board of
Directors, oversight of the relationship between the Fund and its other service
providers. ICCC is also the Fund's transfer and dividend disburing agent and
provides accounting services to the Fund.
6
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the
Fund's financial performance since it began operations. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned on an investment in
the Fund (assuming reinvestment of all dividends and distributions). This
information (except for the six-month period ended June 30, 2000) has been
audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's
financial statements, is included in the Fund's Annual Report, which is
available upon request.
(For a share outstanding throughout each period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional Shares
--------------------------------
For the Period
For the Six For the Year June 4, 1998(1)
Months ended Ended through
June 30, December 31, December 31,
----------------- ------------- --------------
2000(3) 1999 1998
----------------- ------------- --------------
<S> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ............................. $ 43.76 $ 34.27 $ 23.26
------- ------- -------
Income from Investment Operations:
Net investment income .............................................. 0.11 0.27 0.06
Net realized and unrealized gain/(loss) on investments ............. (6.16) 14.93 12.17
------- ------- -------
Total from Investment Operations ................................... (6.05) 15.20 12.23
------- ------- -------
Less Distributions From:
Net investment income and net realized short-term
gains ............................................................ (0.06) ( 0.40) ( 0.31)
Net realized long-term gains ....................................... (0.25) ( 5.31) ( 0.91)
------- ------- -------
Total distributions ................................................ (0.31) ( 5.71) ( 1.22)
------- ------- -------
Net asset value at end of period ................................... $ 37.40 $ 43.76 $ 34.27
======= ======= =======
Total Return ........................................................ (13.89)% 45.89% 53.95%
Ratios to Average Daily Net Assets:
Expenses ........................................................... 0.65%(2) 0.72% 0.83%(2)
Net investment income .............................................. 0.59%(2) 0.86% 0.49%(2)
Supplemental Data:
Net assets at end of period (000) .................................. $27,120 $28,153 $ 813
Portfolio turnover rate ............................................ 9% 17% 14%
</TABLE>
-----------
(1) Commencement of operations.
(2) Annualized.
(3) Unaudited.
7
<PAGE>
Investment Advisor of the Portfolio
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
Investment Sub-Advisor of the Portfolio
ALEX. BROWN INVESTMENT MANAGEMENT
One South Street
Baltimore, Maryland 21202
Distributor
ICC DISTRIBUTORS, INC.
Administrator and Transfer Agent
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
1-800-553-8080
Independent Accountants
PRICEWATERHOUSECOOPERS LLP
250 West Pratt Street
Baltimore, Maryland 21201
Custodian
BANKERS TRUST COMPANY
130 Liberty Street
New York, New York 10006
Fund Counsel
MORGAN, LEWIS & BOCKIUS LLP
1701 Market Streeet
Philadelphia, Pennsylvania 19103
<PAGE>
[GRAPHIC OMITTED]
Flag Investors o P.O. Box 515 o Baltimore, MD 21203 o (800) 767-FLAG
www.flaginvestors.com
--------------------------------------------------------------------------------
You may obtain the following additional information about the Fund, free of
charge, from your securities dealer or servicing agent or by calling (800)
767-FLAG:
o A statement of additional information (SAI) about the Fund that is
incorporated by reference into the Prospectus.
o The Fund's most recent annual and semi-annual reports containing detailed
financial information and, in the case of the annual report, a discussion of
market conditions and investment strategies that significantly affected the
Fund's performance during its last fiscal year.
In addition, you may review information about the Fund (including the SAI) at
the Securities and Exchange Commission's Public Reference Room in Washington,
D.C. (Call 202-942-8090 to find out about the operation of the Public Reference
Room.) The EDGAR Database on the Commission's Internet site at
http://www.sec.gov has reports and other information about the Fund. Copies of
this information may be obtained, upon payment of a duplicating fee, by
electronic request at the following email address: [email protected], or by
writing the Public Reference Section of the Commission, Washington, D.C.
20549-0102.
For other shareholder inquiries, contact the Transfer Agent at (800) 553-8080.
For Fund information, call (800) 767-FLAG or your securities dealer or servicing
agent.
Investment Company Act File No. 811-3883 COMMIPRS (9/00)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
--------------------------------------------
FLAG INVESTORS COMMUNICATIONS FUND, INC.
One South Street
Baltimore, Maryland 21202
--------------------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS
NOT A PROSPECTUS. IT SHOULD BE READ IN
CONJUNCTION WITH A PROSPECTUS. THE AUDITED
FINANCIAL STATEMENTS FOR THE FUND ARE INCLUDED
IN THE FUND'S ANNUAL REPORT, WHICH HAS BEEN
FILED ELECTRONICALLY WITH THE
SECURITIES AND EXCHANGE COMMISSION AND IS
INCORPORATED BY REFERENCE INTO THIS
STATEMENT OF ADDITIONAL INFORMATION. A COPY OF
EACH PROSPECTUS AND THE ANNUAL REPORT MAY BE OBTAINED
WITHOUT CHARGE 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 September 29, 2000,
relating to the Prospectuses Dated September 29, 2000 for:
Flag Investors Class A Shares, Flag Investors Class B Shares,
Flag Investors Class C Shares and Flag Investors Institutional Shares
<PAGE>
TABLE OF CONTENTS
Page
GENERAL INFORMATION AND HISTORY........................................1
INVESTMENT OBJECTIVE AND POLICIES......................................1
VALUATION OF SHARES AND REDEMPTION.....................................6
FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS...................6
MANAGEMENT OF THE FUND AND THE PORTFOLIO...............................9
INVESTMENT ADVISORY AND OTHER SERVICES................................14
ADMINISTRATOR ........................................................16
DISTRIBUTION OF FUND SHARES...........................................16
BROKERAGE.............................................................20
CAPITAL STOCK.........................................................21
SEMI-ANNUAL REPORTS AND ANNUAL REPORTS................................22
CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES.....................22
INDEPENDENT ACCOUNTANTS...............................................23
LEGAL MATTERS.........................................................23
PERFORMANCE INFORMATION...............................................23
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES...................25
FINANCIAL STATEMENTS..................................................26
APPENDIX A............................................................27
<PAGE>
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, 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 Securities and Exchange Commission (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. On September 29,
2000, the Fund became a feeder fund of the Communications Portfolio (the
"Portfolio"), a portfolio of the Flag Investors Portfolios Trust.
Under a license agreement dated January 19, 1989 between the Fund and
Alex. Brown & Sons Incorporated (predecessor to DB Alex. Brown LLC) ("DB Alex.
Brown"), 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.
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks to maximize total return through a combination of
long-term growth of capital and, to a lesser extent, current income. The Fund
seeks to achieve this objective by investing substantially all of its assets in
a non-diversified open-end management investment company, the Communications
Portfolio of Flag Investors Portfolios Trust (the "Portfolio"), having the same
investment objective as the Fund. The Fund may withdraw its investment from the
Portfolio at any time if the Board of Directors determines that it is in the
best interests of the Fund to do so. There can be no assurance that the Fund's
investment objective will be achieved. The Fund's investment objective may not
be changed without shareholder approval.
Investment Company Capital Corp. ("ICCC" or the "Advisor") and Alex.
Brown Investment Management ("ABIM" or the "Sub-Advisor") manage the Portfolio's
investments. Since the investment characteristics of the Fund will correspond
directly to those of the Portfolio, the following is a discussion of the various
investments of and techniques employed by the Portfolio.
In seeking its objective, the Portfolio 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 derive at least 50% of their revenues from such
activities.
-1-
<PAGE>
The Portfolio's Advisor and 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
telecommunications-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 Portfolio's investment objective
will be achieved.
Under normal market conditions at least 65% of the Portfolio'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 Portfolio may temporarily and for defensive
purposes invest up to 100% of its net assets in money market instruments and in
other income-producing securities.
Convertible Securities
The Portfolio may invest in convertible securities. In general, the
market value of a convertible security is at least the higher of its "investment
value" (i.e., its value as a fixed-income security) or its "conversion value"
(i.e., the value of the underlying shares of common stock if the security is
converted). A convertible security tends to increase in market value when
interest rates decline and tends to decrease in value when interest rates rise.
However, the price of a convertible security also is influenced by the market
value of the security's underlying common stock. Thus, the price of a
convertible security tends to increase as the market value of the underlying
stock increases and declines as the market value of the underlying stock
declines. Investments in convertible securities generally entail less risk than
investing in common stock of the same issuer.
Investments in Fixed Income Securities
In general, the Portfolio will invest in investment grade
non-convertible corporate 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 Advisors, under criteria approved
by the Portfolio's Board of Trustees. 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 Portfolio's total assets (measured at the time of the investment) may be
invested in lower quality non-convertible corporate 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 Portfolio 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 Portfolio will be precluded from
investing further in non-convertible debt obligations that are below investment
grade.
-2-
<PAGE>
The Portfolio may purchase non-convertible corporate 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 Trustees. These bonds are
generally known as "junk bonds." These securities may trade at substantial
discounts from their face values. Accordingly, if the Portfolio 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 Portfolio 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 Portfolio may earn from
investments in high-yield securities will be significantly affected not only by
credit quality but also by fluctuations in the markets in which such securities
are traded. Accordingly, selection and supervision by the Advisors of
investments in lower rated securities involve 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 Portfolio 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 Portfolio may invest in American Depositary
Receipts ("ADRs"), which are interests in securities of foreign companies, and
up to 10% of the Portfolio'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
<PAGE>
gains without undue risk. Investing in securities of foreign issuers involves
considerations not typically associated with investing in securities of
companies organized and operated in the United States. The value of the
Portfolio's foreign investments may be adversely affected by changes in
political or social conditions, diplomatic relations, confiscatory taxation,
expropriation, nationalization, limitation on the removal of funds or assets, or
imposition of (or change in) exchange control or economic or monetary policies
in the United States or abroad. One or more of these events could result in
appreciation or depreciation of portfolio securities and could favorably or
unfavorably affect the Portfolio's operations. Furthermore, the economics of
individual foreign nations may differ from the U.S. economy, whether favorably
or unfavorably, in areas such as growth or gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency or balance of
payments position; it may also be more difficult to obtain and enforce a
judgment against a foreign issuer. In general, less information is publicly
available with respect to foreign issuers than is available with respect to U.S.
companies. Most foreign companies are also not subject to the uniform accounting
and financial reporting requirements applicable to issuers in the United States.
Any foreign investments made by the Portfolio must be made in compliance with
U.S. and foreign currency restrictions and tax laws restricting the amounts and
types of foreign investments.
Because foreign securities generally are denominated and pay dividends
or interest in foreign currencies, the value of the net assets of the Portfolio
as measured in U.S. dollars will be affected favorably or unfavorably by changes
in exchange rates. In order to protect against uncertainty in the level of
future foreign currency exchange rates, the Portfolio is also authorized to
enter into certain foreign currency exchange transactions. Furthermore, the
Portfolio's foreign investments may be less liquid and their prices may be more
volatile than comparable investments in securities of U.S. companies. The
settlement periods for foreign securities, which are often longer than those for
securities of U.S. issuers, may affect portfolio liquidity. Finally, there may
be less government supervision and regulation of securities exchanges, brokers
and issuers in foreign countries than in the United States.
Restricted Securities
The Portfolio 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 Advisors under standards approved
by the Portfolio's Board of Trustees, and may invest up to 10% of its net assets
in Rule 144A Securities that are illiquid (see "Investment Restrictions" ). Rule
144A Securities may become illiquid if qualified institutional buyers are not
interested in acquiring the securities.
<PAGE>
Repurchase Agreements
The Portfolio may enter into repurchase agreements with domestic banks
or broker-dealers deemed to be creditworthy by the Advisors. 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 Portfolio'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 Portfolio 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 Portfolio are securities of the
U.S. Government only, may have maturity dates exceeding one year. The Portfolio
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 Portfolio
could experience both delays in liquidating the underlying securities and loss
including (a) possible decline in the value of the underlying security while the
Portfolio 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 Portfolio may lend its investment securities to approved
institutional borrowers who need to borrow securities in order to complete
certain transactions, such as effecting and covering short sales, avoiding
failures to deliver securities or completing arbitrage operations. By lending
its investment securities, the Portfolio 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 Portfolio. The Portfolio 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 Portfolio 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 Portfolio at any time, and (d) the
Portfolio receive reasonable interest on the loan (which may include the
Portfolio 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 that 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.
At the present time, the staff of the SEC does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Board of Directors. In addition, voting
rights may pass with the loaned securities, but if a material event occurs
affecting an investment on loan, the loan must be called and the securities
voted. Cash collateral may be invested in a money market fund managed by Bankers
Trust Company (or its affiliates) and Bankers Trust may serve as the Portfolio's
lending agent and may share in revenue received from securities lending
transactions as compensation for this service.
-3-
<PAGE>
Covered Call Options
In an attempt to earn additional income, and as a means of protecting
the Portfolio's assets against market declines, the Portfolio 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 Portfolio writes a call option on securities that it owns, it
gives the purchaser of the option the right but not the obligation 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 Portfolio, 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
Portfolio 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 Portfolio 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 Portfolio 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
(the "OCC"), which also serves as the clearinghouse 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
OCC 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 Portfolio 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
Portfolio 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 Portfolio, 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 Portfolio of such a transaction
may be greater than the net premium received by the Portfolio upon writing the
original option, the Board of Trustees believes that it is appropriate for the
Portfolio 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.
Special Information Concerning Master-Feeder Fund Structure.
Unlike other open-end management investment companies (mutual funds)
which directly acquire and manage their own portfolio securities, the Fund seeks
to achieve its investment objective by investing substantially all of its assets
in the Portfolio, a separate registered investment company with the same
investment objective as the Fund. Therefore, an investor's interest in the
Portfolio's securities is indirect. In addition to selling a beneficial interest
to the Fund, the Portfolio may sell beneficial interests to other mutual funds,
domestic and offshore investment vehicles or institutional investors. Such
investors will invest in the Portfolio on the same terms and conditions and will
pay a proportionate share of the Portfolio's expenses. However, the other
investors investing in the Portfolio are not required to sell their shares at
the same public offering price as the Fund due to variations in sales
commissions and other fund-specific operating expenses. These differences may
result in differences in returns experienced by investors in the different funds
that invest in the Portfolio. Such differences in returns are also present in
other mutual fund structures. Information concerning other holders of interests
in the Portfolio is available from the Transfer Agent at 1-800-553-8080.
<PAGE>
Small funds investing in the Portfolio may be materially affected by
the actions of larger funds investing in the Portfolio. For example, if a large
fund withdraws from the Portfolio, the remaining funds may experience higher pro
rata operating expenses, thereby producing lower returns. This possibility
exists as well for traditionally structured funds which have large institutional
investors). Additionally, the Portfolio may become less diverse, resulting in
increased portfolio risk. Also, funds with a greater pro rata ownership in the
Portfolio could have effective voting control of the operations of the
Portfolio. Except as permitted by the SEC, whenever the Fund is requested to
vote on matters pertaining to the Portfolio, the Fund will hold a meeting of
shareholders of the Fund and will cast all of its votes in the same proportion
as the votes of the Fund's shareholders. Fund shareholders who do not vote will
not affect the Fund's votes at the Portfolio meeting. The percentage of the
Fund's votes representing the Fund's shareholders not voting will be voted by
the Directors or officers of the Fund in the same proportion as the Fund
shareholders who do, in fact, vote.
Certain changes in the Portfolio's investment objective, policies or
restrictions may require the Fund to withdraw its interest in the Portfolio. Any
such withdrawal could result in a distribution "in kind" of portfolio securities
(as opposed to a cash distribution from the Portfolio). If securities are
distributed, the Fund could incur brokerage, tax or other charges in converting
the securities to cash. In addition, the distribution in kind may result in a
less diversified portfolio of investments or adversely affect the liquidity of
the Fund. Notwithstanding the above, there are other means for meeting
redemption requests, such as borrowing.
The Fund may withdraw its investment from the Portfolio at any time, if
the Fund's Board of Directors determines that it is in the best interests of the
shareholders of the Fund to do so. Upon any such withdrawal, the Fund's Board of
Directors would consider what action might be taken, including the investment of
all the assets of the Fund in another pooled investment entity having the same
investment objective as the Fund or the retaining of an investment advisor to
manage the Fund's assets in accordance with the investment policies described
herein with respect to the Portfolio.
-4-
<PAGE>
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 matters of
fundamental policy of the Fund and the Portfolio and are in addition to those
described in the Fund's Prospectus, 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
Portfolio (Fund) will not:
1) Invest less than 65% of its total assets in the communications field,
except as described in the Prospectus, provided that: (a) otherwise the
Portfolio (Fund) will not concentrate more than 25% of its total assets in
securities of issuers in any industry and (b) notwithstanding this
limitation or any other fundamental investment limitation, assets may be
invested in the securities of one or more management investment companies
to the extent permitted by the 1940 Act and the rules and regulations
thereunder;
2) Invest in the securities of any single issuer if, as a result, the
Portfolio (Fund) would hold more than 10% of the outstanding voting
securities of such issuer, except that the Portfolio's (Fund's) assets may
be invested in the securities of one or more management investment
companies to the extent permitted by the 1940 Act and the rules and
regulations thereunder;
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 Portfolio (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
Portfolio (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. This restriction shall
not limit the Portfolio's (Fund's) ability to invest in securities issued
by one or more management investment companies to the extent permitted by
the 1940 Act and the rules and regulations thereunder;
7) Issue senior securities; or
8) Make loans, except that the Portfolio (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 Portfolio (Fund) will not:
Invest more than 10% of the value of its net assets in illiquid
securities (as defined under federal and state securities laws).
-5-
<PAGE>
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. 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.
The Fund and the Portfolio reserve the right, if conditions exist which
make cash payments undesirable, to honor any request for redemption or
repurchase order by making payment in whole or in part in readily marketable
securities chosen by the Portfolio, as the case may be, and valued as they are
for purposes of computing the Fund's or the Portfolio's net asset value, as the
case may be (a redemption in kind). If payment is made to shareholder in
securities, the shareholder may incur transaction expenses in converting these
securities into cash. The Fund and the Portfolio have elected, however, to be
governed by Rule 18f-1 under the 1940 Act as a result of which the Fund and the
Portfolio are obligated to redeem shares or beneficial interests, as the case
may be, with respect to any one investor during any 90-day period, solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the Fund or
the Portfolio, as the case may be, at the beginning of the period.
The Portfolio has agreed to make a redemption in kind to the Fund
whenever the Fund wishes to make a redemption in kind and therefore shareholders
of the Fund that receive redemptions in kind will receive portfolio securities
of the Portfolio and in no case will they receive a security issued by the
Portfolio. The Portfolio has advised the Fund that the Portfolio will not redeem
in kind except in circumstances in which the Fund is permitted to redeem in kind
or unless requested by the Fund.
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.
-6-
<PAGE>
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 previously, in order to
qualify as a RIC, the Fund must distribute at least 90% of its investment
company taxable income (that generally includes dividends, taxable interest, and
the excess of net short-term capital gains over net long-term capital losses
less operating expenses, but determined without regard to the deduction for
dividends paid) and at least 90% of its net tax-exempt interest income, for each
tax year, if any, to its shareholders. If 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 RIC, all of its
taxable income will be subject to tax at regular corporate income tax rates
without any deduction for distributions to shareholders, and such distributions
generally will be taxable to shareholders as ordinary dividends to the extent of
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.
The Board reserves the right not to maintain the qualification of the
Fund as a regulated investment company if it determines such course of action
to be beneficial to shareholders.
Fund Distributions
Distributions of investment company taxable income will be taxable to
shareholders as ordinary income, regardless of whether such distributions are
paid in cash or are reinvested in additional Shares, 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.
-7-
<PAGE>
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.
If the Fund's distributions exceed its taxable income and capital gains
realized during a taxable year, all or a portion of the distributions made in
the same taxable year may be recharacterized as a return of capital to
shareholders. A return of capital distribution will generally not be taxable,
but will reduce each shareholder's cost basis in the Fund and result in a higher
reported capital gain or lower reported capital loss when those shares on which
the distribution was received are sold.
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 (including
certain holding period limitations), a dividend will be treated as a qualifying
dividend if it has been received from a domestic corporation. All dividends
(including the deducted portion) must be included in your alternative minimum
taxable income calculation.
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.
The Fund may invest in complex securities. These investments may be
subject to numerous special and complex tax rules. These rules could affect
whether gains and losses recognized by the Fund are treated as ordinary income
or capital gain, accelerate the recognition of income to the Fund and/or defer
the Fund's ability to recognize losses. In turn, those rules may affect the
amount, timing or character of the income distributed to you by the Fund.
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 maximum rate of 20% and short-term capital gains
are currently taxed at ordinary income tax rates. However, if a shareholder
realizes a loss on the sale, exchange or redemption of a Share held for six
months or less and has previously received a capital gains distribution with
respect to the Share (or any undistributed net capital gains of 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, 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.
-8-
<PAGE>
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.
Non-U.S. investors in a Fund may be subject to U.S. withholding and
estate tax and are encouraged to consult their tax advisor prior to investing in
the Fund.
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.
MANAGEMENT OF THE FUND AND THE PORTFOLIO
The Fund's Board of Directors and the Portfolio's Board of Trustees
(each a "Director" and collectively, the "Directors") manage the Fund's and
Portfolio's overall business and affairs, respectively. The Directors approve
all significant agreements between the Portfolio and persons or companies
furnishing services to the Fund or Portfolio, including the Fund's or
Portfolio's agreements with the Advisors, Distributor, Administrator, custodian
and transfer agent.
The Directors and executive officers, 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); and
Director and President, Virginia Hot Springs Inc. (property
management). Formerly, Director, Investment Company Capital Corp.
(registered investment advisor); Managing Director and Vice Chairman,
Alex. Brown & Sons Incorporated (now DB Alex. Brown LLC); and Director,
ISI Family of Funds (registered investment companies).
RICHARD R. BURT, Director (2/3/47)
IEP Advisors, LLP, 1275 Pennsylvania Avenue, NW, 10th Floor,
Washington, DC 20004. Chairman, IEP Advisors, Inc.; Chairman of the
Board, Weirton Steel Corporation; Member of the Board, Archer Daniels
Midland Company (agribusiness operations), Hollinger International,
Inc. (publishing), Homestake Mining (mining and exploration), HCL
Technologies (information technology) and Anchor Technologies (gaming
software and equipment); Director, Mitchell Hutchins family of funds
(registered investment companies); and Member, Textron Corporation
International Advisory Council. Formerly, Partner, McKinsey & Company
(consulting), 1991-1994; U.S. Chief Negotiator in Strategic Arms
Reduction Talks (START) with former Soviet Union; and U.S. Ambassador
to the Federal Republic of Germany, 1985-1991.
*RICHARD T. HALE, Director (7/17/45)
Managing Director, DB Alex. Brown LLC (formerly BT Alex. Brown
Incorporated); Director and President, Investment Company Capital Corp.
(registered investment advisor); Director and President, Deutsche Asset
Management Mutual Funds (registered investment companies). Chartered
Financial Analyst. Formerly, Director, ISI Family of Funds (registered
investment companies).
-9-
<PAGE>
JOSEPH R. HARDIMAN, Director (5/27/37)
8 Bowen Mill Road, Baltimore, Maryland 21212. Private Equity Investor
and Capital Markets Consultant; Director, Wit Capital Group (registered
broker-dealer), The Nevis Fund (registered investment company), and ISI
Family of Funds (registered investment companies). Formerly, Director,
Circon Corp. (medical instruments), November 1998-January 1999;
President and Chief Executive Officer, The National Association of
Securities Dealers, Inc. and The NASDAQ Stock Market, Inc., 1987-1997;
Chief Operating Officer of Alex. Brown & Sons Incorporated (now DB
Alex. Brown LLC), 1985-1987; General Partner, Alex. Brown & Sons
Incorporated (now DB Alex. Brown LLC), 1976-1985.
LOUIS E. LEVY, Director (11/16/32)
26 Farmstead Road, Short Hills, New Jersey 07078. Director,
Kimberly-Clark Corporation (personal consumer products), Household
International (banking and finance) and ISI Family of Funds (registered
investment companies). Formerly, Chairman of the Quality Control
Inquiry Committee, American Institute of Certified Public Accountants,
1992-1998; Trustee, Merrill Lynch Funds for Institutions, 1991-1993;
Adjunct Professor, Columbia University-Graduate School of Business,
1991-1992; and Partner, KPMG Peat Marwick, retired 1990.
EUGENE J. MCDONALD, Director (7/14/32)
Duke Management Company, Erwin Square, Suite 1000, 2200 West Main
Street, Durham, North Carolina 27705. President, Duke Management
Company (investments); Executive Vice President, Duke University
(education, research and health care); Executive Vice Chairman and
Director, Central Carolina Bank & Trust (banking); and Director,
Victory Funds (registered investment companies). Formerly, Director,
AMBAC Treasurers Trust (registered investment company), DP Mann
Holdings (insurance) and ISI Family of Funds (registered investment
companies).
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).
ROBERT H. WADSWORTH, Director (1/29/40)
4455 E. Camelback Road, Suite 261 E., Phoenix, Arizona 85018. President
and Director, Investment Company Administration LLC, and President and
Director, First Fund Distributors, Inc. (registered broker-dealer);
Director, The Germany Fund, Inc., The New Germany Fund Inc., The
Central European Equity Fund, Inc.; and Vice President, Professionally
Managed Portfolios and Advisors Series Trust (registered investment
companies). Formerly, President, Guinness Flight Investment Funds, Inc.
(registered investment companies); and President, The Wadsworth Group
(registered investment advisor).
CARL W. VOGT, Esq., President (4/20/36)
Fulbright & Jaworski L.L.P., 801 Pennsylvania Avenue, N.W., Washington,
D.C. 20004-2604. Senior Partner, Fulbright & Jaworski L.L.P. (law);
Director, Yellow Corporation (trucking), American Science & Engineering
(x-ray detection equipment), and ISI Family of Funds (registered
investment companies). Formerly, Interim President of Williams College;
Chairman and Member, National Transportation Safety Board; Director,
National Railroad Passenger Corporation (Amtrak); Member, Aviation
System Capacity Advisory Committee (Federal Aviation Administration);
and Director, Flag Investors family of funds (registered investment
companies).
CHARLES A. RIZZO, Treasurer (8/5/57)
Director, Deutsche Asset Management; Formerly, Vice President and
Department Head, BT Alex. Brown Incorporated (now DB Alex. Brown LLC),
1998-1999; Senior Manager, Coopers & Lybrand L.L.P. (now
PricewaterhouseCoopers LLP), 1993-1998.
-10-
<PAGE>
AMY M. OLMERT, Secretary (5/14/63)
Director, Deutsche Asset Management; Formerly, Vice President, BT Alex.
Brown Incorporated (now DB Alex. Brown LLC), 1997-1999; Senior Manager,
Coopers & Lybrand L.L.P. (now PricewaterhouseCoopers LLP), 1988-1997.
DANIEL O. HIRSCH, Assistant Secretary (3/27/54)
Director, Deutsche Asset Management Americas. Formerly, Principal, BT
Alex. Brown Incorporated (now DB Alex. Brown LLC), 1998-1999; Assistant
General Counsel, United States Securities and Exchange Commission,
1993-1998.
-------------------
* Messrs. Semans and Hale are directors who are "interested persons," as
defined in the 1940 Act.
Directors and officers of the Fund and Portfolio are also directors and
officers of some or all of the other investment companies managed, administered
or advised by Investment Company Capital Corporation ("ICCC") or its affiliates.
There are currently 23 funds in the Flag Investors funds and Deutsche Banc Alex.
Brown Cash Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr. Semans
serves as Chairman of five funds and as a Director of 18 other funds in the Fund
Complex. Mr. Hale serves as Chairman of three funds and as Director of 20 funds
in the Fund Complex. Ms. Rimel and Messrs. Burt, Hardiman, Levy, McDonald and
Wadsworth serve as Directors of each of the funds in the Fund Complex. Mr. Vogt
serves as President of 22 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 are customers of, and have had normal brokerage
transactions with, DB 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 President, officers receive no direct
remuneration in such capacity from the Fund or Portfolio. Officers and Directors
who are officers or directors of ICCC 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 or
Portfolio (as defined in the 1940 Act) (an "Independent Director") and Mr. Vogt,
the President, receive 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. Prior to
September 29, 2000, ICCC and ABIM served as advisor and sub-advisor,
respectively, to the Fund, a stand-alone fund that directly acquired and managed
its own portfolio securities. On September 29, 2000, the Fund's assets were
contributed to the Portfolio and the Fund was made a feeder fund to the
Portfolio. For the fiscal year ended December 31, 1999, Independent Directors'
fees attributable to the assets of the Fund totaled $60,493.
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, 1999.
-11-
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
Name of Person, Position Aggregate Compensation Pension or Retirement Total Compensation
From the Fund Payable to Benefits Accrued As From the Fund
Directors for the Fiscal Year Part of Fund Expenses and Fund Complex
Ended December 31, 1999 Payable to Directors
for the Fiscal Year
Ended December 31, 1999(8)
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Truman T. Semans, Chairman(1) $0 $0 $0
Richard T. Hale, Director(1) $0 $0 $0
Richard R. Burt, Director(2) $1,995.00(4) 5 $9,750.00
James J. Cunnane, Director(3) $ 5,375.00(4) 5 $29,250 for service on 12
Boards in the Fund Complex
Joseph R. Hardiman, Director $ 7,441.00(4) 5 $39,000 for service on 12(6)
Boards in the Fund Complex
Louis E. Levy, Director $ 9,259.00 5 $ 49,000 for service on 12
Boards in the Fund Complex
Eugene J. McDonald, Director $ 9,259.00(4) 5 $49,000 for service on 12
Boards in the Fund Complex
Rebecca W. Rimel, Director $ 7,397.00(4) 5 $39,000 for service on 11(6)
Boards in the Fund Complex
Carl W. Vogt, Esq., Director(7) $ 7,397.00(4) 5 $39,000 for service on 12(6)
Boards in the Fund Complex
Robert H. Wadsworth, Director(2) $1,995.00(4) 5 $9,750.00
</TABLE>
-----------------------------
(1) A Director who is an "interested person" as defined in the 1940 Act.
(2) Elected to the Fund's board effective October 7, 1999.
(3) Retired effective October 7, 1999.
(4) Of amounts payable to Messrs. Burt, Cunnane, McDonald, Vogt, and Wadsworth,
and to Ms. Rimel, $1,995, $5,375, $9,259, $7,397, $1,995 and $7,397
respectively, was deferred pursuant to a deferred compensation plan.
(5) 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, 1999 was approximately $29,022.
(6) Ms. Rimel 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 served as
Director in the fiscal year ended December 31, 1999.
(7) Retired as Fund Director effective October 7, 1999. Currently serves as
President of the Fund.
(8) Prior to September 28, 1999, the Fund Complex consisted of 12 funds and
included four funds in the ISI Family of Funds.
The Fund Complex has adopted a Retirement Plan for Directors who are
not employees of the Fund, the Fund's Administrator or its respective affiliates
(the "Directors' Retirement Plan") and a Retirement Plan for a former Director
serving as the Fund's President (collectively, the "Retirement Plans"). After
completion of six years of service, each participant in the Retirement Plans
will be entitled to receive an annual retirement benefit equal to a percentage
of the fee earned by the participant in his or her last year of service. Upon
retirement, each participant will receive annually 10% of such fee for each year
that he or she served after completion of the first five years, up to a maximum
annual benefit of 50% of the fee earned by the participant in his or her last
year of service. The fee will be paid quarterly, for life, by each fund for
which he or she serves. The Retirement Plans are unfunded and unvested. The Fund
currently has two participants in the Directors' Retirement Plan, a Director who
retired effective December 31, 1994 and another Director who retired effective
December 31, 1996, each of whom qualified for the Retirement Plan by serving
thirteen years and fourteen years, respectively, as Directors in the Fund
Complex and who will be paid a quarterly fee of $4,875 by the Fund Complex for
the rest of their lives. 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.
-12-
<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 earned by such participant in his or her last year of
service, as described above. The approximate credited years of service at
December 31, 1999 are as follows: for Mr. Levy, 5 years; for Mr. McDonald, 7
years; for Ms. Rimel and Mr. Vogt, 4 years; for Mr. Hardiman, 1 year; and for
Mr. Burt and Mr. Wadsworth, 0 years.
<TABLE>
<CAPTION>
Estimated Annual Benefits Payable By Fund Complex Upon Retirement
-------------------------------------------------------------------------
Years of Service 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 and/or the President of the Fund who receive fees from the
Fund is permitted to defer 50% to 100% of his or her annual compensation
pursuant to a Deferred Compensation Plan. Messrs. Levy, McDonald, Vogt, Burt,
Wadsworth, and Ms. Rimel have each executed a Deferred Compensation Agreement.
Currently, the deferring Directors may select from among various Flag Investors
funds and Deutsche Banc Alex. Brown Cash Reserve Fund, Inc. in which all or part
of their deferral account shall be deemed to be invested. Distributions from the
deferring Directors' 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 Fund's Code permits access
persons to engage in personal trading provided that the access persons comply
with the provisions of the advisor's, sub-advisor's or distributor's Codes of
Ethics, as applicable, and requires that each of these Codes be approved by the
applicable disinterested directors of the Fund. The Board of Directors of the
Fund and Portfolio, the Portfolio's Advisor, Investment Company Capital
Corporation ("ICCC" or the "Advisor") and Sub-Advisor, Alex. Brown Investment
Management ("ABIM" or the "Sub-Advisor"), have adopted Codes of Ethics pursuant
to Rule 17j-1 under the 1940 Act. The Codes of Ethics permit access persons to
invest in securities that may be purchased or held by the Fund for their own
accounts, but require compliance with the Codes' preclearance requirements. In
addition, the Codes provide for trading "blackout periods" that prohibit trading
by personnel within periods of trading by the Fund in the same security, subject
to certain exceptions. The Codes also prohibit short term trading profits and
personal investment in initial public offerings. The Codes require prior
approval with respect to purchases of securities in private placements.
The Codes of Ethics are on public file with, and are available from,
the SEC.
The Company's principal underwriter, ICC Distributors, Inc., is not
required to adopt a Code of Ethics as it meets the exception provided by Rule
17j-1(c)(3) under the 1940 Act.
-13-
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
ICCC is the investment advisor of the Portfolio. ABIM is the investment
sub-advisor of the Portfolio. ICCC also serves as investment advisor and ABIM
serves as sub-advisor to other funds in the Flag Investors family of funds.
ICCC is an indirect subsidiary of Deutsche Bank AG. ABIM is a limited
partnership affiliated with the Advisor. Buppert, Behrens & Owens, Inc. ("BB&O")
a company organized and owned by three employees of ABIM, owns a 49% limited
partnership interest and a 1% general partnership interest in ABIM. DB Alex.
Brown owns the remaining 50% general partnership interest. On May 17, 2000, ABIM
and BB&O entered into an Agreement and Sale of Partnership Interests ("Sale
Agreement") with DB Alex. Brown that will result in BB&O holding all partnership
interests in ABIM, effective as of a March 2001 closing date.
The March 2001 closing date for the Sale Agreement is contingent upon,
among other events, the approval of new sub-advisory agreements, reflecting the
sale, by the shareholders of Flag Investors Equity Partners Fund, Inc. and Flag
Investors Value Builder Fund, Inc., two mutual funds to which ABIM provides
sub-advisory services.
Under the Investment Advisory Agreement, ICCC obtains and evaluates
economic, statistical and financial information to formulate and implement
investment policies for the Portfolio. ICCC has delegated this responsibility to
ABIM provided that ICCC continues to supervise the performance of ABIM and
report thereon to the Portfolio's Board of Trustees. Any investment program
undertaken by ICCC or ABIM will at all times be subject to policies and control
of the Portfolio's Board of Trustees. ICCC will provide the Portfolio 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 ICCC without reimbursement by the Portfolio for
any costs. Neither ICCC nor ABIM shall be liable to the Portfolio or its
shareholders for any act or omission by ICCC or ABIM or any losses sustained by
the Portfolio or its shareholders except in the case of willful misfeasance, bad
faith, gross negligence, or reckless disregard of duty. The services of ICCC and
ABIM to the Portfolio are not exclusive and ICCC and ABIM are free to render
similar services to others.
A Special Meeting of Shareholders was held on August 31, 2000, at which
time shareholders voted to approve a new investment advisory agreement (the
"Advisory Agreement") between the Portfolio and ICCC and a new sub-advisory
agreement (the "Sub-Advisory Agreement") among the Portfolio, ICCC and ABIM.
Under the Advisory Agreement, ICCC is entitled to receive a fee from the
Portfolio, calculated daily and paid monthly, at the following annual rates
based upon the Portfolio's average daily net assets: 1.00% of the first $100
million, 0.90% of the next $100 million, 0.85% of the next $100 million, 0.80%
of the next $200 million, 0.73% of the next $500 million, 0.68% of the next $500
million and 0.65% of that portion exceeding $1.5 billion. Under the Sub-Advisory
Agreement, ABIM is entitled to receive a fee from ICCC, payable from its
advisory fee, calculated daily and paid monthly, at the following annual rates
based upon the Portfolio's average daily net assets: 0.65% of the first $100
million, 0.60% of the next $100 million, 0.55% of the next $100 million, 0.50%
of the next $200 million, 0.45% of the next $500 million, 0.42% of the next $500
million and 0.40% of that portion in excess of $1.5 billion. ICCC, the Advisor
and Administrator to the Portfolio, has contractually agreed to waive 0.15% of
its fees until at least September 30, 2002.
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 Portfolio's Board of Trustees, including a majority of the
Independent Trustees who have no direct or indirect financial interest in such
agreements with such independent directors casting votes in person at a meeting
called for such purpose or by a vote of a majority of the outstanding Shares (as
defined under "Capital Stock"). The Portfolio or ICCC 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.
-14-
<PAGE>
Under the previous Investment Advisory Agreement, ICCC obtained and
evaluated economic, statistical and financial information to formulate and
implement investment policies for the Fund. ICCC delegated this responsibility
to ABIM provided that ICCC would continue to supervise the performance of ABIM
and report thereon to the Fund's Board of Directors. Any investment program
undertaken by ICCC or ABIM was at all times subject to policies and control of
the Fund's Board of Directors. ICCC provided 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 were
provided by ICCC without reimbursement by the Fund for any costs. Neither ICCC
nor ABIM was liable to the Fund or its shareholders for any act or omission by
ICCC 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 ICCC and ABIM to the Fund were not exclusive
and ICCC and ABIM were free to render similar services to others.
As compensation for its services under the previous Investment Advisory
Agreement, ICCC was 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. As compensation for its services, ABIM was
entitled to receive a fee from ICCC, 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.
-15-
<PAGE>
Advisory fees paid by the Fund to ICCC and sub-advisory fees paid by
ICCC to ABIM for the last three fiscal years were as follows:
Year Ended December 31,
-------------------------------------------------------------------------------
Fees Paid to: 1999 1998 1997
------------- ---- ---- ----
ICCC $11,892,502 $5,927,518 $4,172,769
ABIM $ 8,337,261 $4,132,229 $2,944,897
-------------------------------------------------------------------------------
ICCC also serves as the Fund's transfer and dividend disbursing agent
and provides accounting services to the Fund. An affiliate of ICCC serves as the
Portfolio's and Fund's custodian (See "Custodian, Transfer Agent and Accounting
Services") and another affiliate serves as the Fund's Distributor (see
"Distribution of Fund Shares.")
ADMINISTRATOR
ICCC serves as Administrator of the Fund. The Administrative Services
Appendix to the Master Services Agreement provides that the Administrator, in
return for its fee, will (a) supervise and manage all aspects of the Fund's
operations, other than portfolio management and distribution; (b) provide the
Fund with such executive, administrative, clerical and bookkeeping services as
are deemed advisable by the Fund's Board of Directors; (c) provide the Fund
with, or obtain for it, adequate office space and all necessary office equipment
and services including all items for any offices as are deemed advisable by the
Fund's Board of Directors; (d) supervise the operations of the Fund's transfer
and dividend disbursing agent; and (e) arrange, but not pay for, the periodic
updating of prospectuses and supplements thereto, proxy material, tax returns,
reports to the Fund's shareholders and reports to and filings with the SEC and
State Blue Sky authorities.
Under the Administrative Services Appendix to the Master Services
Agreement, the Fund pays ICCC an annual fee based on the Fund's average daily
net assets. This fee is calculated and accrued daily and the amounts of the
daily accruals are paid monthly, at the annual rate of 0.15% of the Fund's
average daily net assets. The Administrator may from time to time voluntarily
waive a portion of its administrative services fee.
The Administrative Services Appendix to the Master Services Agreement
may be terminated at any time, on waivable written notice within 60 days and
without any penalty, by vote of the Fund's Board of Directors or by the
Administrator. The agreement automatically terminates in the event of its
assignment.
The Administrative Services Appendix to the Master Services Agreement
obligates the Administrator to exercise care and diligence and to act in good
faith and to use its best efforts within reasonable limits in performing the
services provided for under the agreement, but the Administrator is not liable
for any act or omission which does not constitute willful misfeasance, bad faith
or gross negligence on the part of the Administrator.
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").
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.
-16-
<PAGE>
The Distribution Agreement may be terminated at any time upon 60 days'
written notice by the Fund, without penalty, by the vote of a majority of the
Fund's Independent Directors or by a vote of a majority of the Fund's
outstanding Shares of the related class (as defined under "Capital Stock") or
upon 60 days' written notice by the Distributor and shall automatically
terminate in the event of an assignment. The Distribution Agreement has an
initial term of one year from the date of effectiveness. It shall continue in
effect thereafter with respect to each class of the Fund provided that it is
approved at least annually by (i) a vote of a majority of the outstanding voting
securities of the related class of the Fund or (ii) a vote of a majority of the
Fund's Board of Directors including a majority of the Independent Directors and,
with respect to each class of the Fund for which there is a plan of
distribution, so long as such plan of distribution is approved at least annually
by the Independent Directors in person at a meeting called for the purpose of
voting on such approval.
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 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. Currently, banking laws
and regulations do not prohibit a financial holding company affiliate from
acting as distributor or Shareholder Servicing Agent or in other capacities for
investment companies. Should future legislative, judicial or administrative
action prohibit or restrict the activities of the distributor or Shareholder
Servicing Agents in connection with their respective Agreements, the Fund may be
required to alter materially or discontinue its arrangements with those 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 and 0.75% of the average
daily net assets of each of the Class B Shares and Class C Shares. With respect
to the Class A Shares and Class C Shares, ICC Distributors expects to allocate
up to all of its fee to Participating Dealers and Shareholder Servicing Agents.
With respect to the Class B Shares, ICC Distributors expects to retain the
entire distribution fee as reimbursement for front-end payments to Participating
Dealers. In addition, with respect to the Class B Shares 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:
-17-
<PAGE>
--------------------------------------------------------------------------------
Fiscal Year Ended December 31,
--------------------------------------------------------------------------------
Fees 1999 1998 1997
--------------------------------------------------------------------------------
12b-1 Fees $7,096,506(1) $2,717,467(1) $1,545,188(2)
--------------------------------------------------------------------------------
Shareholder Servicing Fee
(Class B and Class C Shares) $996,008(1) $ 180,687(1) $59,629(3,4)
--------------------------------------------------------------------------------
-----------------
(1) Fees received by ICC Distributors.
(2) Of this amount, Alex. Brown & Sons, the Fund's distributor prior to August
31, 1997, received $974,875 and ICC Distributors, the Fund's distributor
from August 31, 1997 received $570,313.
(3) Of this amount, Alex. Brown & Sons, Incorporated the Fund's distributor
prior to August 31, 1997, received $35,479 and ICC Distributors, the Fund's
distributor from August 31, 1997 received $24,150.
(4) 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.
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 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.
-18-
<PAGE>
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,
------------------------- ------------------------------ ---------------------------- ----------------------------
1999 1998 1997
-------------------------- ------------------------------ ---------------------------- ----------------------------
Class Received Retained Received Retained Received Retained
-------------------------- ---------------- ------------- --------------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Class A Commissions $3,858,037(1) $0 $2,696,511(1) $0(1) $469,945(2) $61,823(4)
-------------------------- ---------------- ------------- --------------- ------------ ------------- --------------
Class B Contingent
Deferred Sales Charge $5,740,396 $0 $3,281,541(1) $0(1) $350,133(3) $34,414(4)
-------------------------- ---------------- ------------- --------------- ------------ ------------- --------------
Class C Contingent
Deferred Sales Charge $391,351 $0 $24,636(1) $0(1) N/A N/A
-------------------------- ---------------- ------------- --------------- ------------ ------------- --------------
</TABLE>
-------------
(1) By ICC Distributors.
(2) Of this amount, Alex. Brown & Sons, Incorporated the Fund's distributor
prior to August 31, 1997, received $307,092 and ICC Distributors, the
Fund's distributor from August 31, 1997 received $66,419.
(3) Of this amount, Alex. Brown & Sons, Incorporated the Fund's distributor
prior to August 31, 1997, received $202,841 and ICC Distributors, the
Fund's distributor from August 31, 1997 received $147,292.
(4) By Alex. Brown & Sons, the Fund's distributor prior to August 31, 1997.
-19-
<PAGE>
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 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 ICCC, ABIM, or ICC Distributors.
The address of ICC Distributors is Two Portland Square, Portland, Maine
04101.
BROKERAGE
ABIM is responsible for decisions to buy and sell securities for the
Portfolio, for the broker-dealer selection and for negotiation of commission
rates, subject to the supervision of ICCC. 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 prices
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 Portfolio 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 Portfolio may not buy portfolio securities from the group
except in accordance with rules of the SEC. The Portfolio 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 Portfolio'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 Portfolio. 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 Portfolio 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 Portfolio's Board of Trustees, ABIM is also authorized to
pay broker-dealers (other than affiliates of the Advisors) higher commissions
than another broker might have charged on brokerage transactions for the
Portfolio for brokerage or research services. The allocation of orders among
broker-dealers and the commission rates paid by the Portfolio will be reviewed
periodically by the Board.
-20-
<PAGE>
Subject to the above considerations, the Board of Trustees has
authorized the Portfolio 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 Trustees and requires ICCC 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 Portfolio 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 Portfolio 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:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Fiscal Year Ended December 31,
-----------------------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Transactions Directed $931,691,059 $244,993,558 $ 312,672,931
-----------------------------------------------------------------------------------------------
Commissions Paid $1,135,899 $ 275,519 $ 406,249
-----------------------------------------------------------------------------------------------
</TABLE>
For the fiscal years ended December 31, 1999 and December 31, 1998, the
Fund paid $7,200 and $4,500, respectively, in brokerage commissions to DB Alex.
Brown or its affiliates. For the fiscal year ended December 31, 1997, the Fund
paid no brokerage commissions to DB Alex. Brown or its affiliates. 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, 1999, the Fund held a 2.00% repurchase
agreement issued by Goldman Sachs & Co. valued at $126,131,000, a 3.25%
repurchase agreement issued by J.P. Morgan Securities, Inc. valued at
$126,131,000 and a 2.50% repurchase agreement issued by Morgan Stanley & Co.
valued at $57,303,000. Goldman Sachs & Co., J.P. Morgan Securities, Inc. and
Morgan Stanley & Co. are "regular brokers or dealers" of the Fund.
CAPITAL STOCK
Under the Fund's Articles of Incorporation, the Fund has 127 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.
-21-
<PAGE>
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.
SEMI-ANNUAL REPORTS AND ANNUAL REPORTS
The Fund furnishes shareholders with semi-annual reports and 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,
PricewaterhouseCoopers LLP.
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 Portfolio's and the
Fund's assets. 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, 1999, Bankers Trust was paid
$146,539 as compensation for providing custody services to the Fund. ICCC has
been retained to act as transfer and dividend disbursing agent. As compensation
for providing these services, the Fund pays ICCC up to $16.07 per account per
year, plus reimbursement for out-of-pocket expenses. For the fiscal year ended
December 31, 1999, ICCC received transfer agency fees of $1,639,648.
ICCC also provides certain accounting services to the Fund under a
Master Services Agreement between the Fund and ICCC. As compensation for these
services, ICCC receives an annual fee, calculated daily and paid monthly as
shown below.
-22-
<PAGE>
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 ICCC for certain out-of-pocket
expenses.
As compensation for providing accounting services to the Fund for the
fiscal year ended December 31, 1999, ICCC received fees of $153,996.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 250 West Pratt Street, Baltimore, Maryland
21201 are independent accountants to the Fund.
LEGAL MATTERS
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the Fund to
that of other open-end diversified management investment companies and to stock
or other relevant indices in advertisements or in certain reports to
shareholders, performance will be stated in terms of total return rather than in
terms of yield. The total return quotations, under the rules of the SEC, must be
calculated according to the following formula:
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.
-23-
<PAGE>
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 1, 5 and 10 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, 1999 were as follows:
<TABLE>
<CAPTION>
One-Year Period Ended Five-Year Period Ended Ten-Year Period Ended Inception Through
December 31, 1999** December 31, December 31, December 31, 1999**
--------------------- ---------------------- --------------------- -------------------
1999** 1999**
---------------------- ---------------------
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 $1,375 37.47% $5,297 39.58% $7,511 22.34% $25,195 22.27%
January 18, 1984*
Class B $1,372 37.20% N/A N/A N/A N/A $5,292 39.63%
January 3, 1995*
Class C $1,429 42.89% N/A N/A N/A N/A $2,049 84.14%
November 1, 1998*
Institutional $1,459 45.88% N/A N/A N/A N/A $2,246 67.19%
May 1, 1998*
</TABLE>
* Inception Date.
** These figures assume the reinvestment of dividends and capital gains
distributions. For Class A Shares, these figures also include the impact of
the current maximum sales charges, which increased on January 18, 2000.
The Fund may also from time to time include in such advertising total
return figures that are not calculated according to the formula set forth above
in order to compare more accurately the Fund's performance with other measures
of investment return. For example, in comparing the Fund's total return with
data published by Lipper, 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.
-24-
<PAGE>
The Fund's annual portfolio turnover rate (the lesser of the value of
the purchases or sales for the year divided by the average monthly market value
of the portfolio during the year, excluding U.S. Government and short-term
securities) may vary from year to year, as well as within a year, depending on
market conditions. The Fund's portfolio turnover rate in fiscal year 1999 was
17% and for fiscal year 1998 was 14%.
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, 1999.
As of December 31, 1999, 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, 1999, the Fund's ratings for
separate periods within its investment category of domestic equity funds, were
five stars among 3,469 funds for three years, five stars among 2,180 funds for
five years and five stars among 770 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%.
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 September 15, 2000:
<TABLE>
<CAPTION>
Owned of Beneficially
Name and Address Record Owned Percentage Owned
---------------- ------ ----- ----------------
<S> <C> <C> <C>
DB Alex. Brown LLC X 6.82% of Class C Shares
FBO 210-90710-15
P.O. Box 1346
Baltimore, MD 21203-1346
Dain Rauscher Inc. FBO Rath Foundation X 7.88% of Institutional Shares
3140 Box Canyon Rd
Santa Ynez, CA 93460-9753
DB Alex. Brown LLC X 85.20% of Institutional Shares
FBO 250-10788-16
P.O. Box 1346
Baltimore, MD 21203-1346
</TABLE>
As of September 15, 2000, the Directors and officers as a group owned
less than 1% of the Fund's total outstanding shares. To Fund management's
knowledge, DB Alex. Brown beneficially owned less than 1% of the Fund's total
outstanding Shares.
-25-
<PAGE>
FINANCIAL STATEMENTS
The financial statements for the Fund for the fiscal year ended
December 31, 1999 and the six months ended June 30, 2000 are incorporated herein
by reference to the Fund's Annual Report dated December 31, 1999 and Semi-Annual
Report dated June 30, 2000. A copy of the Fund's Annual and Semi-Annual Report
must accompany the delivery of this Statement of Additional Information.
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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.
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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 that make the long-term risks
appear somewhat larger than in Aaa securities.
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.
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