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(LOGO)
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND, INC.
(Institutional Shares)
This mutual fund (the "Fund") is designed to provide a high level of
current income consistent with preservation of principal within an
intermediate-term maturity structure. The Fund will invest exclusively in
high quality debt securities, primarily U.S. Government securities (including
agency securities), corporate bonds, collateralized mortgage obligations and
other asset-backed securities. Under normal circumstances, the dollar
weighted expected average maturity of the portfolio will be approximately
three to five years and the maximum dollar weighted average duration will be
four years. (See "Investment Program.")
Flag Investors Institutional Shares of the Fund ("Institutional Shares")
are available through Alex. Brown & Sons Incorporated ("Alex. Brown") or
Participating Dealers and may be purchased only by eligible institutions or by
clients of investment advisory affiliates of Alex. Brown. (See "How to Invest
in Institutional Shares.")
This Prospectus sets forth basic information that investors should know
about the Fund prior to investing and should be retained for future
reference. A Statement of Additional Information dated May 1, 1995, as
amended through November 1, 1995, has been filed with the Securities and
Exchange Commission (the "SEC") and is hereby incorporated by reference. It
is available upon request and without charge by calling the Fund at (800)
767-FLAG.
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THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
PROSPECTUS
The date of this Prospectus is November 1, 1995
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FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND, INC.
(INSTITUTIONAL SHARES)
135 EAST BALTIMORE STREET
BALTIMORE, MARYLAND 21202
TABLE OF CONTENTS
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1. Fund Expenses ................................... 2
2. Financial Highlights ............................ 3
3. Investment Program .............................. 5
4. Investment Restrictions ......................... 10
5. How to Invest in Institutional Shares ........... 10
6. How to Redeem Institutional Shares .............. 13
7. Telephone Transactions ........................... 13
8. Dividends and Taxes ............................. 14
9. Management of the Fund .......................... 16
10. Investment Advisor .............................. 16
11. Distributor ..................................... 17
12. Custodian, Transfer Agent, Accounting Services .. 17
13. Performance Information ......................... 18
14. General Information ............................. 19
Appendix ......................................... A-1
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No person has been authorized to give any information or to make
representations not contained in this Prospectus in connection with any
offering made by this Prospectus and, if given or made, such information must
not be relied upon as having been authorized by the Fund or its distributor.
This Prospectus does not constitute an offering by the Fund or by its
distributor in any jurisdiction in which such offering may not lawfully be
made.
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1. FUND EXPENSES
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SHAREHOLDER TRANSACTION EXPENSES:
(as a percentage of offering price)
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Maximum Sales Charge Imposed on Purchases .............. None
Maximum Sales Charge Imposed on Reinvested Dividends ... None
Deferred Sales Charge .................................. None
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ANNUAL FUND OPERATING EXPENSES:
(as a percentage of average net assets)
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Management Fees (net of fee waivers) ................ .21%*
12b-1 Fees .......................................... None
Other Expenses ...................................... .24%
Total Fund Operating Expenses (net of fee waivers) .. .45%*
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*The Fund's investment advisor currently intends to waive its fee or
reimburse the Fund, on a voluntary basis, to the extent required so that
Total Fund Operating Expenses do not exceed .45% of the Institutional
Shares' average daily net assets. Absent fee waivers, Management Fees would
be .35% and Total Fund Operating Expenses would be .59% of the Institutional
Shares' average daily net assets.
EXAMPLE:
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You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:* 1 year 3 years 5 years 10 years
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$5 $15 $25 $58
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*The example is based on Total Fund Operating Expenses, net of fee waivers.
Absent fee waivers, expenses would be higher.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of the foregoing table is to describe the various costs and
expenses that an investor in the Fund will bear directly and indirectly. A
person who purchases Institutional Shares through a financial institution may
be charged separate fees by the financial institution. (For more complete
descriptions of the various costs and expenses, see "How to Invest in
Institutional Shares", "Investment Advisor" and "Distributor.") The Expenses
and Example appearing in the table above are based on the Fund's expenses
(net of fee waivers) for the Flag Investors Shares, another class of shares
offered by the Fund, for the fiscal year ended December 31, 1994, less 12b-1
fees of .25%.
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2. FINANCIAL HIGHLIGHTS
.............................................................................
The Fund has not offered the Institutional Shares prior to the date of
this Prospectus. However, the Fund has offered another class of shares since
1991. Historical financial information about the Fund is not fully applicable
to the Institutional Shares because the expenses paid by the Fund in the past
differ from those the Institutional Shares will incur. (See "Fund Expenses.")
Nevertheless, historical information about the Fund may be useful to
investors if they take into account the differences in expenses. Accordingly,
the financial highlights included in this table have been derived from the
Fund's financial statements for the periods indicated and have been audited
by Deloitte & Touche LLP, independent auditors. The financial statements and
related notes for the Flag Investors Shares for the fiscal year ended
December 31, 1994 and the report thereon of Deloitte & Touche LLP and the
unaudited financial statements for such shares for the six-month period ended
June 30, 1995 are included in the Statement of Additional Information.
Additional performance information for the Flag Investors Shares is contained
in the Fund's Annual Report for the fiscal year ended December 31, 1994 which
can be obtained at no charge by calling the Fund at (800) 767-FLAG.
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(Based on average shares outstanding during each period)
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Flag Investors Shares
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For the For the Period
Six Months Ended Year Ended December 31, May 13, 1991*
June 30, 1995 ----------------------------------- through
(Unaudited) 1994 1993 1992 December 31, 1991
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Per Share Operating
Performance:
Net asset value at beginning
of period $ 9.62 $10.57 $10.37 $10.54 $10.00
---------------- --------- ---------- --------- -----------------
Income from Investment
Operations:
Net investment income 0.29 0.57 0.57 0.63 0.32
Net realized and unrealized
gain/(loss) on investments 0.59 (0.92) 0.34 (0.05) 0.64
---------------- --------- ---------- --------- -----------------
Total from Investment
Operations 0.88 (0.35) 0.91 0.58 0.96
Less Distributions:
Dividends from net
investment income, short-
term gains and net realized
currency gain/(loss) (0.25) (0.57) (0.69) (0.75) (0.42)
Return of capital -- (0.03) -- -- --
Distributions from net
realized long-term gains -- -- (0.02) -- --
---------------- --------- ---------- --------- -----------------
Total Distributions (0.25) (0.60) (0.71) (0.75) (0.42)
---------------- --------- ---------- --------- -----------------
Net asset value at end of
period $ 10.25 $ 9.62 $10.57 $10.37 $10.54
================ ========= ========== ========= =================
Total Return 9.25% (3.32)% 8.98% 5.68% 9.79%
Ratio to Average Net Assets:
Expenses(2) 0.70%(1) 0.70% 0.70% 0.70% 0.70%(1)
Net Investment Income(3) 5.94%(1) 5.57% 5.43% 6.01% 5.97%(1)
Supplemental Data:
Net assets at end of period
(000) $71,597 $78,789 $112,520 $78,706 $64,327
Portfolio turnover rate 20% 50% 86% 107% 46%
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* Commencement of operations.
** Total return represents aggregate total return for the periods indicated
and does not reflect any applicable sales charges.
(1) Annualized.
(2) Without the waiver of advisory fees, the ratio of expenses to average net
assets would have been .91% (annualized), .84%, .85%, .87% and 1.73%
(annualized) for the six months ended June 30, 1995, for the years ended
December 31, 1994, 1993 and 1992 and for the period ended December 31,
1991, respectively.
(3) Without the waiver of advisory fees, the ratio of net investment income
to average net assets would have been 5.73% (annualized), 5.43%, 5.28%,
5.83% and 4.94% (annualized) for the six months ended June 30, 1995, for
the years ended December 31, 1994, 1993 and 1992 and for the period ended
December 31, 1991, respectively.
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3. INVESTMENT PROGRAM
.............................................................................
INVESTMENT OBJECTIVES, POLICIES AND RISK
CONSIDERATIONS
The Fund's investment objective is to provide a high level of current
income consistent with preservation of principal within an intermediate-term
maturity structure. The Fund's investment objective is a fundamental policy
and may not be changed without the affirmative vote of the majority of the
outstanding shares of the Fund.
In seeking this objective the Fund will, under normal circumstances,
invest at least 65% of its total assets in (i) obligations issued or
guaranteed by the U.S. Government or its agencies and instrumentalities
(including securities of the Government National Mortgage Association
("GNMA")), (ii) collateralized mortgage obligations ("CMOs") which are
collateralized by mortgage-backed securities issued by GNMA, the Federal Home
Loan Mortgage Corporation ("FHLMC") or the Federal National Mortgage
Association ("FNMA") and which are rated AAA by Standard & Poor's Ratings
Group ("S&P") or Aaa by Moody's Investors Service, Inc. ("Moody's") or are
determined to be of comparable quality by Investment Company Capital Corp.,
the Fund's investment advisor ("ICC" or the "Advisor") and (iii) corporate
bonds and debentures that are rated A or better by S&P or Moody's or are
determined to be of comparable quality by the Advisor. The Fund may also
invest up to 35% of its assets in other asset-backed securities that are
rated AAA by S&P or Aaa by Moody's or are determined to be of comparable
quality by the Advisor. In addition, up to 20% of the Fund's assets may be
invested in debt obligations denominated in foreign or composite currencies
(such as the European Currency Unit) issued by (i) foreign national,
provincial, state or municipal governments or their political subdivisions,
(ii) international organizations designated or supported by governmental
entities (e.g. the International Bank for Reconstruction and Development (the
World Bank) and the European Steel and Coal Community), (iii) the U.S.
Government (non-dollar securities only) and (iv) foreign corporations, which
obligations are rated AAA by S&P or Aaa by Moody's or if unrated, are
determined to be of comparable quality by the Advisor. For a discussion of
the above ratings see the "Appendix."
U.S. Government securities include obligations issued and backed by the
full faith and credit of the United States Treasury, as well as obligations
issued by agencies or instrumentalities of the U.S. Government. These
obligations may or may not be backed by the full faith and credit of the U.S.
Government. Certain agencies or instrumentalities of the U.S. Government
5
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(such as the United States Postal Service) have the right to borrow from the
United States Treasury to meet their obligations, but in other instances the
obligations of the issuing agency or instrumentality (such as the Federal
Farm Credit System and the Federal National Mortgage Association) are
supported only by the credit of the agency or instrumentality.
Under normal circumstances the Fund's portfolio will have a dollar
weighted expected average maturity of approximately three to five years and a
maximum dollar weighted average duration of four years. For purposes of
determining the dollar weighted expected average maturity of the Fund's
portfolio, the maturity of a mortgage-backed security will be deemed to be
equal to its assumed life, in recognition of the fact that such securities
are subject to prepayment.
To meet its short-term liquidity needs, the Fund may invest in repurchase
agreements with respect to U.S. Treasury securities, in variable amount
master demand notes and in commercial paper rated A-1 by S&P or Prime-1 by
Moody's, or if not rated, determined to be of comparable quality by the
Advisor. For temporary, defensive purposes, the Fund may invest up to 100% of
its assets in such instruments. Variable amount master demand notes are
unsecured demand notes that permit investment of fluctuating amounts of money
at variable rates of interest pursuant to arrangements with issuers who meet
the foregoing quality criteria. All variable amount master demand notes
acquired by the Fund will be payable within a prescribed notice period not to
exceed seven days.
Mortgage-backed securities consist of mortgage loans made by lenders, such
as commercial banks and savings and loan institutions, assembled into pools
for sale to investors. The Fund may invest in pools that are issued and
guaranteed by an agency or instrumentality of the U.S. Government, although
not necessarily by the U.S. Government itself. One type of mortgage-backed
security in which the Fund may invest is a GNMA Certificate. GNMA
Certificates are backed as to the timely payment of principal and interest by
the full faith and credit of the U.S. Government. The Fund may also invest in
FHLMC Participation Certificates and FNMA Certificates. Principal and
interest payments on FHLMC and FNMA Certificates are guaranteed only by FHLMC
and FNMA, respectively, and not by the full faith and credit of the U.S.
Government. For additional information about GNMA, FHLMC and FNMA, see the
Statement of Additional Information.
Mortgage-backed securities provide monthly payments to the certificate
holders, consisting of both interest and principal payments, which in effect
"pass-through" the monthly interest and principal payments made on
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the underlying mortgage loans. During periods of declining interest rates,
prepayment of mortgages underlying mortgage-backed securities can be expected
to accelerate. Because prepayment of the underlying mortgages may vary, it is
not possible to predict accurately the average life or realized yield of a
particular issue of pass-through certificates. Prepayments of mortgages which
underlie securities purchased at a premium could result in capital losses.
Changes in market yields will affect the value of securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities
(including mortgage-backed securities) because the price of fixed income
securities generally increases when interest rates decline and decreases when
interest rates rise. Prices of longer term securities generally increase or
decrease more sharply in response to interest rate changes than those of
shorter term securities. In addition, prepayments of principal on mortgage
pass-through securities may make it difficult to fix interest rates for a
specified period of time.
The Fund may invest in CMOs that meet both the following criteria: (i) are
collateralized by securities issued or guaranteed by agencies or
instrumentalities of the U.S. Government (e.g., GNMA Certificates, FHLMC
Participation Certificates or FNMA Certificates) (collectively, "Mortgage
Assets") and (ii) are rated AAA by S&P or Aaa by Moody's or are determined to
be of comparable quality by the Advisor. No CMO is insured or guaranteed by
the agency or instrumentality of the U.S. Government which issues the
mortgage-backed securities that collateralize the CMO. Payment of principal
and interest on the Mortgage Assets, and any reinvestment income thereon,
provide the funds to pay debt service on the CMOs. If there is a default in
the payment of principal and interest there can be no assurance that the
underlying collateral will be sufficient to effect full repayment. CMOs may
be issued by agencies or instrumentalities of the U.S. Government, or by
private originators of, or investors in, mortgage loans. Because CMOs are
collateralized by mortgage-backed securities, they are subject to similar
risks and uncertainties associated with the prepayment of principal and the
ability to accurately predict yield described above with respect to
mortgage-backed securities.
The Fund may also invest in securities backed by assets other than
mortgages, including company receivables, truck and auto loans, leases, and
credit card receivables, which securities are rated AAA by S&P or Aaa by
Moody's, or if not rated, are determined by the Advisor to be of comparable
quality. Through the use of trusts and special purpose corporations, these
types of assets are being securitized in pass-through structures similar to
the mortgage pass-through structure or in pay-through structures similar to
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the CMO structure, both as described above. In general, the collateral
supporting asset-backed securities is of shorter maturity than mortgage loans
and is less likely to experience substantial prepayments. However, asset-backed
securities do not generally have the benefit of the same security interest in
the related collateral as either mortgage-backed securities or CMOs, and may
therefore present certain risks not associated with such other securities.
A change in the value of a foreign currency relative to the U.S. dollar
will result in a corresponding change in the U.S. dollar value of the Fund's
assets denominated in that currency. Accordingly, the value of those assets
of the Fund, as measured in U.S. dollars, may be affected favorably or
unfavorably by changes in foreign currency exchange rates and exchange
control regulations. In addition, the Fund may incur costs in connection with
conversions between various currencies. In order to protect against
uncertainty in the level of future foreign exchange rates, the Fund is
authorized to use forward foreign currency exchange contracts. A forward
foreign currency exchange contract is an obligation to purchase or sell a
specific currency at a future date at a price set at the time the contract is
entered into. The Fund may use such forward contracts only under two
circumstances. First, if the Advisor believes the Fund should fix the U.S.
dollar price of the foreign security when the Fund enters into a contract for
the purchase or sale, at a future date, of a security denominated in a
foreign currency, the Fund may enter into forward contracts. Second, if the
Advisor believes the Fund should hedge against risk of loss in the value of
those portfolio securities denominated in foreign currencies, the Fund may
enter into a forward contract to sell or purchase an amount of the foreign
currency approximating the value of some or all of those securities.
The market value of the Fund's debt securities will change in response to
interest rate changes and other factors. During periods of falling interest
rates, the value of outstanding debt securities generally rises. Conversely,
during periods of rising interest rates, the value of such securities
generally declines. An investment in Fund shares should be made with an
understanding of the risks which an investment in fixed-rate CMOs may entail,
including the risk that the value of the portfolio, hence the value of the
Fund's shares, will decline with an increase in interest rates and that the life
of the CMOs in the portfolio depends on the actual prepayments received on the
underlying mortgage-backed securities, the timing of which cannot be
determined but which may be sooner or later than anticipated, especially if
interest rates decline.
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REPURCHASE AGREEMENTS
The Fund may agree to purchase U.S. Treasury securities from financial
institutions, such as banks and broker-dealers, subject to the seller's
agreement to repurchase the securities at an established time and price. The
collateral for such repurchase agreements will be held by the Fund's
custodian or a duly appointed sub-custodian. The Fund will enter into
repurchase agreements only with banks and broker-dealers that have been
determined to be creditworthy by the Fund's Board of Directors under criteria
established with the assistance of the Advisor. The seller under a repurchase
agreement would be required to maintain the value of the securities subject
to the repurchase agreement at not less than the repurchase price. Default by
the seller would, however, expose the Fund to possible loss because of
adverse market action or delay in connection with the disposition of the
underlying obligations. In addition, if bankruptcy proceedings are commenced
with respect to the seller of the security, the Fund may be delayed or
limited in its ability to sell the collateral.
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PURCHASE OF WHEN-ISSUED SECURITIES
From time to time, in the ordinary course of business, the Fund may
purchase securities, at the current market value of the securities, on a
forward commitment or "when issued" basis. When such transactions are
negotiated, the price is fixed at the time of the commitment, but delivery
and payment will take place after the date of the commitment. A segregated
account of the Fund, consisting of cash, cash equivalents or U.S. Government
securities or other high quality liquid debt securities equal at all times to
the amount of the when-issued commitments will be established and maintained
by the Fund at the Fund's custodian. Additional cash or liquid debt
securities will be added to the account when necessary. While the Fund will
purchase securities on a forward commitment or "when issued" basis only with
the intention of acquiring the securities, the Fund may sell the securities
before the settlement date if it is deemed advisable. The securities so
purchased or sold are subject to market fluctuation and no interest accrues
to the purchaser during this period. At the time of delivery of the
securities, their value may be more or less than the purchase or sale price.
............................................................................
ADDITIONAL RISK CONSIDERATIONS
Purchasing foreign securities may subject the Fund to additional risks
associated with the holding of property abroad. Such risks include future
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political and economic developments, currency fluctuations, the possible
withholding of tax payments, the possible seizure or nationalization of
foreign assets, the possible establishment of exchange controls or the
adoption of other foreign government restrictions which might adversely
affect the payment of principal or interest on foreign securities held by the
Fund.
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4. INVESTMENT RESTRICTIONS
The Fund's investment program is subject to a number of restrictions which
reflect both self imposed standards and federal and state regulatory
limitations. The investment restrictions numbered 1 through 3 below are
matters of fundamental policy and may not be changed without the affirmative
vote of a majority of the Fund's outstanding shares. Investment restriction
number 4 may be changed by a vote of the majority of the Board of Directors.
The Fund will not:
1) Concentrate 25% or more of its total assets in securities of issuers in
any one industry (for these purposes the U.S. Government and its agencies
and instrumentalities are not considered an issuer);
2) Invest more than 5% of its total assets in the securities of any single
issuer or acquire more than 10% of the voting securities of any issuer
(for these purposes the U.S. Government and its agencies and
instrumentalities are not considered an issuer);
3) Borrow money except as a temporary measure to facilitate settlements and
for extraordinary or emergency purposes and then only from banks and in an
amount not exceeding 10% of the value of the total assets of the Fund at
the time of such borrowing, provided that, while borrowings by the Fund
equalling 5% or more of the Fund's total assets are outstanding, the Fund
will not purchase securities; and
4) Invest more than 10% of the Fund's net assets in illiquid securities,
including repurchase agreements with maturities of greater than seven
days.
The Fund is subject to further investment restrictions that are set forth
in the Statement of Additional Information.
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5. HOW TO INVEST IN INSTITUTIONAL SHARES
Institutions (e.g., banks and trust companies, savings institutions,
corporations, insurance companies, investment counsellors, pension funds,
employee benefit plans, trusts, estates and educational, religious and
10
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charitable institutions) and clients of investment advisory affiliates of Alex.
Brown may purchase Institutional Shares through Alex. Brown, 135 East Baltimore
Street, Baltimore, Maryland 21202 (telephone: (800) 553-8080), through any
securities dealer which has entered into a dealer agreement with Alex. Brown
("Participating Dealers"), or by completing the Application Form attached to
this Prospectus and returning it, together with payment of the purchase price,
as instructed in the Application.
The minimum initial investment in Institutional Shares is $500,000. There
is no minimum investment requirement for clients of investment advisory
affiliates of Alex. Brown or for subsequent investments. The Fund reserves the
right to reject any order for the purchase of Institutional Shares.
Orders for purchases of Institutional Shares are accepted on any day on which
the New York Stock Exchange is open for business ("Business Day"). Purchase
orders for Institutional Shares will be executed at the net asset value per
share next determined after receipt of the purchase order. Purchases made
through Alex. Brown or a Participating Dealer must be in accordance with such
entity's payment procedures. The Fund reserves the right to suspend the sale of
Institutional Shares at any time at the discretion of Alex. Brown and ICC.
The net asset value per share is determined once daily as of the close of
the New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on
each Business Day. Net asset value per share of a class is calculated by
valuing all assets held by the Fund, deducting all liabilities, including
liabilities attributable to that specific class, and dividing the resulting
amount by the number of then outstanding shares of the class. For this
purpose portfolio securities will be given their market value where feasible.
Portfolio securities that are actively traded in the over-the-counter market,
including listed securities for which the primary market is believed by the
Advisor to be over-the-counter, are valued at the quoted bid prices provided
by principal market makers. If a portfolio security is traded primarily on a
national exchange on the valuation date, the last quoted sale price will
generally be used. Securities or other assets for which market quotations are
not readily available are valued at their fair value as determined in good
faith under procedures established from time to time and monitored by the
Fund's Board of Directors. Such procedures may include the use of an
independent pricing service which uses prices based upon yields or prices of
securities of comparable quality, coupon, maturity and type; indications as
to values from dealers; and general market conditions. Debt obligations with
maturities of 60 days or less will be valued at amortized cost, which
constitutes fair value as determined by the Fund's Board of Directors.
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Institutional Shares may be offered only to residents of those states in
which such shares are eligible for purchase.
.............................................................................
PURCHASES BY EXCHANGE
Shareholders of other Flag Investors Funds that offer Institutional shares
may exchange their Institutional shares of those funds for an equal dollar
amount of Institutional Shares. The net asset value of shares purchased and
redeemed in an exchange request received on a Business Day will be determined
on the same day, provided that the exchange request is received prior to
4:00 p.m. (Eastern Time), or the close of the New York Stock Exchange, whichever
is earlier. Exchange requests received after 4:00 p.m. (Eastern Time) will be
effected on the next Business Day.
The exchange privilege may be exercised by notifying the Fund's transfer
agent (the "Transfer Agent") by telephone at (800) 553-8080 on any Business Day
between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time) (see "Telephone
Transactions" below) or by regular or express mail at its address listed under
"Custodian, Transfer Agent, Accounting Services." The exchange privilege may be
exercised only in those states where the Institutional shares of such other
funds may legally be sold. Investors should receive and read the applicable
prospectus prior to tendering shares for exchange. The Fund may modify or
terminate this offer of exchange at any time on 60 days' prior written notice
to shareholders.
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OTHER INFORMATION
Periodic statements of account from the Fund will reflect all dividends,
purchases and redemptions of Institutional Shares.
In the interest of economy and convenience and because of the operating
procedures for the Institutional Shares, certificates representing such
shares will not be issued. All purchases of Institutional Shares are confirmed
and credited to the shareholder's account on the Fund's books maintained by
ICC or its agents. Shareholders will have the same rights and ownership with
respect to such shares as if certificates had been issued.
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6. HOW TO REDEEM INSTITUTIONAL SHARES
Shareholders may redeem all or part of their Institutional Shares on any
Business Day by transmitting a redemption order through Alex. Brown or a
Participating Dealer, or by regular or express mail to the Transfer Agent at
its address listed under "Custodian, Transfer Agent, Accounting Services."
Shareholders may also redeem Institutional Shares by telephone (in amounts up
to $500,000). (See "Telephone Transactions" below.)
A redemption request is effected at the net asset value per share next
determined after receipt of the order in proper form. Redemption orders
received after 4:00 p.m. (Eastern Time) will be effected at the net asset value
next determined on the following Business Day. Payment for redeemed
Institutional Shares will be made by wire transfer of funds to the shareholder's
bank, or to a Participating Dealer, as appropriate, upon receipt of a duly
authorized redemption request as promptly as feasible and, under most
circumstances, within two Business Days.
Dividends payable up to the date of the redemption of Institutional Shares
will be paid on the next dividend payment date. If all of the Institutional
Shares in an account have been redeemed on the dividend payment date, the
dividend will be remitted by wire to the shareholder's bank or to a
Participating Dealer, as appropriate.
The Fund has the power, under its Articles of Incorporation, to redeem
shareholder accounts amounting to less than $500 (as a result of redemption)
upon 60 days' notice.
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7. TELEPHONE TRANSACTIONS
Shareholders may exercise the exchange privilege with respect to other Flag
Investors funds, or redeem Institutional Shares in amounts up to $500,000, by
notifying the Transfer Agent by telephone at (800) 553-8080 on any Business
Day between the hours of 8:30 a.m. and 5:30 p.m. (Eastern Time) or by
regular or express mail at its address listed under "Custodian, Transfer Agent,
Accounting Services." Telephone transaction privileges are automatic.
Shareholders may specifically request that no telephone redemptions or
exchanges be accepted for their accounts. This election may be made on the
Application Form or at any time thereafter by completing and returning
appropriate documentation supplied by the Transfer Agent.
A telephone exchange or redemption placed by 4:00 p.m. (Eastern Time) or the
close of the New York Stock Exchange, whichever is earlier, is effective that
day. Telephone orders placed after 4:00 p.m. (Eastern Time) will be effected at
the net asset value as next determined on the following Business Day.
13
<PAGE>
The Fund and the Transfer Agent will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine. These procedures
include requiring the investor to provide certain personal identification
information at the time an account is opened and prior to effecting each
transaction requested by telephone. In addition, all telephone transaction
requests will be recorded and investors may be required to provide additional
telecopied instructions of such transaction requests. The Fund or the Transfer
Agent may be liable for any losses due to unauthorized or fraudulent telephone
instructions if either of them does not employ these procedures. Neither the
Fund nor the Transfer Agent will be responsible for any loss, liability, cost or
expense for following instructions received by telephone that either of them
reasonably believes to be genuine. During periods of extreme economic or market
changes, shareholders may experience difficulty in effecting telephone
transactions. In such event, requests should be made by express mail or
fascimile. (See "How to Invest in Institutional Shares -- Purchases by Exchange"
and "How to Redeem Institutional Shares.")
=============================================================================
8. DIVIDENDS AND TAXES
.............................................................................
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute to shareholders substantially all of
its taxable net investment income (including net short-term capital gains) in
the form of monthly dividends. The Fund may distribute to shareholders any
net capital gains (net long-term capital gains less net short-term capital
losses) on an annual basis, or alternatively, may elect to retain net capital
gains and pay tax thereon.
Unless the shareholder elects otherwise, all income dividends (consisting
of dividend and interest income and the excess, if any, of net short-term
capital gains over net long-term capital losses) and net capital gains
distributions, if any, will be reinvested in additional Institutional Shares
at the net asset value per share on the payment date. Shareholders may elect
to terminate automatic reinvestment by giving written notice to the Transfer
Agent (see "Custodian, Transfer Agent, Accounting Services"), either directly
or through Alex. Brown or a Participating Dealer, at least five days before the
next date on which dividends or distributions will be paid.
.............................................................................
TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a general summary of certain tax considerations
affecting the Fund and the shareholders. No attempt is made to present a
detailed explanation of the tax treatment of the Fund or the shareholders,
and the discussion here is not intended as a substitute for careful tax
planning.
14
<PAGE>
The following summary is based on current tax laws and regulations, which
may be changed by legislative, judicial, or administrative action. The
Statement of Additional Information sets forth further information regarding
taxes.
The Fund has been and expects to continue to be taxed as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986,
as amended. Generally, as long as the Fund qualifies for this tax treatment,
it will be relieved of U.S. federal income tax on amounts distributed to
shareholders, but U.S. shareholders, unless otherwise exempt, will pay income
or capital gains tax on the amounts so distributed, regardless of whether
such distributions are paid in cash or reinvested in additional Institutional
Shares.
Distributions from the Fund out of net capital gains (the excess of
long-term capital gains over short-term capital losses), if any, are treated
by shareholders as long-term capital gains regardless of the length of time
the shareholder has held the Institutional Shares. All other income
distributions are taxed to shareholders as ordinary income. Distributions
from the Fund generally will not qualify for the corporate dividends received
deduction.
The sale, exchange or redemption of Institutional Shares is a taxable
event to the shareholder.
Ordinarily, shareholders will include all dividends declared by the Fund
in income in the year of payment. However, dividends declared payable to
shareholders of record in December of one year but paid in January of the
following year, will be deemed to have been received by the shareholders and
paid by the Fund in the year in which the dividends were declared.
Investors should be careful to consider the tax implications of buying
Institutional Shares just prior to a distribution. The price of Institutional
Shares purchased at that time may reflect the amount of the forthcoming
distribution. Those investors purchasing just prior to a distribution will
nevertheless be taxable on the entire amount of the distribution received.
The Fund intends to make sufficient distributions of its ordinary income
and capital gain net income prior to the end of each calendar year to avoid
liability for federal excise tax.
Shareholders will be advised annually as to the federal income tax
consequences of distributions made during the year. Shareholders are urged to
consult their tax advisers concerning the application of state and local
taxes to investments in the Fund.
15
<PAGE>
=============================================================================
9. MANAGEMENT OF THE FUND
The overall business affairs of the Fund are managed by its Board of
Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, distributor, custodian and transfer
agent. The day-to-day operations of the Fund are delegated to the Fund's
executive officers and to ICC. Two Directors and all of the officers of the
Fund are officers or employees of Alex. Brown or ICC. The other Directors of
the Fund have no affiliation with Alex. Brown or ICC.
The Fund's Directors and officers are as follows:
<TABLE>
<S> <C> <C> <C>
*Richard T. Hale Chairman M. Elliott Randolph, Jr. President
*W. James Price Director Paul D. Corbin Executive Vice President
James J. Cunnane Director Edward J. Veilleux Vice President
N. Bruce Hannay Director Gary V. Fearnow Vice President
John F. Kroeger Director Brian C. Nelson Vice President and Secretary
Louis E. Levy Director Monica M. Hausner Vice President
Eugene J. McDonald Director Diana M. Ellis Treasurer
Harry Woolf Director Laurie D. DePrine Assistant Secretary
</TABLE>
- ------
* Messrs. Hale and Price are "interested persons" of the Fund within the
meaning of Section 2(a)(19) under the Investment Company Act of 1940, as
amended (the "1940 Act").
=============================================================================
10. INVESTMENT ADVISOR
Investment Company Capital Corp., a wholly-owned subsidiary of Alex.
Brown, is the Fund's investment advisor. ICC is also the investment advisor
to, and Alex. Brown acts as distributor for, other mutual funds in the Flag
Investors family of funds and Alex. Brown Cash Reserve Fund, Inc., which
funds had approximately $4 billion of net assets as of September 30, 1995. The
address of the Advisor is 135 East Baltimore Street, Baltimore, Maryland
21202.
ICC is responsible for the general management of the Fund, as well as for
decisions to buy and sell securities for the Fund, for broker-dealer
selection, and for negotiation of commission rates under standards
established and periodically reviewed by the Board of Directors.
As compensation for its services for the fiscal year ended December 31,
1994, ICC received a fee (net of fee waivers) equal to .21% of the Fund's
average daily net assets. ICC currently intends to waive, on a voluntary
basis, its annual fee to the extent necessary so that the Fund's annual
expenses do not exceed .45% of the Institutional Shares' average daily net
assets.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. (See "Custodian, Transfer Agent,
Accounting Services.")
16
<PAGE>
.............................................................................
PORTFOLIO MANAGERS
Messrs. M. Elliott Randolph, Jr., the Fund's President, and Paul D.
Corbin, the Fund's Executive Vice President, have shared primary
responsibility for managing the Fund's assets since inception.
M. Elliott Randolph has nearly 21 years of investment experience and has
been a portfolio manager with the Advisor since 1991. From 1988-1991 he was
a Principal with Monument Capital Management, Inc.
Paul D. Corbin has 17 years of investment experience and has been a
portfolio manager with the Advisor since 1991. From 1984-1991 he served as
the Senior Vice President in charge of Fixed Income Portfolio Management at
First National Bank of Maryland.
=============================================================================
11. DISTRIBUTOR
Alex. Brown, 135 East Baltimore Street, Baltimore, Maryland 21202, acts as
distributor of each class of the Fund's shares. Alex. Brown is an investment
banking firm which offers a broad range of investment services to individual,
institutional, corporate and municipal clients. It is a wholly-owned
subsidiary of Alex. Brown Incorporated, which has engaged directly and
through subsidiaries and affiliates in the investment business since 1800.
Alex. Brown is a member of the New Stock Exchange and other leading
securities exchanges. Headquartered in Baltimore, Maryland, Alex. Brown has
offices throughout the United States and, through subsidiaries, maintains
offices in London, England, Geneva, Switzerland and Tokyo, Japan. Alex. Brown
receives no compensation for distributing the Institutional Shares.
Alex. Brown bears all expenses associated with advertisements, promotional
materials, sales literature and printing and mailing prospectuses to other
than Fund shareholders.
=============================================================================
12. CUSTODIAN, TRANSFER AGENT, ACCOUNTING SERVICES
PNC Bank, National Association ("PNC Bank"), a national banking
association, with offices at Airport Business Park, 200 Stevens Drive,
Lester, Pennsylvania 19113, acts as custodian of the Fund's assets.
Investment Company Capital Corp., 135 East Baltimore Street, Baltimore,
Maryland 21202 (telephone: (800) 553-8080) is the Fund's transfer and
dividend disbursing agent. ICC also provides accounting services to the Fund.
17
<PAGE>
As compensation for providing such accounting services, ICC receives from the
Fund an annual fee equal to $15,000, plus a percentage of the Fund's daily net
assets in excess of $10 million at a maximum rate of .08% of net assets, and
declining at various asset levels to a minimum rate of .003% on assets of $1
billion or more. (See the Statement of Additional Information.) ICC also serves
as the Fund's investment advisor.
=============================================================================
13. PERFORMANCE INFORMATION
From time to time the Fund may advertise its performance including
comparisons to other mutual funds with similar investment objectives and to
relevant indices. Any quotations of yield of the Fund will be determined by
dividing the net investment income earned by the Fund during a 30 day period
by the maximum offering price per share on the last day of the period and
annualizing the result on a semi-annual basis. All advertisements of
performance will show the average annual total return over one, five and ten
year periods or, if such periods have not yet elapsed, shorter periods
corresponding to the life of the Fund. Such total return quotations will be
computed by finding average annual compounded rates of return over such
periods that would equate an assumed initial investment of $1,000 to the
ending redeemable value according to the required standardized calculation.
If the Fund compares its performance to other funds or to relevant
indices, the Fund's performance will be stated in the same terms in which
such comparative data and indices are stated, which is normally total return
rather than yield. For these purposes, the performance of the Fund, as well
as the performance of such investment companies or indices, may not reflect
sales charges, which, if reflected, would reduce performance results.
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services which monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Lehman Government
Corporate Bond Index, Lehman Government Corporate Intermediate-Term Bond
Index and Salomon Brothers Broad Investment Grade Index. The Fund may also
use total return performance data as reported in national financial and
industry publications that monitor the performance of mutual funds such as
Money Magazine, Forbes, Business Week, Barron's, Investor's Daily,
IBC/Donoghue's Money Fund Report and The Wall Street Journal.
Performance will fluctuate and any statement of performance should not be
considered as representative of the future performance of the Fund.
18
<PAGE>
Shareholders should remember that performance is generally a function of the
type and quality of instruments held by the Fund, operating expenses and
market conditions. Any fees charged by banks with respect to customer
accounts through which Institutional Shares may be purchased, although not
included in calculations of performance, will reduce performance results.
=============================================================================
14. GENERAL INFORMATION
.............................................................................
DESCRIPTION OF SHARES
The Fund was incorporated under the laws of the State of Maryland on April
16, 1990 and is authorized to issue 55 million shares of capital stock, par
value of $.001 per share, all of which shares are designated common stock.
Each share has one vote and shall be entitled to dividends and distributions
when and if declared by the Fund. In the event of liquidation or dissolution
of the Fund, each share would be entitled to its pro rata portion of the
Fund's assets after all debts and expenses have been paid.
The Board of Directors is authorized to establish additional series of
shares of capital stock, each of which would evidence interests in a separate
portfolio of securities, and separate classes of each series of the Fund. The
shares offered by this Prospectus have been designated "Flag Investors
Intermediate-Term Income Fund Institutional Shares." The Board has no present
intention of establishing any additional series of the Fund but the Fund does
have another class of shares in addition to the shares offered hereby: Flag
Investors Intermediate-Term Income Fund Shares. Shares of that class are
subject to a maximum front-end sales charge of 1.5% and a .25% 12b-1 fee.
Different classes of the Fund may be offered to certain investors and holders
of such shares may be entitled to certain exchange privileges not offered to
Institutional Shares. All classes of the Fund share a common investment
objective, portfolio of investments and advisory fee, but the classes may
have different distribution fees or sales load structures and the net asset
value per share of the classes may differ at times.
.............................................................................
ANNUAL MEETINGS
Unless required under applicable Maryland law, the Fund does not expect to
hold annual meetings of shareholders. However, shareholders of the Fund
retain the right, under certain circumstances to request that a meeting of
shareholders be held for the purpose of considering the removal of a Director
from office, and if such a request is made, the Fund will assist with the
shareholder communications in connection with the meeting.
19
<PAGE>
.............................................................................
REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The annual
financial statements are audited by the Fund's independent auditors, Deloitte
& Touche LLP.
.............................................................................
FUND COUNSEL
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
.............................................................................
SHAREHOLDER INQUIRIES
Shareholders with inquiries concerning their Institutional Shares should
contact Alex. Brown at (800) 767-FLAG, the Transfer Agent at (800) 553-8080
or a Participating Dealer, as appropriate.
20
<PAGE>
APPENDIX
Corporate Bond Rating Definitions
...............................................................................
STANDARD & POOR'S RATINGS GROUP
AAA--Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A--Debt rated A has 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.
...............................................................................
MOODY'S INVESTORS SERVICE, INC.
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than the Aaa securities.
A--Bonds which are rated 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
which suggest a susceptibility to impairment some time in the future.
A-1
<PAGE>
Commercial Paper Rating Definitions
...............................................................................
STANDARD & POOR'S RATINGS GROUP
Commercial paper rated A by S&P is regarded by S&P as having the greatest
capacity for timely payment. Issues rated A are further refined by use of the
numbers 1+, 1, 2 and 3 to indicate the relative degree of safety. Issues rated
A-1+ are those with an "overwhelming degree" of credit protection. Those rated
A-1 reflect a "very strong" degree of safety regarding timely payment.
...............................................................................
MOODY'S INVESTORS SERVICE, INC.
Commercial paper issuers rated Prime-1 by Moody's are judged by Moody's to be of
the highest quality on the basis of relative repayment capacity.
A-2
<PAGE>
FLAG INVESTORS INTERMEDIATE-TERM INCOME FUND, INC.
(INSTITUTIONAL SHARES)
NEW ACCOUNT APPLICATION
==============================================================================
Send completed Application by overnight carrier to:
Alex. Brown & Sons Incorporated/Flag Investors Funds
1004 Baltimore Avenue, 4th Floor
Kansas City, MO 64105
Attn: Flag Investors Intermediate-Term Income Fund, Inc.
For assistance in completing this Application please call: 1-800-553-8080
8:30 a.m. to 5:30 p.m., Eastern Time, Monday-Friday.
If you are paying by check, make check payable to "Flag Investors Intermediate-
Term Income Fund, Inc." and mail with this Application. If you are paying by
wire, see instructions below.
==============================================================================
Your Account Registration (Please Print)
Name on Account
- ------------------------------------------------------------------------------
Name of Corporation, Trust or Partnership
- ----------------
Tax ID Number
[ ] Corporation [ ] Partnership [ ] Trust
[ ] Non-Profit or Charitable Organization [ ] Other
If a Trust, please provide the following:
- -----------------------------------------------------------------------------
Date of Trust For the Benefit of
- -----------------------------------------------------------------------------
Name of Trustees (If to be included in the Registration)
Mailing Address
- -----------------------------------------------------------------------------
Name of Individual to Receive Correspondence
- -----------------------------------------------------------------------------
Street
- -----------------------------------------------------------------------------
City State Zip
( )
- -----------------------------------------------------------------------------
Daytime Phone
=============================================================================
Initial Investment
The initial minimum purchase for the Institutional Shares of the Fund is
$500,000. There is no minimum for clients of investment advisory affiliates
of Alex. Brown or for subsequent investments.
Indicate the amount to be invested and the method of payment:
_____ A. By Mail: Enclosed is a check in the amount of $__________ payable to
Flag Investors Intermediate-Term Income Fund, Inc.
_____ B. By Wire: A bank wire in the amount of $_________ has been sent from
_________________ _________________________
Name of Bank Wire Control Number
Wire Instructions
Follow the instructions below to arrange for a wire transfer for
initial investment:
o Send completed Application by overnight carrier to Alex. Brown &
Sons Incorporated/Flag Investors Funds at the address listed
above.
<PAGE>
o Call 1-800-553-8080 to obtain new investor's Fund account number.
o Wire payment of the purchase price to Investors Fiduciary Trust
Company ("IFTC"), as follows:
IFTC
a/c Alex. Brown & Sons Incorporated/Flag Investors Funds
Acct. #7528175
ABA #1010-0362-1
Kansas City, Missouri 64105
Please include the following information in the wire:
o Flag Investors Intermediate-Term Income Fund, Inc. --
Institutional Shares
o The amount to be invested
o "For further credit to ________________________________."
(Investor's Fund Account Number)
==============================================================================
Distribution Options
Please check appropriate boxes. If none of the options is selected, all
distributions will be reinvested in additional Institutional Shares of the
Fund.
Income Dividends
[ ] Reinvested in additional shares
[ ] Paid in Cash
Capital Gains
[ ] Reinvested in additional shares
[ ] Paid in Cash
==============================================================================
Telephone Transactions
I understand that the investor will automatically have telephone redemption
privileges (for amounts up to $500,000) and exchange privileges (with respect
to Institutional Shares of other Flag Investors Funds) unless I mark one or both
of the boxes below:
No, the investor does not want:
[ ] Telephone redemption privileges
[ ] Telephone exchange privileges
Redemptions effected by telephone will be wire to the bank account
designated below.
==============================================================================
Bank Account Designation
(This Section Must Be Completed)
Please attach a blank, voided check to provide account and bank routing
information.
_____________________________________________________________________________
Name of Bank Branch
_____________________________________________________________________________
Bank Address City/State/Zip
_____________________________________________________________________________
Name(s) on Account
_____________________________________________________________________________
Account Number A.B.A. Number
<PAGE>
=============================================================================
Acknowledgement, Certificate and Signature
I have received a copy of the Fund's prospectus dated November 1, 1995. Unless
the box below is checked, I certify under penalties of perjury, (1) that the
number shown on this form is the investor's correct taxpayer identification
number and (2) that the investor is not subject to backup withholding as a
result of a failure to report all interest or dividends, or the Internal
Revenue Service has notified the investor that it is no longer subject to
backup withholding. [ ] Check here if the investor is subject to backup
withholding.
If a non-resident alien, please indicate country of residence:_______________
I acknowledge that the telephone redemption and exchange privileges are
automatic and will be effected as described in the Fund's current prospectus
(see "Telephone Transactions"). I also acknowledge that the investor may bear
the risk of loss in the event of fraudulent use of such privileges. If the
investor does not want telephone redemption or exchange privileges, I have so
indicated on this Application.
_______________________________________________________________________________
Signature of Corporate Officer, General Partner, Trustee, etc. Date
_______________________________________________________________________________
Signature of Corporate Officer, General Partner, Trustee, etc. Date
==============================================================================
Person(s) Authorized To Conduct Transactions
The following person(s) ("Authorized Person(s)") are currently officers,
trustees, general partners or other authorized agents of the investor. Any
________* of the Authorized Person(s) is, by lawful and appropriate action of
the investor, a person entitled to give instructions regarding purchases and
redemptions or make inquiries regarding the Account.
__________________________________ _________________________________________
Name/Title Signature Date
__________________________________ _________________________________________
Name/Title Signature Date
__________________________________ _________________________________________
Name/Title Signature Date
__________________________________ _________________________________________
Name/Title Signature Date
The signature appearing to the right of each Authorized Person is that
person's signature. Investment Company Capital Corp. ("ICC") may, without
inquiry, act upon the instructions (whether verbal, written, or provided by
wire, telecommunication, or any other process) of any person claiming to be
an Authorized Person. Neither ICC nor any entity on behalf of which ICC is
acting shall be liable for any claims or expenses (including legal fees) or
for any losses resulting from actions taken upon any instructions believed to
be genuine. ICC may continue to rely on the instructions made by any person
claiming to be an Authorized Person until it is informed through an amended
Application that the person is no longer an Authorized Person and it has a
reasonable period (not to exceed one week) to process the amended
Application. Provisions of this Application shall be equally Applicable to
any successor of ICC.
<PAGE>
* If this space is left blank, any one Authorized Person is authorized to
give instructions and make inquiries. Verbal instructions will be accepted
from any one Authorized Person. Written instructions will require
signatures of the number of Authorized Persons indicated in this space.
==============================================================================
Certificate of Authority
Investors must complete one of the following two Certificates of Authority.
Certificate A: FOR CORPORATIONS AND UNINCORPORATED ASSOCIATION (With a Board of
Directors or Board of Trustees.)
I ________________________, Secretary of the above-named investor, do hereby
certify that at a meeting on ____________, at which a quorum was present
throughout, the Board of Directors (Board of Trustees) of the investor duly
adopted a resolution which is in full force and effect and in accordance with
the investor's charter and by-laws, which resolution did the following: (1)
empowered the officers/trustees executing this Application (or amendment) to do
so on behalf of the investor; (2) empowered the above-named Authorized Person(s)
to effect securities transactions for the investor on the terms described above;
(3) authorized the Secretary to certify, from time to time, the names and titles
of the officers of the investor and to notify ICC when changes in officers
occur; and (4) authorized the Secretary to certify that such a resolution has
been duly adopted and will remain in full force and effect until ICC receives a
duly-executed amendment to the Certification form.
Witness my hand and seal on behalf of the investor.
this ___ day of ________, 199_ Secretary ________________________________
The undersigned officer (other than the Secretary) hereby certifies that the
foregoing instrument has been signed by the Secretary of the investor.
_____________________________________________________________________________
Signature and title Date
Certificate B: FOR PARTNERSHIPS AND TRUSTS (Even if you are the sole trustee)
The undersigned certify that they are all general partners/trustees of the
investor and that they have done the following under the authority of the
investor's partnership agreement/trust instrument: (1) empowered the general
partner/trustee executing this Application (or amendment) to do so on behalf
of the investor; (2) empowered the above-named Authorized Person(s) to effect
securities transactions for the investor on the terms described above; (3)
authorized the Secretary to certify, from time to time, the names of the
general partners/trustees of the investor and to notify ICC when changes in
general partners/trustees occur. This authorization will remain in full force
and effect until ICC receives a further duly-executed certification. (If
there are not enough spaces here for all necessary signatures, complete a
separate certificate containing the language of this Certificate B and attach it
to the Application).
______________________________________________________________________________
Signature and title Date
______________________________________________________________________________
Signature and title Date
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
----------------------------------
FLAG INVESTORS INTERMEDIATE-TERM INCOME FUND, INC.
135 E. Baltimore Street
Baltimore, Maryland 21202
-------------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A
PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH A
PROSPECTUS, WHICH MAY BE OBTAINED FROM ANY
PARTICIPATING DEALER OR SHAREHOLDER SERVICING AGENT
OR BY WRITING ALEX. BROWN & SONS INCORPORATED, 135
EAST BALTIMORE STREET, BALTIMORE, MARYLAND 21202, OR
BY CALLING (800)767-FLAG.
Statement of Additional Information Dated: May 1, 1995,
as amended through November 1, 1995
Relating to the Prospectuses Dated:
May 1, 1995 relating to the Flag Investors Shares
and
November 1, 1995, relating to the Institutional Shares
<PAGE>
TABLE OF CONTENTS
Page
----
1. General Information and History......................... 1
2. Investment Objectives and Policies...................... 1
3. Valuation of Shares and Redemption...................... 6
4. Federal Tax Treatment of Dividends and
Distributions......................................... 7
5. Management of the Fund.................................. 9
6. Investment Advisory and Other Services................. 13
7. Distribution of Fund Shares............................ 14
8. Brokerage.............................................. 17
9. Capital Stock.......................................... 19
10. Semi-Annual Reports.................................... 20
11. Custodian, Transfer Agent, Accounting Services ........ 20
12. Independent Auditors .................................. 20
13. Performance Information................................ 21
14. Control Persons and Principal Holders of
Securities........................................... 23
15. Financial Statements................................... 23
<PAGE>
1. GENERAL INFORMATION AND HISTORY
Flag Investors Intermediate-Term Income Fund, Inc. (the "Fund") is an
open-end management investment company. Under the rules and regulations of
the Securities and Exchange Commission (the "SEC"), all mutual funds are
required to furnish prospective investors with certain information concerning
the activities of the company being considered for investment. The Fund
currently offers two classes of shares: Flag Investors Intermediate-Term
Income Fund Shares (the "Flag Investors Shares") and Flag Investors
Intermediate-Term Income Fund Institutional Shares (the "Institutional
Shares") (collectively, the "Shares"). As used herein, the "Fund" refers to
Flag Investors Intermediate-Term Income Fund, Inc. and specific references to
either class of the Fund's Shares will be made using the name of such class.
Important information concerning the Fund is included in the Fund's
current Prospectuses which may be obtained without charge from Alex. Brown &
Sons Incorporated ("Alex. Brown"), 135 East Baltimore Street, Baltimore,
Maryland 21202 (telephone: (800) 767-FLAG) or, from Participating Dealers that
offer Shares to prospective investors. Prospectuses for the Flag Investors
Shares may also be obtained from Shareholder Servicing Agents. Some of the
information required to be in this Statement of Additional Information is also
included in the Fund's current Prospectuses. To avoid unnecessary repetition,
references are made to related sections of the Prospectuses. In addition, the
Prospectuses and this Statement of Additional Information omit certain
information about the Fund and its business that is contained in the
Registration Statement respecting the Fund and its Shares filed with the SEC.
Copies of the Registration Statement as filed, including such omitted items, may
be obtained from the SEC by paying the charges prescribed under its rules and
regulations.
The Fund was incorporated under the laws of the State of Maryland on
April 16, 1990. The Fund filed a registration statement with the SEC
registering itself as an open-end diversified management investment company
under the Investment Company Act of 1940, as amended (the "Investment Company
Act"), and its Shares under the Securities Act of 1933, as amended, and
commenced operations on May 13, 1991. The Institutional Shares which have not
been offered prior to the date of this Statement of Additional Information, are
offered only to certain eligible institutions and to clients of investment
advisory affiliates of Alex. Brown.
Under a license agreement dated May 10, 1991 between the Fund and Alex.
Brown Incorporated, Alex. Brown Incorporated licenses to the Fund the "Flag
Investors" name and logo but retains the rights to the name and logo,
including the right to permit other investment companies to use them.
2. INVESTMENT OBJECTIVE AND POLICIES
The Fund is designed to provide a high level of current income
consistent with preservation of principal within an intermediate-term
maturity structure. As described in the Prospectus, the Fund will attempt to
achieve its objective by investing in high quality debt obligations,
primarily securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, corporate bonds, collateralized mortgage
obligations and other asset backed securities. There can be no assurance
that the Fund's investment objective will be achieved.
Mortgage-Backed Securities
As indicated in the Prospectus, the Fund may invest in mortgage-backed
securities representing ownership interests in a pool of mortgage loans which
securities are issued or guaranteed by the Government National Mortgage
Association ("GNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or
the Federal National Mortgage Association ("FNMA").
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GNMA Certificates.
GNMA Certificates are mortgage-backed securities which evidence an
undivided ownership interest in a pool of mortgage loans. Principal and
interest is paid back monthly by the borrower over the term of the underlying
loans. The National Housing Act authorizes GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration or the Farmers' Home
Administration or guaranteed by the Veterans Administration. The GNMA
guarantee is backed by the full faith and credit of the U.S. Government. The
GNMA is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantees.
The average life of a GNMA Certificate is likely to be substantially
less than the original maturity of the mortgage pools underlying the
securities. Prepayments of principal by mortgagors and mortgage foreclosures
will usually result in the return of the greater part of principal investment
substantially before maturity of the mortgages in the pool. Because
prepayment rates of individual mortgage pools vary, it is not possible to
predict accurately the average life of a particular issue of GNMA
Certificates. However, statistics published by the FHA indicate that the
average life of single-family home mortgage loans with 25 to 30 year
maturities (the type of mortgage underlying most GNMA Certificates) is
approximately 12 years. It is customary, therefore, to treat GNMA
Certificates as 30-year mortgage-backed securities which prepay in full in
the twelfth year.
FHLMC and FNMA Certificates.
The FHLMC is a corporate instrumentality of the U.S. Government and was
created in 1970 for the purpose of increasing the availability of mortgage
credit for residential housing through the development of a nationwide
secondary market in conventional residential mortgages. The FHLMC issues
Participation Certificates which represent a pro rata share of all interest
and principal payments made and owed on the underlying pool (which consists
of mortgages from FHLMC's national portfolio). The FHLMC guarantees the
timely payment of interest and ultimate collection of principal. FHLMC
Participation Certificates are assumed to be prepaid in full in the twelfth
year.
The FNMA is a government-sponsored corporation owned by private
stockholders that was established in 1938 to create a secondary market in
mortgages issued by the FHA. FNMA Certificates resemble GNMA Certificates in
that each Certificate represents a pro rata share of all interest and
principal payments made and owed on the underlying pool. FNMA guarantees
timely payment of interest on FNMA Certificates and full return of principal.
FNMA Certificates are assumed to be prepaid in full in the twelfth year.
Risk of foreclosure of the underlying mortgages is greater with FHLMC
and FNMA securities because, unlike GNMA securities, FHLMC and FNMA
securities are not backed by the full faith and credit of the U.S.
Government.
Interests in such mortgage-backed securities differ from other forms of
debt securities, which typically provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Mortgage-backed securities provide monthly payments to the certificate
holders, consisting of both interest and principal payments, which in effect
"pass-through" the monthly interest and principal payments made on the
underlying mortgage loans. Although the underlying mortgage loans are for
specified periods of time (such as 20 or 30 years), borrowers can repay their
loans sooner and the certificate holders would receive any such prepayment of
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principal in addition to the principal that is part of the monthly payment.
A borrower is more likely to prepay a mortgage which bears a relatively high
rate of interest. Accordingly, during periods of declining interest rates,
prepayment of mortgages underlying mortgage-backed securities can be expected
to accelerate. Because prepayment of the underlying mortgages may vary, it
is not possible to predict accurately the average life or realized yield of a
particular issue of pass-through certificates. When the prepayments of
principal are included in the monthly payments to the Fund as a certificate
holder, the Fund reinvests the prepaid amounts in securities, the yield of
which reflects interest rates prevailing at the time. Prepayments of
mortgages which underlie securities purchased at a premium could result in
capital losses.
Changes in market yields will affect the value of securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities
(including mortgage-backed securities) because the price of fixed income
securities generally increases when interest rates decline and decreases when
interest rates rise. Prices of longer term securities generally increase or
decrease more sharply in response to interest rate changes than those of
shorter term securities. In addition, prepayments of principal on mortgage
pass-through securities may make it difficult to fix interest rates for a
specified period of time. To the extent that mortgage-backed securities are
purchased at prices that differ from par, such prepayments (which are
received at par) may make up a significant portion of the pass-through total
return.
Collateralized Mortgage Obligations
As indicated in the Prospectus, the Fund may invest in collateralized
mortgage obligations ("CMOs") which are collateralized by mortgage-backed
securities issued by GNMA, FHLMC or FNMA (collectively, "Mortgage Assets")
and which are rated AAA by Standard & Poor's Corporation ("S&P") or Aaa by
Moody's Investors Service, Inc. ("Moody's") or are determined to be of
comparable quality by the Fund's investment advisor.
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche", is issued at
a specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause
the CMOs to be retired substantially earlier than their stated maturities or
final distribution dates. Interest is paid or accrues on all classes of the
CMOs on a monthly, quarterly or semi-annual basis. Payments of principal of
and interest on the Mortgage Assets are commonly applied to the classes of a
series of the CMO in the order of their respective stated maturities or final
distribution dates, so that no payment of principal will be made on any class
of a CMO until all other classes having an earlier stated maturity or final
distribution date have been paid in full. Because CMOs are collateralized by
mortgage-backed securities, they are subject to similar risks and
uncertainties associated with the prepayment of principal and the ability to
accurately predict yield described above with respect to mortgage-backed
securities.
Asset Backed Securities
The Fund may also invest in securities backed by assets other than
mortgages, including company receivables, truck and auto loans, leases, and
credit card receivables, which securities are rated AAA by S&P or Aaa by
Moody's, or if not rated, are determined by the Advisor to be of comparable
quality. Through the use of trusts and special purpose corporation, these
types of assets are being securitized in pass-through structures similar to
the mortgage pass-through structure or in pay-through structures similar to
the CMO structure, both as described above. In general, the collateral
supporting asset-backed securities is of shorter maturity than mortgage loans
and is less likely to experience substantial prepayments. However, asset-
backed securities do not generally have the benefit of the same security
interest in the related collateral as either mortgage-backed securities or
CMOs, and may therefore present certain risks not associated with such other
securities. If the asset-backed security is issued in a pay-through
structure similar to a CMO, the cash flow generated by the underlying assets
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is applied to make required payments on the securities and to pay related
administrative expenses. The residual in an asset-backed security pay-
through structure represents the interest in any excess cash flow remaining
after making the foregoing payments, and will depend on, among other things,
the characteristics of the underlying assets, the coupon rates on the
securities, prevailing interest rates, the amount of administrative expenses
and the actual prepayment experience on the underlying assets.
Other Investment Practices
In addition, the Fund may enter into repurchase agreements and make
purchases of when-issued securities as described below.
Repurchase Agreements.
The Fund may enter into repurchase agreements with financial
institutions, such as banks and broker-dealers, deemed to be creditworthy by
the Fund's Board of Directors under criteria established with the guidance of
the Fund's investment advisor, Investment Company Capital Corp. ("ICC" or the
"Advisor"). A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and the
seller agrees to repurchase the obligation at a future time and set price,
usually not more than seven days from the date of purchase, thereby
determining the yield during the purchaser's holding period. The value of
underlying securities will be at least equal at all times to the total amount
of the repurchase obligation, including the interest factor. The Fund makes
payment for such securities only upon physical delivery or evidence of book
entry transfer to the account of a custodian or bank acting as agent. The
underlying securities, which in the case of the Fund are securities of the
U.S. Treasury only, may have maturity dates exceeding one year. The Fund
does not bear the risk of a decline in value of the underlying securities
unless the seller defaults under its repurchase obligation. In the event of
a bankruptcy or other default of a seller of a repurchase agreement, the Fund
could experience both delays in liquidating the underlying securities and
loss including (a) possible decline in the value of the underlying security
while the Fund seeks to enforce its rights thereto, (b) possible subnormal
levels of income and lack of access to income during this period and (c)
expenses of enforcing its rights.
Foreign Currency Exchange Transactions.
The Fund may conduct its foreign currency exchange transactions through
forward contracts to purchase or sell foreign currencies. A forward foreign
currency exchange contract involves an obligation to purchase or sell a
specified currency at a future date (which may be any fixed number of days
from the date the contract is entered into by the parties) at the price set
at the time of the contract. These contracts are traded directly between
currency traders (usually large commercial banks) and their customers.
The Fund may use such forward contracts only under two circumstances:
first, if the Advisor believes that the Fund should fix the U.S. dollar price
of the foreign security when the Fund enters into a contract for the purchase
or sale, at a future date, of a security denominated in a foreign currency;
and second, if the Advisor believes that the Fund should hedge against risk
of loss in the value of its portfolio securities denominated in foreign
currencies, the Fund may enter into a forward contract to purchase or sell an
amount of the foreign currency approximating the value of some or all of the
Fund's portfolio securities denominated in such foreign currency.
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Investment Restrictions
The Fund's investment program is subject to a number of investment
restrictions which reflect self-imposed standards as well as federal and
state regulatory limitations. The investment restrictions recited below are
in addition to those described in the Fund's Prospectus, and are matters of
fundamental policy and may not be changed without the affirmative vote of a
majority of the outstanding Shares. Accordingly, the Fund will not:
1. Invest in real estate or mortgages on real estate;
2. Purchase or sell commodities or commodities contracts or futures
contracts;
3. 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;
4. Issue senior securities;
5. Make loans, except that the Fund may purchase or hold debt
instruments in accordance with its investment objectives and policies;
6. Effect short sales of securities;
7. Purchase securities on margin (but the Fund may obtain such short-
term credits as may be necessary for the clearance of transactions);
8. Purchase participations or other direct interests in oil, gas or
other mineral exploration or development programs; or
9. Invest more than 10% of the value of its net assets in illiquid
securities, including repurchase agreements with remaining maturities in
excess of seven days.
The following are investment restrictions that may be changed by a vote
of the majority of the Board of Directors. The Fund will not:
1. Purchase any securities of unseasoned issuers which have been in
operation directly or through predecessors for less than three years;
2. Invest in shares of any other investment company registered under
the Investment Company Act, other than in connection with a merger,
consolidation, reorganization or acquisition of assets;
3. Purchase or retain the securities of any issuer if to the knowledge
of the Fund any officer or Director of the Fund or its investment advisor
owns beneficially more than .5% of the outstanding securities of such issuer
and together they own beneficially more than 5% of the securities of such
issuer;
4. Invest in companies for the purpose of exercising management or
control;
5. Purchase or sell puts or calls or any combination thereof;
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6. Invest in real estate limited partnerships or oil, gas or mineral
leases; or
7. Purchase warrants.
The percentage limitations contained in these restrictions apply at the
time of purchase of securities.
3. VALUATION OF SHARES AND REDEMPTION
Valuation of Shares
The net asset value per Share is determined once daily as of 4:00 p.m.
(Eastern Time) each day on which the New York Stock Exchange is open for
business ("Business Day"). The New York Stock Exchange is open for business
on all weekdays except for the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Net asset value per Share of a class is calculated by valuing all assets
held by the Fund, deducting liabilities attributable to all Shares and any
liabilities attributable to the specific class, and dividing the resulting
amount by the number of then outstanding Shares of the class. For this
purpose, portfolio securities will be given their market value where
feasible. Portfolio securities that are actively traded in the over-the-
counter market, including listed securities for which the primary market is
believed by the Advisor to be over-the-counter, are valued at the quoted bid
prices provided by principal market makers. If a portfolio security is
traded primarily on a national exchange on the valuation date, the last
quoted sale price will generally be used. Securities or other assets for
which market quotations are not readily available are valued at their fair
market value as determined in good faith under procedures established from
time to time and monitored by the Fund's Board of Directors. Such procedures
may include (i) the use of an independent pricing service which uses prices
based upon yields or prices of securities of comparable quality, coupon,
maturity and type, (ii) indications as to values from dealers, (iii) and
general market conditions. Debt obligations with maturities of 60 days or
less will be valued at amortized cost, which constitutes fair value as
determined by the Fund's Board of Directors.
Redemption
The Fund may suspend the right of redemption or postpone the date of
payment during any period when (a) trading on the New York Stock Exchange is
restricted by applicable rules and regulations of the SEC; (b) the New York
Stock Exchange is closed for other than customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension; or (d) an
emergency exists as determined by the SEC so that valuation of the net assets
of the Fund is not reasonably practicable.
Under normal circumstances, the Fund will redeem Flag Investors Shares
by check and Institutional Shares by wire transfer of funds, as described in
the Prospectus relating to each class of Shares. However, if the Board of
Directors determines that it would be in the best interests of the remaining
shareholders to make payment of the redemption price in whole or in part by a
distribution in kind of securities from the portfolio of the Fund in lieu of
cash, in conformity with applicable rules of the SEC, the Fund will make such
distributions in kind. If Shares are redeemed in kind, the redeeming
shareholder will incur brokerage costs in later converting the assets into
cash. The method of valuing portfolio securities is described under
"Valuation of Shares" and such valuation will be made as of the same time the
redemption price is determined. The Fund has elected to be governed by Rule
18f-1 under the Investment Company Act pursuant to which the Fund is
obligated to redeem Shares solely in cash up to the lesser of $250,000 or 1%
of the net asset value of the Fund during any 90-day period for any one
shareholder.
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4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a summary of certain additional tax considerations
generally affecting the Fund and its shareholders that are not described in
the Fund's Prospectus. No attempt is made to present a detailed explanation
of the tax treatment of the Fund or its shareholders, and the discussion here
and in the Fund's Prospectus is not intended as a substitute for careful tax
planning.
The following general discussion of 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 Prospectus.
New legislation as well as administrative changes or court decisions, may
significantly change the conclusions expressed herein, and may have a
retroactive effect with respect to the transactions contemplated herein.
The Fund intends to continue to qualify as a regulated investment
company ("RIC") under Subchapter M of the Code. However, to qualify as a RIC
for any taxable year, the Fund must (1) derive at least 90% of its gross
income from dividends, interest, certain payments with respect to securities
loans and gains from the sale or other disposition of stock, securities or
foreign currencies and other income (including, but not limited to gains from
options, futures or forward contracts) derived with respect to its business
of investing in such stock, securities or currencies (the "Income
Requirement") and (2) derive less than 30% of its gross income (exclusive of
certain gains from designated hedging transactions that are offset by
unrealized losses on offsetting positions) from gains on the sale or other
disposition of any of the following investments if such investments are held
for less than three months (the "Short-Short Gain Test"): (a) stock or
securities (as defined in Section 2(a)(36) of the Investment Company Act);
(b) options, futures or forward contracts (other than options, futures, or
forward contracts on foreign currencies), and (c) foreign currencies (or
options, futures, or forward contracts on foreign currencies) but only if
such currencies (or options, futures, or forward contracts on foreign
currencies) are not directly related to the regulated investment company's
principal business of investing in stock or securities (or options and
futures with respect to stocks or securities). The Short-Short Gain Test
will not prevent the Fund from disposing of investments at a loss, since the
recognition of a loss before the expiration of the three-month holding period
is disregarded.
In addition, at the close of each quarter of the Fund's taxable year, at
least 50% of the value of its assets must consist of cash and cash items,
U.S. government securities, securities of other RICs, and securities of other
issuers (as to which the Fund has not invested more than 5% of the value of
its total assets in securities of such issuer and as to which the Fund does
not hold more than 10% of the outstanding voting securities of such issuer),
and no more than 25% of the value of its total assets may be invested in the
securities of any one issuer (other than U.S. government securities and
securities of other regulated investment companies), or in two or more
issuers which the Fund controls and which are engaged in the same, similar or
related trades or businesses (the "Asset Diversification Test"). Generally,
the Fund will not lose its status as a RIC if it fails to meet the Asset
Diversification Test solely as a result of a fluctuation in value of
portfolio assets not attributable to a purchase.
Under Subchapter M, the Fund is exempt from federal income tax on its
net investment income and net capital gains which it distributes to
shareholders, provided generally that it distributes at least 90% of its
investment company taxable income (net investment income and the excess of
net short term capital gains over net long term capital loss) for the year
(the "Distribution Requirement") and complies with the other requirements of
the Code described above. The Distribution Requirement for any year may be
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waived if a regulated investment company establishes to the satisfaction of
the Internal Revenue Service that it is unable to satisfy the Distribution
Requirement by reason of distributions previously made for the purpose of
avoiding liability for federal excise tax (discussed below). Distributions of
investment company taxable income will generally be taxable to shareholders
as ordinary income, regardless of whether such distributions are paid in cash
or are reinvested in Shares.
For purposes of the Distribution Requirement (as well as for other
purposes), the Fund will be required to treat as interest income any
recognized market discount on debt obligations which it holds. Generally,
market discount is the amount by which the stated redemption price of a bond
exceeds the amount paid by a purchaser of the bond (most common where the
value of a bond decreases after original issue as a result of a decline in
the creditworthiness of the issuer or an increase in prevailing interest
rates). Generally, upon the disposition of a bond bearing market discount or
receipt of any principal payment with respect to such a bond, market discount
is recognized by treating a portion of the proceeds as interest income. The
application of these rules (and the rules regarding original issue discount)
to debt obligations held by the Fund could affect (i) the amount and timing
of distributions to shareholders and (ii) the ability of the Fund to satisfy
the Distribution Requirement.
The Fund may either retain or distribute to shareholders its excess of
net long-term capital gains over net short-term capital losses ("net capital
gain"). If such gains are distributed as capital gains, they are taxable to
shareholders as long-term capital gains, regardless of the length of time the
shareholder has held the Shares. Conversely, if the Fund elects to retain
its net capital gains, it will be taxed thereon at the applicable corporate
capital gains tax rate. In this event, it is expected that the Fund also
will elect to have shareholders treated as having received a distribution of
such gains, with the result that they will be required to report such gains
on their returns as long-term capital gains, will receive a tax credit for
their allocable share of capital gains tax paid by the Fund on the gains, and
will increase the tax basis for their Shares by an amount equal to 65 percent
of the deemed distribution.
Generally, gains or losses on the sale or exchange of a Share will be
capital gains or losses which will be long-term if the Share is held for more
than one year. 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 which have been included in determining such
investor'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). Investors should particularly
note that this loss disallowance rule will apply to Shares received through
the reinvestment of dividends during the 61-day period.
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 purchasing just prior to an
ordinary income dividend or capital gains distribution will be taxable on the
entire amount of the dividend received, even though the net asset value per
Share on the date of such purchase reflected the amount of such distribution.
If for any taxable year, the Fund does not qualify as a RIC, all of its
taxable income will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will
generally be taxable as ordinary dividends to the extent of the Fund's
current and accumulated earnings and profits. However, in the case of
corporate shareholders, such distributions will generally be eligible for the
70% dividends received deduction for "qualifying dividends."
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The Fund will be required in certain cases to withhold and remit tax to the
United States Treasury on distributions payable to any shareholder who
(1) has provided the Fund either an incorrect tax identification number or no
number at all, (2) who is subject to backup withholding by the Internal
Revenue Service for failure to properly report payments of interest or
dividends, or (3) who has failed to certify to the Fund that such shareholder
is not subject to backup withholding.
The Fund will provide a statement annually to shareholders as to the
federal tax status of distributions paid (or deemed to be paid) by the Fund
during the year.
The Code imposes a nondeductible 4% federal excise tax on RICs that do
not distribute in each calendar year an amount equal to 98% of their ordinary
income for the calendar year plus 98% of their capital gains 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 such calendar year.
The balance of such income must be distributed during the next calendar year.
For the foregoing purposes, an investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable
year ending in such calendar year.
The Fund intends to make sufficient distributions of its ordinary income
and capital gains net income prior to the end of each calendar year to avoid
liability for excise tax. However, investors should note that the Fund may
in certain circumstances be required to liquidate portfolio investments in
order to make sufficient distributions to avoid excise tax liability, and, in
addition, that the liquidation of such investments in such circumstances may
affect the ability of the Fund to satisfy the Short-Short Gain Test.
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 advisers as to the consequences of these and other state
and local tax rules affecting an investment in the Fund and also as to the
application of the rules set forth above to a shareholder's particular
circumstances.
5. MANAGEMENT OF THE FUND
Directors and Officers
The Directors and executive officers of the Fund, their respective ages 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 135 East Baltimore Street, Baltimore, Maryland 21202.
*RICHARD T. HALE, Chairman and Director (50)
Managing Director, Alex. Brown & Sons Incorporated; Chartered
Financial Analyst.
*W. JAMES PRICE, Director (71)
6885 North Ocean Boulevard, Apartment #306, Ocean Ridge, Florida
33435-3343. Director, Boca Research, Inc. (computer peripherals).
Formerly, Managing Director, Alex. Brown & Sons Incorporated;
Director, CSX Corporation (transportation and natural resources
company), and PHH Corporation (business services).
JAMES J. CUNNANE, Director (57)
CBC Capital, 264 Carlyle Lake Drive, St. Louis, Missouri 63141.
Managing Director, CBC Capital (merchant banking), 1993 - Present;
Formerly, Senior Vice President and Chief Financial Officer, General
Dynamics Corporation (defense), 1989-1993 and Director, The Arch
Fund (mutual fund).
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* Messrs. Hale and Price are Directors who are "interested persons", as
defined in the Investment Company Act.
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N. BRUCE HANNAY, Director (74)
201 Condon Lane, Port Ludlow, Washington 98365. Director, Plenum
Publishing Corp; Formerly, Director, Rohm & Haas Company
(diversified chemicals) and General Signal Corp. (control equipment
& systems) and Consultant, SRI International (nonprofit consulting
organization).
JOHN F. KROEGER, Director (71)
P.O. Box 464, 24875 Swan Road-Martingham, St. Michaels, Maryland
21663. Director/Trustee, AIM Funds; Formerly, Consultant, Wendell &
Stockel Associates, Inc. (consulting firm) and General Manager,
Shell Oil Company.
LOUIS E. LEVY, Director (62)
26 Farmstead Road, Short Hills, New Jersey 07078. Director,
Kimberly-Clark Corporation (personal consumer products) and
Household International (finance and banking); Chairman of the
Quality Control Inquiry Committee, American Institute of Certified
Public Accountants; Formerly, Trustee, Merrill Lynch Funds for
Institutions, 1991-1993; Adjunct Professor, Columbia University-
Graduate School of Business, 1991-1992; Partner, KPMG Peat Marwick,
retired 1990.
EUGENE J. MCDONALD, Director (63)
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 healthcare).
HARRY WOOLF, Director (72)
Institute for Advanced Study, South Olden Lane, Princeton, New
Jersey 08540. Professor-at-Large Emeritus, Institute for Advanced
Study; Director, Merrill Lynch Cluster C Funds (registered
investment companies), ATL and Spacelabs Medical Corp. (medical
equipment) and Family Health International (nonprofit research and
education); Trustee, Reed College (education); Formerly, Trustee,
Rockefeller Foundation.
M. ELLIOTT RANDOLPH, President (53)
Principal, Alex. Brown & Sons Incorporated, 1991 - Present;
Principal, Monument Capital Management, Inc., 1988-1991; Senior Vice
President and Chief Investment Officer, First National Bank of
Maryland, 1976-1988.
PAUL D. CORBIN, Executive Vice President (43)
Principal, Alex. Brown & Sons Incorporated, 1991 - Present; Senior
Vice President, First National Bank of Maryland, 1985-1991.
EDWARD J. VEILLEUX, Vice President (52)
Principal, Alex. Brown & Sons Incorporated; President, Investment
Company Capital Corp., (registered investment advisor); Vice
President, Armata Financial Corp. (registered broker-dealer).
GARY V. FEARNOW, Vice President (50)
Managing Director, Alex. Brown & Sons Incorporated and Manager,
Special Products Department, Alex. Brown & Sons Incorporated.
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BRIAN C. NELSON, Vice President and Secretary (36)
Vice President, Alex. Brown & Sons Incorporated, Investment Company
Capital Corp. (registered investment advisor) and Armata Financial
Corp. (registered broker-dealer).
MONICA M. HAUSNER, Vice President (34)
Vice President, Fixed Income Management Department, Alex. Brown & Sons
Incorporated, March 1992-Present; Formerly, Assistant Vice President,
First National Bank of Maryland, 1984-1992.
DIANA M. ELLIS, Treasurer (44)
Manager, Portfolio Accounting Department, Investment Company Capital
Corp. (registered investment advisor); Mutual Fund Accounting
Department, Alex. Brown & Sons Incorporated, 1991-Present; Formerly,
Accounting Manager, Downtown Press Inc. (printer), 1987-1991.
LAURIE D. DePRINE, Assistant Secretary (29)
Asset Management Department, Alex. Brown & Sons Incorporated,
1991-Present; Prior thereto, Student 1989-1991.
Directors and officers of the Fund are also directors and officers of
some or all of the other investment companies managed, administered, advised
or distributed by Alex. Brown or its affiliates. There are currently 12
funds in the Flag Investors/ISI Funds and Alex. Brown Cash Reserve Fund, Inc.
fund complex (the "Fund Complex"). Mr. Price serves as a Director of seven
funds in the Fund Complex. Mr. Hale serves as President and Director of one
fund, Vice President of one fund and Director of 10 other funds in the Fund
Complex. Messrs. Cunnane, Hannay, Kroeger, Levy, McDonald and Woolf serve as
Directors of each fund in the Fund Complex. Mr. Veilleux serves as Executive
Vice President of one fund and as Vice President of each of the other funds
in the Fund Complex. Mr. Nelson serves as Vice President and Secretary, Ms.
Ellis serves as Treasurer and Ms. DePrine serves as Assistant Secretary,
respectively, of each fund in the Fund Complex. Mr. Randolph serves as
President of two funds and Vice President of one fund in the Fund Complex.
Mr. Corbin serves as Vice President of three funds and Mr. Fearnow serves as
Vice President of 10 funds in the Fund Complex. Ms. Hausner serves as Vice
President of three funds in the Fund complex.
Some of the Directors of the Fund are customers of, and have had normal
brokerage transactions with, Alex. Brown 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.
Officers of the Fund receive no direct remuneration in such capacity
from the Fund. Officers and Directors of the Fund who are officers or
directors of Alex. Brown may be considered to have received remuneration
indirectly. As compensation for his services as Director, each Director who
is not an "interested person" of the Fund (as defined in the Investment
Company Act) (a "Non-Interested Director") receives an aggregate annual fee
(plus reimbursement for reasonable out-of-pocket expenses incurred in
connection with his attendance at Board and committee meetings) from all Flag
Investors/ISI Funds and Alex. Brown Cash Reserve Fund, Inc. for which he
serves. Payment of such fees and expenses are allocated among all such funds
described above in direct proportion to their relative net assets. For the
fiscal year ended December 31, 1994, Non-Interested Directors' fees
attributable to the assets of the Fund totalled approximately $5,001.
-11-
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COMPENSATION TABLE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Name of Person, Position Aggregate Compensation Total Compensation
From the Fund in the From the Fund
Fiscal Year Ended and Fund Complex
December 31, 1994 Paid to Directors
in the Fiscal Year
Ended December 31, 1994
- --------------------------------------------------------------------------------------
<S> <C> <C>
*Richard T. Hale, Director $0 $0
*W. James Price, Chairman $0 $0
**James J. Cunnane, Director $0** $0
N. Bruce Hannay, Director $5,037 $39,000 for service on 11
Boards(1) in the Fund Complex
John F. Kroeger, Director $5,541 $42,000 for service on 11
Boards(1) in the Fund Complex
***Louis E. Levy, Director $1,307*** $9,750 for service on 11
Boards(1) in the Fund Complex ***
Eugene J. McDonald, Director $5,037 $39,000 for service on 11
Boards(1) in the Fund Complex
Harry Woolf, Director $5,037 $39,000 for service on 11
Boards(1) in the Fund Complex
</TABLE>
- ---------
* A Director who is an "interested person" as defined in the Investment
Company Act.
** Elected to the Board on December 14, 1994.
*** Elected to the Board on June 17, 1994.
(1) Two other funds in the Fund Complex commenced operations after December
31, 1994. In addition, one fund ceased operations on May 17, 1995.
The Fund Complex has adopted a Retirement Plan (the "Retirement
Plan") for Directors who are not employees of the Fund, the Fund's Advisor or
their respective affiliates (the "Participants"). After completion of five
years of service, each Participant will be entitled to receive an annual
retirement benefit equal to a percentage of the fee earned by him in his last
year of service. Upon retirement, each Participant will receive annually 10%
of such fee for each year that he served after completion of the first five
years, up to a maximum annual benefit of 50% of the fee earned by him in his
last year of service. The fee will be paid quarterly, for life, by each Fund
for which he serves. The Retirement Plan is unfunded and unvested. Messrs.
Hannay, Kroeger and Woolf have qualified but have not received benefits, and
no such benefits are being accrued for them since they have not yet retired.
The Fund has one Participant, a Director who retired effective December 31,
1994, who has qualified for the Retirement Plan and who will be paid a
quarterly fee of $4,875 by the Fund Complex for the rest of his life. Such
fee is allocated to each fund in the Fund Complex based upon the relative net
assets of such fund to the Fund Complex.
Beginning in December, 1994, any Director who receives fees from the
Fund is permitted to defer a minimum of 50%, or up to all, of his annual
compensation pursuant to a Deferred Compensation Plan.
Code of Ethics
The Board of Directors of the Fund has adopted a Code of Ethics
pursuant to Rule 17j-1 under the Investment Company Act. The Code of Ethics
significantly restricts the personal investing activities of all employees of
ICC and the directors and officers of Alex. Brown. As described below, the
Code of Ethics imposes additional, more onerous, restrictions on the Fund's
investment personnel, including the portfolio managers and employees who
execute or help execute a portfolio manager's decisions or who obtain
contemporaneous information regarding the purchase or sale of a security by
the Fund.
-12-
<PAGE>
The Code of Ethics requires that all employees of ICC, any director
or officer of Alex. Brown, and all Non-Interested Directors, preclear any
personal securities investments (with limited exceptions, such as non-
volitional purchases or purchases which are part of an automatic dividend
reinvestment plan). The preclearance requirement and associated procedures
are designed to identify any substantive prohibition or limitation applicable
to the proposed investment. The substantive restrictions applicable to
investment personnel include a ban on acquiring any securities in an initial
public offering, a prohibition from profiting on short-term trading in
securities and preclearance of the acquisition of securities in private
placements. Furthermore, the Code of Ethics provides for trading "blackout
periods" that prohibit trading by investment personnel and certain other
employees within periods of trading by the Fund in the same security.
6. INVESTMENT ADVISORY AND OTHER SERVICES
On May 9, 1991, the sole shareholder of the Fund approved an Investment
Advisory Agreement between the Fund and ICC. ICC is a wholly-owned subsidiary of
Alex. Brown, the Fund's distributor. ICC is also the investment advisor to Flag
Investors Telephone Income Fund, Inc., Flag Investors Value Builder Fund, Inc.
and Flag Investors Equity Partners Fund, Inc., Alex. Brown Cash Reserve Fund,
Inc., Flag Investors International Fund, Inc., Flag Investors Emerging Growth
Fund, Inc., Flag Investors Maryland Intermediate Tax Free Income Fund, Inc. and
Flag Investors Real Estate Securities Fund, Inc. which are also distributed by
Alex. Brown.
Under the Investment Advisory Agreement, ICC obtains and evaluates
economic, statistical and financial information to formulate and implement
investment policies for the Fund. Any investment program undertaken by ICC
will at all times be subject to policies and control of the Fund's Board of
Directors. ICC will provide the Fund with office space for managing its
affairs, with the services of required executive personnel and with certain
clerical and bookkeeping services and facilities. These services are
provided by ICC without reimbursement by the Fund for any costs. ICC shall
not be liable to the Fund or its shareholders for any act or omission by ICC
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. As compensation for its services, ICC receives an annual fee from the
Fund, payable monthly, at the annual rate of .35% of the first $1 billion of
the Fund's average daily net assets, .30% of the Fund's average daily net
assets in excess of $1 billion but not exceeding $1.5 billion and .25% of the
Fund's average daily net assets exceeding $1.5 billion. ICC has voluntarily
agreed to reduce its annual fee, if necessary, or to make payments to the
Fund to the extent required so that the Fund's annual expenses do not exceed
.70% of the Flag Investors Shares' average daily net assets and .45% of the
Institutional Shares' average daily net assets. As compensation for investment
advisory services for the fiscal years ended December 31, 1994, December 31,
1993 and December 31, 1992, ICC received fees of $357,585, $332,862 and
$297,903 and from such amounts waived fees of $141,214, $145,696 and
$147,150, respectively. Absent such waivers for the fiscal years ended
December 31, 1994, December 31, 1993 and December 31, 1992, the Fund's Total
Operating Expenses would have been .84%, .85% and .87%, respectively, of its
average net assets. The services of ICC to the Fund are not exclusive and
ICC is free to render similar services to others.
ICC has also agreed to reduce its aggregate fees on a monthly basis for
any fiscal year to the extent required so that the amount of the ordinary
expenses of the Fund (excluding brokerage commissions, interest, taxes and
extraordinary expenses such as legal claims, liabilities, litigation costs
and indemnification related thereto) paid or incurred by the Fund for such
fiscal year does not exceed the expense limitations applicable to the Fund
imposed by the securities laws or regulations of the states in which the
Shares are registered or qualified for sale, as such limitations may be
raised or lowered from time to time. Currently, the most restrictive of such
expense limitations requires the Advisor to reduce its fees to the extent
required so that ordinary expenses of the Fund (excluding brokerage
-13-
<PAGE>
commissions, interest, taxes and extraordinary expenses such as legal claims,
liabilities, litigation costs and indemnification related thereto) do not
exceed 2.5% of the first $30 million of the Fund's average daily net assets,
2.0% of the next $70 million of the Fund's average daily net assets and 1.5%
of the Fund's average daily net assets in excess of $100 million. In
addition, if required to do so by any applicable state securities laws or
regulations, ICC will reimburse the Fund to the extent required to prevent
the expense limitations of any state law or regulation from being exceeded.
No such reimbursements were required in the fiscal year ended December 31,
1994.
The Investment Advisory Agreement will continue in effect from year to
year thereafter if such continuance is specifically approved at least
annually by the Fund's Board of Directors, including a majority of the Non-
Interested Directors who have no direct or indirect financial interest in
such agreement, by votes cast 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 Investment Advisory Agreement was approved in the
foregoing manner by the Fund's Board of Directors most recently on September
22, 1994 and by a majority of the outstanding Shares on July 31, 1992. The
Fund or ICC may terminate the Investment Advisory Agreement on sixty days'
written notice without penalty. The Investment Advisory Agreement will
terminate automatically in the event of assignment (as defined in the
Investment Company Act).
In addition to its services as investment advisor, ICC also provides
accounting services to the Fund and serves as the Fund's transfer and
dividend disbursing agent. (See "Custodian, Transfer Agent, Accounting
Services.")
7. DISTRIBUTION OF FUND SHARES
Alex. Brown serves as the distributor of the Fund's Shares pursuant to
two separate Distribution Agreements, one for the Flag Investors Shares (the
"Flag Investors Distribution Agreement") and one for the Institutional Shares
(the "Institutional Distribution Agreement") (collectively, the "Distribution
Agreements").
The Flag Investors Shares
The Flag Investors Distribution Agreement provides that Alex. Brown has
the exclusive right to distribute Flag Investors Shares either directly or
through other broker-dealers. The Distribution Agreement further provides
that Alex. Brown will: (a) solicit and receive orders for the purchase of
Flag Investors Shares; (b) accept or reject such orders on behalf of the Fund
in accordance with the Fund's currently effective Prospectus and transmit
such orders as are accepted to the Fund's transfer agent as promptly as
possible; (c) receive requests for redemptions and transmit such redemption
requests to the Fund's transfer agent as promptly as possible; and (d)
respond to inquiries from shareholders concerning the status of their
accounts and the operations of the Fund. Alex. Brown has not undertaken to
sell any specific number of Flag Investors Shares. The Flag Investors Shares
Distribution Agreement further provides that, in connection with the
distribution of Shares, Alex. Brown will be responsible for all of the
promotional expenses. The services provided by Alex. Brown to the Fund are
not exclusive, and Alex. Brown is free to provide similar services to others.
Alex. Brown shall not be liable to the Fund or its shareholders for any act
or omission by Alex. Brown or any losses sustained by the Fund or its
shareholders except in the case of willful misfeasance, bad faith, gross
negligence or reckless disregard of duty.
Alex. Brown and certain broker-dealers ("Participating Dealers") have
entered into Sub-Distribution Agreements under which such broker-dealers have
agreed to process investor purchase and redemption orders and respond to
inquiries from shareholders concerning the status of their accounts and the
operations of the Fund.
-14-
<PAGE>
As compensation for providing distribution for the Flag Investors Shares as
described above, Alex. Brown receives an annual fee, paid monthly, equal to .25%
of the average daily net assets of the Flag Investors Shares. Alex. Brown
expects to allocate most of its annual fee to its investment representatives and
up to all of its fee to broker-dealers who enter into Sub-Distribution
Agreements with Alex. Brown. For the fiscal years ended December 31, 1994,
December 31, 1993 and December 31, 1992, Alex. Brown received fees of $255,418,
$237,758 and $212,788, respectively, and paid from such fees $239,042, $138,839
and $126,031, respectively, as compensation to its investment representatives
and $4,457, $2,596 and $1,192, respectively, as compensation to outside
broker-dealers. No compensation was paid to financial institutions in any fiscal
period.
Pursuant to Rule 12b-1 under the Investment Company 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
the Fund's Flag Investors Shares (the "Flag Investors Plan"). Under the Flag
Investors Plan, the Fund pays a fee to Alex. Brown for distribution and other
shareholder servicing assistance as set forth in the Flag Investors Distribution
Agreement, and Alex. Brown is authorized to make payments out of its fee to its
investment representatives and to participating broker-dealers. The Flag
Investors Distribution Agreement, including the Flag Investors Plan and a form
of Sub-Distribution Agreement, was approved by the sole shareholder of the Fund
on May 9, 1991, by a majority of the outstanding Shares of the Fund on July 31,
1992, and most recently by the Fund's Board of Directors, including a majority
of the Non-Interested Directors, on September 25, 1995. The Flag Investors
Distribution Agreement and the Flag Investors Plan encompassed therein will
remain in effect from year to year thereafter, if specifically approved at least
annually by the Fund's Board of Directors and by the affirmative vote of a
majority of the Non-Interested Directors by votes cast in person at a meeting
called for such purpose.
In approving the Flag Investors Plan, the Directors concluded, in the
exercise of reasonable business judgment, that there was a reasonable likelihood
that the Flag Investors Plan would benefit the Fund and its shareholders. The
Flag Investors Plan will be renewed only if the Directors make a similar
determination in each subsequent year. The Flag Investors Plan may not be
amended to increase materially the fee to be paid pursuant to the Flag Investors
Distribution Agreement without the approval of the shareholders of the Fund. The
Flag Investors Plan may be terminated at any time and the Flag Investors
Distribution Agreement may be terminated at any time upon sixty days' notice, in
either case without penalty, by the vote of a majority of the Fund's
Non-Interested Directors or by a vote of a majority of the outstanding Shares
(as defined under "Capital Stock"). Any Sub-Distribution Agreement may be
terminated in the same manner at any time. The Flag Investors Distribution
Agreement and any Sub-Distribution Agreement shall automatically terminate in
the event of assignment.
During the continuance of the Flag Investors Plan, the Fund's Board of
Directors will be provided for their review, at least quarterly, a written
report concerning the payments made under the Flag Investors Plan to Alex. Brown
pursuant to the Flag Investors Distribution Agreement and to broker-dealers
pursuant to Sub-Distribution Agreements. Such reports shall be made by the
persons authorized to make such payments. In addition, during the continuance of
the Flag Investors Plan, the selection and nomination of the Fund's
Non-Interested Directors shall be committed to the discretion of the
Non-Interested Directors then in office.
-15-
<PAGE>
In addition, with respect to the Flag Investors Shares, the Fund may enter
into Shareholder Servicing Agreements with certain financial institutions, such
as banks, to act as Shareholder Servicing Agents, pursuant to which Alex. Brown
will allocate a portion of its distribution fee as compensation for such
financial institutions' ongoing shareholder services. Although banking laws and
regulations prohibit banks from distributing shares of open-end investment
companies such as the Fund, according to interpretations by various bank
regulatory authorities, financial institutions are not prohibited from acting in
other capacities for investment companies, such as the shareholder servicing
capacities described above. Should future legislative, judicial or
administrative action prohibit or restrict the activities of the Shareholder
Servicing Agents in connection with the Shareholder Servicing Agreements, the
Fund may be required to alter materially or discontinue its arrangements with
the Shareholder Servicing Agents. Such financial institutions may impose
separate fees in connection with these services and investors should review the
Prospectus and this Statement of Additional Information in conjunction with any
such institution's fee schedule. In addition, state securities laws on this
issue may differ from the interpretations of federal law expressed herein, and
banks and financial institutions may be required to register as dealers pursuant
to state law.
Under the Flag Investors Plan, amounts allocated to Participating Dealers
and Shareholder Servicing Agents may not exceed amounts payable to Alex.
Brown under the Flag Investors Plan. Payments under the Flag Investors Plan
are made as described above regardless of Alex. Brown's actual cost of
providing distribution services and may be used to pay Alex. Brown's overhead
expenses. If the cost of providing distribution services to the Fund in
connection with the sale of the Flag Investors Shares is less than .25% of
the Fund's average daily net assets for any period, the unexpended portion of
the distribution fee may be retained by Alex. Brown. The Flag Investors Plan
does not provide for any charges to the Fund for excess amounts expended by
Alex. Brown and, if the Flag Investors Plan is terminated in accordance with
its terms, the obligation of the Fund to make payments to Alex. Brown
pursuant to the Flag Investors Plan will cease and the Fund will not be
required to make any payments past the date the related Flag Investors
Distribution Agreement terminates.
The Institutional Shares
The Institutional Distribution Agreement provides that Alex. Brown has the
exclusive right to distribute the Institutional Shares, either directly or
through Participating Dealers, and further provides that Alex. Brown will
solicit and receive orders for the purchase of Institutional Shares, accept or
reject such orders on behalf of the Fund in accordance with the Fund's currently
effective Prospectus for the Institutional Shares and transmit such orders as
are accepted to the Fund's transfer agent as promptly as possible, receive
requests for redemption and transmit such redemption requests to the Fund's
transfer agent as promptly as possible, respond to inquiries from the Fund's
shareholders concerning the status of their accounts with the Fund, maintain
such accounts, books and records as may be required by law or be deemed
appropriate by the Fund's Board of Directors, and take all actions deemed
necessary to carry into effect the distribution of the Institutional Shares.
Alex. Brown has not undertaken to sell any specific number of Institutional
Shares. The Institutional Distribution Agreement further provides that, in
connection with the distribution of Institutional Shares, Alex. Brown will be
responsible for all of the promotional expenses. The services provided by Alex.
Brown to the Fund are not exclusive, and Alex. Brown is free to provide similar
services to others. Alex. Brown shall not be liable to the Fund or its
shareholders for any act or omission by Alex. Brown or any losses sustained by
the Fund or its shareholders, except in the case of willful misfeasance, bad
faith, gross negligence or reckless disregard of duty.
Alex. Brown receives no compensation for distributing the Institutional
Shares.
-16-
<PAGE>
Alex. Brown and Participating Dealers have entered into Sub-Distribution
Agreements under which such Participating Dealers have agreed to process
investor purchase and redemption orders and respond to inquiries from
shareholders concerning the status of their accounts and the operations of the
Fund.
The Institutional Distribution Agreement was approved by the Fund's Board
of Directors on September 25, 1995 and by the sole shareholder of the class
on October 31, 1995. It has an initial term of two years and will remain in
effect from year to year thereafter, if specifically approved at least
annually by the Fund's Board of Directors and by the affirmative vote of a
majority of the Non-Interested Directors by votes cast at a meeting called
for such purpose. It may be terminated at any time upon sixty days'
written notice, without penalty, by the vote of a majority of the Fund's
Non-Interested Directors or by a vote of a majority of the outstanding
Institutional Shares (as defined under Capital Stock). The Institutional
Distribution Agreement and any Sub-Distribution Agreement shall automatically
terminate in the event of assignment.
General Information
The Fund will pay all costs associated with its organization and
registration under the Securities Act of 1933 and the Investment Company 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 registration of the Fund and its Shares
with the SEC and various states and other jurisdictions (including filing
fees, legal fees and disbursements of counsel); the costs and expenses of
printing, including typesetting and distributing prospectuses and statements
of additional information of the Fund and supplements thereto to the Fund's
shareholders; all expenses of shareholders' and Directors' meetings and of
preparing, printing and mailing proxy statements and reports to shareholders;
fees and travel expenses of Directors and Director members of any advisory
board or committee; all expenses incident to the payment of any dividend,
distribution, withdrawal or redemption, whether in Shares or in cash; charges
and expenses of any outside service used for pricing of the Shares; fees and
expenses of legal counsel, including counsel to the Non-Interested Directors,
and of independent auditors, in connection with any matter relating to the
Fund; a portion of membership dues of industry associations; interest payable
on Fund borrowings; postage; insurance premiums on property or personnel
(including officers and Directors) of the Fund which inure to its benefit;
extraordinary expenses (including, but not limited to, legal claims and
liabilities and litigation costs and any indemnification related thereto);
and all other charges and costs of the Fund's operation unless otherwise
explicitly assumed by Alex. Brown or ICC.
The address of Alex. Brown is 135 East Baltimore Street, Baltimore,
Maryland 21202.
8. BROKERAGE
ICC is responsible for decisions to buy and sell securities for the Fund,
for the broker-dealer selection and for negotiation of commission rates.
Purchases and sales of securities on a securities exchange are effected
through broker-dealers who charge a commission for their services. ICC may
direct purchase and sale orders to any broker-dealer, including, to the
extent and in the manner permitted by applicable law, Alex. Brown.
In over-the-counter transactions, orders are placed directly with a
principal market maker and such purchases normally include a mark up over the
bid to the broker-dealer based on the spread between the bid and asked price
for the security. Purchases from underwriters of portfolio securities
-17-
<PAGE>
include a commission or concession paid by the issuer to the underwriter. On
occasion, certain money market instruments may be purchased directly from an
issuer without payment of a commission or concession. The Fund will not deal
with Alex. Brown in any transaction in which Alex. Brown acts as a principal;
that is, an order will not be placed with Alex. Brown if execution of the
trade involves Alex. Brown serving as a principal with respect to any part of
the Fund's order, nor will the Fund buy or sell over-the-counter securities
with Alex. Brown acting as market maker.
If Alex. Brown is participating in an underwriting or selling group, the
Fund may not buy portfolio securities from the group except in accordance
with rules of the SEC. The Fund believes that the limitation will not affect
its ability to carry out its present investment objective.
ICC's primary consideration in effecting securities transactions is to
obtain best price and execution of orders on an overall basis. As described
below, however, ICC may, in its discretion, effect brokerage transactions
with broker-dealers that furnish statistical, research or other information
or services which are deemed by ICC to be beneficial to the Fund's investment
program. Certain research services furnished by broker-dealers may be useful
to ICC with clients other than the Fund. Similarly, any research services
received by ICC through placement of portfolio transactions of other clients
may be of value to ICC in fulfilling its obligations to the Fund. No
specific value can be determined for research and statistical services
furnished without cost to ICC by a broker-dealer. ICC 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
ICC's research and analysis. Therefore, it may tend to benefit the Fund by
improving ICC's investment advice. ICC'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 ICC's opinion, this policy
furthers the overall objective of obtaining best price and execution.
Subject to periodic review by the Fund's Board of Directors, ICC is also
authorized to pay broker-dealers other than Alex. Brown higher commissions on
brokerage transactions for the Fund in order to secure research and
investment services described above. The allocation of orders among broker-
dealers and the commission rates paid by the Fund will be reviewed
periodically by the Board of Directors. For the fiscal years ended December
31, 1994, December 31, 1993 and December 31, 1992, ICC directed no brokerage
transactions to broker-dealers and paid no related commissions because of
research services provided to the Fund.
Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions, on an agency basis,
through Alex. Brown. At the time of such authorization certain policies and
procedures incorporating the standards of Rule 17e-1 under the Investment
Company Act which requires that the commissions paid Alex. Brown must be
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities during a comparable period of
time." Rule 17e-1 also contains requirements for the review of such
transactions by the Board of Directors and requires ICC to furnish reports
and to maintain records in connection with such reviews. The Distribution
Agreements between Alex. Brown and the Fund do not provide for any reduction
in the distribution fee to be received by Alex. Brown from the Fund as a
result of profits resulting from brokerage commissions on transactions of the
Fund effected through Alex. Brown. For the fiscal years ended December 31,
1994, December 31, 1993 and December 31, 1992, the Fund paid no brokerage
commissions to Alex. Brown. The Fund is required to identify any securities
of its "regular brokers or dealers" (as such term is defined in the
Investment Company Act) which the Fund has acquired during its most recent
fiscal year. As of December 31, 1994, the Fund held a 5.50% repurchase
agreement issued by Goldman Sachs & Co. valued at $6,202,000. Goldman Sachs
& Co. is a "regular broker or dealer" of the Fund.
-18-
<PAGE>
ICC manages other investment accounts. It is possible that, at times,
identical securities will be acceptable for the Fund and one or more of such
other accounts; however, the position of each account in the securities of
the same issuer may vary and the length of time that each account may choose
to hold its investment in such securities may likewise vary. The timing and
amount of purchase by each account will also be determined by its cash
position. If the purchase or sale of securities consistent with the
investment policies of the Fund or one or more of these accounts is
considered at or about the same time, transactions in such securities will be
allocated among the accounts in a manner deemed equitable by ICC. ICC may
combine such transactions, in accordance with applicable laws and
regulations, in order to obtain the best net price and most favorable
execution. Such simultaneous transactions, however, could adversely affect
the ability of the Fund to obtain or dispose of the full amount of a security
which it seeks to purchase or sell.
9. CAPITAL STOCK
The Fund is authorized to issue fifty-five million Shares of common
stock, par value $.001 per share. The Board of Directors may increase or
decrease the number of authorized Shares without shareholder approval.
The Fund's Articles of Incorporation provide for the establishment of
separate series and separate classes of Shares by the Directors at any time
without shareholder approval. The Fund currently has one Series and the
Board has designated three classes of shares: Flag Investors Intermediate-
Term Income Fund Shares, Flag Investors Intermediate-Term Income Fund Class B
Shares, and Flag Investors Intermediate-Term Income Fund Institutional
Shares. The Institutional Shares are offered only to certain eligible
institutions and to clients of investment advisory affiliates of Alex. Brown.
The Class B Shares are not currently being offered. 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 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 would be identical to every other class in a
particular series and expenses of the Fund (other than 12b-1 and any applicable
service fees) would be prorated between all classes of a series based upon the
relative net assets of each class. Any matters affecting any class exclusively
will be voted on by the holders of such class.
Shareholders of the Fund do not have cumulative voting rights, and
therefore the holders of more than 50% of the outstanding Shares voting
together for election of Directors may elect all the members of the Board of
Directors of the Fund. In such event, the remaining holders cannot elect any
members of the Board of Directors of the Fund. There are no preemptive,
conversion or exchange rights applicable to any of the Shares. The issued
and outstanding Shares are fully paid and non-assessable. In the event of
liquidation or dissolution of the Fund, each Share is entitled to its portion
of the Fund's assets (or the assets allocated to a separate series of shares
if there is more than one series) after all debts and expenses have been
paid.
As used in this Statement of Additional Information the term "majority of
the outstanding Shares" means the vote of the lesser of (i) 67% or more of
the Shares present at a meeting, if the holders of more than 50% of the
outstanding Shares are present or represented by proxy, or (ii) more than 50%
of the outstanding Shares.
-19-
<PAGE>
10. SEMI-ANNUAL REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of
investments held in the Fund's portfolio and financial statements. The
annual financial statements are audited by the Fund's independent auditors.
11. CUSTODIAN, TRANSFER AGENT, ACCOUNTING SERVICES
PNC Bank, National Association ("PNC Bank"), with offices at Airport
Business Park, 200 Stevens Drive, Lester, Pennsylvania, 19113, has been
retained to act as custodian of the Fund's investments. PNC Bank receives
such compensation from the Fund for its services as custodian as may be
agreed to from time to time by PNC Bank and the Fund. Investment Company
Capital Corp., 135 East Baltimore Street, Baltimore, Maryland 21202, has
been retained to act as transfer and dividend disbursing agent. As
compensation for providing these services, the Fund pays ICC up to $15.00 per
account per year, plus reimbursement for out of pocket expenses incurred in
connection therewith. As compensation for providing transfer agent services to
the Fund for the period from March 1, 1994 through December 31, 1994, ICC
received fees of $17,670. Prior to March 1, 1994, PFPC provided these services.
ICC also provides certain accounting services to the Fund under a Master
Services Agreement effective January 1, 1994, between the Fund and ICC. As
compensation for these services, ICC is entitled to receive an annual fee,
calculated daily and paid monthly, as shown below.
Average Net Assets Incremental Fee
------------------ ---------------
$ 0 - $ 10,000,000 $15,000 (fixed fee)
$ 10,000,001 - $ 24,999,999 .080%
$ 25,000,000 - $ 50,000,000 .077%
$ 50,000,001 - $ 75,000,000 .050%
$ 75,000,001 - $ 99,999,999 .030%
$100,000,000 - $ 500,000,000 .020%
$500,000,001 - $1,000,000,000 .008%
over $1,000,000,000 .003%
In addition, the Fund will reimburse ICC for the following out of
pocket expenses incurred in connection with ICC's provision of accounting
services under the Master Services Agreement: express delivery service,
independent pricing and storage. For the fiscal year ended December 31, 1994,
ICC received accounting fees of $66,390.
ICC also serves as the Fund's investment advisor.
12. INDEPENDENT AUDITORS
The annual financial statements of the Fund are audited by Deloitte &
Touche LLP. Deloitte & Touche LLP has offices at 117 Campus Drive,
Princeton, New Jersey 08540.
-20-
<PAGE>
13. PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the Fund to
that of other open-end diversified management investment companies and to
stock or other relevant indices in advertisements or in certain reports to
shareholders, performance will generally be stated both in terms of total
return and in terms of yield. However, the Fund may also from time to time
state the performance of the Fund solely in terms of total return.
Total Return Calculations
The total return quotations, under the rules of the SEC, must be
calculated according to the following formula:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the end of the 1, 5, or 10 year periods
(or fractional portion thereof) of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods.
Under the foregoing formula, the time periods used in advertising will be
based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and
will cover one, five, and ten year periods or a shorter period dating from
the effectiveness of the Fund's registration statement (or the later
commencement of operations of a Series or class). During its first year of
operations, the Fund may, in lieu of annualizing its total return, use an
aggregate total return calculated in the same manner. In calculating the
ending redeemable value, the maximum sales load is deducted from the initial
$1,000 payment and all dividends and distributions by the Fund are assumed to
have been reinvested at net asset value as described in the Prospectuses on
the reinvestment dates during the period. "T" in the formula above is
calculated by finding the average annual compounded rate of return over the
period that would equate an assumed initial payment of $1,000 to the ending
redeemable value. Any sales loads that might in the future be made
applicable at the time to reinvestments would be included as would any
recurring account charges that might be imposed by the Fund. The
Institutional Shares are sold without a sales load.
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 to compare more accurately the Fund's performance with other
measures of investment return. For example, in comparing the Fund's total
return with data published by Lipper Analytical Services, Inc.,
CDA/Weisenberger or Morningstar Inc., or with the performance of Lehman
Brothers Government Corporate Bond Index, Lehman Brothers Government
Intermediate-Term Bond Index or Salomon Brothers Broad Investment Grade
Index, 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.
-21-
<PAGE>
For this alternative computation, the Fund assumes that the $10,000
invested in Shares is net of all sales charges (as distinguished from the
computation required by the SEC where the $1,000 payment is reduced by sales
charges before being invested in Shares). 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.
Calculated according to the SEC rules for the one-year period ended
December 31, 1994, the ending redeemable value of a hypothetical $1,000
payment for Flag Investors Shares was $952, resulting in a total return for
such Shares equal to -4.77%. For the period from effectiveness of the Fund's
registration statement on May 13, 1991 to the end of the Fund's most recent
fiscal year on December 31, 1994, the ending redeemable value of a
hypothetical $1,000 payment for Flag Investors Shares was $1,204 resulting in
an average annual total return for such Shares equal to 5.24%.
Calculated according to the alternative computation which assumes
no sales charges and reinvestment of all distributions, for the one-year
period ended December 31, 1994, the ending redeemable value of a hypothetical
$10,000 investment in Flag Investors Shares was $9,668, resulting in a total
return for such Shares equal to -3.3%. For the period from effectiveness of
the Fund's registration statement on May 13, 1991 to the end of the Fund's
most recent fiscal year on December 31, 1994, the ending redeemable value of
a hypothetical $10,000 investment in Flag Investors Shares was $12,225,
resulting in an average annual total return for such Shares equal to 5.7%.
The Institutional Shares were not offered prior to the date of this
Statement of Additional Information.
Yield Calculations
The Fund's yield for the 30 day period ended December 31, 1994 was
6.21% and was computed in the manner discussed below. The yield of the Fund
is calculated by dividing the net investment income per Share earned by the
Fund during a 30-day (or one month) period by the maximum offering price per
share on the last day of the period and annualizing the result on a
semi-annual basis by adding one to the quotient, raising the sum to the power
of six, subtracting one from the result and then doubling the difference.
The Fund's yield calculations assume a maximum sales charge of 1.50%. The
Fund's net investment income per Share earned during the period is based on
the average daily number of Shares outstanding during the period entitled to
receive dividends and includes dividends and interest earned during the
period minus expenses accrued for the period, net of reimbursements.
Except as noted below, for the purpose of determining net
investment income earned during the period, interest earned on debt
obligations held by the Fund is calculated by computing the yield to maturity
of each obligation based on the market value of the obligation (including
actual accrued interest) at the close of business on the last business day of
each month, or, with respect to obligations purchased during the month, based
on the purchase price (plus actual accrued interest), dividing the result by
360 and multiplying the quotient by the market value of the obligation
(including actual accrued interest) in order to determine the interest income
-22-
<PAGE>
on the obligation for each day of the subsequent month that the obligation is
held by the Fund. For purposes of this calculation, it is assumed that each
month contains 30 days. The maturity of an obligation with a call provision
is the next call date on which the obligation reasonably may be expected to
be called or, if none, the maturity date.
Undeclared earned income will be subtracted from the net asset
value per share. Undeclared earned income is net investment income which, at
the end of the base period, has not been declared as a dividend, but is
reasonably expected to be and is declared as a dividend shortly thereafter.
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 securities
and securities with maturities of one year or less) may vary from year to
year, as well as within a year, depending on market conditions. The Fund's
portfolio turnover rate for the fiscal years ended December 31, 1994 and
December 31, 1993 was 50% and 86%. A high level of portfolio turnover may
generate relatively high transaction costs and may increase the amount of
taxes payable by the Fund's shareholders.
14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of August 10, 1995, to Fund management's knowledge, the
following persons owned of record or beneficially 5% or more of the Fund's
outstanding Flag Investors Shares.
Name and Address % Ownership
---------------- -----------
Alex. Brown & Sons Incorporated 76.84%*
135 E. Baltimore Street
Baltimore, MD 21202
* As of such date Alex. Brown owned beneficially less than 1% of
such Shares.
Glicom A/B 13.93%
Attn Jorgen Nielsen
Nybrovej114
DK-2800
Lyngby Denmark
As of August 10, 1995, Directors and officers as a group owned less
than 1% of the Fund's total outstanding Shares.
The Institutional Shares were not offered prior to the date of this
Statement of Additional Information.
15. FINANCIAL STATEMENTS
(See next page.)
-23-
<PAGE>
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND, INC.
Statement of Net Assets December 31, 1994
<TABLE>
<CAPTION>
S&P PAR VALUE
SECURITY RATING** (000) (NOTE A)
<S> <C> <C> <C>
CORPORATE BONDS - 37.5%
BANC ONE CREDIT CARD MASTER TRUST
7.80%, 12/15/00....................................................... AAA $ 3,000 $ 2,968,200
BANC ONE COLUMBUS
7.375%, 12/1/02....................................................... AA- 1,000 941,250
BEAR STEARNS CO.
6.625%, 1/15/04....................................................... A 3,000 2,583,750
CNA FINANCIAL
6.25%, 11/15/03....................................................... A+ 3,750 3,168,750
COUNTRYWIDE FUNDING
8.25%, 7/15/02........................................................ A- 3,250 3,156,563
ELF AQUITAINE
7.75%, 5/1/99......................................................... AA 2,000 1,970,000
FUND AMERICA ENTERPRISE
7.75%, 2/1/03......................................................... A- 3,000 2,865,000
GUARANTEED EXPORT TRUST
8.187%, 12/15/04...................................................... AAA 1,191 1,184,837
INTERNATIONAL BUSINESS MACHINES CORP.
6.375%, 6/15/00....................................................... A 2,500 2,296,875
MORGAN STANLEY
5.65%, 6/15/97........................................................ A+ 2,500 2,359,375
PACIFIC GAS & ELECTRIC
6.25%, 3/1/04......................................................... A 2,000 1,727,500
SALOMON INC.
7.00%, 6/15/03........................................................ BBB+ 3,000 2,643,750
WAL-MART STORES
5.875%, 10/15/05...................................................... AA 2,000 1,647,500
TOTAL CORPORATE BONDS (Cost $32,216,843).................................. 29,513,350
U.S. GOVERNMENT AGENCY SECURITIES - 22.9%
FEDERAL HOME LOAN MORTGAGE CORP. - 12.0%
Multi-Class Mortgage Certificates
Series 1580-H, 6.50%, 9/15/08...................................... AAA 1,000 868,233
Series 21-Y8, 5.85%, 1/25/19....................................... AAA 4,000 3,452,523
Series 1163-I, 6.95%, 12/15/20..................................... AAA 600 546,951
Series 106-F, 8.50%, 12/15/20...................................... AAA 4,627 4,626,351
FEDERAL NATIONAL MORTGAGE ASSOC. - 5.3%
Multi-Class Mortgage Certificates
Series 88-18-B, 9.40%, 7/25/03..................................... AAA 303 306,843
Series 91-11-G, 7.00%, 11/25/19.................................... AAA 4,002 3,875,937
GOVERNMENT NATIONAL MORTGAGE ASSOC. - 5.6%
Multi-Class Mortgage Certificates
Pool #194615, 8.00%, 3/15/17....................................... NR* 169 161,661
Pool #204405, 8.00%, 4/15/17....................................... NR* 196 187,679
Pool #371200, 8.00%, 12/15/23...................................... NR* 2,021 1,936,003
Pool #371206, 8.00%, 12/15/23...................................... NR* 2,186 2,094,632
TOTAL U.S. GOVT. AGENCY SECURITIES (Cost $19,176,504)................... 18,056,813
</TABLE>
-24-
<PAGE>
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND, INC.
Statement of Net Assets December 31, 1994
(CONCLUDED)
<TABLE>
<CAPTION>
S&P PAR VALUE
SECURITY RATING** (000) (NOTE A)
<S> <C> <C> <C>
U.S. TREASURY SECURITIES - 18.1%
U.S. TREASURY NOTES
6.125%, 12/31/96...................................................... NR* $ 10,000 $ 9,731,599
4.75%, 9/30/98........................................................ NR* 5,000 4,506,650
TOTAL U.S. TREASURY SECURITIES (Cost $15,124,266)....................... 14,238,249
ASSET-BACKED SECURITIES - 10.7%
CAPITAL AUTO RECEIVABLES, 93-2-A3
4.20%, 11/15/95....................................................... AAA 929 923,907
PREMIER AUTO TRUST, 94-1-A3
4.75%, 2/2/00......................................................... AAA 1,000 942,800
DISCOVER CREDIT CARD, 93-A-A
6.25%, 8/16/00........................................................ AAA 3,000 2,844,300
CIT RV GRANTOR TRUST, 94-A
4.90%, 7/15/09........................................................ AAA 4,001 3,741,833
TOTAL ASSET-BACKED SECURITIES (Cost $8,978,269)......................... 8,452,840
FOREIGN GOVERNMENT SECURITIES - 2.0%
PROVINCE OF ONTARIO, CANADA
8.00%, 3/11/03
(Cost $1,917,298).................................................. AA- 2,500 1,620,250
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.1%
GOLDMAN SACHS TRUST SERIES 3
Remic, Series 3 E-4, 8.00%, 5/27/15
(Cost $94,112)..................................................... AAA 93 92,458
REPURCHASE AGREEMENT - 7.9%
GOLDMAN SACHS & CO., 5.50%
Dated 12/30/94, to be repurchased on 01/3/95, collateralized
by U.S. Treasury Strips with a market value of $6,326,055
(Cost $6,202,000)..................................................... NR* 6,202 6,202,000
TOTAL INVESTMENT IN SECURITIES - 99.2%
(Cost $83,709,292)***................................................... 78,175,960
OTHER ASSETS IN EXCESS OF LIABILITIES, NET - 0.8%......................... 613,039
NET ASSETS - 100.0%....................................................... $ 78,788,999
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($78,788,999 / 8,194,190 shares outstanding)............................ $9.62
MAXIMUM OFFERING PRICE PER SHARE
($9.62 / .985).......................................................... $9.77
</TABLE>
*Not rated.
**The Standard & Poor's rating indicated is believed to be the most recent
rating available as of December 31, 1994.
***Also aggregate cost for federal tax purposes.
See accompanying Notes to Financial Statements.
-25-
<PAGE>
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND, INC.
Statement of Operations For the Year Ended December 31, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME (NOTE A):
Interest....................................................................................... $ 6,407,237
EXPENSES:
Investment advisory fee (Note B)............................................................... 357,585
Distribution fee (Note B)...................................................................... 255,418
Accounting fee (Note B)........................................................................ 66,390
Transfer agent fees (Note B)................................................................... 29,001
Registration fees.............................................................................. 27,475
Custodian fee.................................................................................. 25,542
Legal.......................................................................................... 25,001
Audit.......................................................................................... 23,999
Printing and postage........................................................................... 18,500
Organizational expense (Note A)................................................................ 9,092
Miscellaneous.................................................................................. 8,501
Directors' fees................................................................................ 5,001
Insurance...................................................................................... 4,879
Total expenses.............................................................................. 856,384
Less: Fees waived (Note B)..................................................................... (141,214)
Net expenses................................................................................ 715,170
Net investment income..................................................................... 5,692,067
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized loss from security and foreign currency transactions.............................. (2,533,036)
Net unrealized depreciation of investments..................................................... (6,949,494)
Net unrealized depreciation on translation of assets and liabilities
denominated in foreign currency............................................................. (1,174)
Net loss on investments........................................................................ (9,483,704)
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS............................................. $(3,791,637)
</TABLE>
See accompanying Notes to Financial Statements.
-26-
<PAGE>
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND, INC.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
<S> <C> <C>
1994 1993
</TABLE>
<TABLE>
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income......................................... $ 5,692,067 $ 5,168,756
Net gain/(loss) from security and foreign currency
transactions................................................ (2,533,036) 1,361,763
Net unrealized appreciation/(depreciation) of investments and
foreign currency translation................................ (6,950,668) 1,053,512
Net increase/(decrease) in net assets resulting from
operations.................................................. (3,791,637) 7,584,031
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income, net of realized
currency loss............................................... (5,690,349) (5,168,756)
Net realized short-term gains................................. -- (1,142,562)
Net realized long-term gains.................................. -- (238,690)
Return of capital............................................. (324,493) --
Total distributions......................................... (6,014,842) (6,550,008)
CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of 1,793,782 and 5,694,092 shares,
respectively................................................ 18,470,875 60,993,963
Value of 404,005 and 440,330 shares issued in reinvestment of
dividends, respectively..................................... 4,067,306 4,707,023
Cost of 4,649,437 and 3,081,977 shares repurchased,
respectively................................................ (46,462,862) (32,920,585)
Increase/(decrease) in net assets derived from
capital share transactions.................................. (23,924,681) 32,780,401
Total increase/(decrease) in net assets....................... (33,731,160) 33,814,424
NET ASSETS:
Beginning of year............................................. 112,520,159 78,705,735
End of year................................................... $ 78,788,999 $112,520,159
</TABLE>
See accompanying Notes to Financial Statements.
-27-
<PAGE>
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND, INC.
Financial Highlights
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
FOR THE PERIOD
MAY 13, 1991*
YEAR ENDED DECEMBER 31, THROUGH
1994 1993 1992 DECEMBER 31, 1991
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period......... $10.57 $10.37 $10.54 $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.......................... 0.57 0.57 0.63 0.32
Net realized and unrealized gain/(loss) on
investments.................................. (0.92) 0.34 (0.05) 0.64
Total from Investment Operations............... (0.35) 0.91 0.58 0.96
LESS DISTRIBUTIONS:
Dividends from net investment income,
short-term gains and net realized currency
gain/(loss).................................. (0.57) (0.69) (0.75) (0.42)
Return of capital.............................. (0.03) -- -- --
Distributions from net realized long-term
gains........................................ -- (0.02) -- --
Total Distributions............................ (0.60) (0.71) (0.75) (0.42)
Net asset value at end of period............. $ 9.62 $10.57 $10.37 $10.54
TOTAL RETURN................................... (3.32)% 8.98% 5.68% 9.79%
RATIOS TO AVERAGE NET ASSETS:
Expenses(1).................................. 0.70% 0.70% 0.70% 0.70%**
Net investment income(2)..................... 5.57% 5.43% 6.01% 5.97%**
SUPPLEMENTAL DATA:
Net assets at end of period (000)............ $78,789 $112,520 $78,706 $64,327
Portfolio turnover rate...................... 50% 86% 107% 46%
</TABLE>
* Commencement of Operations.
** Annualized.
1 Without the waiver of advisory fees (Note B), the ratio of expenses to
average net assets would have been .84%, .85%, .87% and 1.73% (annualized)
for the years ended December 31, 1994, 1993 and 1992 and for the period ended
December 31, 1991, respectively.
2 Without the waiver of advisory fees (Note B), the ratio of net investment
income to average net assets would have been 5.43%, 5.28%, 5.83% and 4.94%
(annualized) for the years ended December 1994, 1993 and 1992 and for the
period ended December 31, 1991, respectively.
See accompanying Notes to Financial Statements.
-28-
<PAGE>
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND, INC.
Notes to Financial Statements
A. SIGNIFICANT ACCOUNTING POLICIES - Flag Investors Intermediate-Term Income
Fund, Inc. (the "Fund") is registered under the Investment Company Act of
1940 as an open-end, diversified management investment company designed to
provide a high level of current income consistent with preservation of
capital within an intermediate-term maturity structure. The Fund commenced
operations on May 13, 1991. The following is a summary of significant
accounting policies followed by the Fund.
SECURITY VALUATION - Debt securities are valued on the basis of quotations
provided by a pricing service which uses information with respect to
transactions on bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining value. Portfolio securities which are listed on a national
securities exchange are valued on the basis of their last sale price or, in
the absence of recorded sales, at the average of readily available closing
bid and asked prices. Securities or other assets for which market quotations
are not readily available are valued at their fair value so determined in
good faith by the investment advisor under procedures established and
monitored by the Board of Directors. Short-term obligations with maturities
of 60 days or less are valued at amortized cost which approximates market.
FEDERAL INCOME TAX - No provision is made for federal income taxes as it is
the Fund's intention to continue to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code and to make requisite
distributions to the shareholders which will be sufficient to relieve it from
all or substantially all federal income and excise taxes. The Fund's policy
is to distribute to shareholders substantially all of its taxable net
investment income on a monthly basis and net realized long-term capital gains
annually, if any.
OTHER - Security transactions are accounted for on the trade date and the
cost of investments sold or redeemed is determined by use of the specific
identification method for both financial reporting and income tax purposes.
Interest income is recorded on an accrual basis and includes amortization of
premiums and accretion of discounts.
Costs incurred by the Fund in connection with its organization, registration,
and the initial public offering of shares have been deferred and are being
amortized on the straight-line method over a five-year period beginning on
the date on which the Fund commenced its investment activities.
B. INVESTMENT ADVISORY FEES, TRANSACTIONS WITH AFFILIATES AND OTHER FEES -
Investment Company Capital Corp. ("ICC"), a subsidiary of Alex. Brown & Sons
Incorporated ("Alex. Brown"), serves as the Fund's investment advisor. As
compensation for its advisory services, ICC receives from the Fund an annual
fee, calculated daily and paid monthly, at an annual rate of .35% of the
first $1 billion of the Fund's average daily net assets, .30% of the Fund's
average daily net assets in excess of $1 billion but not exceeding $1.5
billion, and .25% of the Fund's average daily net assets in excess of $1.5
billion.
ICC has agreed to reduce its aggregate fees so that ordinary expenses of the
Fund for any fiscal year do not exceed 0.70% of the Fund's average daily net
assets. For the year ended December 31, 1994, ICC waived fees of $141,214.
As compensation for its transfer agent services, ICC receives from the Fund a
per account fee, calculated and paid monthly. ICC received $17,670 for
transfer agent services for the period March 1, 1994 through December 31,
1994. Prior to March 1, 1994, PFPC, Inc. provided these services.
-29-
<PAGE>
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND, INC.
Notes to Financial Statements
(CONCLUDED)
As compensation for its accounting services, ICC received from the Fund an
annual fee, calculated daily and paid monthly, from the Fund's average daily
net assets. ICC received $66,390 for accounting services for the year ended
December 31, 1994.
As compensation for providing distribution services, ICC receives from the
Fund an annual fee, calculated daily and paid monthly, at an annual rate
equal to 0.25% of the Fund's average daily net assets. For the year ended
December 31, 1994, distribution fees aggregated $255,418.
C. CAPITAL SHARE TRANSACTIONS - The Fund is authorized to issue up to 20 million
shares of capital stock, par value $.001 per share, all of which are
designated as common stock.
D. INVESTMENT TRANSACTIONS - Purchases and sales of investment securities, other
than short-term obligations, aggregated $44,557,648 and $56,545,316,
respectively, for the year ended December 31, 1994.
At December 31, 1994 aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $447 and
aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over value was $5,533,779.
E. NET ASSETS - At December 31, 1994, net assets consisted of:
<TABLE>
<S> <C>
Paid-in-capital......................... $86,750,887
Accumulated net realized loss from
security transactions................. (2,427,340)
Unrealized depreciation of
investments........................... (5,533,332)
Unrealized translation loss............. (1,216)
$78,788,999
</TABLE>
Independent Auditors' Report
The Board of Directors and Shareholders,
Flag Investors Intermediate-Term Income
Fund, Inc.:
We have audited the accompanying statement of net assets of Flag Investors
Intermediate-Term Income Fund, Inc. as of December 31, 1994, the related
statements of operations for the year then ended and changes in net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the years in the three-year period then ended and the
period May 13, 1991 (commencement of operations) to December 31, 1991. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1994 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
-30-
<PAGE>
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND, INC.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Flag Investors
Intermediate-Term Income Fund, Inc. as of December 31, 1994, the results of its
operations, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
January 27, 1995
-31-
<PAGE>
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND, INC.
Statement of Net Assets June 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
S&P PAR VALUE
SECURITY RATING** (000) (NOTE A)
<S> <C> <C> <C>
CORPORATE BONDS - 34.3%
BANC ONE CREDIT CARD MASTER TRUST
7.80%,12/15/00 .................................................................. AA- $3,000 $ 3,142,200
BANC ONE COLUMBUS
7.375%,12/1/02 .................................................................. AA- 1,000 1,048,750
BEAR STEARNS CO.
6.625%,1/15/04 .................................................................. A 3,000 2,902, 500
CNA FINANCIAL
6.25%, 11/15/03 ................................................................. A+ 3,750 3,478,125
COUNTRYWIDE FUNDING
8.25%, 7/15/02 .................................................................. A- 3,250 3,469,375
ELF AQUITAINE
7.75%, 5/1/99 ................................................................... AA 2,000 2,080,000
FUND AMERICA ENTERPRISE
7.75%, 2/1/03 ................................................................... A- 3,000 2,850,000
GUARANTEED EXPORT TRUST
8.187%, 12/15/04 ................................................................ AA 1,126 1,195,839
MORGAN STANLEY
5.65%, 6/15/97 .................................................................. A+ 2,500 2,471,875
PACIFIC GAS & ELECTRIC
6.25%, 3/1/04 ................................................................... A 2,000 1,940,000
TOTAL CORPORATE BONDS (Cost $24,721,788) ......................................... 24,578,664
U.S. GOVERNMENT AGENCY SECURITIES - 33.4%
FEDERAL HOME LOAN MORTGAGE CORP. - 15.9%
MULTI-CLASS MORTGAGE CERTIFICATES
Series 1580-H, 6.50%, 9/15/08 ................................................. AAA 1,000 964,510
Series 21-Y8, 5.85%, 1/25/19 .................................................. AAA 4,000 3,825,280
Series 1544-A, 5.00%, 6/15/19 ................................................. AAA 1,770 1,764,923
Series 1163-I, 6.95%, 12/15/20 ................................................ AAA 600 600,174
Series 106-F, 8.50%, 12/15/20 ................................................. AAA 4,123 4,212,592
FEDERAL NATIONAL MORTGAGE ASSOC. - 11.0%
MULTI-CLASS MORTGAGE CERTIFICATES
Series 88-18-B, 9.40%, 7/25/03 ................................................ AAA 274 286,232
Series 149-D, 12.00%, 4/25/19 ................................................. AAA 1,825 1,916,376
Series 91-11-G,7.00%,11/25/19 ................................................. AAA 3,612 3,618,191
Series W-1,8.20%,4/25/25 ...................................................... AAA 2,000 2,056,400
GOVERNMENT NATIONAL MORTGAGE ASSOC. - 6.5%
MULTI-CLASS MORTGAGE CERTIFICATES
Pool #194615, 8.00%, Due 3/15/17 .............................................. NR* 167 171,398
Pool #204405, 8.00%, Due 4/15/17 .............................................. NR* 192 196,370
Pool #371200, 8.00%, Due 12/15/23 ............................................. NR* 2,009 2,060,276
Pool #371206, 8.00%, Due 12/15/23 ............................................. NR* 2,144 2,197,968
TOTAL U.S. GOVERNMENT AGENCY SECURITIES (Cost $23,857,597) ....................... 23,870,690
</TABLE>
-32-
<PAGE>
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND, INC.
Statement of Net Assets (CONCLUDED) June 30,1995
(UNAUDITED)
<TABLE>
<CAPTION>
S&P PAR VALUE
SECURITY RATING** (000) (NOTE A)
<S> <C> <C> <C>
U.S. TREASURY SECURITIES - 14.2%
U.S. TREASURY NOTES
4.750%,9/30/98 ....................................................... NR* $ 5,000 $ 4,827,800
5.500%, 4/15/00 ...................................................... NR* 2,500 2,451,450
5.750%, 8/15/03 ...................................................... NR* 3,000 2,910,900
TOTAL U.S. TREASURY SECURITIES (Cost $10,111,185)...................... 10,190,150
ASSET-BACKED SECURITIES - 10.8%
PREMIER AUTO TRUST, 94-1-A3
4.75%,2/2/00 ......................................................... AAA 1,000 976,190
DISCOVER CREDIT CARD, 93-A-A
6.25%,8/15/00 ........................................................ AAA 3,000 3,000,300
SEARS CREDIT ACCOUNT MASTER TRUST, II 95-2
8.10%,6/15/04 ........................................................ AAA 3,500 3,750,180
TOTAL ASSET-BACKED SECURITIES (Cost $7,540,486) ....................... 7,726,670
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.1%
GOLDMAN SACHS TRUST SERIES 3
Remic, Series 3 E-4, 8.00%, 5/27/15
(Cost $82,577) ........................................................ AAA 81 82,781
REPURCHASE AGREEMENT - 6.3%
GOLDMAN SACHS & CO., 6.00%
Dated 6/30/95,to be repurchased on 7/3/95,
collateralized by U.S.Treasury Bonds with a market value of $4,572,343
(Cost $4,482,000) ..................................................... NR* 4,482 4,482,000
TOTAL INVESTMENT IN SECURITIES - 99.1%
(Cost $70,795,633)*** ................................................ 70,930,955
OTHER ASSETS IN EXCESS OF LIABILITIES, NET - 0.9% ..................... 665,989
NET ASSETS - 100.00% .................................................. $71,596,944
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($71,596,944 / 6,984,344 shares outstanding) .......................... $ 10.25
MAXIMUM OFFERING PRICE PER SHARE ($10.25 /.985) ...................... $ 10.41
</TABLE>
*Not rated.
**The Standard & Poor's rating indicated is believed to be the most
recent rating available as of June 30,1995.
***Also aggregate cost for federal tax purposes.
See accompanying Notes to Financial Statements.
-33-
<PAGE>
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND, INC.
Statement of Operations For the Six Months Ended June 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME (NOTE A):
Interest ................................................... $ 2,443,711
EXPENSES:
Investment advisory fee (Note B) ........................... 128,900
Distribution fee (Note B) .................................. 92,071
Accounting fee (Note B) .................................... 28,821
Transfer agent fees (Note B) ............................... 14,876
Custodian fee .............................................. 12,893
Legal ...................................................... 12,397
Audit ...................................................... 11,901
Registration fees .......................................... 9,917
Printing and postage ....................................... 9,621
Organizational expense (Note A) ............................ 4,509
Miscellaneous .............................................. 4,215
Directors'fees ............................................. 2,480
Insurance .................................................. 2,301
Total expenses ........................................... 334,902
Less: Fees waived (Note B) ................................. (77,117)
Net expenses .............................................. 257,785
Net investment income ...................................... 2,185,926
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized loss from security and foreign
currency transactions ..................................... (1,245,487)
Change in unrealized appreciation of investments ........... 5,668,654
Change in unrealized appreciation on translation
of assets and liabilities denominated in
foreign currency .......................................... 1,216
Net gain on investments ................................... 4,424,383
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ......... $ 6,610,309
</TABLE>
See accompanying Notes to Financial Statements.
-34-
<PAGE>
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND, INC.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
FOR THE SIX MONTHS FOR THE YEAR
ENDED ENDED
JUNE 30, 1995 DECEMBER 31,
(UNAUDITED) 1994
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income .......................................... $ 2,185,926 $ 5,692,067
Net loss from security transactions ............................ (1,245,487) (2,533,036)
Change in unrealized appreciation/(depreciation)
of investments and foreign currency
translation ................................................. 5,669,870 (6,950,668)
Net increase/(decrease) in net assets
resulting from operations 6,610,309 (3,791,637)
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income,net of realized currency
loss .......................................................... (1,853,896) (5,690,349)
Return of capital .............................................. -- (324,493)
Total distributions ............................................ (1,853,896) (6,014,842)
CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of 171,841 and 1,793,782
shares, respectively ........................................... 1,697,308 18,470,875
Value of 141,627 and 404,005 shares issued in
reinvestment of dividends,respectively ........................ 1,400,314 4,067,306
Cost of 1,523,314 and 4,649,437 shares repurchased,
respectively .................................................... (15,046,090) (46,462,862)
Decrease in net assets derived from
capital share transactions ..................................... (11,948,468) (23,924,681)
Total decrease in net assets
. (7,192,055) (33,731,160)
NET ASSETS:
Beginning of period ............................................. 78,788,999 112,520,159
End of period ................................................... $ 71,596,944 $ 78,788,999
</TABLE>
See accompanying Notes to Financial Statements.
-35-
<PAGE>
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND, INC.
Financial Highlights
(BASED ON AVERAGE SHARES OUTSTANDING DURING EACH PERIOD)
<TABLE>
<CAPTION>
FOR THE SIX FOR THE PERIOD
MONTHS ENDED MAY 13, 1991*
JUNE 30, 1995 YEAR ENDED DECEMBER 31, THROUGH
(UNAUDITED) 1994 1993 1992 DEC. 31, 1991
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period ........ $ 9.62 $ 10.57 $ 10.37 $ 10.54 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ......................... 0.29 0.57 0.57 0.63 0.32
Net realized and unrealized gain/(loss)
on investments .............................. 0.59 (0.92) 0.34 (0.05) 0.64
Total from Investment Operations ............. 0.88 (0.35) 0.91 0.58 0.96
LESS DISTRIBUTIONS:
Dividends from net investment
income,short-term gains and
net realized currency gain/(loss) ........... (0.25) (0.57) (0.69) (0.75) (0.42)
Return of capital ............................. -- (0.03) -- -- --
Distributions from net realized
long-term gains.............................. -- -- (0.02) -- --
Total distributions ........................... (0.25) (0.60) (0.71) (0.75) (0.42)
Net asset value at end of period .............. $ 10.25 $ 9.62 $ 10.57 $ 10.37 $ 10.54
TOTAL RETURN ................................... 9.25% (3.32)% 8.98% 5.68% 9.79%
RATIOS TO AVERAGE NET ASSETS:
Expenses(1) ................................... 0.70%** 0.70% 0.70% 0.70% 0.70%**
Net investment income(2) ...................... 5.94%** 5.57% 5.43% 6.01% 5.97%**
SUPPLEMENTAL DATA:
Net assets at end of period (000) ............. $71,597 $78,789 $112,520 $78,706 $64,327
Portfolio turnover rate ....................... 20% 50% 86% 107% 46%
</TABLE>
* Commencement of Operations.
** Annualized.
(1) Without the waiver of advisory fees (Note B), the ratio of expenses to
average net assets would have been .91% (annualized), .84%, .85%, .87%, and
1.73% (annualized) for the six months ended June 30, 1995, for the years ended
December 31, 1994, 1993 and 1992 and for the period ended December 31, 1991,
respectively.
(2) Without the waiver of advisory fees (Note B), the ratio of net investment
income to average net assets would have been 5.73% (annualized), 5.43%, 5.28%,
5.83%, and 4.94% (annualized) for the six months ended June 30, 1995, for the
years ended December 31,1994, 1993 and 1992 and for the period ended December
31, 1991, respectively.
See accompanying Notes to Financial Statements.
-36-
<PAGE>
FLAG INVESTORS INTERMEDIATE-TERM INCOME FUND, INC.
Notes to Financial Statements
A. SIGNIFICANT ACCOUNTING POLICIES - Flag Investors Intermediate-Term
Income Fund,Inc.(the "Fund") is registered under the Investment Company Act of
1940 as an open-end, diversified management investment company designed to
provide a high level of current income consistent with preservation of capital
within an intermediate-term maturity structure. The Fund commenced operations on
May 13, 1991. The following is a summary of significant accounting policies
followed by the Fund.
SECURITY VALUATION - Debt securities are valued on the basis of quotations
provided by a pricing service, which uses information with respect to
transactions on bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining value.Portfolio securities that are listed on a national securities
exchange are valued on the basis of their last sale price or, in the absence of
recorded sales, at the average of readily available closing bid and asked
prices. Securities or other assets for which market quotations are not readily
available are valued at their fair value so determined in good faith by the
investment advisor under procedures established and monitored by the Board of
Directors. Short-term obligations with maturities of 60 days or less are valued
at amortized cost which approximates market.
FEDERAL INCOME TAX - No provision is made for federal income taxes as it is
the Fund's intention to continue to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code and to make requisite
distributions to the shareholders that will be sufficient to relieve it from all
or substantially all federal income and excise taxes. The Fund's policy is to
distribute to shareholders substantially all of its taxable net investment
income on a monthly basis and net realized long-term capital gains annually, if
any.
OTHER - Security transactions are accounted for on the trade date and the
cost of investments sold or redeemed is determined by use of the specific
identification method for both financial reporting and income tax purposes.
Interest income is recorded on an accrual basis and includes amortization of
premiums and accretion of discounts.
Costs incurred by the Fund in connection with its organization,
registration, and the initial public offering of shares have been deferred and
are being amortized on the straight-line method over a five-year period
beginning on the date on which the Fund commenced its investment activities.
B. INVESTMENT ADVISORY FEES, TRANSACTIONS WITH AFFILIATES AND OTHER FEES-
Investment Company Capital Corp.("ICC"),a subsidiary of Alex. Brown & Sons
Incorporated ("Alex.Brown"), serves as the Fund's investment advisor. As
compensation for its advisory services, ICC receives from the Fund an annual
fee, calculated daily and paid monthly, at an annual rate of .35% of the first
$1 billion of the Fund's average daily net assets, .30% of the Fund's average
daily net assets in excess of $1 billion but not exceeding $1.5 billion, and
.25% of the Fund's average daily net assets in excess of $1.5 billion.
ICC has agreed to reduce its aggregate fees so that ordinary expenses of
the Fund for any fiscal year do not exceed 0.70% of the Fund's average daily net
assets. For the six months ended June 30, 1995, ICC waived fees of $77,117.
As compensation for its transfer agent services, ICC receives from the
Fund a per account fee, calculated and paid monthly. ICC received $14,876 for
transfer agent services for the six months ended June 30, 1995.
As compensation for its accounting services, ICC receives from the Fund
an annual fee, calculated daily and paid monthly, from the Fund's average daily
net assets. ICC received $28,821 for accounting services for the six months
ended June 30, 1995.
-37-
<PAGE>
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND, INC.
Notes to Financial Statements
(CONCLUDED)
As compensation for providing distribution services, Alex.Brown receives
from the Fund an annual fee, calculated daily and paid monthly, at anannual rate
equal to 0.25% of the Fund's average daily net assets. For the six months ended
June 30, 1995,distribution fees aggregated $92,071.
C. CAPITAL SHARE TRANSACTIONS - The Fund is authorized to issue up to 20
million shares of capital stock, par value $.001 per share, all of which
are designated as common stock.
D. INVESTMENT TRANSACTIONS - Purchases and sales of investment securities,
other than short-term obligations, aggregated $14,399,952 and $24,231,690,
respectively, for the six months ended June 30,1995.
At June 30, 1995, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $1,221,595,and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value was $1,086,273.
E. NET ASSETS - At June 30, 1995, net assets consisted of:
<TABLE>
<CAPTION>
<S> <C>
Paid-in-capital........................... $74,802,419
Accumulated net realized loss from
security transactions.................... (3,340,797)
Unrealized appreciation of
investments.............................. 135,322
$71,596,944
</TABLE>
-38-
