<PAGE> 1
As Filed With the Securities and Exchange Commission on April 26, 1995
Registration No. 33-34275
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
POST-EFFECTIVE AMENDMENT NO. 5 [X]
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 7 [X]
FLAG INVESTORS INTERMEDIATE-TERM INCOME FUND, INC.
(Exact Name of Registrant as Specified in Charter)
135 East Baltimore Street
Baltimore, MD 21202
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (410) 727-1700
Edward J. Veilleux
135 East Baltimore Street
Baltimore, MD 21202
(Name and Address of Agent for Service)
Copy to:
Richard W. Grant, Esq.
Morgan, Lewis & Bockius
2000 One Logan Square
Philadelphia, PA 19103
It is proposed that the filing will become effective (check appropriate box)
- --- immediately upon filing pursuant to paragraph (b)
X on May 1, 1995 pursuant to paragraph (b)
- --- 60 days after filing pursuant to paragraph (a)
- --- on (date) pursuant to paragraph (a) of Rule 485
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- -------------------------------------------------------------------------------
Title of Amount Being Proposed Maximum Proposed Maximum Amount of
Securities Registered Offering Price Aggregate Registration
Being Per Share Offering Fee
Registered Price (1)
- ---------- ------------ --------------- ---------------- -------------
Share of 3,145,655 NAV per share $100
Common Stock shares
(1) Registrant has calculated the maximum aggregate offering price pursuant to
Rule 24e-2 under the Investment Company Act of 1940 (the "1940 Act") for
fiscal year ended December 31, 1994. Registrant had actual aggregate
redemptions of 4,649,437 shares for its fiscal year ended December 31, 1994;
has used 1,793,782 of available redemptions for reductions pursuant to Rule
24f-2(c) under the 1940 Act and has previously used no available redemptions
for reductions pursuant to Rule 24e-2(a) of the 1940 Act during the current
year. Registrant elects to use redemptions in the aggregate amount of
2,855,655 shares for reductions in its current amendment.
Registrant has elected to maintain an indefinite number of shares of
Common Stock pursuant to Rule 24f-2 under the Investment Company Act of 1940.
Registrant's Rule 24f-2 Notice for its fiscal year ended December 31, 1994
was filed with the Commission on February 6, 1995.
<PAGE> 2
FLAG INVESTORS INTERMEDIATE-TERM INCOME FUND, INC.
Cross Reference Sheet
April 26, 1995
Registration
Statement
Items Required by Form N-1A Location
- --------------------------- --------------
Part A - Information Required in a Prospectus
Item 1. Cover Page Cover Page
Item 2. Synopsis Fund Expenses
Item 3. Condensed Financial
Information Financial Highlights
Item 4. General Description of
Registrant Investment Program; General
Information
Item 5. Management of the Fund Management of the Fund; Investment
Advisor; Distributor; Custodian,
Transfer Agent, Accounting Services
Item 5A. Management's Discussion of
Fund Performance *
Item 6. Capital Stock and Other
Securities Cover Page; Dividends and Taxes;
General Information
Item 7. Purchase of Securities Being
Offered How to Invest in the Fund;
Distributor
Item 8. Redemption or Repurchase How to Redeem Shares
Item 9. Pending Legal Proceedings **
Part B - Information Required in a
Statement of Additional
Information
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and
History General Information and History
Item 13. Investment Objectives and
Policies Investment Objectives and Policies
Item 14. Management of the Fund Management of the Fund
Item 15. Control Persons and Principal
Holders of Securities Control Persons and Principal Holders
of Securities
Item 16. Investment Advisory and Other
Services Investment Advisory and Other
Services; Custodian, Transfer Agent,
Accounting Services; Independent
Accountants
Item 17. Brokerage Allocation Brokerage
Item 18. Capital Stock and Other
Securities Capital Stock; Quarterly Reports
Item 19. Purchase, Redemption and
Pricing of Securities Being
Offered Valuation of Shares and Redemption
Item 20. Tax Status Federal Tax Treatment of Dividends
and Distributions
Item 21. Underwriters Distribution of Fund Shares
Item 22. Calculation of Performance
Data Performance Information
Item 23. Financial Statements Financial Statements
Part C - Other Information
- --------
Part C contains the information required by the items contained
therein under the items set forth in the form.
* Information required by Item 5A is contained in the 1994 Annual
Report to Shareholders.
** Omitted since the answer is negative or the item is not applicable.
<PAGE> 3
LOGO
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND, INC.
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.")
Shares of the Fund ("Shares") are available through Alex. Brown & Sons
Incorporated ("Alex. Brown"), as well as through Participating Dealers and
Shareholder Servicing Agents. (See "How to Invest in the Fund.")
This Prospectus sets forth basic information that investors should know
about the Fund prior to investing and should be retained for future
reference. A Statement of Additional Information dated May 1, 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.
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.
- -----------------------------------------------------------------------------
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 May 1, 1995
<PAGE> 4
LOGO
<PAGE> 5
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND, INC.
135 EAST BALTIMORE STREET
BALTIMORE, MARYLAND 21202
TABLE OF CONTENTS
---------------------------
1. Fund Expenses ................................... 2
2. Financial Highlights ............................ 3
3. Investment Program .............................. 5
4. Investment Restrictions ......................... 10
5. How to Invest in the Fund ....................... 10
6. How to Redeem Shares ............................ 15
7. Telephone Transactions .......................... 17
8. Dividends and Taxes ............................. 18
9. Management of the Fund .......................... 19
10. Investment Advisor .............................. 20
11. Distributor ..................................... 21
12. Custodian, Transfer Agent, Accounting Services .. 22
13. Performance Information ......................... 22
14. General Information ............................. 23
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________________________________________________________________________________
1. FUND EXPENSES
................................................................................
SHAREHOLDER TRANSACTION EXPENSES:
(as a percentage of offering price)
_______________________________________________________________________________
Maximum Sales Charge Imposed on Purchases .............. 1.50%*
Maximum Sales Charge Imposed on Reinvested Dividends ... None
Deferred Sales Charge .................................. None*
_______________________________________________________________________________
ANNUAL FUND OPERATING EXPENSES (NET OF FEE
WAIVERS):
(as a percentage of average net assets)
_______________________________________________________________________________
Management Fees (net of fee waivers) ................. .21%
12b-1 Fees ........................................... .25%
Other Expenses ....................................... .24%
----
Total Fund Operating Expenses (net of fee waivers) ... .70%
_______________________________________________________________________________
* Purchases of $1 million or more are not subject to an initial sales charge.
However, a contingent deferred sales charge of .50% will be imposed on such
purchases in the event of redemption within 24 months following such
purchase. (See "How to Invest in the Fund -- Offering Price.")
EXAMPLE:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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
$22 $37 $54 $104
</TABLE>
________________________________________________________________________________
* Absent fee waivers, expenses for the 1, 3, 5 and 10 year periods would be
$23, $42, $62 and $122, respectively.
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 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 the Fund -- Offering
Price", "Investment Advisor" and "Distributor.") The Expenses and Example
appearing in the table above are based on the Fund's expenses for the fiscal
year ended December 31, 1994 which, net of fee waivers, were .70% of its
average net assets. Absent fee waivers, management fees would be .35% of the
Fund's average net assets and the Fund's total expenses would be .84% of its
average net assets. The Fund's investment advisor currently intends to
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waive its fee or to reimburse the Fund on a voluntary basis to the extent
required so that Total Fund Operating Expenses do not exceed .70% of the Fund's
average daily net assets.
The rules of the SEC require that the maximum sales charge (in the Fund's
case, 1.50% of the offering price) be reflected in the above table. However,
certain investors may qualify for reduced sales charges or no sales charge at
all. (See "How to Invest in the Fund -- Offering Price.") Due to the
continuous nature of Rule 12b-1 fees, long-term shareholders of the Fund may
pay more than the equivalent of the maximum front-end sales charges permitted
by the Rules of Fair Practice of the National Association of Securities
Dealers, Inc. The foregoing table has not been audited by Deloitte & Touche
LLP, the Fund's independent auditors.
________________________________________________________________________________
2. FINANCIAL HIGHLIGHTS
The Fund was organized as a corporation under the laws of the State of
Maryland on April 16, 1990 and commenced operations on May 13, 1991. 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 fiscal year ended December 31, 1994 and the report
thereon of Deloitte & Touche LLP are included in the Statement of Additional
Information. Additional performance information is contained in the Fund's
Annual Report for the fiscal year ended December 31, 1994 which can be
obtained at no charge by calling the Fund at (800) 767-FLAG.
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<PAGE> 8
(For a Share outstanding throughout each period)
________________________________________________________________________________
<TABLE>
<CAPTION>
For the Period
Year Ended December 31, May 13, 1991*
----------------------------------- 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%
Ratio to Average Net Assets:
Expenses(2) 0.70% 0.70% 0.70% 0.70%(1)
Net Investment Income(3) 5.57% 5.43% 6.01% 5.97%(1)
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.
(1) Annualized.
(2) Without the waiver of advisory fees, 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.
(3) Without the waiver of advisory fees, 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 31, 1994, 1993 and 1992 and for
the period ended December 31, 1991, respectively.
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<PAGE> 9
________________________________________________________________________________
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 ("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
<PAGE> 10
(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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<PAGE> 11
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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<PAGE> 12
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 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
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.
8
<PAGE> 13
................................................................................
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.
................................................................................
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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<PAGE> 14
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.
________________________________________________________________________________
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 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.
________________________________________________________________________________
5. HOW TO INVEST IN THE FUND
Shares may be purchased from Alex. Brown & Sons Incorporated, 135 East
Baltimore Street, Baltimore, Maryland 21202 ("Alex. Brown"), through any
securities dealer which has entered into a dealer agreement with
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<PAGE> 15
Alex. Brown ("Participating Dealers"), or through any financial institution
which has entered into a shareholder servicing agreement with the Fund
("Shareholder Servicing Agents"). Shares may also be purchased directly from the
Fund by completing the Application Form attached to this Prospectus and
returning it, together with payment of the purchase price, to the Fund at the
address shown on the Application Form.
The minimum initial investment is $2,000, except that the minimum initial
investment for shareholders of any other Flag Investors fund or class is $500
and the minimum initial investment for participants in the Fund's Automatic
Investing Plan is $250. Each subsequent investment must be at least $100,
except that the minimum subsequent investment under the Fund's Automatic
Investing Plan is $250 for quarterly investments and $100 for monthly
investments. (See "Purchases through Automatic Investing Plan" below.) There
is no minimum investment requirement for qualified retirement plans (i.e.,
401(k) plans or pension and profit sharing plans). IRA accounts are, however,
subject to the $2,000 minimum initial investment requirement. There is no
minimum investment requirement for spousal IRA accounts. Orders for purchases
of Shares are accepted on any day on which the New York Stock Exchange is
open for business ("Business Day"). The Fund reserves the right to suspend
the sale of Shares at any time at the discretion of Alex. Brown and ICC.
Purchase orders for Shares will be executed at a per Share purchase price
equal to the net asset value next determined after receipt of the purchase
order plus any applicable front-end sales charge (the "Offering Price") on
the date such net asset value is determined (the "Purchase Date"). Purchases
made directly from the Fund must be accompanied by payment of the purchase
price. Purchases made through Alex. Brown or a Participating Dealer or
Shareholder Servicing Agent must be in accordance with such entity's payment
procedures. Alex. Brown may, in its sole discretion, refuse to accept any
purchase order.
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 is calculated by valuing all
assets held by the Fund, deducting liabilities, and dividing the resulting
amount by the number of then outstanding Shares. 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
11
<PAGE> 16
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.
................................................................................
OFFERING PRICE
Shares may be purchased from Alex. Brown, Participating Dealers or
Shareholder Servicing Agents at the Offering Price which includes a sales
charge which is calculated as a percentage of the Offering Price and
decreases as the amount of purchase increases as shown below:
Sales Charge
as % of Dealer
-------------------------- Retention
Offering Net Amount as % of
Amount of Purchase Price Invested Offering Price
- --------------------------------------------------------------------------------
Less than $100,000 .... 1.50% 1.52% 1.25%
$100,000 - $499,999 ... 1.25% 1.27% 1.00%
$500,000 - $999,999 ... 1.00% 1.01% .75%
$1,000,000 and over ... None* None* None*
- ------------
* Purchases of $1 million or more may be subject to a contingent deferred
sales charge. (See below.) The distributor may make payments to dealers in
the amount of .50% of the Offering Price.
A shareholder who purchases additional Shares may obtain reduced sales
charges as set forth in the table above through a right of accumulation. In
addition, an investor may obtain reduced sales charges as set forth above
through a right of accumulation of purchases of Shares and purchases of
shares of other Flag Investors funds with a higher front-end sales charge and
purchases of shares of Flag Investors Maryland Intermediate Tax Free Income
Fund, Inc. The applicable sales charge will be determined based on the total
of (a) the shareholder's current purchase plus (b) an amount equal to the
then current net asset value or cost, whichever is higher, of all Flag
Investors shares described above and any Flag Investors Class D shares held
by the shareholder. To obtain the reduced sales charge through a right of
accumulation, the shareholder must provide Alex. Brown, either directly or
through a Participating Dealer or Shareholder Servicing Agent, as applicable,
with sufficient information to verify that the shareholder has such a right.
The Fund may amend or terminate this right of accumulation at any time as to
subsequent purchases.
12
<PAGE> 17
The term "purchase" refers to an individual purchase by a single
purchaser, or to concurrent purchases, which will be aggregated by a
purchaser, the purchaser's spouse and their children under the age of 21
years purchasing Shares for their own account.
An investor may also obtain the reduced sales charges shown above by
executing a written Letter of Intent which states the investor's intention to
invest not less than $100,000 within a 13-month period in Shares. Each
purchase of Shares under a Letter of Intent will be made at the Offering
Price applicable at the time of such purchase to the full amount indicated in
the Letter of Intent. A Letter of Intent is not a binding obligation upon the
investor to purchase the full amount indicated. The minimum initial
investment under a Letter of Intent is 5% of the full amount. Shares
purchased with the first 5% of the full amount will be held in escrow (while
remaining registered in the name of the investor) to secure payment of the
higher sales charge applicable to the Shares actually purchased if the full
amount indicated is not invested. Such escrowed Shares will be involuntarily
redeemed to pay the additional sales charge, if necessary. When the full
amount indicated has been purchased, the escrowed Shares will be released. An
investor who wishes to enter into a Letter of Intent in conjunction with an
investment in Shares may do so by completing the form attached to this
Prospectus.
No sales charge will be payable at the time of purchase on investments of
$1 million or more. However, a contingent deferred sales charge will be
imposed on such investments in the event of a Share redemption within 24
months following the Share purchase, at the rate of .50% on the lesser of the
value of the Shares redeemed or the total cost of such Shares. No contingent
deferred sales charge will be imposed on purchases of $3 million or more of
Shares redeemed within 24 months of purchase if the Participating Dealer and
Alex. Brown have entered into an agreement under which the Participating
Dealer agrees to return any payments received on the sale of such Shares. In
determining whether a contingent deferred sales charge is payable, and, if
so, the amount of the charge, it is assumed that Shares not subject to such
charge are the first redeemed followed by other Shares held for the longest
period of time.
The Fund may sell Shares at net asset value (without sales charge) to the
following: (i) banks, bank trust departments, registered investment advisory
companies, financial planners and broker-dealers purchasing Shares on behalf
of their fiduciary and advisory clients, provided such clients have paid an
account management fee for these services; (ii) qualified retirement plans;
(iii) participants in a Flag Investors fund payroll savings plan program;
(iv) investors who have redeemed Shares, or shares of any other
13
<PAGE> 18
mutual fund in the Flag Investors family of funds with a higher front-end
sales charge, or shares of Flag Investors Maryland Intermediate Tax Free
Income Fund, Inc., in an amount that is not more than the total redemption
proceeds, provided that the purchase is within 90 days after the redemption;
and (v) current or retired Directors of the Fund, and directors and employees
(and their immediate families) of Alex. Brown and Participating Dealers, and
their respective affiliates.
Shares may also be purchased through a Systematic Purchase Plan. An
investor who wishes to take advantage of such a plan should contact Alex.
Brown, a Participating Dealer or Shareholder Servicing Agent.
................................................................................
PURCHASES BY EXCHANGE
As permitted pursuant to any rule, regulation or order promulgated by the
SEC, shareholders of Flag Investors Maryland Intermediate Tax Free Income
Fund, Inc. and shareholders of other mutual funds in the Flag Investors
family of funds with a higher front-end sales charge, may exchange their
shares of those funds for an equal dollar amount of Shares. Shares issued
pursuant to this offer will not be subject to the sales charges described
above or any other charge. Shareholders of Flag Investors Cash Reserve Prime
Class A Shares may exchange into Shares upon payment of the difference in
sales charges, as applicable.
When a shareholder acquires Shares through an exchange from another fund
in the Flag Investors family of funds, the fund will combine the period for
which the original shares were held prior to the exchange with the holding
period of the Shares acquired in the exchange for purposes of determining
what, if any, contingent deferred sales charge is applicable upon a
redemption of any such shares.
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). Exchange requests received after 4:00 p.m. (Eastern Time) will be
effected on the next Business Day.
Shareholders of any mutual fund not affiliated with the Fund who have paid
a sales charge may exchange shares of such fund for an equal dollar amount of
Shares by submitting to Alex. Brown or a Participating Dealer the proceeds of
the redemption of such shares, together with evidence of the payment of a
sales charge and the source of such proceeds. Shares issued pursuant to this
offer will not be subject to the sales charges described above or any other
charge.
14
<PAGE> 19
In addition, shareholders may exchange their Shares for an equal dollar
amount of shares of any other mutual fund in the Flag Investors family of
funds with a higher front-end sales charge. In connection with such exchange,
shareholders will be required to pay the difference between the sales charge
paid on Shares and the sales charge applicable to the purchase of the shares
of such other fund, except that the exchange will be made at net asset value
(without payment of any sales charge) if the Shares have been held for more
than 24 months following the purchase date.
This exchange privilege with respect to other Flag Investors funds may
also be exercised by telephone. (See "Telephone Transactions" below).
The exchange privilege may be exercised only in those states where the
class of shares of such other fund may legally be sold. Investors should
receive and read the applicable prospectus prior to tendering shares for
exchange. The Fund may modify or terminate these offers of exchange at any
time on 60 days' prior written notice to shareholders and the exchange offers
set forth herein are expressly subject to modification or termination.
................................................................................
PURCHASES THROUGH AUTOMATIC INVESTING PLAN
Shareholders may purchase Shares regularly by means of an Automatic
Investing Plan with a pre-authorized check drawn on their checking accounts.
Under this plan, the shareholder may elect to have a specified amount
invested monthly or quarterly in Shares. The amount specified by the
shareholder will be withdrawn from the shareholder's checking account using
the pre-authorized check. This amount will be invested in Shares at the
applicable Offering Price determined on the date the amount is available for
investment. Participation in the Automatic Investing Plan may be discontinued
either by the Fund or the shareholder upon 30 days' prior written notice to
the other party. A shareholder who wishes to enroll in the Automatic
Investing Plan or who wishes to obtain additional purchase information may do
so by completing the appropriate section of the Application Form attached to
this Prospectus.
________________________________________________________________________________
6. HOW TO REDEEM SHARES
Shareholders may redeem all or part of their investment on any Business
Day by transmitting a redemption order through Alex. Brown, a Participating
Dealer, a Shareholder Servicing Agent or by regular or express mail to the
Fund's transfer agent (the "Transfer Agent"). Shareholders may also redeem
Shares by telephone (in amounts up to $50,000). (See "Telephone Transactions"
below.) A redemption order is effected at the net asset value per Share
15
<PAGE> 20
(reduced by any applicable contingent deferred sales charge) next determined
after receipt of the order (or, if stock certificates have been issued for the
Shares to be redeemed, after the tender of the stock certificates for
redemption). Redemption orders received after 4:00 p.m. (Eastern Time) will be
effected at the net asset value next determined on the following Business Day.
Payment for redeemed Shares will be made by check and will be mailed within
seven days after receipt of a duly authorized telephone redemption request or of
a redemption order fully completed and, as applicable, accompanied by the
documents described below:
1) A letter of instructions, specifying the shareholder's account number with
a Participating Dealer, if applicable, and the number of Shares or dollar
amount to be redeemed, signed by all owners of the Shares in the exact
names in which their account is maintained;
2) For redemptions in excess of $50,000, a guarantee of the signature of each
registered owner by a member of the Federal Deposit Insurance Corporation,
a trust company, broker, dealer, credit union (if authorized under state
law), securities exchange or association, clearing agency, or savings
association;
3) If Shares are held in certificate form, stock certificates either properly
endorsed or accompanied by a duly executed stock power for Shares to be
redeemed; and
4) Any additional documents required for redemption by corporations,
partnerships, trusts or fiduciaries.
Dividends payable up to the date of the redemption of Shares will be paid
on the next dividend payable date. If all of the Shares in a shareholder's
account have been redeemed on a dividend payable date, the dividend will be
remitted by check to the shareholder.
The Fund has the power, under its Articles of Incorporation, to redeem
shareholder accounts amounting to less than $500 (as a result of redemptions)
upon 60 days' written notice.
................................................................................
SYSTEMATIC WITHDRAWAL PLAN
Shareholders who hold Shares having a value of $10,000 or more may arrange
to have a portion of their Shares redeemed monthly or quarterly under the
Fund's Systematic Withdrawal Plan. Such payments are drawn from income
16
<PAGE> 21
dividends, and, to the extent necessary, from Share redemptions (which would be
a return of principal and, if reflecting a gain, would be taxable). If
redemptions continue, a shareholder's account may eventually be exhausted.
Because Share purchases include a sales charge that will not be recovered at the
time of redemption, a shareholder should not have a withdrawal plan in effect at
the same time he is making recurring purchases of Shares. A shareholder who
wishes to enroll in the Systematic Withdrawal Plan may do so by completing the
appropriate section of the Application Form attached to this Prospectus.
________________________________________________________________________________
7. TELEPHONE TRANSACTIONS
Shareholders may exercise the exchange privilege with respect to other
Flag Investors funds, or redeem Shares in amounts up to $50,000, 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 (less any applicable contingent deferred
sales charge on redemptions) as determined on the next Business Day.
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. These
procedures include requiring the investor to provide certain personal
identification information at the time an account is opened and prior to
effecting each transaction requested by telephone. In addition, all telephone
transaction requests will be recorded and investors may be required to
provide additional telecopied instructions of such transaction requests. 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
17
<PAGE> 22
difficulty in effecting telephone transactions. In such event, requests should
be made by regular or express mail. Shares held in certificate form may not be
exchanged or redeemed by telephone. (See "How to Invest in the Fund--Purchases
by Exchange" and "How to Redeem Shares.")
________________________________________________________________________________
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 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 their Participating Dealer or Shareholder Servicing Agent, 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.
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
18
<PAGE> 23
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 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 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 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
Shares just prior to a distribution. The price of 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.
_______________________________________________________________________________
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
19
<PAGE> 24
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>
<CAPTION>
<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 Diana M. Ellis Treasurer
Eugene J. McDonald Director Laurie D. DePrine Assistant Secretary
Harry Woolf Director
</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 $3.4 billion of net assets as of December 31, 1994.
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 .70% of the Fund's 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.")
................................................................................
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.
20
<PAGE> 25
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 acts as distributor of the 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.
The Fund has adopted a Distribution Agreement and related Plan of
Distribution (the "Plan") pursuant to Rule 12b-1 under the 1940 Act. As
compensation for providing distribution services for the fiscal year ended
December 31, 1994, Alex. Brown received a fee from the Fund which represented
.25% of the Fund's average daily net assets. Alex. Brown expects to allocate
on a proportional basis most of its annual distribution fee to its investment
representatives or up to all of its fee to Participating Dealers as
compensation for their ongoing shareholder services, including processing
purchase and sale requests and responding to shareholder inquiries.
In addition, the Fund may enter into Shareholder Servicing Agreements with
certain financial institutions, such as banks, to act as Shareholder
Servicing Agents, pursuant to which Alex. Brown will allocate a portion of
its distribution fee as compensation for such financial institutions' ongoing
shareholder services. Such financial institutions may impose separate fees in
connection with these services and investors should review this Prospectus in
conjunction with any such institution's fee schedule. In addition, financial
institutions may be required to register as dealers pursuant to state
securities laws. Amounts allocated to Participating Dealers and Shareholder
Servicing Agents may not exceed amounts payable to Alex. Brown under the Plan
with respect to Shares held by or on behalf of customers of such entity.
21
<PAGE> 26
Payments under the 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 Shares is less than
.25% of the average daily net assets of the Fund for any period, the
unexpended portion of the distribution fee may be retained by Alex. Brown.
Alex. Brown will from time to time and from its own resources pay or allow
additional discounts or promotional incentives in the form of cash or other
compensation (including merchandise or travel) to Participating Dealers.
________________________________________________________________________________
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 and provides accounting services to the Fund. As
compensation for providing accounting services to the Fund for the fiscal
year ended December 31, 1994, ICC received a fee equal to .06% of the Fund's
average daily net assets. (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, net of the Fund's
maximum sales charge, 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, net of the
maximum sales charge and other fees according to the required standardized
calculation. The standardized calculation is required by the SEC to provide
consistency and comparability in investment company advertising and is not
equivalent to a yield calculation.
22
<PAGE> 27
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.
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 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 50 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 may classify any authorized but unissued Shares
into classes and may establish certain distinctions between classes relating
to additional voting rights, payments of dividends, rights upon liquidation
or distribution of the assets of the Fund and any other restrictions
permitted by law and the Fund's charter.
23
<PAGE> 28
................................................................................
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.
................................................................................
REPORTS
The Fund furnishes shareholders with quarterly 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 serves as counsel to the Fund.
................................................................................
SHAREHOLDER INQUIRIES
Shareholders with inquiries concerning their Shares should contact the
Transfer Agent at (800) 553-8080, Alex. Brown at (800) 767-FLAG, or any
Participating Dealer or Shareholder Servicing Agent, as appropriate.
24
<PAGE> 29
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 higher 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
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 edge." 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
in 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 sometime in the
future.
A-1
<PAGE> 30
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
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> 31
LOGO
<PAGE> 32
LOGO
<PAGE> 33
LOGO
<PAGE> 34
FLAG INVESTORS INTERMEDIATE-TERM INCOME FUND, INC.
NEW ACCOUNT APPLICATION
- -----------------------------------------------------------------------------
Make check payable to "Flag Investors Intermediate-Term
Income Fund, Inc." and mail with this application to:
Flag Investors Funds
P.O. Box 419426
Kansas City, MO 64141-6426
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
To open an IRA account, call 1-800-767-3524 to request an IRA application
I enclose a check for $________ payable to "Flag Investors Intermediate-Term
Income Fund, Inc." for the purchase of Fund shares. The minimum initial
purchase is $2,000, except that the minimum initial purchase for shareholders
of any other Flag Investors Fund or class is $500 and the minimum initial
purchase for participants in the Fund's Automatic Investing Plan is $250.
Each subsequent purchase requires a $100 minimum, except that the minimum
subsequent purchase under the Fund's Automatic Investing Plan is $250 for
quarterly purchases and $100 for monthly purchases. The Fund reserves the
right not to accept checks for more than $50,000 that are not certified or
bank checks.
- ------------------------------------------------------------------------------
YOUR ACCOUNT REGISTRATION (PLEASE PRINT)
Existing Account No., if any: _______________________________________________
INDIVIDUAL OR JOINT TENANT
- -----------------------------------------------------------------------------
First Name Initial Last Name
- -----------------------------------------------------------------------------
Social Security Number
- -----------------------------------------------------------------------------
Joint Tenant Initial Last Name
CORPORATIONS, TRUSTS, PARTNERSHIPS, ETC.
- ------------------------------------------------------------------------------
Name of Corporation, Trust or Partnership
- -------------------------------- -----------------------------------------
Tax ID Number Date of Trust
- -----------------------------------------------------------------------------
Name of Trustees (If to be included in the Registration)
- -----------------------------------------------------------------------------
For the Benefit of
GIFTS TO MINORS
- -----------------------------------------------------------------------------
Custodian's Name (only one allowed by law)
- -----------------------------------------------------------------------------
Minor's Name (only one)
- -----------------------------------------------------------------------------
Social Security Number of Minor
under the __________________ Uniform Gifts to Minors Act
State of Residence
YOUR MAILING ADDRESS
- -----------------------------------------------------------------------------
Street
- -----------------------------------------------------------------------------
City State Zip
( )
- -----------------------------------------------------------------------------
Daytime Phone
LETTER OF INTENT (OPTIONAL)
[ ] I agree to the Letter of Intent and Escrow Agreement set forth in the
accompanying prospectus. Although I am not obligated to do so, I intend to
invest over a 13-month period in shares of Flag Investors Intermediate-Term
Income Fund, Inc. in an aggregate amount at least equal to:
| | $100,000 | | $500,000 | | $1,000,000
<PAGE> 35
RIGHT OF ACCUMULATION (OPTIONAL)
[ ] I already own shares of the Flag Investors Fund(s) (except Class B shares)
set forth below to be applied for a reduced sales charge. List the Account
numbers of other Flag Investors Funds that you or your immediate family (spouse
and children under 21) already own that qualify for reduced sales charges.
Fund Name Account No. Owner's Name Relationship
--------- ----------- ------------ ------------
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
<PAGE> 36
DISTRIBUTION OPTIONS
Please check appropriate boxes. If none of the options are elected, all
distributions will be reinvested in additional shares of the Fund at no sales
charge.
Income Dividends
[ ] Reinvested in additional shares
[ ] Paid in Cash
Capital Gains
[ ] Reinvested in additional shares
[ ] Paid in Cash
- --------------------------------------------------------------------------------
AUTOMATIC INVESTING PLAN (OPTIONAL)
[ ] I authorize you as Agent for the Automatic Investing Plan to
automatically invest $______ for me, on a monthly or quarterly basis, on or
about the 20th of each month or if quarterly, the 20th of January, April,
July and October, and to draw a bank draft in payment of the investment
against my checking account. (Bank drafts may be drawn on commercial banks
only.)
Minimum Initial Investment: $250
Subsequent Investments (check one):
[ ] Monthly ($100 minimum)
[ ] Quarterly ($250 minimum)
- -------------------------------------------------------------------------------
Bank Name
- -------------------------------------------------------------------------------
Existing Flag Investors Fund Account No., if any
Please attach a voided check.
- -------------------------------------------------------------------------------
Depositor's Signature Date
- -------------------------------------------------------------------------------
Depositor's Signature Date
(if joint acct., both must sign)
- -------------------------------------------------------------------------------
SYSTEMATIC WITHDRAWAL PLAN (OPTIONAL)
[ ] Beginning the month of ________, 19__ please send me checks on a
monthly or quarterly basis, as indicated below, in the amount of $______,
from Shares that I own, payable to the account registration address as shown
above. (Participation requires minimum account value of $10,000.)
Frequency (check one):
[ ] Monthly
[ ] Quarterly (January, April, July and October)
- --------------------------------------------------------------------------------
TELEPHONE TRANSACTIONS
You will automatically have telephone redemption privileges (for amounts up
to $50,000) and telephone exchange privileges (with respect to other Flag
Investors Funds) unless you mark one or both of the boxes below:
No, I/We do not want
[ ] Telephone exchange privileges
[ ] Telephone redemption privileges
Redemptions effected by telephone will be mailed to the address of record. If
you would prefer redemptions mailed to a pre-designated bank account, please
provide the following information:
Bank: _____________________________________
Address: _____________________________________
Bank Account No: _____________________________________
Bank Account Name: _____________________________________
- --------------------------------------------------------------------------------
<PAGE> 37
SIGNATURE AND TAXPAYER CERTIFICATION
I have received a copy of the Fund's prospectus dated May 1, 1995. Unless the
box below is checked, I certify under penalties of perjury, (1) that the
number shown on this form is my correct taxpayer identification number and
(2) that I am not subject to backup withholding as a result of a failure to
report all interest or dividends, or the Internal Revenue Service has
notified me that I am no longer subject to backup withholding. [ ] Check here
if you are 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 I may bear the risk
of loss in the event of fraudulent use of such privileges. If I do not want
telephone redemption or exchange privileges, I have so indicated on this
Application.
- --------------------------------------------------------------------------------
Signature Date
- --------------------------------------------------------------------------------
Signature (if joint acct., both must sign) Date
For Dealer Use Only
Dealer's Name:____________________________ Dealer Code: ________________________
Dealer's Address: ________________________ Branch Code: ________________________
________________________
Representative: ________________________ Rep. No. ________________________
<PAGE> 38
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
Relating to Prospectus Dated: May 1, 1995
<PAGE> 39
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......................................... 6
5. Management of the Fund.................................. 9
6. Investment Advisory and Other Services.................. 13
7. Distribution of Fund Shares............................. 14
8. Brokerage............................................... 16
9. Capital Stock........................................... 18
10. Quarterly Reports....................................... 18
11. Custodian, Transfer Agent, Accounting Services ......... 18
12. Independent Auditors ................................... 19
13. Performance Information................................. 19
14. Control Persons and Principal Holders of
Securities............................................ 22
15. Financial Statements.................................... 22
<PAGE> 40
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. Important
information concerning the Fund is included in the Fund's current Prospectus
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
of the Fund ("Shares") to prospective investors. Prospectuses may also be
obtained from Shareholder Servicing Agents. Some of the information required
to be in this Statement of Additional Information is also included in the
Fund's current Prospectus. To avoid unnecessary repetition, references are
made to related sections of the Prospectus. In addition, the Prospectus and
this Statement of Additional Information omit certain information about the
Fund and its business that is contained in the Registration Statement
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, and commenced
operations on May 13, 1991.
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").
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
1
<PAGE> 41
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
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.
2
<PAGE> 42
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 Ratings Group ("S&P") or Aaa by
Moody's Investors Service ("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
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.
3
<PAGE> 43
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.
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;
4
<PAGE> 44
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;
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.
5
<PAGE> 45
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 is calculated by valuing all assets held by
the Fund, deducting liabilities, and dividing the resulting amount by the
number of then outstanding Shares. 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 Shares by check as
described in the Prospectus. However, if the Board of Directors determines
that it would be in the best interests of the remaining shareholders 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.
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.
6
<PAGE> 46
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
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
7
<PAGE> 47
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."
The Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of distributions payable to any shareholder who
(1) has provided 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.
8
<PAGE> 48
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 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
Managing Director, Alex. Brown & Sons Incorporated; Chartered
Financial Analyst.
*W. JAMES PRICE, Director
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
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).
- ------------
* Messrs. Hale and Price are Directors who are "interested persons", as
defined in the Investment Company Act.
9
<PAGE> 49
N. BRUCE HANNAY, Director
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
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
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
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
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
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
Principal, Alex. Brown & Sons Incorporated, 1991 - Present; Senior
Vice President, First National Bank of Maryland, 1985-1991.
EDWARD J. VEILLEUX, Vice President
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
Managing Director, Alex. Brown & Sons Incorporated and Manager,
Special Products Department, Alex. Brown & Sons Incorporated.
BRIAN C. NELSON, Vice President and Secretary
Vice President, Alex. Brown & Sons Incorporated, Investment Company
Capital Corp. (registered investment advisor) and Armata Financial
Corp. (registered broker-dealer).
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<PAGE> 50
DIANA M. ELLIS, Treasurer
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
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 13
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 eight
funds in the Fund Complex. Mr. Hale serves as President and Director of one
fund, Vice President of one fund and Director of 11 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 12 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 11
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.
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<PAGE> 51
COMPENSATION TABLE
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
*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
- -------------------
* 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 additional funds in the Fund Complex commenced operations after
December 31, 1994.
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.
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<PAGE> 52
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 Quality
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 Fund's 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
13
<PAGE> 53
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
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
The Distribution Agreement provides that Alex. Brown has the exclusive
right to distribute 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 Shares; (b) accept or reject
such orders on behalf of the Fund in accordance with the Fund's currently
effective prospectus and transmit such orders as are accepted to the Fund's
transfer agent as promptly as possible; (c) receive requests for redemptions
and transmit such redemption requests to the Fund's transfer agent as
promptly as possible; and (d) respond to inquiries from shareholders
concerning the status of their accounts and the operations of the Fund.
Alex. Brown has not undertaken to sell any specific number of Shares. The
Distribution 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.
As compensation for providing distribution as described above, Alex.
Brown receives an annual fee, paid monthly, equal to .25% of the Fund's
average daily net assets. Alex. Brown expects to allocate most of its annual
14
<PAGE> 54
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 (the "Plan"). Under the Plan, the Fund pays a fee to Alex.
Brown for distribution and other shareholder servicing assistance as set
forth in the Distribution Agreement, and Alex. Brown is authorized to make
payments out of its fee to its investment representatives and to
participating broker-dealers. The Distribution Agreement, including the 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
22, 1994. The Distribution Agreement and the Plan encompassed therein will
remain in effect from year to year as 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 Plan, the Directors concluded, in the exercise of
reasonable business judgment, that there was a reasonable likelihood that the
Plan would benefit the Fund and its shareholders. The Plan will be renewed
only if the Directors make a similar determination in each subsequent year.
The Plan may not be amended to increase materially the fee to be paid
pursuant to the Distribution Agreement without the approval of the
shareholders of the Fund. The Plan may be terminated at any time and the
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 Distribution Agreement and
any Sub-Distribution Agreement shall automatically terminate in the event of
assignment.
During the continuance of the 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 Plan to Alex. Brown pursuant to the Distribution
Agreement and to broker-dealers pursuant to Sub-Distribution Agreements.
Such reports shall be made by the persons authorized to make such payments.
In addition, during the continuance of the 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.
In addition, the Fund may enter into Shareholder Servicing Agreements
with certain financial institutions, such as banks, to act as Shareholder
Servicing Agents, pursuant to which Alex. Brown will allocate a portion of
its distribution fee as compensation for such financial institutions' ongoing
shareholder services. Although banking laws and regulations prohibit banks
from distributing shares of open-end investment companies such as the Fund,
according to interpretations by various bank regulatory authorities,
financial institutions are not prohibited from acting in other capacities for
investment companies, such as the shareholder servicing capacities described
above. Should future legislative, judicial or administrative action prohibit
or restrict the activities of the Shareholder Servicing Agents in connection
with the Shareholder Servicing Agreements, the Fund may be required to alter
15
<PAGE> 55
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 this Prospectus 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 Plan, amounts allocated to Participating Dealers and
Shareholder Servicing Agents may not exceed amounts payable to Alex. Brown
under the Plan. Payments under the 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 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 Plan does not provide for any charges to the Fund for
excess amounts expended by Alex. Brown and, if the Plan is terminated in
accordance with its terms, the obligation of the Fund to make payments to
Alex. Brown pursuant to the Plan will cease and the Fund will not be required
to make any payments past the date the related Distribution Agreement
terminates.
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
16
<PAGE> 56
direct purchase and sale orders to any broker-dealer, including, to the
extent and in the manner permitted by applicable law, Alex. Brown.
In over-the-counter transactions, orders are placed directly with a
principal market maker and such purchases normally include a mark up over the
bid to the broker-dealer based on the spread between the bid and asked price
for the security. Purchases from underwriters of portfolio securities
include a commission or concession paid by the issuer to the underwriter. On
occasion, certain money market instruments may be purchased directly from an
issuer without payment of a commission or concession. The Fund will not deal
with Alex. Brown in any transaction in which Alex. Brown acts as a principal;
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
Agreement between Alex. Brown and the Fund does not provide for any reduction
in the distribution fee to be received by Alex. Brown from the Fund as a
result of profits resulting from brokerage commissions on transactions of the
Fund effected through Alex. Brown. 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
17
<PAGE> 57
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.
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 50 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.
Shareholders of the Fund do not have cumulative voting rights, and
therefore the holders of more than 50% of the outstanding Shares voting
together for election of Directors may elect all the members of the Board of
Directors of the Fund. In such event, the remaining holders cannot elect any
members of the Board of Directors of the Fund. There are no preemptive,
conversion or exchange rights applicable to any of the Shares. The issued
and outstanding Shares are fully paid and non-assessable. In the event of
liquidation or dissolution of the Fund, each Share is entitled to its portion
of the Fund's assets (or the assets allocated to a separate series of shares
if there is more than one series) after all debts and expenses have been
paid.
As used in this Statement of Additional Information the term "majority of
the outstanding Shares" means the vote of the lesser of (i) 67% or more of
the Shares present at a meeting, if the holders of more than 50% of the
outstanding Shares are present or represented by proxy, or (ii) more than 50%
of the outstanding Shares.
10. QUARTERLY REPORTS
The Fund furnishes shareholders with quarterly 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
18
<PAGE> 58
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 $10.50 per
account, 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.
These services were previously provided by Alex. Brown. As compensation for
these services, ICC will receive an annual fee, calculated daily and paid
monthly, as shown below. These fees are the same as those paid to Alex.
Brown under the prior accounting services agreement.
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.
ICC also serves as the Fund's investment advisor.
As compensation for providing accounting services for the fiscal year
ended December 31, 1994, ICC received fees of $66,390.
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.
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:
19
<PAGE> 59
P(1 + T)n= ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value at the end of the 1, 5, or 10 year periods
(or fractional portion thereof) of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year periods.
Under the foregoing formula, the time periods used in advertising will be
based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication, and
will cover one, five, and ten year periods or a shorter period dating from
the effectiveness of the Fund's registration statement. 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 prospectus on the
reinvestment dates during the period. "T" in the formula above is calculated
by finding the average annual compounded rate of return over the period that
would equate an assumed initial payment of $1,000 to the ending redeemable
value. Any sales loads that might in the future be made applicable at the
time to reinvestments would be included as would any recurring account
charges that might be imposed by the Fund.
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.
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 was $952, resulting in a total return for the Fund 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 was $1,204 resulting in an average annual total return equal to
5.24%.
20
<PAGE> 60
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 the Fund was $9,668, resulting in a
total return for the Fund 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 was $12,225 resulting in an average
annual total return equal to 5.7%.
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
semiannual 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
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.
21
<PAGE> 61
14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of March 31, 1995, to Fund management's knowledge, the
following persons owned of record or beneficially 5% or more of the Fund's
total outstanding Shares.
Name and Address % Ownership
Alex. Brown & Sons Incorporated 13.13%
FBO 201-66944-12
P.O. Box 1346
Baltimore, MD 21203-1346
Alex. Brown & Sons Incorporated 79.29%
135 E. Baltimore Street
Baltimore, MD 21202
As of such date Alex. Brown owned beneficially less than 1% of such
shares.
As of March 31, 1995, Directors and officers as a group owned less
than 1% of the Fund's total outstanding shares.
15. FINANCIAL STATEMENTS
(See next page.)
22
<PAGE> 62
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>
23
<PAGE> 63
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.
24
<PAGE> 64
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.
25
<PAGE> 65
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.
26
<PAGE> 66
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.
27
<PAGE> 67
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.
28
<PAGE> 68
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND, INC.
Notes to Financial Statements Independent Auditors' Report
(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:
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
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.
29
<PAGE> 69
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
30
<PAGE> 70
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
List all financial statements and exhibits filed as part of the
Registration Statement.
(a) Financial statements:
(1) Included in Part A of the Registration Statement:
- Financial Highlights for the years ended December 31,
1994, December 31, 1993 and December 31, 1992 and for
the period ended December 31, 1991
(2) Included in Part B of the Registration Statement:
- Statement of Net Assets as of December 31, 1994.
- Statement of Operations for the year ended December
31, 1994.
- Statements of Changes in Net Assets for the years
ended December 31, 1994 and December 31, 1993.
- Financial Highlights for the years ended December 31,
1994, December 31, 1993 and December 31, 1992 and for
the period ended December 31, 1991.
- Notes to Financial Statements.
- Independent Auditors' Report.
(3) All required financial statements are included in Part B
of the Registration Statement. All other financial
statements and schedules are inapplicable.
(b) Exhibits
(1) (a)/1/ Articles of Incorporation.
(b)/2/ Form of Amended Articles of Incorporation.
(c)/3/ Form of Amendment to Amended Articles of
Incorporation.
(d)/4/ Articles Supplementary dated April 23, 1992.
(2) /2/ By-Laws, as amended.
(3) Not Applicable.
(4) /2/ Specimen Security.
C-1
<PAGE> 71
(5) (a)/2/ Investment Advisory Agreement between Registrant and
Flag Investors Management Corp. (now known as
Investment Company Capital Corp).
(b) Withdrawn.
(6) (a)/1/ Distribution Agreement between Registrant and Alex.
Brown & Sons Incorporated.
(b) Form of Sub-Distribution Agreement between Alex.
Brown & Sons Incorporated and Participating Dealers.
(c) Form of Shareholder Servicing Agreement between
Registrant and Shareholder Servicing Agents.
(7) Not Applicable.
(8) (a)/2/ Form of Custodian Agreement between Registrant and
Provident National Bank (now known as PNC Bank).
(b)/5/ Form of Master Services Agreement between Registrant
and Investment Company Capital Corp.
(9) Not Applicable.
(10) /3/ Form of Opinion of Counsel.
(11)(a) Consent of Deloitte & Touche LLP.
(b)/1/ Consents to Serve as Directors.
(12) Not Applicable.
(13) /1/ Form of Subscription Agreement re: initial $100,000
capital.
(14) Not Applicable.
(15) /1/ Distribution Plan.
(16) /4/ Schedule of Computation of Performance Quotations
(unaudited).
(24)(a)/5/ Powers of Attorney.
(b) Powers of Attorney for Louis E. Levy and James J.
Cunnane.
(27) Financial Data Schedule.
C-2
<PAGE> 72
- ------------
1 Incorporated by reference to Registrant's Registration Statement on Form
N-1A (Registration No. 33-34275), filed with the Securities and Exchange
Commission on April 17, 1990.
2 Incorporated by reference to Pre-Effective Amendment No. 1. to
Registrant's Registration Statement on Form N-1A (Registration No.
33-34275), filed with the Securities and Exchange Commission on March 14,
1991.
3 Incorporated by reference to Pre-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-1A (Registration No.
33-34275), filed with the Securities and Exchange Commission on May 1, 1991.
4 Incorporated by reference to Post-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-1A (Registration No.
33-34275), filed with the Securities and Exchange Commission on April 30,
1992.
5 Incorporated by reference to Post-Effective Amendment No. 4 to
Registrant's Registration Statement on Form N-1A (Registration No.
33-34275), filed with the Securities and Exchange Commission on April 28,
1994.
Item 25. Persons Controlled by or under Common Control with Registrant.
Furnish a list or diagram of all persons directly or indirectly
controlled by or under common control with the Registrant and as to each such
person indicate (1) if a company, the state or other sovereign power under
the laws of which it is organized, and (2) the percentage of voting
securities owned or other basis of control by the person, if any, immediately
controlling it.
None.
Item 26. Number of Holders of Securities.
State in substantially the tabular form indicated, as of a specified
date within 90 days prior to the date of filing, the number of record holders
of each class of securities of the Registrant.
The following information is given as of March 31, 1995:
Title of Class Number of Record Holders
Shares of Capital Stock 1,501
Item 27. Indemnification.
State the general effect of any contract, arrangements or statute
under which any director, officer, underwriter or affiliated person of the
Registrant is insured or indemnified in any manner against any liability
C-3
<PAGE> 73
which may be incurred in such capacity, other than insurance provided by any
director, officer, affiliated person or underwriter for their own protection.
Section 1, 2, 3 and 4 of Article VIII of Registrant's Articles of
Incorporation, included as Exhibit 1 to this Registration Statement and
incorporated herein by reference, provide as follows:
Section 1. To the fullest extent that limitations on the liability
of directors and officers are permitted by the Maryland General
Corporation Law, no director or officer of the Corporation shall
have any liability to the Corporation or its stockholders for
damages. This limitation on liability applies to events occurring
at the time a person serves as a director or officer of the
Corporation whether or not such person is a director or officer at
the time of any proceeding in which liability is asserted.
Section 2. The Corporation shall indemnify and advance expenses to
its currently acting and its former directors to the fullest extent
that indemnification of directors is permitted by the Maryland
General Corporation Law. The Corporation shall indemnify and
advance expenses to its officers to the same extent as its directors
and to such further extent as is consistent with law. The Board of
Directors of the Corporation may make further provision for
indemnification of directors, officers, employees and agents in the
By-Laws of the Corporation or by resolution or agreement to the
fullest extent permitted by the Maryland General Corporation Law.
Section 3. No provision of this Article VIII shall be effective to
protect or purport to protect any director or officer of the
Corporation against any liability to the Corporation or its security
holders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office.
Section 4. References to the Maryland General Corporation Law in
this Article VIII are to such law as from time to time amended. No
further amendment to the Charter of the Corporation shall decrease,
but may expand, any right of any person under this Article VIII
based on any event, omission or proceeding prior to such amendment.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1940 Act and is, therefore, unenforceable. In the
event of a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person in connection with the securities being registered) the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the 1940 Act and will be governed by the final
adjudication of such issue.
Item 28. Business and Other Connections of Investment Advisor.
Describe any other business, profession, vocation or employment of a
substantial nature in which the investment advisor of the Registrant, and
each director, officer or partner of any such investment advisor, is or has
been, at any time during the past two fiscal years, engaged for his own
account or in the capacity of director, officer, employee, partner or
trustee.
C-4
<PAGE> 74
During the last two fiscal years, no director or officer of
Investment Company Capital Corp., the Registrant's investment advisor, has
engaged in any other business, profession, vocation or employment of a
substantial nature other than that of the business of investment management
and, through affiliates, investment banking.
Item 29. Principal Underwriters.
(a) Alex. Brown & Sons Incorporated acts as distributor for Alex.
Brown Cash Reserve Fund, Inc., Flag Investors Telephone Income
Fund, Inc., Flag Investors International Fund, Inc., Flag
Investors Emerging Growth Fund, Inc., Flag Investors Quality
Growth Fund, Inc., the Flag Investors Total Return U.S. Treasury
Fund Shares of Total Return U.S. Treasury Fund, Inc., the Flag
Investors Managed Municipal Fund Shares of Managed Municipal
Fund, Inc., Flag Investors Value Builder Fund, Inc. Flag
Investors Maryland Intermediate Tax Free Income Fund, Inc., Flag
Investors Real Estate Securities Fund, Inc. and Flag Investors
Equity Partners Fund, Inc., all registered open-end management
investment companies.
(b) Position and
Offices with Position and
Name and Principal Principal Officers with
Business Address* Underwriter Registrant
- ------------------ -------------- -------------
Benjamin Howell Griswold, IV Chairman, None
Director
Alvin B. Krongard Chief None
Executive
Officer,
Director
Mayo A. Shattuck III President, Director None
Beverly L. Wright Chief Financial None
Officer and
Treasurer
Robert F. Price Secretary and None
General Counsel
- ------------
* 135 East Baltimore Street
Baltimore, Maryland 21202
(c) Not Applicable.
Item 30. Location of Accounts and Records.
With respect to each account, book or other document required to be
maintained by Section 31(a) of the 1940 Act [15 U.S.C. 80a-30(a)] and the
Rules [17 CFR 270.31a-1 to 31a-3] promulgated thereunder, furnish the name
and address of each person maintaining physical possession of each such
account, book or other document.
C-5
<PAGE> 75
Investment Company Capital Corp., 135 E. Baltimore Street,
Baltimore, Maryland 21202, the Fund's investment advisor and
transfer and dividend disbursing agent, maintains physical
possession of each such account, book or other document of the Fund,
except for those accounts, books and documents pursuant to Rule
31a-1(b)(1) maintained by the Registrant's custodian, PNC Bank, Airport
Business Park, 200 Stevens Drive, Lester, Pennsylvania 19113.
Item 31. Management Services.
Furnish a summary of the substantive provisions of any management-
related service contract not discussed in Part A or Part B of this Form
(because the contract was not believed to be of interest to a purchaser of
securities of the Registrant) under which services are provided to the
Registrant, indicating the parties to the contract, the total dollars paid
and by whom, for the last three fiscal years.
See Exhibit 8.
Item 32. Undertakings.
Furnish the following undertakings in substantially the following
form in all initial Registration Statements filed under the 1933 Act:
(a) Not Applicable.
(b) Not Applicable.
(c) A copy of the Registrant's latest Annual Report to Shareholders
is available upon request, without charge by contacting the
Registrant at (800) 767-3524.
C-6
<PAGE> 76
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940 the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment No. 5
to the Registration Statement pursuant to Rule 485(b) under the Securities
Act of 1933 and has duly caused this amendment to the Registration Statement
to be signed on its behalf by the undersigned thereto duly authorized in the
City of Baltimore, in the State of Maryland, on the 26th day of April,
1995.
FLAG INVESTORS INTERMEDIATE-TERM
INCOME FUND, INC.
By: /s/ M. Elliot Randolph.
------------------------------
M. Elliott Randolph, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
*/s/ Richard T. Hale Director April 26, 1995
- ------------------------------ Date
Richard T. Hale
*/s/ W. James Price Director April 26, 1995
- ------------------------------ Date
W. James Price
/s/ James J. Cunnane Director April 26, 1995
- ------------------------------ Date
James J. Cunnane
*/s/ N. Bruce Hannay Director April 26, 1995
- ------------------------------ Date
N. Bruce Hannay
*/s/ John F. Kroeger Director April 26, 1995
- ------------------------------ Date
John F. Kroeger
/s/ Louis E. Levy Director April 26, 1995
- ------------------------------ Date
Louis E. Levy
*/s/ Eugene J. McDonald Director April 26, 1995
- ----------------------------- Date
Eugene J. McDonald
*/s/ Harry Woolf Director April 26, 1995
- ----------------------------- Date
Harry Woolf
/s/ M. Elliott Randolph, Jr. President April 26, 1995
- ----------------------------- Date
M. Elliott Randolph, Jr.
/s/ Diana M. Ellis Chief Financial April 26, 1995
- ---------------------------- and Accounting Date
Diana M. Ellis Officer
*By: /s/ Brian C. Nelson
- ---------------------------
Brian C. Nelson
Attorney-in-Fact
<PAGE> 77
FLAG INVESTORS INTERMEDIATE-TERM INCOME FUND, INC.
INDEX OF EXHIBITS
Exhibit Page
Number Document Number
- ------ -------- ------
1 (a) Registrant's Articles of Incorporation are incorporated
herein by reference to Registrant's Registration Statement
on Form N-1A (Registration No. 33-34275), filed with the
Securities and Exchange Commission on April 17, 1990.
(b) Form of Registrant's Amended Articles of Incorporation are
incorporated herein by reference to Pre-Effective Amendment
No. 1 to Registrant's Registration Statement on Form N-1A
(Registration No. 33-34275), filed with the Securities and
Exchange Commission on March 14, 1991.
(c) Form of Amendment to Amended Articles of Incorporation is
incorporated herein by reference to Pre-Effective Amendment
No. 2 to the Registration Statement on Form N-1A
(Registration No. 33-34275), filed with the Securities and
Exchange Commission on May 1, 1991.
(d) Articles Supplementary dated April 23, 1992 are incorporated
herein by reference to Post-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-1A
(Registration No. 33-34275), filed with the Securities and
Exchange Commission on April 30, 1992.
2 Registrant's By-Laws, as amended are incorporated herein by
reference to Pre-Effective Amendment No. 1 to Registrant's
Registration Statement on Form N-1A (Registration No. 33-34275),
filed with the Securities and Exchange Commission on March
14, 1991.
3 Not Applicable.
4 Specimen Security is incorporated herein by reference to Pre-
Effective Amendment No. 1 to Registrant's Registration
Statementon Form N-1A (Registration No. 33-34275), filed with the
Securitiesand Exchange Commission on March 14, 1991.
5 (a) Investment Advisory Agreement between Registrant and Flag
Investors Management Corp. (now known as Investment Company
Capital Corp.) is incorporated herein by reference to Pre-
Effective Amendment No. 1 to Registrant's Registration
Statement on Form N-1A (Registration No. 33-34275),
filed with the Securities and Exchange Commission on
March 14, 1991.
(b) Withdrawn.
<PAGE> 78
Exhibit Page
Number Document Number
- ------ -------- ------
6 (a) Distribution Agreement between Registrant and Alex. Brown
& Sons Incorporated is incorporated herein by reference to
Registrant's Registration Statement on Form N-1A
(Registration No. 33-34275), filed with the Securities
and Exchange Commission on April 17, 1990.
(b) Registrant's Form of Sub-Distribution Agreement between Alex.
Brown & Sons Incorporated and Participating Broker-Dealers,
filed herewith.
(c) Registrant's Form of Shareholder Servicing Agreement, filed
herewith.
7 Not Applicable.
8 (a) Form of proposed Custodian Agreement between Registrant and
Provident National Bank (now known as PNC Bank) is
incorporated herein by reference to Pre-Effective Amendment
No. 1 to Registrant's Registration Statement on Form N-1A
(Registration No. 33-34275), filed with the Securities and
Exchange Commission on March 14, 1991.
(b) Form of Master Services Agreement between Registrant and
Investment Company Capital Corp. is incorporated herein by
reference to Post-Effective Amendment No. 4 to Registrant's
Registration Statement on Form N-1A (Registration No.
33-34275), filed with the Securities and Exchange Commission
on April 28, 1994.
9 Not Applicable.
10 Form of Opinion of Counsel is incorporated herein by reference
to Pre-Effective Amendment No. 2 to Registrant's Registration
Statement on Form N-1A (Registration No. 33-34275), filed with
the Securities and Exchange Commission on May 1, 1991.
11 (a) Consent of Deloitte & Touche LLP, filed herewith.
(b) Consents of Directors to Serve are incorporated herein by
reference to Registrant's Registration Statement on Form
N-1A (Registration No. 33-34275), filed with the Securities
and Exchange Commission on April 17, 1990.
12 Not applicable.
<PAGE> 79
Exhibit Page
Number Document Number
- ------ -------- ------
13 Form of Subscription Agreement re: initial capitalization of the
Fund is incorporated herein by reference to Registrant's
Registration Statement on Form N-1A (Registration No. 33-34275),
filed with the Securities and Exchange Commission on April 17,
1990.
14 Not Applicable.
15 Registrant's Distribution Plan is incorporated herein by
reference to Registrant's Registration Statement on Form N-1A
(Registration No. 33-34275), filed with the Securities and
Exchange Commission on April 17, 1990.
16 Schedule of Computation of Performance Quotations (unaudited)
is incorporated herein by reference to Post-Effective Amendment
No. 2 to Registrant's Registration Statement on Form N-1A
(Registration No. 33-34275), filed with the Securities and
Exchange Commission on April 30, 1992.
24 (a) Powers of Attorney are incorporated herein by reference to
Post-Effective Amendment No. 4 to Registrant's Registration
Statement on Form N-1A (Registration No. 33-34275), filed
with the Securities and Exchange Commission on April 28,
1994.
(b) Powers of Attorney for Louis E. Levy and James J. Cunnane,
filed herewith.
27 Financial Data Schedule.
<PAGE> 80
FLAG INVESTORS FAMILY OF FUNDS
135 East Baltimore Street
Baltimore, Maryland 21202
SUB-DISTRIBUTION AGREEMENT
_______________________, 19__
Gentlemen:
Alex. Brown & Sons Incorporated ("Alex. Brown"), a Maryland corporation,
serves as distributor (the "Distributor") of the Flag Investors Funds
(collectively, the "Funds", individually a "Fund"). The Funds are open-end
investment companies registered under the Investment Company Act of 1940, as
amended (the "Investment Company Act"). The Funds offer their shares ("Shares")
to the public in accordance with the terms and conditions contained in the
Prospectus of each Fund. - The term "Prospectus" used herein refers to the
prospectus on file with the Securities and Exchange Commission which is part of
the registration statement of each Fund under the Securities Act of 1933 (the
"Securities Act"). In connection with the foregoing you may serve as a
participating dealer (and, therefore, accept orders for the purchase or
redemption of Shares, respond to shareholder inquiries and perform other related
functions) on the following terms and conditions:
1. Participating Dealer. You are hereby designated a Participating Dealer
and as such are authorized (i) to accept orders for the purchase of Shares and
to transmit to the Funds such orders and the payment made therefore, (ii) to
accept orders for the redemption of Shares and to transmit to the Funds such
orders and all additional material, including any certificates for Shares, as
may be required to complete the redemption and (iii) to assist shareholders with
the foregoing and other matters relating to their investments in each Fund, in
each case subject to the terms and conditions set forth in the Prospectus of
each Fund. You are to review each Share purchase or redemption order submitted
through you or with your assistance for completeness and accuracy. You further
agree to undertake from time to time certain shareholder servicing activities
for customers of yours who have purchased Shares and who use your facilities to
communicate with the Funds or to effect redemptions or additional purchases of
Shares.
2. Limitation of Authority. No person is authorized to make any
representations concerning the Funds or the Shares except those contained in the
Prospectus of each Fund and in such printed information as the Distributor may
subsequently prepare. No person is authorized to distribute any sales material
relating to any Fund without the prior written approval of the Distributor.
3. Compensation. As compensation for such services, you will look solely to
the Distributor, and you acknowledge that the Funds shall have no direct
responsibility for any compensation. In addition to any sales charge payable to
you by your customer pursuant to a Prospectus, the Distributor will pay you no
less often than annually a shareholder processing and service fee (as we may
determine from time to time in writing) computed as a percentage of the average
daily net assets maintained with each Fund during the preceding period by
<PAGE> 81
shareholders who purchase their shares through you or with your assistance,
provided that said assets are at least $250,000 for each Fund for which you are
to be compensated, and provided that in all cases your name is transmitted with
each shareholder's purchase order.
4. Prospectus and Reports. You agree to comply with the provisions contained
in the Securities Act governing the distribution of prospectuses to persons to
whom you offer Shares. You further agree to deliver, upon our request, copies of
any amended Prospectus of the relevant Fund to purchasers whose Shares you are
holding as record owner and to deliver to such persons copies of the annual and
interim reports and proxy solicitation materials of the Funds. We agree to
furnish to you as many copies of each Prospectus, annual and interim reports and
proxy solicitation materials as you may reasonably request.
5. Qualification to Act. You represent that you are a member in good
standing of the National Association of Securities Dealers, Inc. (the "NASD").
Your expulsion or suspension from the NASD will automatically terminate this
Agreement on the effective date of such expulsion or suspension. You agree that
you will not offer Shares to persons in any jurisdiction in which you may not
lawfully make such offer due to the fact that you have not registered under, or
are not exempt from, the applicable registration or licensing requirements of
such jurisdiction. You agree that in performing the services under this
Agreement, you at all times will comply with the Rules of Fair Practice of the
NASD, including, without limitation, the provisions of Section 26 of such Rules.
You agree that you will not combine customer orders to reach breakpoints in
commissions for any purposes whatsoever unless authorized by the then current
Prospectus in respect of Shares of a particular class or by us in writing. You
also agree that you will place orders immediately upon their receipt and will
not withhold any order so as to profit therefrom. In determining the amount
payable to you hereunder, we reserve the right to exclude any sales which we
reasonably determine are not made in accordance with the terms of the Prospectus
and provisions of the Agreement.
6. Blue Sky. The Funds have registered an indefinite number of Shares under
the Securities Act. The Funds intend to register or qualify in certain states
where registration or qualification is required. We will inform you as to the
states or other jurisdictions in which we believe the Shares have been qualified
for sale under, or are exempt from the requirements of, the respective
securities laws of such states. You agree that you will offer Shares to your
customers only in those states where such Shares have been registered,
qualified, or an exemption is available. We assume no responsibility or
obligation as to your right to sell Shares in any jurisdiction. We will file
with the Department of State in New York a State Notice and a Further State
Notice with respect to the Shares, if necessary.
7. Authority of Fund. Each of the Funds shall have full authority to take
such action as it deems advisable in respect of all matters pertaining to the
offering of its Shares, including the right not to accept any order for the
purchase of Shares.
8. Record Keeping. You will (i) maintain all records required by law to be
kept by you relating to transactions in Shares and, upon request by any Fund,
promptly make such of these records available to the Fund as the Fund may
reasonably request in connection with its operations and (ii) promptly notify
the Fund if you experience any difficulty in maintaining the records described
in the foregoing clauses in an accurate and complete manner.
9. Liability. The Distributor shall be under no liability to you except for
lack of good faith and for obligations expressly assumed by it hereunder. In
carrying out your obligations, you agree to act in good faith and without
negligence. Nothing contained in this Agreement is intended to operate as a
waiver by the Distributor or you of compliance with any provision of the
-2-
<PAGE> 82
Investment Company Act, the Securities Act, the Securities Exchange Act of 1934,
as amended, or the rules and regulations promulgated by the Securities and
Exchange Commission thereunder.
10. Termination. This Agreement may be terminated by either party, without
penalty, upon ten days' notice to the other party and shall automatically
terminate in the event of its assignment (as defined in the Investment Company
Act). This Agreement may also be terminated at any time for any particular Fund
without penalty by the vote of a majority of the members of the Board of
Directors or Trustees of such Fund who are not "interested persons" (as defined
in the Investment Company Act) and who have no direct or indirect financial
interest in the operation of the Distribution Agreement between such Fund and
the Distributor or by the vote of a majority of the outstanding voting
securities of the Fund.
11. Communications. All communications to us should be sent to the above
address. Any notice to you shall be duly given if mailed or telegraphed to you
at the address specified by you below.
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us one copy of this agreement.
ALEX. BROWN & SONS INCORPORATED
____________________________________
(Authorized Signature)
Confirmed and accepted:
Firm Name: _____________________
By: ____________________________
Address: _______________________
Date: __________________________
-3-
<PAGE> 83
FLAG INVESTORS FAMILY OF FUNDS
135 East Baltimore Street
Baltimore, Maryland 21202
SHAREHOLDER SERVICING AGREEMENT
_________________, 19__
Gentlemen:
We wish to enter into this Shareholder Servicing Agreement with you
concerning the provision of support services to your clients and customers
("Customers") who may from time to time beneficially own shares of our common
stock ("Shares").
The terms and conditions of this Servicing Agreement are as
follows:
Section 1. (a) You agree to provide the following services to
Customers who may from time to time beneficially own Shares: (i) aggregating
and processing purchase and redemption requests for Shares from Customers and
placing net purchase and redemption orders with our distributor; (ii)
processing dividend payments from us on behalf of Customers; (iii) providing
information periodically to Customers showing their positions in Shares; (iv)
arranging for bank wires; (v) responding to Customer inquiries relating to
the services performed by you; (vi) providing subaccounting with respect to
Shares beneficially owned by Customers; (vii) as required by law, forwarding
shareholder communications from us (such as proxies, shareholder reports,
annual and semi-annual financial statements and dividend, distribution and
tax notices) to Customers; and (viii) providing such other similar services
as we may reasonably request to the extent you are permitted to do so under
applicable statutes, rules or regulations. You will provide to Customers a
schedule of any fees that you may charge directly to them for such services.
You hereby represent that such fees are not unreasonable or excessive.
Shares purchased by you on behalf of Customers will be registered with our
transfer agent in your name or in the name of your nominee. The Customer
will be the beneficial owner of Shares purchased and held by you in
accordance with the Customer's instructions ("Customers' Shares") and the
Customer may exercise all rights of a shareholder of the Fund.
(b) You agree that you will (i) maintain all records required
by law relating to transactions in Shares and, upon our request, promptly
make such of these records available to us as we may reasonably request in
connection with our operations, and (ii) promptly notify us if you experience
any difficulty in maintaining the records described in the foregoing clauses
in an accurate and complete manner.
Section 2. You will provide such office space and equipment,
telephone facilities and personnel (which may be a part of the space,
equipment and facilities currently used in your business, or any personnel
employed by you) as may be reasonably necessary or beneficial in order to
provide the aforementioned services to Customers.
Section 3. Neither you nor any of your officers, employees, agents
or assignees are authorized to make any representations concerning us or
Shares except those contained in our then current prospectus for such Shares,
copies of which will be supplied by us to you, or in such supplemental
literature or advertising as may be authorized by us in writing.
<PAGE> 84
Section 4. For all purposes of this Agreement you will be deemed
to be an independent contractor, and will have no authority to act as agent
for us in any matter or in any respect. You may, upon prior written notice
to us, delegate your responsibilities hereunder to another person or persons;
provided, however, that notwithstanding any such delegation, you will remain
responsible for the performance of all of your responsibilities under this
Agreement. By your written acceptance of this Agreement, you agree to and do
release, indemnify and hold us harmless from and against any and all direct
or indirect liabilities or losses resulting from requests, directions,
actions or inactions of or by you or your officers, employees, agents or
assignees regarding your responsibilities hereunder or the purchase,
redemption, transfer or registration of Shares by or on behalf of Customers.
You and your employees will, upon request, be available during normal
business hours to consult with us or our designees concerning the performance
of your responsibilities under this Agreement.
Section 5. In consideration of the services and facilities
provided by you hereunder, we will cause our distributor pay to you, and you
will accept as full payment therefor, a fee (as we may determine from time to
time in writing) computed as a percentage of the average daily net assets of
the Customers' Shares held of record by you from time to time, which fee will
be computed daily and payable no less often than annually. For purposes of
determining the fees payable under this Section 5, the average daily net
assets of the Customers' Shares will be computed in the manner specified in
our registration statement (as the same is in effect from time to time) in
connection with the computation of the net asset value of Shares for purposes
of purchases and redemptions. The fee rate stated above may be prospectively
increased or decreased by us or by our distributor, at any time upon notice
to you. Further, we may, in our discretion and without notice, suspend or
withdraw the sale of Shares, including the sale of such shares to you for the
account of any Customer or Customers.
Section 6. You will furnish us or our designees with such
information relating to your performance under this Agreement as we or they
may reasonably request (including, without limitation, periodic
certifications confirming the provision to Customers of the services
described herein), and shall otherwise cooperate with us and our designees
(including, without limitation, any auditors designated by us), in connection
with the preparation of reports to our Board of Directors concerning this
Agreement and the monies paid or payable by us pursuant hereto, as well as
any other reports or filings that may be required by law.
Section 7. We may enter into other similar services agreements
with any other person or persons without your consent.
Section 8. This Agreement will become effective on the date a
fully executed copy of this Agreement is received by us or our distributor,
and is terminable, without penalty, at any time by us or by you upon ten
days' notice to the other party hereto and shall automatically terminate in
the event of its assignment, as that term is defined in the Investment
Company Act of 1940, as amended.
Section 9. This Agreement will be construed in accordance with the
laws of the State of Maryland.
Section 10. All notices and other communications to either you or
us will be duly given if mailed, telegraphed, telexed or transmitted by
similar telecommunications device, if to us at the address below, and if to
you, at the address specified by you after your signature below:
Flag Investors Family of Funds
135 East Baltimore Street
Baltimore, Maryland 21202
Attention: Edward J. Veilleux
2
<PAGE> 85
If you agree to be legally bound by the provisions of this
Agreement, please sign a copy of this letter where indicated below and
promptly return it to us, at the address set forth in Section 10 above.
Very truly yours,
ALEX. BROWN & SONS INCORPORATED
Date: _________ By: ___________________
Authorized Officer
Confirmed and Accepted:
Firm Name: _______________________________
By: _______________________________
Address: _______________________________
_______________________________
Date: _______________________________
3
<PAGE> 86
CONSENT OF INDEPENDENT AUDITORS
Flag Investors Intermediate-Term Income Fund, Inc.
We hereby consent to the use in Post-Effective Amendment No. 5 to the
Registration Statement of Flag Investors Intermediate-Term Income Fund, Inc.
(Registration No. 33-34275) of our report dated January 27, 1995 appearing in
the Statement of Additional Information, which is a part of such Registration
Statement, and to the reference to us under the caption "Financial
Highlights" appearing in the Prospectus which is also part of such
Registration Statement.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
April 24, 1995
<PAGE> 87
FLAG INVESTORS INTERMEDIATE-TERM
INCOME FUND, INC.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that, Louis E. Levy, whose signature
appears below, does hereby constitute and appoint Edward J. Veilleux and
Brian C. Nelson, and each of them singly, his true and lawful attorney-in-
fact and agent, with full power of substitution or resubstitution, to do any
and all acts and things and to execute any and all instruments, in his name,
place and stead, which said attorney-in-fact and agent may deem necessary or
advisable or which may be required to enable Flag Investors Intermediate-Term
Income Fund, Inc. (the "Fund") to comply with the Securities Act of 1933, as
amended (the "1933 Act") and the Investment Company Act of 1940, as amended
(the "1940 Act"), and any rules, regulations or requirements of the
Securities and Exchange Commission in respect thereof, in connection with the
Fund's Registration Statement on Form N-1A pursuant to the 1933 Act and the
1940 Act, together with any and all pre-and post-effective amendments
thereto, including specifically, but without limiting the generality of the
foregoing, the power and authority to sign in the name and on behalf of the
undersigned as a director of the Fund such Registration Statement and any and
all such pre-and post-effective amendments filed with the Securities and
Exchange Commission under the 1933 Act and the 1940 Act, and any other
instruments or documents related thereto, and the undersigned does hereby
ratify and confirm all that said attorney-in-fact and agent, or either of
them or their substitute or substitutes, shall lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ Louis E. Levy
---------------------------
Louis E. Levy
Date: April 26, 1995
<PAGE> 88
FLAG INVESTORS INTERMEDIATE-TERM
INCOME FUND, INC.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that, James J. Cunnane, whose
signature appears below, does hereby constitute and appoint Edward J.
Veilleux and Brian C. Nelson, and each of them singly, his true and lawful
attorney-in-fact and agent, with full power of substitution or
resubstitution, to do any and all acts and things and to execute any and all
instruments, in his name, place and stead, which said attorney-in-fact and
agent may deem necessary or advisable or which may be required to enable Flag
Investors Intermediate-Term Income Fund, Inc. (the "Fund") to comply with the
Securities Act of 1933, as amended (the "1933 Act") and the Investment
Company Act of 1940, as amended (the "1940 Act"), and any rules, regulations
or requirements of the Securities and Exchange Commission in respect thereof,
in connection with the Fund's Registration Statement on Form N-1A pursuant to
the 1933 Act and the 1940 Act, together with any and all pre-and post-
effective amendments thereto, including specifically, but without limiting
the generality of the foregoing, the power and authority to sign in the name
and on behalf of the undersigned as a director of the Fund such Registration
Statement and any and all such pre-and post-effective amendments filed with
the Securities and Exchange Commission under the 1933 Act and the 1940 Act,
and any other instruments or documents related thereto, and the undersigned
does hereby ratify and confirm all that said attorney-in-fact and agent, or
either of them or their substitute or substitutes, shall lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal
as of the date set forth below.
/s/ James J. Cunnane
---------------------------------
James J. Cunnane
Date: April 26, 1995
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<S> <C>
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<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 83,709
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<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 324
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<SHARES-REINVESTED> 404
<NET-CHANGE-IN-ASSETS> 23,925
<ACCUMULATED-NII-PRIOR> 0
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<AVERAGE-NET-ASSETS> 102,167
<PER-SHARE-NAV-BEGIN> 10.57
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<PER-SHARE-GAIN-APPREC> .92
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<PER-SHARE-DISTRIBUTIONS> .57
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<PER-SHARE-NAV-END> 9.62
<EXPENSE-RATIO> .70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
