<PAGE>
As Filed With the Securities and Exchange Commission on October 18, 1996
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. 8 [X]
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 10 [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 LLP
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)
- ------
on (date) pursuant to paragraph (b)
- ------
X 60 days after filing pursuant to paragraph (a)(1)
- ------
75 days after filing pursuant to paragraph (a)(2)
- ------
on (date) pursuant to paragraph (a) of Rule 485
- ------
- -------------------------------------------------------------------------------
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, 1995 was
filed with the Commission on February 23, 1996.
- -------------------------------------------------------------------------------
<PAGE>
FLAG INVESTORS INTERMEDIATE-TERM INCOME FUND, INC.
(Class A Shares)
Cross Reference Sheet
October 18, 1996
<TABLE>
<CAPTION>
Registration
Statement
Items Required by Form N-1A Location
- --------------------------- ------------
<S> <C> <C>
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
- ----------
* Information required by Item 5A is contained in the 1995 Annual
Report to Shareholders.
** Omitted since the answer is negative or the item is not
applicable.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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; Semi-Annual 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.
</TABLE>
<PAGE>
The prospectus dated May 1, 1996 relating to the Flag Investors Class A Shares
of Flag Investors Intermediate-Term Income Fund, Inc. (the "Fund"), filed with
the Securities and Exchange Commission via EDGAR on April 26, 1996 as part of
Post-Effective Amendment No. 7 to the Fund's Registration Statement on Form N-1A
(File No. 33-34275) under Rule 485(b) under the Securities Act of 1933, as
amended (the "1933 Act") (Accession No. 0000950116-96-000268), and in final form
under Rule 497(c) under the 1933 Act via EDGAR on May 3, 1996 (Accession No.
0000950116-96-000305) is incorporated herein by reference as if set forth in its
entirety.
<PAGE>
FLAG INVESTORS INTERMEDIATE-TERM INCOME FUND, INC.
(Institutional Shares)
Cross Reference Sheet
October 18, 1996
<TABLE>
<CAPTION>
Registration
Statement
Items Required by Form N-1A Location
- --------------------------- ------------
<S> <C> <C>
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 Institutional Shares;
Distributor
Item 8. Redemption or Repurchase......................... How to Redeem Institutional 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
- -----------
* Information required by Item 5A is contained in the 1995 Annual
Report to Shareholders.
** Omitted since the answer is negative or the item is not
applicable.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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; Semi-Annual 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.
</TABLE>
<PAGE>
The prospectus dated May 1, 1996 relating to the Flag Investors Institutional
Shares of Flag Investors Intermediate-Term Income Fund, Inc. (the "Fund"), filed
with the Securities and Exchange Commission via EDGAR on April 26, 1996 as part
of Post-Effective Amendment No. 7 to the Fund's Registration Statement on Form
N-1A (File No. 33-34275) under Rule 485(b) under the Securities Act of 1933, as
amended (the "1933 Act") (Accession No. 0000950116-96-000268), and in final form
under Rule 497(c) under the 1933 Act via EDGAR on May 3, 1996 (Accession No.
0000950116-96-000305) is incorporated herein by reference as if set forth in its
entirety.
<PAGE>
FLAG INVESTORS INTERMEDIATE-TERM INCOME FUND, INC.
(Alex. Brown Capital Advisory & Trust Shares)
Cross Reference Sheet
October 18, 1996
<TABLE>
<CAPTION>
Registration
Statement
Items Required by Form N-1A Location
- --------------------------- ------------
<S> <C> <C>
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 (with respect to Flag
Investors Class A Shares and Flag
Investors Institutional Shares)
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 and Accounting Services
Item 5A. Management's Discussion of Fund
Performance...................................... *
Item 6. Capital Stock and Other
Securities....................................... Cover Page; Dividends and Taxes;
General Information
Item 7. Purchase of Securities Being
Offered.......................................... How to Invest in the Alex. Brown Capital
Advisory & Trust Shares; Distributor
Item 8. Redemption or Repurchase......................... How to Redeem Alex. Brown Capital
Advisory & Trust 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
- -----------
* Information required by Item 5A will be contained in the
Registrant's first Annual Report to Shareholders containing
results of operations of the ABCAT Shares, when available.
** Omitted since the answer is negative or the item is not
applicable.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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 and
Accounting Services; Independent
Accountants
Item 17. Brokerage Allocation............................. Brokerage
Item 18. Capital Stock and Other
Securities....................................... Capital Stock; Semi-Annual 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 (relating to the
Fund's other classes of shares)
Part C - Other Information
Part C contains the information required by the items contained
therein under the items set forth in the form.
</TABLE>
<PAGE>
LOGO
ALEX. BROWN
CAPITAL ADVISORY
& TRUST
INTERMEDIATE-TERM INCOME SHARES
(A Class of 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.")
Alex. Brown Capital Advisory & Trust Shares of the Fund ("ABCAT Shares")
are available solely for the discretionary accounts of Alex. Brown Capital
Advisory & Trust Company and its affiliates. (See "How to Invest in ABCAT
Shares.")
This Prospectus sets forth basic information that investors should know
about the Fund prior to investing and should be retained for future
reference. A Statement of Additional Information dated May 1, 1996, as
amended through _______, 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)
767-3524.
- -------------------------------------------------------------------------------
THE FUND'S SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK. THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENT IN THE SHARES INVOLVES RISK, INCLUDING POSSIBLE
LOSS OF PRINCIPAL.
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.
The date of this Prospectus is ______, 1996
<PAGE>
ALEX. BROWN
CAPITAL ADVISORY
& TRUST
INTERMEDIATE-TERM
INCOME SHARES
(A Class of Flag Investors Intermediate-Term Income Fund, Inc.)
135 East Baltimore Street
Baltimore, Maryland 21202
TABLE OF CONTENTS
------
<TABLE>
<CAPTION>
Page
<S> <C>
1. Fund Expenses ..................................... 2
2. Financial Highlights .............................. 3
3. Investment Program ................................ 5
4. Investment Restrictions ........................... 10
5. How to Invest in ABCAT Shares ..................... 11
6. How to Redeem ABCAT Shares ........................ 13
7. Dividends and Taxes ............................... 14
8. Management of the Fund ............................ 16
9. Investment Advisor ................................ 16
10. Distributor ....................................... 17
11. Custodian, Transfer Agent and Accounting Services . 18
12. Performance Information ........................... 18
13. General Information ............................... 19
Appendix .............................................. A-1
</TABLE>
- -------------------------------------------------------------------------------
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. Shares may be offered only to residents of those states in which such
shares are eligible for purchase.
- -------------------------------------------------------------------------------
1
<PAGE>
===============================================================================
1. FUND EXPENSES
...............................................................................
SHAREHOLDER TRANSACTION EXPENSES:
(as a percentage of offering price)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Maximum Sales Charge Imposed on Purchases .............. None
Maximum Sales Charge Imposed on Reinvested Dividends ... None
Deferred Sales Charge .................................. None
</TABLE>
- -------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (net of fee waivers):
(as a percentage of average daily net assets)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Management Fees (net of fee waivers) ................. .12%*
12b-1 Fees ........................................... None
Other Expenses ....................................... .33%
Total Fund Operating Expenses (net of fee waivers) ... .45%*+
=========
</TABLE>
- -------------------------------------------------------------------------------
+Alex. Brown Capital Advisory & Trust Company intends, consistent with
applicable legal requirements, to reimburse its clients at the account level
in an amount such that the additional cost for client assets invested in
ABCAT Shares is .20%.
*The Fund's investment advisor currently intends to waive its fee or
reimburse the Fund, on a voluntary basis, to the extent required so that
Total Fund Operating Expenses do not exceed .45% of the ABCAT Shares'
average daily net assets. Absent fee waivers, Management Fees would be .35%
and Total Fund Operating Expenses would be .68% of the ABCAT Shares' average
daily net assets.
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
- ---------------------------------------------------------------------------------------------------------
$5 $15 $25 $58
</TABLE>
- -----------------------------------------------------------------------------
*The Example is based on Total Fund Operating Expenses, net of fee waivers.
Absent fee waivers, expenses would be higher.
The Example should not be considered a representation of future expenses.
Actual expenses may be greater or less than those shown.
The purpose of the foregoing table is to describe the various costs and
expenses that an investor in the Fund will bear directly and indirectly. (For
more complete descriptions of the various costs and expenses, see "How to
Invest in ABCAT Shares", "Investment Advisor" and "Distributor.") The ABCAT
Shares have not been offered prior to the date of this Prospectus.
Accordingly, the Expenses and Example appearing in the table above are based
on the Fund's expenses (net of fee waivers) for the Flag Investors Class A
Shares, another class of shares offered by the Fund, for the fiscal year
ended December 31, 1995, less 12b-1 fees of .25%.
2
<PAGE>
===============================================================================
2. Financial Highlights
The Fund has not offered the ABCAT Shares prior to the date of this
Prospectus. However, the Fund has offered Flag Investors Institutional Shares
since November 2, 1995 and Flag Investors Class A Shares since May 13, 1991.
Historical financial information about the Fund is not fully applicable to
the ABCAT Shares because the expenses paid by the Fund in the past differ
from those the ABCAT Shares will incur. (See "Fund Expenses.") Nevertheless,
historical information about the Fund may be useful to investors if they take
into account the differences in expenses. Accordingly, the financial
highlights included in this table have been derived from the Fund's financial
statements for its other classes of shares for the periods indicated and,
except for the financial statements for the six-month period ended June 30,
1996 which are unaudited, have been audited by Deloitte & Touche LLP,
independent auditors. The financial statements and related notes for the
fiscal year ended December 31, 1995 and the report thereon of Deloitte &
Touche LLP, and the unaudited financial statements for the six-month period
ended June 30, 1996 are included in the Statement of Additional Information.
Additional performance information for the Fund's other classes is contained
in the Fund's Annual Report for the fiscal year ended December 31, 1995 and
its Semi-Annual Report for the six-month period ended June 30, 1996 which can
be obtained at no charge by calling the Fund at (800) 767-3524.
3
<PAGE>
(For a Share outstanding throughout each period)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Flag Investors
Institutional
Shares
---------------------------------
For the Six For the Period
Months Ended Nov. 2, 1995*
June 30, 1996 through
(Unaudited) Dec. 31, 1995
--------------- ---------------
<S> <C> <C>
Per Share Operating
Performance:
Net asset value at
beginning of period $10.58 $10.42
------ ------
Income from Investment
Operations:
Net investment
income 0.36 0.09
Net realized and
unrealized gain/(loss)
on
investments (0.34) 0.12
------ ------
Total from Investment
Operations 0.02 0.21
------ ------
Less Distributions:
Dividends from net
investment income and
short-term
gains (0.31) (0.05)
Return of capital -- --
Distributions from net
realized long-term
gains -- --
------ ------
Total distributions (0.31) (0.05)
------ ------
Net asset value at end
of period $10.29 $10.58
====== ======
Total Return((1)) (0.43)% 12.47%**
Ratios to Average
Net Assets:
Expenses((2)) 0.45%** 0.45%**
Net investment
income((3)) 6.51%** 6.52%**
Supplemental Data:
Net assets at end of
period (000) $7,918 $2,186
Portfolio turnover rate 23% 46%
</TABLE>
<PAGE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Flag Investors Class A Shares
------------------------------------------------------------------
For the Six For the Period
Months Ended Year Ended December 31, May 13, 1991*
June 30, 1996 ----------------------------------------------- through
(Unaudited) 1995 1994 1993 1992 Dec. 31, 1991
--------------- --------- --------- ---------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value at
beginning of period $10.48 $ 9.62 $10.57 $10.37 $10.54 $10.00
------ ------ ------ ------ ------ ------
Income from Investment
Operations:
Net investment
income 0.37 0.62 0.57 0.57 0.63 0.32
Net realized and
unrealized gain/(loss)
on
investments (0.36) 0.84 (0.92) 0.34 (0.05) 0.64
------ ------ ------ ------ ------ ------
Total from Investment
Operations 0.01 1.46 (0.35) 0.91 0.58 0.96
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends from net
investment income and
short-term
gains (0.30) (0.60) (0.57) (0.69) (0.75) (0.42)
Return of capital -- -- (0.03) -- -- --
Distributions from net
realized long-term
gains -- -- -- (0.02) -- --
------ ------ ------ ------ ------ ------
Total distributions (0.30) (0.60) (0.60) (0.71) (0.75) (0.42)
------ ------ ------ ------ ------ ------
Net asset value at end
of period $10.19 $10.48 $ 9.62 $10.57 $10.37 $10.54
====== ====== ====== ====== ====== ======
Total Return((1)) (0.43)% 15.43% (3.32)% 8.98% 5.68% 9.79%**
Ratios to Average
Net Assets:
Expenses((2)) 0.70%** 0.70% 0.70% 0.70% 0.70% 0.70%**
Net investment
income((3)) 6.16%** 6.00% 5.57% 5.43% 6.01% 5.97%**
Supplemental Data:
Net assets at end of
period (000) $58,009 $67,116 $78,789 $112,520 $78,706 $64,327
Portfolio turnover rate 23% 46% 50% 86% 107% 46%
</TABLE>
- ------
* Commencement of operations.
** Annualized.
(1) Total return excludes the effect of sales loads.
(2) Without the waiver of advisory fees, the ratio of expenses to average net
assets would have been 0.96% (annualized), 0.93%, 0.84%, 0.85%, 0.87% and
1.73% (annualized) for the Flag Investors Class A Shares for the six
months ended June 30, 1996, the years ended December 31, 1995, 1994, 1993
and 1992, and for the period ended December 31, 1991, respectively and
0.71% (annualized) and 0.72% (annualized) for the Flag Investors
Institutional Shares for the six months ended June 30, 1996 and the
period ended December 31, 1995, respectively.
(3) Without the waiver of advisory fees, the ratio of net investment income
to average net assets would have been 5.91% (annualized), 5.77%, 5.43%,
5.28%, 5.83% and 4.94% (annualized) for the Flag Investors Class A Shares
for the six months ended June 30, 1996, the years ended December 31,
1995, 1994, 1993 and 1992 and for the period ended December 31, 1991,
respectively and 6.26% (annualized) and 6.25% (annualized) for the Flag
Investors Institutional Shares for the six months ended June 30, 1996 and
the period ended December 31, 1995, respectively.
4
<PAGE>
===============================================================================
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. This investment objective is a fundamental policy and may
not be changed without the affirmative vote of the majority of the
outstanding shares of the Fund.
In seeking this objective the Fund will, under normal circumstances,
invest at least 65% of its total assets in (i) obligations issued or
guaranteed by the U.S. Government or its agencies and instrumentalities
(including securities of the Government National Mortgage Association
("GNMA"), (ii) collateralized mortgage obligations ("CMOs") which are
collateralized by mortgage-backed securities issued by GNMA, the Federal Home
Loan Mortgage Corporation ("FHLMC") or the Federal National Mortgage
Association ("FNMA") and which are rated AAA by Standard & Poor's Ratings
Group ("S&P") or Aaa by Moody's Investors Service, Inc. ("Moody's") or are
determined to be of comparable quality by the Fund's investment advisor (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. In the event any security owned by the Fund is downgraded, the
Advisor will review the situation and take appropriate action, but will not
be automatically required to sell any such security. 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
5
<PAGE>
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
(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.
6
<PAGE>
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. 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
7
<PAGE>
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
the CMO structure, both as described above. In general, the collateral
supporting asset-backed securities is of shorter maturity than mortgage loans
and is less likely to experience substantial prepayments. However,
asset-backed securities do not generally have the benefit of the same
security interest in the related collateral as either mortgage-backed
securities or CMOs, and may therefore present certain risks not associated
with such other securities.
A change in the value of a foreign currency relative to the U.S. dollar
will result in a corresponding change in the U.S. dollar value of the Fund's
assets denominated in that currency. Accordingly, the value of those assets
of the Fund, as measured in U.S. dollars, may be affected favorably or
unfavorably by changes in foreign currency exchange rates and exchange
control regulations. In addition, the Fund may incur costs in connection with
conversions between various currencies. In order to protect against
uncertainty in the level of future foreign exchange rates, the Fund is
authorized to use forward foreign currency exchange contracts. A forward
foreign currency exchange contract is an obligation to purchase or sell a
specific currency at a future date at a price set at the time the contract is
entered into. The Fund may use such forward contracts only under two
circumstances. First, if the Advisor believes the Fund should fix the U.S.
dollar price of the foreign security when the Fund enters into a contract for
the purchase or sale, at a future date, of a security denominated in a
foreign currency, the Fund may enter into forward contracts. Second, if the
Advisor believes the Fund should hedge against risk of loss in the value of
those portfolio securities denominated in foreign currencies, the Fund may
enter into a forward contract to sell or purchase an amount of the foreign
currency approximating the value of some or all of those securities.
The market value of the Fund's debt securities will change in response to
interest rate changes and other factors. During periods of falling interest
rates, the value of outstanding debt securities generally rises. Conversely,
during periods of rising interest rates, the value of such securities
generally declines. An investment in Fund shares should be made with an
understanding of the risks which an investment in fixed-rate CMOs may entail,
including the risk that the value of the portfolio, hence the value of the
Fund's shares, will decline with an increase in interest rates and that the
life of the CMOs in the portfolio depends on the actual prepayments received
on the underlying mortgage-backed securities, the timing of which cannot be
determined but which may be sooner or later than anticipated, especially if
interest rates decline.
8
<PAGE>
Subject to the Fund's overall investment limitations on investing in
illiquid securities and restricted securities, the Fund may purchase Rule
144A Securities. Rule 144A Securities are restricted securities in that they
have not been registered under the Securities Act of 1933, but they may be
traded between certain qualified institutional investors, including
investment companies. The presence or absence of a secondary market may
affect the value of the Rule 144A Securities. The Fund's Board of Directors
has established guidelines and procedures to be utilized to determine the
liquidity of such securities.
...............................................................................
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
9
<PAGE>
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
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 Fund's outstanding shares. Investment restriction
number 4 may be changed by a vote of the majority of the Board of Directors.
The Fund will not:
1) Concentrate 25% or more of its total assets in securities of issuers in
any one industry (for these purposes the U.S. Government and its agencies
and instrumentalities are not considered an issuer);
2) Invest more than 5% of its total assets in the securities of any single
issuer or acquire more than 10% of the voting securities of any issuer
(for these purposes the U.S. Government and its agencies and
instrumentalities are not considered an issuer);
3) Borrow money except as a temporary measure to facilitate settlements and
for extraordinary or emergency purposes and then only from banks and in an
amount not exceeding 10% of the value of the total assets of the Fund at
the time of such borrowing, provided that, while borrowings by the Fund
equalling 5% or more of the Fund's total assets are outstanding, the Fund
will not purchase securities; and
4) Invest more than 10% of the Fund's net assets in illiquid securities,
including repurchase agreements with maturities of greater than seven
days.
10
<PAGE>
The Fund is subject to further investment restrictions that are set forth
in the Statement of Additional Information.
===============================================================================
5. How to Invest in ABCAT Shares
Alex. Brown Capital Advisory & Trust Company and its affiliates may
acquire ABCAT Shares on behalf of their discretionary accounts by placing
orders with the Fund's distributor (the "Distributor"). Beneficial ownership
of ABCAT Shares will be reflected on books maintained by Alex. Brown Capital
Advisory & Trust Company, an affiliate, or another financial institution.
There is no minimum for initial or subsequent investments in ABCAT Shares.
It is the responsibility of Alex. Brown Capital Advisory & Trust Company
and its affiliates to transmit orders for ABCAT Share purchases and deliver
required funds to the Distributor.
Orders for purchases of ABCAT Shares are accepted on any day on which the
New York Stock Exchange is open for business (a "Business Day"). Purchase
orders for ABCAT Shares will be executed at the net asset value per share
next determined after receipt of the purchase order and immediately available
funds. The Fund reserves the right to suspend the sale of ABCAT Shares at any
time or reject any order.
The net asset value per share is determined daily as of the close of the
New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time), on
each Business Day. Net asset value per share of a class is calculated by
valuing all assets held by the Fund, deducting all liabilities, including
liabilities attributable to that specific class, and dividing the resulting
amount by the number of then outstanding shares of the class. For this
purpose, portfolio securities are 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 is
generally used. Securities or other assets for which market quotations are
not readily available are valued at their fair value as determined in good
faith under procedures established from time to time and monitored by the
Fund's Board of Directors. Such procedures may include the use of an
independent pricing service which uses prices based upon yields or prices of
securities of comparable quality, coupon, maturity and type; indications as
to values from dealers; and general market conditions. Debt obligations with
maturities of 60 days or less will be valued at amortized cost, which
constitutes fair value as determined by the Fund's Board of Directors.
11
<PAGE>
In the interest of economy and convenience and because of the operating
procedures for the ABCAT Shares, certificates representing such shares will
not be issued. Beneficial owners of ABCAT Shares ("Shareholders") will have
the same rights and ownership with respect to such shares as if certificates
had been issued.
===============================================================================
6. How to Redeem ABCAT Shares
ABCAT Shares may be redeemed by, or at the direction of, Alex. Brown
Capital Advisory & Trust Company or an affiliate, as appropriate, on any
Business Day by transmission of a redemption order through the Distributor,
or by regular or express mail to the Fund's transfer agent (the "Transfer
Agent") at its address listed under "Custodian, Transfer Agent and Accounting
Services." A redemption is effected at the net asset value per share next
determined after receipt of the order in proper form. Redemption orders
received after 4:00 p.m. (Eastern Time), or the close of the New York Stock
Exchange, whichever is earlier, will be effected at the net asset value next
determined on the following Business Day. Payment for redeemed ABCAT Shares
will be made to, or at the direction of, Alex. Brown Capital Advisory & Trust
Company or an affiliate, as appropriate, for the benefit of Shareholders.
Payment will be made as promptly as feasible and, under most circumstances,
within three Business Days.
Dividends payable up to the date of the redemption of ABCAT Shares will be
paid on the next dividend payment date.
===============================================================================
7. 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 other arrangements are made, 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 ABCAT Shares at the
net asset value per share on the payment date.
12
<PAGE>
...............................................................................
TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a general summary of certain federal income 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
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 ABCAT 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 ABCAT 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.
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
ABCAT Shares just prior to a distribution. The price of ABCAT 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.
13
<PAGE>
The Fund will provide advice annually as to the federal income tax
consequences of distributions made during the year. Shareholders are urged to
consult their tax advisors concerning the application of the rules described
above to their particular circumstances and the application of federal, state
and local taxes to investments in the Fund.
The sale, exchange or redemption of ABCAT Shares is a taxable event for
the Shareholder.
===============================================================================
8. 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 the Advisor. Two Directors and all of the officers
of the Fund are officers or employees of the Distributor or the Advisor. The
other Directors of the Fund have no affiliation with the Distributor or the
Advisor.
The Fund's Directors and officers are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
*Richard T. Hale Chairman Paul D. Corbin Executive Vice President
*W. James Price Director Edward J. Veilleux Vice President
James J. Cunnane Director Gary V. Fearnow Vice President
John F. Kroeger Director Scott J. Liotta Vice President
Louis E. Levy Director Monica M. Hausner Vice President
Eugene J. McDonald Director Joseph A. Finelli Treasurer
[Harry Woolf Director] Edward J. Stoken Secretary
M. Elliott Randolph, Jr. President Laurie D. DePrine Assistant Secretary
</TABLE>
- ------
* Messrs. Hale and Price are "interested persons" of the Fund within the
meaning of Section 2(a)(19) under the Investment Company Act of 1940, as
amended (the "1940 Act").
==============================================================================
9. INVESTMENT ADVISOR
Investment Company Capital Corp. ("ICC"), an indirect subsidiary of Alex.
Brown Incorporated and an affiliate of Alex. Brown Capital Advisory & Trust
Company, is the Fund's investment advisor. ICC is also the investment advisor
to, and the Distributor 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 $ billion of net assets as of , 1996. The
address of ICC is 135 East Baltimore Street, Baltimore, Maryland 21202.
14
<PAGE>
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,
1995, ICC received a fee (net of fee waivers) equal to .12% of the Fund's
average daily net assets. ICC currently intends to waive, on a voluntary
basis, its annual fee to the extent necessary so that the Fund's annual
expenses do not exceed .45% of the ABCAT Shares' average daily net assets.
ICC also serves as the Fund's transfer and dividend disbursing agent and
provides accounting services to the Fund. (See "Custodian, Transfer Agent and
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.
M. Elliott Randolph has nearly 22 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 18 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.
===============================================================================
10. Distributor
Alex. Brown & Sons Incorporated ("Alex. Brown"), 135 East Baltimore
Street, Baltimore, Maryland 21202, acts as distributor of each class of the
Fund's shares. Alex. Brown is an investment banking firm which offers a broad
range of investment services to individual, institutional, corporate and
municipal clients. It is a wholly-owned subsidiary of Alex. Brown
Incorporated, which has engaged directly and through subsidiaries and
affiliates in the investment business since 1800. Alex. Brown is a member of
the New Stock Exchange and other leading securities exchanges. Headquartered
in Baltimore, Maryland, Alex. Brown has offices throughout the United States
and, through subsidiaries, maintains offices in London, England, Geneva,
Switzerland and Tokyo, Japan. Alex. Brown receives no compensation for
distributing the ABCAT Shares.
Alex. Brown bears all expenses associated with advertisements, promotional
materials, sales literature and printing and mailing prospectuses to other
than Fund shareholders.
15
<PAGE>
==============================================================================
11. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
PNC Bank, National Association ("PNC Bank"), a national banking
association, with offices at Airport Business Park, 200 Stevens Drive,
Lester, Pennsylvania 19113, acts as custodian of the Fund's assets.
Investment Company Capital Corp., 135 East Baltimore Street, Baltimore,
Maryland 21202 (telephone: (800) 553-8080) is the Fund's transfer and
dividend disbursing agent. ICC also provides accounting services to the Fund.
As compensation for providing accounting services to the Fund for the fiscal
year ended December 31, 1995, ICC received a fee equal to .08% of the Fund's
average daily net assets. (See the Statement of Additional Information.) ICC
also serves as the Fund's investment advisor.
===============================================================================
12. Performance Information
From time to time the Fund may advertise its performance including
comparisons to other mutual funds with similar investment objectives and to
relevant indices. Any quotations of yield of the Fund will be determined by
dividing the net investment income earned by the Fund during a 30 day period
by the maximum offering price per share on the last day of the period and
annualizing the result on a semi-annual basis. All advertisements of
performance will show the average annual total return over one, five and ten
year periods or, if such periods have not yet elapsed, shorter periods
corresponding to the life of the Fund. Such total return quotations will be
computed by finding average annual compounded rates of return over such
periods that would equate an assumed initial investment of $1,000 to the
ending redeemable value according to the required standardized calculation.
If the Fund compares its performance to other funds or to relevant
indices, the Fund's performance will be stated in the same terms in which
such comparative data and indices are stated, which is normally total return
rather than yield. For these purposes, the performance of the Fund, as well
as the performance of such investment companies or indices, may not reflect
sales charges, which, if reflected, would reduce performance results.
The performance of the Fund may be compared to data prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. and Morningstar
Inc., independent services which monitor the performance of mutual funds. The
performance of the Fund may also be compared to the Lehman Brothers
Government Corporate Bond Index, Lehman Brothers 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 pub
16
<PAGE>
lications 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.
Performance is generally a function of the type and quality of instruments
held by the Fund, operating expenses and market conditions.
==============================================================================
13. General Information
..............................................................................
DESCRIPTION OF SHARES
The Fund is an open-end management investment company organized under the
laws of the State of Maryland on April 16, 1990 and is authorized to issue 60
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 fiscal year end of the Fund is December 31.
The Board of Directors is authorized to establish additional series of
shares of capital stock, each of which would evidence interests in a separate
portfolio of securities, and separate classes of each series of the Fund. The
shares offered by this Prospectus have been designated "Alex. Brown Capital
Advisory & Trust Intermediate-Term Income Shares." The Board has no present
intention of establishing any additional series of the Fund but the Fund does
have two other classes of shares in addition to the shares offered hereby:
"Flag Investors Intermediate-Term Income Fund Class A Shares" and "Flag
Investors Intermediate-Term Income Fund Institutional Shares". Additional
information concerning the Fund's other classes of shares may be obtained by
calling Alex. Brown at (800) 767-3524. Different classes of the Fund may be
offered to certain investors and holders of such shares may be entitled to
certain exchange privileges not offered to ABCAT Shares. All classes of the
Fund share a common investment objective, portfolio of investments and
advisory fee, but the classes may have different distribution fees or sales
load structures and the net asset value per share of the classes may differ
at times.
17
<PAGE>
...............................................................................
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 semi-annual reports containing information about the
Fund and its operations, including a list of investments held in the Fund's
portfolio and financial statements. The annual financial statements are
audited by the Fund's independent auditors, Deloitte & Touche LLP.
..............................................................................
FUND COUNSEL
Morgan, Lewis & Bockius LLP serves as counsel to the Fund.
..............................................................................
SHAREHOLDER INQUIRIES
Shareholders with inquiries concerning their ABCAT Shares should contact
their account manager at Alex. Brown Capital Advisory & Trust Company.
18
<PAGE>
APPENDIX
Corporate Bond Rating Definitions
...............................................................................
STANDARD & POOR'S RATINGS GROUP
AAA--Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA--Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A--Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
..............................................................................
MOODY'S INVESTORS SERVICE, INC.
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or 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 the case
of Aaa securities, or the fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term risk
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 some time in the
future.
A-1
<PAGE>
Commercial Paper Rating Definitions
..............................................................................
STANDARD & POOR'S RATINGS GROUP
Commercial paper rated A by S&P is regarded by S&P as having the greatest
capacity for timely payment. Issues rated A are further refined by use of the
numbers 1+, 1, 2 and 3 to indicate the relative degree of safety. Issues
rated A-1+ are those with an "overwhelming degree" of credit protection.
Those rated A-1 reflect a "very strong" degree of safety regarding timely
payment.
..............................................................................
MOODY'S INVESTORS SERVICE, INC.
Commercial paper issuers rated Prime-1 by Moody's are judged by Moody's to be
of the highest quality on the basis of relative repayment capacity.
A-2
<PAGE>
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, 1996, as amended through______
Relating to the Prospectuses Dated:
May 1, 1996 -- Relating to the Flag Investors Class A Shares and the
Flag Investors Institutional Shares
, 199 -- Relating to the Alex. Brown Capital Advisory & Trust Shares
<PAGE>
TABLE OF CONTENTS
Page
----
1. General Information and History............................ 1
2. Investment Objectives and Policies......................... 1
3. Valuation of Shares and Redemption......................... 6
4. Federal Tax Treatment of Dividends and
Distributions............................................ 7
5. Management of the Fund..................................... 9
6. Investment Advisory and Other Services.................... 13
7. Distribution of Fund Shares............................... 15
8. Brokerage................................................. 18
9. Capital Stock............................................. 20
10. Semi-Annual Reports....................................... 20
11. Custodian, Transfer Agent, Accounting Services ........... 20
12. Independent Auditors ..................................... 21
13. Performance Information................................... 21
14. Control Persons and Principal Holders of
Securities.............................................. 24
15. Financial Statements...................................... 24
<PAGE>
1. GENERAL INFORMATION AND HISTORY
Flag Investors Intermediate-Term Income Fund, Inc. (the "Fund") is an
open-end management investment company. Under the rules and regulations of the
Securities and Exchange Commission (the "SEC"), all mutual funds are required to
furnish prospective investors with certain information concerning the activities
of the company being considered for investment. The Fund currently offers three
classes of shares: Flag Investors Intermediate-Term Income Fund Class A Shares
(the "Flag Investors Class A Shares"), Flag Investors Intermediate-Term Income
Fund Institutional Shares (the "Flag Investors Institutional Shares") and Alex.
Brown Capital Advisory & Trust Intermediate-Term Income Shares (the "ABCAT
Shares") (collectively, the "Shares"). The Flag Investors Class A Shares were
formerly known as the Flag Investors Shares.
There are three separate prospectuses for the Fund's Shares: one for
the Flag Investors Class A Shares, one for the Flag Investors Institutional
Shares and one for the ABCAT Shares. Each prospectus contains important
information concerning the class of Shares offered thereby and the Fund and may
be obtained without charge from Alex. Brown & Sons Incorporated ("Alex. Brown"),
135 East Baltimore Street, Baltimore, Maryland 21202 (telephone: (800) 767-FLAG)
or, with respect to the Flag Investors Class A Shares and the Flag Investors
Institutional Shares, from Participating Dealers that offer Shares to
prospective investors. Prospectuses for the Flag Investors Class A Shares may
also be obtained from Shareholder Servicing Agents. As used herein, the term
"Prospectus" describes information common to the prospectuses of the three
classes of the Fund's shares, unless the term "Prospectus" is modified by the
appropriate class designation. As used herein, the "Fund" refers to Flag
Investors Intermediate-Term Income Fund, Inc. and specific references to any
class of the Fund's Shares will be made using the name of such class. Some of
the information required to be in this Statement of Additional Information is
also included in the Fund's current Prospectuses. To avoid unnecessary
repetition, references are made to related sections of the Prospectuses. In
addition, the Prospectuses and this Statement of Additional Information omit
certain information about the Fund and its business that is contained in the
Registration Statement respecting the Fund and its Shares filed with the SEC.
Copies of the Registration Statement as filed, including such omitted items, may
be obtained from the SEC by paying the charges prescribed under its rules and
regulations.
The Fund was incorporated under the laws of the State of Maryland on
April 16, 1990. The Fund filed a registration statement with the SEC registering
itself as an open-end diversified management investment company under the
Investment Company Act of 1940, as amended (the "Investment Company Act"), and
its Shares under the Securities Act of 1933, as amended, and commenced
operations on May 13, 1991. The Fund has offered the Flag Investors Class A
Shares since its inception on May 13, 1991 and the Flag Investors Institutional
Shares since November 2, 1995. The ABCAT Shares have not been offered prior to
the date of this Statement of Additional Information.
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 OBJECTIVES 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.
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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 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,
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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.
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, Inc. ("Moody's") or are determined to be of comparable
quality by the Fund's investment advisor.
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche", is issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the Mortgage Assets may cause the
CMOs to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on a
monthly, quarterly or semi-annual basis. Payments of principal of and interest
on the Mortgage Assets are commonly applied to the classes of a series of the
CMO in the order of their respective stated maturities or final distribution
dates, so that no payment of principal will be made on any class of a CMO until
all other classes having an earlier stated maturity or final distribution date
have been paid in full. Because CMOs are collateralized by mortgage-backed
securities, they are subject to similar risks and uncertainties associated with
the prepayment of principal and the ability to accurately predict yield
described above with respect to mortgage-backed securities.
Asset Backed Securities
The Fund may also invest in securities backed by assets other than
mortgages, including company receivables, truck and auto loans, leases, and
credit card receivables, which securities are rated AAA by S&P or Aaa by
Moody's, or if not rated, are determined by the Advisor to be of comparable
quality. Through the use of trusts and special purpose 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 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
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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.
Other Investment Practices
In addition, the Fund may enter into repurchase agreements and make
purchases of when-issued securities as described below.
Repurchase Agreements.
The Fund may enter into repurchase agreements with financial
institutions, such as banks and broker-dealers, deemed to be creditworthy by the
Fund's Board of Directors under criteria established with the guidance of the
Fund's investment advisor, Investment Company Capital Corp. ("ICC" or the
"Advisor"). A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, usually not
more than seven days from the date of purchase, thereby determining the yield
during the purchaser's holding period. The value of underlying securities will
be at least equal at all times to the total amount of the repurchase obligation,
including the interest factor. The Fund makes payment for such securities only
upon physical delivery or evidence of book entry transfer to the account of a
custodian or bank acting as agent. The underlying securities, which in the case
of the Fund are securities of the U.S. Treasury only, may have maturity dates
exceeding one year. The Fund does not bear the risk of a decline in value of the
underlying securities unless the seller defaults under its repurchase
obligation. In the event of a bankruptcy or other default of a seller of a
repurchase agreement, the Fund could experience both delays in liquidating the
underlying securities and loss including (a) possible decline in the value of
the underlying security while the Fund seeks to enforce its rights thereto, (b)
possible subnormal levels of income and lack of access to income during this
period and (c) expenses of enforcing its rights.
Foreign Currency Exchange Transactions.
The Fund may conduct its foreign currency exchange transactions through
forward contracts to purchase or sell foreign currencies. A forward foreign
currency exchange contract involves an obligation to purchase or sell a
specified currency at a future date (which may be any fixed number of days from
the date the contract is entered into by the parties) at the price set at the
time of the contract. These contracts are traded directly between currency
traders (usually large commercial banks) and their customers.
The Fund may use such forward contracts only under two circumstances:
first, if the Advisor believes that the Fund should fix the U.S. dollar price of
the foreign security when the Fund enters into a contract for the purchase or
sale, at a future date, of a security denominated in a foreign currency; and
second, if the Advisor believes that the Fund should hedge against risk of loss
in the value of its portfolio securities denominated in foreign currencies, the
Fund may enter into a forward contract to purchase or sell an amount of the
foreign currency approximating the value of some or all of the Fund's portfolio
securities denominated in such foreign currency.
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<PAGE>
Investment Restrictions
The Fund's investment program is subject to a number of investment
restrictions which reflect self-imposed standards as well as federal and state
regulatory limitations. The investment restrictions recited below are in
addition to those described in the Fund's Prospectus, and are matters of
fundamental policy and may not be changed without the affirmative vote of a
majority of the outstanding Shares. Accordingly, the Fund will not:
1. Invest in real estate or mortgages on real estate;
2. Purchase or sell commodities or commodities contracts or futures
contracts;
3. Act as an underwriter of securities within the meaning of the U.S.
federal securities laws except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities;
4. Issue senior securities;
5. Make loans, except that the Fund may purchase or hold debt
instruments in accordance with its investment objectives and policies;
6. Effect short sales of securities;
7. Purchase securities on margin (but the Fund may obtain such
short-term credits as may be necessary for the clearance of transactions);
8. Purchase participations or other direct interests in oil, gas or
other mineral exploration or development programs; or
9. Invest more than 10% of the value of its net assets in illiquid
securities, including repurchase agreements with remaining maturities in excess
of seven days.
The following are investment restrictions that may be changed by a vote
of the majority of the Board of Directors. The Fund will not:
1. Purchase any securities of unseasoned issuers which have been in
operation directly or through predecessors for less than three years;
2. Invest in shares of any other investment company registered under the
Investment Company Act, other than in connection with a merger, consolidation,
reorganization or acquisition of assets;
3. Purchase or retain the securities of any issuer if to the knowledge
of the Fund any officer or Director of the Fund or its investment advisor owns
beneficially more than .5% of the outstanding securities of such issuer and
together they own beneficially more than 5% of the securities of such issuer;
4. Invest in companies for the purpose of exercising management or
control;
5. Purchase or sell puts or calls or any combination thereof;
6. Invest in real estate limited partnerships or oil, gas or mineral
leases; or
7. Purchase warrants.
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<PAGE>
The percentage limitations contained in these restrictions apply at the
time of purchase of securities.
3. VALUATION OF SHARES AND REDEMPTION
Valuation of Shares
The net asset value per Share is determined daily as of the close of
the New York Stock Exchange, which is ordinarily 4:00 p.m. (Eastern Time) on
each day on which the New York Stock Exchange is open for business (a "Business
Day"). The New York Stock Exchange is open for business on all weekdays except
for the following holidays (or the days on which they are observed): New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Net asset value per Share of a class is calculated by valuing all assets
held by the Fund, deducting liabilities attributable to all Shares and any
liabilities attributable to the specific class, and dividing the resulting
amount by the number of then outstanding Shares of the class. For this purpose,
portfolio securities will be given their market value where feasible. Portfolio
securities that are actively traded in the over-the-counter market, including
listed securities for which the primary market is believed by the Advisor to be
over-the-counter, are valued at the quoted bid prices provided by principal
market makers. If a portfolio security is traded primarily on a national
exchange on the valuation date, the last quoted sale price will generally be
used. Securities or other assets for which market quotations are not readily
available are valued at their fair market value as determined in good faith
under procedures established from time to time and monitored by the Fund's Board
of Directors. Such procedures may include (i) the use of an independent pricing
service which uses prices based upon yields or prices of securities of
comparable quality, coupon, maturity and type, (ii) indications as to values
from dealers, (iii) and general market conditions. Debt obligations with
maturities of 60 days or less will be valued at amortized cost, which
constitutes fair value as determined by the Fund's Board of Directors.
Redemption
The Fund may suspend the right of redemption or postpone the date of
payment during any period when (a) trading on the New York Stock Exchange is
restricted by applicable rules and regulations of the SEC; (b) the New York
Stock Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC so that valuation of the net assets of the Fund is not
reasonably practicable.
Under normal circumstances, the Fund will redeem Flag Investors Class A
Shares by check, Flag Investors Institutional Shares by wire transfer of funds
and ABCAT Shares by transfer of funds by, or at the direction of, Alex. Brown
Capital Advisory & Trust Company or an affiliate, as described in the Prospectus
relating to each class of Shares. However, if the Board of Directors determines
that it would be in the best interests of the remaining shareholders to make
payment of the redemption price in whole or in part by a distribution in kind of
securities from the portfolio of the Fund in lieu of cash, in conformity with
applicable rules of the SEC, the Fund will make such distributions in kind. If
Shares are redeemed in kind, the redeeming shareholder will incur brokerage
costs in later converting the assets into cash. The method of valuing portfolio
securities is described under "Valuation of Shares" and such valuation will be
made as of the same time the redemption price is determined. The Fund has
elected to be governed by Rule 18f-1 under the Investment Company Act pursuant
to which the Fund is obligated to redeem Shares solely in cash up to the lesser
of $250,000 or 1% of the net asset value of the Fund during any 90-day period
for any one shareholder.
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4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a summary of certain additional tax considerations
generally affecting the Fund and its shareholders that are not described in the
Fund's Prospectus. No attempt is made to present a detailed explanation of the
tax treatment of the Fund or its shareholders, and the discussion here and in
the Fund's Prospectus is not intended as a substitute for careful tax planning.
The following general discussion of certain federal income tax
consequences is based on the Internal Revenue Code of 1986, as amended (the
"Code") and the regulations issued thereunder as in effect on the date of this
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.
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For purposes of the Distribution Requirement (as well as for other
purposes), the Fund will be required to treat as interest income any recognized
market discount on debt obligations which it holds. Generally, market discount
is the amount by which the stated redemption price of a bond exceeds the amount
paid by a purchaser of the bond (most common where the value of a bond decreases
after original issue as a result of a decline in the creditworthiness of the
issuer or an increase in prevailing interest rates). Generally, upon the
disposition of a bond bearing market discount or receipt of any principal
payment with respect to such a bond, market discount is recognized by treating a
portion of the proceeds as interest income. The application of these rules (and
the rules regarding original issue discount) to debt obligations held by the
Fund could affect (i) the amount and timing of distributions to shareholders and
(ii) the ability of the Fund to satisfy the Distribution Requirement.
The Fund may either retain or distribute to shareholders its excess of
net long-term capital gains over net short-term capital losses ("net capital
gain"). If such gains are distributed as capital gains, they are taxable to
shareholders as long-term capital gains, regardless of the length of time the
shareholder has held the Shares. Conversely, if the Fund elects to retain its
net capital gains, it will be taxed thereon at the applicable corporate capital
gains tax rate. In this event, it is expected that the Fund also will elect to
have shareholders treated as having received a distribution of such gains, with
the result that they will be required to report such gains on their returns as
long-term capital gains, will receive a tax credit for their allocable share of
capital gains tax paid by the Fund on the gains, and will increase the tax basis
for their Shares by an amount equal to 65 percent of the deemed distribution.
Generally, gains or losses on the sale or exchange of a Share will be
capital gains or losses which will be long-term if the Share is held for more
than one year. However, if a shareholder realizes a loss on the sale, exchange
or redemption of a Share held for six months or less and has previously received
a capital gains distribution with respect to the Share (or any undistributed net
capital gains of the Fund with respect to such Share are included in determining
the shareholder's long-term capital gains), the shareholder must treat the loss
as a long-term capital loss to the extent of the amount of the prior capital
gains distribution (or any undistributed net capital gains of the Fund which
have been included in determining such investor's long-term capital gains). In
addition, any loss realized on a sale or other disposition of Shares will be
disallowed to the extent an investor repurchases (or enters into a contract or
option to repurchase) Shares within a period of 61 days (beginning 30 days
before and ending 30 days after the disposition of the Shares). Investors should
particularly note that this loss disallowance rule will apply to Shares received
through the reinvestment of dividends during the 61-day period.
Investors should be careful to consider the tax implications of
purchasing Shares just prior to the ex-dividend date of any ordinary income
dividend or capital gains distribution. Those purchasing just prior to an
ordinary income dividend or capital gains distribution will be taxable on the
entire amount of the dividend received, even though the net asset value per
Share on the date of such purchase reflected the amount of such distribution.
If for any taxable year, the Fund does not qualify as a RIC, all of its
taxable income will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will
generally be taxable as ordinary dividends to the extent of the Fund's current
and accumulated earnings and profits. However, in the case of corporate
shareholders, such distributions will generally be eligible for the 70%
dividends received deduction for "qualifying dividends."
The Fund will be required in certain cases to withhold and remit tax to
the United States Treasury on distributions payable to any shareholder who (1)
has provided the Fund either an incorrect tax identification number or no number
at all, (2) who is subject to backup withholding by the Internal Revenue Service
for failure to properly report payments of interest or dividends, or (3) who has
failed to certify to the Fund that such shareholder is not subject to backup
withholding.
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The Fund will provide a statement annually to shareholders as to the
federal tax status of distributions paid (or deemed to be paid) by the Fund
during the year.
The Code imposes a nondeductible 4% federal excise tax on RICs that do
not distribute in each calendar year an amount equal to 98% of their ordinary
income for the calendar year plus 98% of their capital gains net income (the
excess of short and long-term capital gains over short and long-term capital
losses) for the one-year period ending on October 31 of such calendar year. The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, an investment company is treated as having distributed
any amount on which it is subject to income tax for any taxable year ending in
such calendar year.
The Fund intends to make sufficient distributions of its ordinary income
and capital gains net income prior to the end of each calendar year to avoid
liability for excise tax. However, investors should note that the Fund may in
certain circumstances be required to liquidate portfolio investments in order to
make sufficient distributions to avoid excise tax liability, and, in addition,
that the liquidation of such investments in such circumstances may affect the
ability of the Fund to satisfy the Short-Short Gain Test.
Rules of state and local taxation of dividend and capital gains
distributions from regulated investment companies often differ from the rules
for federal income taxation described above. Shareholders are urged to consult
their tax advisers as to the consequences of these and other state and local tax
rules affecting an investment in the Fund and also as to the application of the
rules set forth above to a shareholder's particular circumstances.
5. MANAGEMENT OF THE FUND
Directors and Officers
The Directors and executive officers of the Fund, their respective dates
of birth and their principal occupations during the last five years are set
forth below. Unless otherwise indicated, the address of each Director and
executive officer is 135 East Baltimore Street, Baltimore, Maryland 21202.
*RICHARD T. HALE, Chairman and Director (7/17/45)
Managing Director, Alex. Brown & Sons Incorporated; President,
Investment Company, Capital Corp. (registered investment advisor); Chartered
Financial Analyst.
*W. JAMES PRICE, Director (10/6/24)
6885 North Ocean Boulevard, Apartment #306, Ocean Ridge, Florida
33435-3342. Director, Boca Research, Inc. (computer peripherals);
Managing Director Emeritus, Alex. Brown & Sons Incorporated; Formerly,
Director, CSX Corporation (transportation) and PHH Corporation (business
services).
JAMES J. CUNNANE, Director (3/11/38)
CBC Capital, 264 Carlyle Lake Drive, St. Louis, Missouri 63141. Managing
Director, CBC Capital (merchant banking), 1993-Present; Formerly, Senior
Vice President and Chief Financial Officer, General Dynamics Corporation
(defense), 1989-1993 and Director, The Arch Fund (mutual funds).
JOHN F. KROEGER, Director (8/11/24)
37 Pippins Way, Morristown, New Jersey 07960. Director/Trustee, AIM
Funds; Formerly, Consultant, Wendell & Stockel Associates, Inc.
(consulting firm) and General Manager, Shell Oil Company.
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LOUIS E. LEVY, Director (11/16/32)
26 Farmstead Road, Short Hills, New Jersey 07078. Director,
Kimberly-Clark Corporation (personal consumer products) and Household
International (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 (7/14/32)
Duke Management Company, Erwin Square, Suite 1000, 2200 West Main
Street, Durham, North Carolina 27705. President, Duke Management
Company (investments); Executive Vice President, Duke University
(education, research and healthcare); Director, Central Carolina Bank
& Trust (banking), Key Funds (mutual funds), and AMBAC Treasurers Trust
(mutual funds).
[HARRY WOOLF, Director (8/12/23)
Institute for Advanced Study, South Olden Lane, Princeton, New Jersey
08540. Professor-at-Large Emeritus, Institute for Advanced Study;
Director, ATL and Spacelabs Medical Corp. (medical equipment) and Family
Health International (non-profit research and education); Trustee, Reed
College (education); Director, Research America (non-profit medical
research); Formerly, Trustee, Rockefeller Foundation and Director,
Merrill Lynch Cluster C Funds (mutual funds).]
M. ELLIOTT RANDOLPH, President (1/10/42)
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 (7/24/52)
Principal, Alex. Brown & Sons Incorporated, 1991 - Present; Senior Vice
President, First National Bank of Maryland, 1985-1991.
EDWARD J. VEILLEUX, Vice President (8/26/43)
Principal, Alex. Brown & Sons Incorporated; Executive Vice President,
Investment Company Capital Corp., (registered investment advisor);
Vice President, Armata Financial Corp. (registered broker-dealer).
GARY V. FEARNOW, Vice President (12/6/44)
Managing Director, Alex. Brown & Sons Incorporated and Manager, Special
Products Department, Alex. Brown & Sons Incorporated.
MONICA M. HAUSNER, Vice President (10/26/61)
Vice President, Fixed Income Management Department, Alex. Brown & Sons
Incorporated, March 1992-Present; Formerly, Assistant Vice President,
First National Bank of Maryland, 1984-1992.
SCOTT J. LIOTTA, Vice President (3/18/65)
Manager, Fund Administration, Alex. Brown & Sons Incorporated, July
1996-Present; Formerly, Manager and Foreign Markets Specialist, Putnam
Investments Inc. (mutual funds), April 1994-July 1996; and Supervisor,
Brown Brothers Harriman & Co. (domestic and global custody), August
1991-April 1994.
JOSEPH A. FINELLI, Treasurer (1/24/57)
Vice President, Alex. Brown & Sons Incorporated and Investment Company
Capital Corp. (registered investment advisor), September 1995-Present;
Formerly, Vice President and Treasurer, The Delaware Group of Funds
(mutual funds) and Vice President, Delaware Management Company Inc.,
1980-August 1995.
EDWARD J. STOKEN, Secretary (8/7/47)
Compliance Officer, Alex. Brown & Sons Incorporated, April 1995-Present;
Formerly, Legal Advisor, Federated Investors (registered investment
advisor), 1991-1995.
-10-
<PAGE>
LAURIE D. DePRINE, Assistant Secretary (1/1/66)
Asset Management Department, Alex. Brown & Sons Incorporated, 1991-
Present.
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* Messrs. Hale and Price are Directors who are "interested persons", as defined
in the Investment Company Act.
Directors and officers of the Fund are also directors and officers of
some or all of the other investment companies managed, administered, advised or
distributed by Alex. Brown or its affiliates. There are currently 12 funds in
the Flag Investors/ISI Funds and Alex. Brown Cash Reserve Fund, Inc. fund
complex (the "Fund Complex"). Mr. Price serves as a Director of seven funds in
the Fund Complex. Mr. Hale serves as President and Director of one fund, and
Director of each of the other funds in the Fund Complex. Messrs. Cunnane,
Kroeger, Levy, McDonald and Woolf serve as Directors of each fund in the Fund
Complex. Mr. Veilleux serves as Executive Vice President of one fund and as Vice
President of each of the other funds in the Fund Complex. Mr. Liotta serves as
Vice President, Mr. Finelli serves as Treasurer, Mr. Stoken serves as Secretary
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 Executive Vice President
of two funds and Vice President of one fund in the Fund Complex. Mr. Fearnow
serves as Vice President of 10 funds and Ms. Hausner serves as Vice President of
three funds in the Fund Complex.
Some of the Directors of the Fund are customers of, and have had normal
brokerage transactions with, Alex. Brown in the ordinary course of business. All
such transactions were made on substantially the same terms as those prevailing
at the time for comparable transactions with unrelated persons. Additional
transactions may be expected to take place in the future.
Officers of the Fund receive no direct remuneration in such capacity
from the Fund. Officers and Directors of the Fund who are officers or directors
of Alex. Brown may be considered to have received remuneration indirectly. As
compensation for his services as Director, each Director who is not an
"interested person" of the Fund (as defined in the Investment Company Act) (a
"Non-Interested Director") receives an aggregate annual fee (plus reimbursement
for reasonable out-of-pocket expenses incurred in connection with his attendance
at Board and committee meetings) from all Flag Investors/ISI Funds and Alex.
Brown Cash Reserve Fund, Inc. for which he serves. In addition, the Chairman of
the Fund Complex's Audit Committee receives an aggregate annual fee from the
Fund Complex. Payment of such fees and expenses are allocated among all such
funds described above in direct proportion to their relative net assets. For the
fiscal year ended December 31, 1995, Non-Interested Directors' fees attributable
to the assets of the Fund totaled approximately $5,000. The following table
shows aggregate compensation paid to each of the Fund's Directors by the Fund
and the Fund Complex, respectively, and pension or retirement benefits accrued
as part of Fund expenses in the fiscal year ended December 31, 1995.
-11-
<PAGE>
COMPENSATION TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Name of Person, Position Aggregate Compensation Pension or Retirement Total Compensation
From the Fund in the Benefits Accrued As From the Fund
Fiscal Year Ended Part of Fund Expenses and Fund Complex
December 31, 1995 Paid to Directors
in the Fiscal Year
Ended December 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
*Richard T. Hale, Director $0 $0 $0
*W. James Price, Chairman $0 $0 $0
James J. Cunnane, Director $640.31(2) + $39,000 for service on 13
Boards(1) in the Fund Complex
N. Bruce Hannay, Director** $640.31(2) + $39,000 for service on 13
Boards(1) in the Fund Complex
John F. Kroeger, Director $725.91(2) + $44,425 for service on 13
Boards(1) in the Fund Complex
Louis E. Levy, Director $640.31(2) + $39,000 for service on 13
Boards(1) in the Fund Complex
Eugene J. McDonald, Director $640.31(2) + $39,000 for service on 13
Boards(1) in the Fund Complex
Harry Woolf, Director $640.31(2) + $39,000 for service on 13
Boards(1) in the Fund Complex
</TABLE>
- ----------
* A Director who is an "interested person" as defined in the Investment
Company Act.
** Retired on January 31, 1996 and is now deceased.
+ The Fund Complex has adopted a Retirement Plan for eligible Directors, as
described below. The actuarially computed pension expense for the Fund for
the year ended December 31, 1995 was approximately $2,195.
(1) One fund ceased operations on May 17, 1995.
(2) Of the amounts paid to Messrs. Cunnane, Hannay, Kroeger, Levy, McDonald
and Woolf, $640.31, $454.73, $0, $0, $640.31 and $640.31, respectively, was
deferred pursuant to a deferred compensation plan.
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 six years of
service, each Participant will be entitled to receive an annual retirement
benefit equal to a percentage of the fee earned 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. Kroeger and Woolf have
qualified but have not received benefits. 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. Another Participant, who retired on January
31, 1996 and died on June 2, 1996, was paid fees of $13,000 by the Fund Complex
under the Retirement Plan. Such fees are allocated to each fund in the Fund
Complex based upon the relative net assets of such fund to the Fund Complex.
Set forth in the table below are the estimated annual benefits payable
to a Participant upon retirement assuming various years of service and payment
of a percentage of the fee earned by such Participant in his last year of
service, as described above. The estimated credited years of service are as
follows: for Mr. Cunnane, 1 year; for Mr. Kroeger, 13 years; for Mr. Levy, 2
years; for Mr. McDonald, 4 years; and for Mr. Woolf 13 years, respectively.
-12-
<PAGE>
<TABLE>
<CAPTION>
Years of Service Estimated Annual Benefits Payable By Fund Complex Upon Retirement
- ---------------- -----------------------------------------------------------------
Chairman of Audit Committee Other Participants
--------------------------- ------------------
<C> <C> <C>
6 years $4,595 $3,900
7 years $9,190 $7,800
8 years $13,785 $11,700
9 years $18,380 $15,600
10 years or more $22,975 $19,500
</TABLE>
Any Director who receives fees from the Fund is permitted to defer a
minimum of 50%, or up to all, of his annual compensation pursuant to a Deferred
Compensation Plan. Messrs. Cunnane, Kroeger, Levy, McDonald and Woolf have each
executed a Deferred Compensation Agreement. Currently, the deferring Directors
may select various Flag Investors and Alex. Brown Cash Reserve Funds in which
all or part of their deferral account shall be deemed to be invested.
Distributions from the deferring Directors' deferral accounts will be paid in
cash, in generally equal quarterly installments over a period of five years.
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.
The Code of Ethics requires that all employees of ICC, any director or
officer of Alex. Brown, and all Interested Directors, preclear personal
securities investments (with certain 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 Financial Corporation and an indirect subsidiary of Alex. Brown
Incorporated. ICC is also the investment advisor to Flag Investors Telephone
Income Fund, Inc., Flag Investors Value Builder Fund, Inc., Flag Investors
Equity Partners Fund, Inc., Alex. Brown Cash Reserve Fund, Inc., Flag Investors
International Fund, Inc., Flag Investors Emerging Growth Fund, Inc., Flag
Investors Maryland Intermediate Tax Free Income Fund, Inc. and Flag Investors
Real Estate Securities Fund, Inc. which are distributed by Alex. Brown, the
Fund's distributor.
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
-13-
<PAGE>
Directors. ICC will provide the Fund with office space for managing its
affairs, with the services of required executive personnel and with certain
clerical and bookkeeping services and facilities. These services are provided by
ICC without reimbursement by the Fund for any costs. ICC shall not be liable to
the Fund or its shareholders for any act or omission by ICC or any losses
sustained by the Fund or its shareholders, except in the case of willful
misfeasance, bad faith, gross negligence, or reckless disregard of duty. As
compensation for its services, ICC receives an annual fee from the Fund, payable
monthly, at the annual rate of .35% of the first $1 billion of the Fund's
average daily net assets, .30% of the Fund's average daily net assets in excess
of $1 billion but not exceeding $1.5 billion and .25% of the Fund's average
daily net assets exceeding $1.5 billion. ICC has voluntarily agreed to reduce
its annual fee, if necessary, or to make payments to the Fund to the extent
required so that the Fund's annual expenses do not exceed .70% of the Flag
Investors Class A Shares' average daily net assets and .45% of the Flag
Investors Institutional Shares' and the ABCAT Shares' respective average daily
net assets. As compensation for investment advisory services for the fiscal
years ended December 31, 1995, December 31, 1994 and December 31, 1993, ICC
received fees of $252,372, $357,585 and $332,862 and from such amounts waived
fees of $162,943, $141,214 and $145,696, respectively. Absent such waivers for
the fiscal years ended December 31, 1995, December 31, 1994 and December 31,
1993, the Fund's Total Operating Expenses would have been .93%, .84% and .85%,
respectively, of the Flag Investors Class A Shares' average daily net assets.
The services of ICC to the Fund are not exclusive and ICC is free to render
similar services to others.
[ICC has also agreed to reduce its aggregate fees on a monthly basis
for any fiscal year to the extent required so that the amount of the ordinary
expenses of the Fund (excluding brokerage commissions, interest, taxes and
extraordinary expenses such as legal claims, liabilities, litigation costs and
indemnification related thereto) paid or incurred by the Fund for such fiscal
year does not exceed the expense limitations applicable to the Fund imposed by
the securities laws or regulations of the states in which the Shares are
registered or qualified for sale, as such limitations may be raised or lowered
from time to time. Currently, the most restrictive of such expense limitations
requires the Advisor to reduce its fees to the extent required so that ordinary
expenses of the Fund (excluding brokerage 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, 1995.]
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 30, 1996 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.")
-14-
<PAGE>
7. DISTRIBUTION OF FUND SHARES
Alex. Brown serves as the distributor of the Fund's Shares pursuant to
three separate Distribution Agreements, one for the Flag Investors Class A
Shares (the "Flag Investors Class A Distribution Agreement"), one for the Flag
Investors Institutional Shares (the "Flag Investors Institutional Distribution
Agreement") and one for the ABCAT Shares (the "ABCAT Distribution Agreement")
(collectively, the "Distribution Agreements").
The Flag Investors Class A Shares
The Flag Investors Class A Distribution Agreement provides that Alex.
Brown has the exclusive right to distribute Flag Investors Class A Shares either
directly or through other broker-dealers. The Flag Investors Class A
Distribution Agreement further provides that Alex. Brown will: (a) solicit and
receive orders for the purchase of Flag Investors Class A Shares; (b) accept or
reject such orders on behalf of the Fund in accordance with the Fund's currently
effective Prospectus and transmit such orders as are accepted to the Fund's
transfer agent as promptly as possible; (c) receive requests for redemptions and
transmit such redemption requests to the Fund's transfer agent as promptly as
possible; and (d) respond to inquiries from shareholders concerning the status
of their accounts and the operations of the Fund. Alex. Brown has not undertaken
to sell any specific number of Flag Investors Class A Shares. The Flag Investors
Class A Shares Distribution Agreement further provides that, in connection with
the distribution of Shares, Alex. Brown will be responsible for all of the
promotional expenses. The services provided by Alex. Brown to the Fund are not
exclusive, and Alex. Brown is free to provide similar services to others. Alex.
Brown shall not be liable to the Fund or its shareholders for any act or
omission by Alex. Brown or any losses sustained by the Fund or its shareholders
except in the case of willful misfeasance, bad faith, gross negligence or
reckless disregard of duty.
Alex. Brown and certain broker-dealers ("Participating Dealers") have
entered into Sub-Distribution Agreements under which such broker-dealers have
agreed to process investor purchase and redemption orders and respond to
inquiries from shareholders concerning the status of their accounts and the
operations of the Fund.
As compensation for providing distribution services for the Flag
Investors Class A Shares as described above, Alex. Brown receives an annual fee,
paid monthly, equal to .25% of the average daily net assets of the Flag
Investors Class A Shares. Alex. Brown expects to allocate most of its annual fee
to its investment representatives and up to all of its fee to Participating
Dealers. For the fiscal years ended December 31, 1995, December 31, 1994 and
December 31, 1993, Alex. Brown received distribution fees of $179,666, $255,418
and $237,758, respectively.
Pursuant to Rule 12b-1 under the Investment Company Act, which provides
that investment companies may pay distribution expenses, directly or indirectly,
only pursuant to a plan adopted by the investment company's board of directors
and approved by its shareholders, the Fund has adopted a Plan of Distribution
for the Fund's Flag Investors Class A Shares (the "Flag Investors Class A
Plan"). Under the Flag Investors Class A Plan, the Fund pays a fee to Alex.
Brown for distribution and other shareholder servicing assistance as set forth
in the Flag Investors Class A Distribution Agreement, and Alex. Brown is
authorized to make payments out of its fee to its investment representatives and
to participating broker-dealers. The Flag Investors Class A Distribution
Agreement, including the Flag Investors Class A Plan and a form of
Sub-Distribution Agreement, was approved by the sole shareholder of the Fund on
May 9, 1991, by a majority of the outstanding Shares of the Fund on July 31,
1992, and most recently by the Fund's Board of Directors, including a majority
of the Non-Interested Directors, on September 25, 1995. The Flag Investors Class
A Distribution Agreement and the Flag Investors Class A Plan encompassed therein
will remain in effect from year to year thereafter, if specifically approved at
least annually by the Fund's Board of Directors and by the affirmative vote of a
majority of the Non-Interested Directors by votes cast in person at a meeting
called for such purpose.
-15-
<PAGE>
In approving the Flag Investors Class A Plan, the Directors concluded,
in the exercise of reasonable business judgment, that there was a reasonable
likelihood that the Flag Investors Class A Plan would benefit the Fund and its
shareholders. The Flag Investors Class A Plan will be renewed only if the
Directors make a similar determination in each subsequent year. The Flag
Investors Class A Plan may not be amended to increase materially the fee to be
paid pursuant to the Flag Investors Class A Distribution Agreement without the
approval of the shareholders of the Fund. The Flag Investors Class A Plan may be
terminated at any time and the Flag Investors Class A Distribution Agreement may
be terminated at any time upon sixty days' notice, in either case without
penalty, by the vote of a majority of the Fund's Non-Interested Directors or by
a vote of a majority of the outstanding Shares (as defined under "Capital
Stock"). Any Sub-Distribution Agreement may be terminated in the same manner at
any time. The Flag Investors Class A Distribution Agreement and any
Sub-Distribution Agreement shall automatically terminate in the event of
assignment.
During the continuance of the Flag Investors Class A Plan, the Fund's
Board of Directors will be provided for their review, at least quarterly, a
written report concerning the payments made under the Flag Investors Class A
Plan to Alex. Brown pursuant to the Flag Investors Class A Distribution
Agreement and to broker-dealers pursuant to Sub-Distribution Agreements. Such
reports shall be made by the persons authorized to make such payments. In
addition, during the continuance of the Flag Investors Class A 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.
For the fiscal year ended December 31, 1995, the Fund paid $179,666 to
Alex. Brown, the Fund's distributor, pursuant to the Flag Investors Class A
Plan. Alex. Brown, in turn, paid the distribution-related expenses of the Fund
including one or more of the following: printing and mailing of prospectuses to
other than current shareholders; compensation to dealers and sales personnel;
and interest, carrying, or other financing charges.
In addition, with respect to the Flag Investors Class A Shares, the
Fund may enter into Shareholder Servicing Agreements with certain financial
institutions, such as banks, to act as Shareholder Servicing Agents, pursuant to
which Alex. Brown will allocate a portion of its distribution fee as
compensation for such financial institutions' ongoing shareholder services.
Although banking laws and regulations prohibit banks from distributing shares of
open-end investment companies such as the Fund, according to interpretations by
various bank regulatory authorities, financial institutions are not prohibited
from acting in other capacities for investment companies, such as the
shareholder servicing capacities described above. Should future legislative,
judicial or administrative action prohibit or restrict the activities of the
Shareholder Servicing Agents in connection with the Shareholder Servicing
Agreements, the Fund may be required to alter materially or discontinue its
arrangements with the Shareholder Servicing Agents. Such financial institutions
may impose separate fees in connection with these services and investors should
review the Prospectus and this Statement of Additional Information in
conjunction with any such institution's fee schedule. In addition, state
securities laws on this issue may differ from the interpretations of federal law
expressed herein, and banks and financial institutions may be required to
register as dealers pursuant to state law.
Under the Flag Investors Class A Plan, amounts allocated to
Participating Dealers and Shareholder Servicing Agents may not exceed amounts
payable to Alex. Brown under the Flag Investors Class A Plan. Payments under the
Flag Investors Class A Plan are made as described above regardless of Alex.
Brown's actual cost of providing distribution services and may be used to pay
Alex. Brown's overhead expenses. If the cost of providing distribution services
to the Fund in connection with the sale of the Flag Investors Class A Shares is
less than .25% of the Fund's average daily net assets for any period, the
unexpended portion of the distribution fee may be retained by Alex. Brown. The
Flag Investors Class A Plan does not provide for any charges to the Fund for
excess amounts expended by Alex. Brown and, if the Flag Investors Class A Plan
is terminated in accordance with its terms, the obligation of the Fund to make
payments to Alex. Brown pursuant to the Flag Investors Class A Plan will cease
and the Fund will not be required to make any payments past the date the related
Flag Investors Class A Distribution Agreement terminates.
-16-
<PAGE>
In the fiscal years ended December 31, 1995, December 31, 1994 and
December 31, 1993, Alex. Brown received sales commissions on the Flag Investors
Class A Shares of $11,196, $134,543 and $281,443 and from such amounts retained
$11,088, $132,337 and $278,516 for each such year, respectively.
The Flag Investors Institutional Shares and the ABCAT Shares
The Flag Investors Institutional Distribution Agreement and the ABCAT
Distribution Agreement provide that Alex. Brown has the exclusive right to
distribute the related class of shares, either directly or through Participating
Dealers, and further provide that Alex. Brown will solicit and receive orders
for the purchase of Flag Investors Institutional Shares or ABCAT Shares, as
appropriate, accept or reject such orders on behalf of the Fund in accordance
with the Fund's currently effective Prospectus for the related class of shares
and transmit such orders as are accepted to the Fund's transfer agent as
promptly as possible, receive requests for redemption and transmit such
redemption requests to the Fund's transfer agent as promptly as possible,
respond to inquiries from the Fund's shareholders concerning the status of their
accounts with the Fund, maintain such accounts, books and records as may be
required by law or be deemed appropriate by the Fund's Board of Directors, and
take all actions deemed necessary to carry into effect the distribution of the
related class of shares. Alex. Brown has not undertaken to sell any specific
number of Flag Investors Institutional Shares or ABCAT Shares. The Flag
Investors Institutional Distribution Agreement and the ABCAT Distribution
Agreement further provide that, in connection with the distribution of the
related class 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. The ABCAT Shares are available solely for the
discretionary accounts of Alex. Brown Capital Advisory Trust Company and its
affiliates.
Alex. Brown receives no compensation for distributing the Flag
Investors Institutional Shares or ABCAT Shares.
With respect to the Flag Investors Institutional Shares, Alex. Brown
and Participating Dealers have entered into Sub-Distribution Agreements under
which such Participating Dealers have agreed to process investor purchase and
redemption orders and respond to inquiries from shareholders concerning the
status of their accounts and the operations of the Fund. It is not currently
anticipated that Alex. Brown will enter into Sub-Distribution Agreements for the
ABCAT Shares.
The Institutional Distribution Agreement was approved by the Fund's
Board of Directors on September 25, 1995 and by the sole shareholder of the
class on October 31, 1995. The ABCAT Distribution Agreement was approved by the
Fund's Board of Directors on September 30, 1996 and by the sole shareholder of
the class on __________. Each such Agreement has an initial term of two years
and will remain in effect from year to year thereafter, if specifically approved
at least annually by the Fund's Board of Directors and by the affirmative vote
of a majority of the Non-Interested Directors by votes cast at a meeting called
for such purpose. Each Agreement may be terminated at any time upon sixty days'
written notice, without penalty, by the vote of a majority of the Fund's
Non-Interested Directors or by a vote of a majority of the outstanding shares of
the class (as defined under Capital Stock). The Flag Investors Institutional
Distribution Agreement, the ABCAT Distribution Agreement and any
Sub-Distribution Agreement shall automatically terminate in the event of
assignment.
-17-
<PAGE>
General Information
The Fund will pay all costs associated with its organization and
registration under the Securities Act of 1933 and the Investment Company Act.
Except as described elsewhere, the Fund pays or causes to be paid all continuing
expenses of the Fund, including, without limitation: investment advisory and
distribution fees; the charges and expenses of any registrar, any custodian or
depository appointed by the Fund for the safekeeping of cash, portfolio
securities and other property, and any transfer, dividend or accounting agent or
agents appointed by the Fund; brokers' commissions chargeable to the Fund in
connection with portfolio securities transactions to which the Fund is a party;
all taxes, including securities issuance and transfer taxes, and fees payable by
the Fund to federal, state or other governmental agencies; the costs and
expenses of engraving or printing of certificates representing Shares; all costs
and expenses in connection with the registration and maintenance of registration
of the Fund and its Shares with the SEC and various states and other
jurisdictions (including filing fees, legal fees and disbursements of counsel);
the costs and expenses of printing, including typesetting and distributing
prospectuses and statements of additional information of the Fund and
supplements thereto to the Fund's shareholders; all expenses of shareholders'
and Directors' meetings and of preparing, printing and mailing proxy statements
and reports to shareholders; fees and travel expenses of Directors and Director
members of any advisory board or committee; all expenses incident to the payment
of any dividend, distribution, withdrawal or redemption, whether in Shares or in
cash; charges and expenses of any outside service used for pricing of the
Shares; fees and expenses of legal counsel, including counsel to the
Non-Interested Directors, and of independent auditors, in connection with any
matter relating to the Fund; a portion of membership dues of industry
associations; interest payable on Fund borrowings; postage; insurance premiums
on property or personnel (including officers and Directors) of the Fund which
inure to its benefit; extraordinary expenses (including, but not limited to,
legal claims and liabilities and litigation costs and any indemnification
related thereto); and all other charges and costs of the Fund's operation unless
otherwise explicitly assumed by Alex. Brown or ICC.
The address of Alex. Brown is 135 East Baltimore Street, Baltimore,
Maryland 21202.
8. BROKERAGE
ICC is responsible for decisions to buy and sell securities for the
Fund, for the broker-dealer selection and for negotiation of commission rates.
Purchases and sales of securities on a securities exchange are effected through
broker-dealers who charge a commission for their services. ICC may direct
purchase and sale orders to any broker-dealer, including, to the extent and in
the manner permitted by applicable law, Alex. Brown.
In over-the-counter transactions, orders are placed directly with a
principal market maker and such purchases normally include a mark up over the
bid to the broker-dealer based on the spread between the bid and asked price for
the security. Purchases from underwriters of portfolio securities 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
-18-
<PAGE>
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,
1995, December 31, 1994 and December 31, 1993, ICC directed no brokerage
transactions to broker-dealers and paid no related commissions because of
research services provided to the Fund.
Subject to the above considerations, the Board of Directors has
authorized the Fund to effect portfolio transactions, on an agency basis,
through Alex. Brown. At the time of such authorization certain policies and
procedures incorporating the standards of Rule 17e-1 under the Investment
Company Act which requires that the commissions paid Alex. Brown must be
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time."
Rule 17e-1 also contains requirements for the review of such transactions by the
Board of Directors and requires ICC to furnish reports and to maintain records
in connection with such reviews. The Distribution Agreements between Alex. Brown
and the Fund do not provide for any reduction in the distribution fee to be
received by Alex. Brown from the Fund as a result of profits resulting from
brokerage commissions on transactions of the Fund effected through Alex. Brown.
For the fiscal years ended December 31, 1995, December 31, 1994 and December 31,
1993, the Fund paid no brokerage commissions to Alex. Brown. The Fund is
required to identify any securities of its "regular brokers or dealers" (as such
term is defined in the Investment Company Act) which the Fund has acquired
during its most recent fiscal year. As of December 31, 1995, the Fund held a
5.70% repurchase agreement issued by Goldman Sachs & Co. valued at $1,806,000.
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.
-19-
<PAGE>
9. CAPITAL STOCK
The Fund is authorized to issue sixty million Shares of common stock,
par value $.001 per share. The Board of Directors may increase or decrease the
number of authorized Shares without shareholder approval.
The Fund's Articles of Incorporation provide for the establishment of
separate series and separate classes of Shares by the Directors at any time
without shareholder approval. The Fund currently has one Series and the Board
has designated four classes of shares: Flag Investors Intermediate-Term Income
Fund Class A Shares, Flag Investors Intermediate-Term Income Fund Class B
Shares, Flag Investors Intermediate-Term Income Fund Institutional Shares and
Alex. Brown Capital Advisory & Trust Intermediate-Term Income Shares. The Flag
Investors Institutional Shares are offered only to certain eligible institutions
and to clients of investment advisory affiliates of Alex. Brown. The ABCAT
Shares are offered only to clients of Alex. Brown Capital Advisory & Trust
Company and its affiliates. The Flag Investors Class B Shares are not currently
being offered. Shares of the Fund, regardless of series or class would have
equal rights with respect to voting, except that with respect to any matter
affecting the rights of the holders of a particular series or class, the holders
of each series or class would vote separately. In general, each series would be
managed separately and shareholders of each series would have an undivided
interest in the net assets of that series. For tax purposes, the series would be
treated as separate entities. Generally, each class of Shares would be identical
to every other class in a particular series and expenses of the Fund (other than
12b-1 and any applicable service fees) would be prorated between all classes of
a series based upon the relative net assets of each class. Any matters affecting
any class exclusively will be voted on by the holders of such class.
Shareholders of the Fund do not have cumulative voting rights, and
therefore the holders of more than 50% of the outstanding Shares voting together
for election of Directors may elect all the members of the Board of Directors of
the Fund. In such event, the remaining holders cannot elect any members of the
Board of Directors of the Fund. There are no preemptive, conversion or exchange
rights applicable to any of the Shares. The issued and outstanding Shares are
fully paid and non-assessable. In the event of liquidation or dissolution of the
Fund, each Share is entitled to its portion of the Fund's assets (or the assets
allocated to a separate series of shares if there is more than one series) after
all debts and expenses have been paid.
As used in this Statement of Additional Information the term "majority
of the outstanding Shares" means the vote of the lesser of (i) 67% or more of
the Shares present at a meeting, if the holders of more than 50% of the
outstanding Shares are present or represented by proxy, or (ii) more than 50% of
the outstanding Shares.
10. SEMI-ANNUAL REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of investments
held in the Fund's portfolio and financial statements. The annual financial
statements are audited by the Fund's independent auditors.
11. CUSTODIAN, TRANSFER AGENT, ACCOUNTING SERVICES
PNC Bank, National Association ("PNC Bank"), with offices at Airport
Business Park, 200 Stevens Drive, Lester, Pennsylvania, 19113, has been retained
to act as custodian of the Fund's investments. PNC Bank receives such
compensation from the Fund for its services as custodian as may be agreed to
from time to time by PNC Bank and the Fund. Investment Company Capital Corp.,
135 East Baltimore Street, Baltimore, Maryland 21202, serves as the Fund's
transfer and dividend disbursing agent and provides certain accounting services
to the Fund under a Master Services Agreement between the Fund and ICC. As
-20-
<PAGE>
compensation for providing dividend and transfer agency services, the Fund pays
ICC up to $10.62 per account per year, plus reimbursement for out-of-pocket
expenses incurred in connection therewith. For the fiscal year ended December
31, 1995, such fees totaled $24,999.
As compensation for providing accounting services, ICC receives an
annual fee, calculated daily and paid monthly, as shown below.
Average Net Assets Incremental Fee
------------------ ---------------
$ 0 - $ 10,000,000 $15,000 (fixed fee)
$ 10,000,001 - $ 24,999,999 .080%
$ 25,000,000 - $ 50,000,000 .077%
$ 50,000,001 - $ 75,000,000 .050%
$ 75,000,001 - $ 99,999,999 .030%
$100,000,000 - $ 500,000,000 .020%
$500,000,001 - $1,000,000,000 .008%
over $1,000,000,000 .003%
In addition, the Fund will reimburse ICC for the following out-of-pocket
expenses incurred in connection with ICC's provision of accounting services
under the Master Services Agreement: express delivery service, independent
pricing and storage. For the fiscal year ended December 31, 1995, ICC received
accounting fees of $57,172.
ICC also serves as the Fund's investment advisor.
12. INDEPENDENT AUDITORS
The annual financial statements of the Fund are audited by Deloitte &
Touche LLP. Deloitte & Touche LLP has offices at 117 Campus Drive, Princeton,
New Jersey 08540.
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:
-21-
<PAGE>
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 (or the later commencement of operations of a
Series or class). During its first year of operations, the Fund may, in lieu of
annualizing its total return, use an aggregate total return calculated in the
same manner. In calculating the ending redeemable value, the maximum sales load
(1.50% for the Flag Investors Class A Shares) is deducted from the initial
$1,000 payment and all dividends and distributions by the Fund are assumed to
have been reinvested at net asset value as described in the Prospectuses on the
reinvestment dates during the period. "T" in the formula above is calculated by
finding the average annual compounded rate of return over the period that would
equate an assumed initial payment of $1,000 to the ending redeemable value. Any
sales loads that might in the future be made applicable at the time to
reinvestments would be included as would any recurring account charges that
might be imposed by the Fund. The Flag Investors Institutional Shares and the
ABCAT Shares are sold without a sales load.
The Fund may also from time to time include in such advertising total
return figures that are not calculated according to the formula set forth above
to compare more accurately the Fund's performance with other measures of
investment return. For example, in comparing the Fund's total return with data
published by Lipper Analytical Services, Inc., CDA/Weisenberger or Morningstar
Inc., or with the performance of Lehman Brothers Government Corporate Bond
Index, Lehman Brothers Government Intermediate-Term Bond Index or Salomon
Brothers Broad Investment Grade Index, the Fund calculates its aggregate and
average annual total return for the specified periods of time by assuming the
investment of $10,000 in Shares and assuming the reinvestment of each dividend
or other distribution at net asset value on the reinvestment date.
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, 1995, the ending redeemable value of a hypothetical $1,000 payment
for Flag Investors Class A Shares was $1,138, resulting in a total return for
such shares equal to 13.77%. For the period from effectiveness of the Fund's
registration statement on May 13, 1991 to the end of the Fund's fiscal year on
-22-
<PAGE>
December 31, 1995, the ending redeemable value of a hypothetical $1,000 payment
for Flag Investors Class A Shares was $1,391 resulting in an average annual
total return for such shares equal to 7.38%.
Calculated according to the SEC rules for the period from November 2,
1995 (commencement of offering of the Flag Investors Institutional Shares)
through December 31, 1995, the ending redeemable value of a hypothetical $1,000
payment for Flag Investors Institutional Shares was $1,025, resulting in an
aggregate total return for such shares equal to 2.50%.
Calculated according to the alternative computation which assumes no
sales charges and reinvestment of all distributions, for the one-year period
ended December 31, 1995, the ending redeemable value of a hypothetical $10,000
investment in Flag Investors Class A Shares was $11,543, resulting in a total
return for such shares equal to 15.43%. For the period from effectiveness of the
Fund's registration statement on May 13, 1991 to the end of the Fund's fiscal
year on December 31, 1995, the ending redeemable value of a hypothetical $10,000
investment in Flag Investors Class A Shares was $14,112, resulting in an average
annual total return for such shares equal to 7.21%.
Calculated according to the alternative computation for the period from
November 2, 1995 (commencement of offering of the Flag Investors Institutional
Shares) through December 31, 1995, the ending redeemable value of a hypothetical
$10,000 investment in Flag Investors Institutional Shares was $10,250, resulting
in an aggregate total return for such Shares equal to 2.50%.
The ABCAT Shares were not offered prior to the date of this Statement of
Additional Information.
Yield Calculations
The Fund's yield for the Flag Investors Class A Shares and the Flag
Investors Institutional Shares for the 30 day period ended December 31, 1995 was
6.27% and 6.30%, respectively, and was computed in the manner discussed below.
The yield of the Fund is calculated by dividing the net investment income per
Share earned by the Fund during a 30-day (or one month) period by the maximum
offering price per share on the last day of the period and annualizing the
result on a semi-annual basis by adding one to the quotient, raising the sum to
the power of six, subtracting one from the result and then doubling the
difference. The Fund's yield calculations assume a maximum sales charge of 1.50%
for the Flag Investors Class A Shares and no sales charge for the Flag Investors
Institutional Shares or the ABCAT Shares. 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.
-23-
<PAGE>
The Fund's annual portfolio turnover rate (the lesser of the value of
the purchases or sales for the year divided by the average monthly market value
of the portfolio during the year, excluding U.S. Government 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, 1995 and December 31, 1994
was 46% and 50%. A high level of portfolio turnover may generate relatively high
transaction costs and may increase the amount of taxes payable by the Fund's
shareholders.
14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of September 20, 1996 to Fund management's knowledge, the following
persons owned of record or beneficially 5% or more of the Fund's outstanding
Shares.
Name and Address % Ownership
---------------- -----------
OLICOM A/S 13.39%
ATTN: Jorgen Nielsen
Nybrovej 114
DK-2800
Lyngby, Denmark
Alex. Brown & Sons Incorporated 63.0%*
135 E. Baltimore Street
Baltimore, MD 21202
Lauer & Co. Cust. 8.18%
BAT Customers
c/o Glenmede Income Collection Dept.
1650 Market St., Ste. 1200
Philadelphia, PA 19103-7301
- ----------
* As of such date Alex. Brown owned beneficially less than 5% of such
Shares.
As of September 20, 1996, Directors and officers as a group owned less than
1% of the Fund's total outstanding Shares.
15. FINANCIAL STATEMENTS
(See next page.)
-24-
<PAGE>
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND
Statement of Net Assets December 31, 1995
<TABLE>
<CAPTION>
S&P Par Value
Security Rating(1) (000) (Note A)
<S> <C> <C> <C>
CORPORATE BONDS -- 26.1%
Banc One Columbus
7.375%, 12/1/02 AA- $1,000 $ 1,092,500
Banc One Credit Card Master Trust
6.30%, 10/15/02 AAA 3,000 3,067,500
Bear Stearns Co.
6.625%, 1/15/04 A 3,000 3,041,250
Countrywide Funding
8.25%, 7/15/02 A- 3,250 3,599,375
Fund America Enterprise
7.75%, 2/1/03 BBB+ 3,000 3,142,500
Pacific Gas & Electric
6.25%, 3/1/04 A 2,000 2,002,500
Societe Nationale Elf Aquitaine
7.75%, 5/1/99 AA- 2,000 2,125,000
----------
Total Corporate Bonds (Cost $17,483,844) 18,070,625
----------
U.S. GOVERNMENT AGENCY SECURITIES -- 20.1%
Federal Home Loan Banks Board -- 4.4%
7.151%, 9/13/05 (callable 9/13/97) AAA 3,000 3,086,310
Federal Home Loan Mortgage Corp. -- 2.1%
Pool #G10049, 8.00%, 10/1/07 AAA 1,393 1,444,393
Federal National Mortgage Assoc. -- 5.9%
Multi-Class Mortgage Certificates
Pool #326570, 7.00%, 2/1/08 AAA 3,997 4,074,315
Government National Mortgage Assoc. -- 6.0%
Multi-Class Mortgage Certificates
Pool #194615, 8.00%, Due 3/15/17 AAA 166 172,545
Pool #204405, 8.00%, Due 4/15/17 AAA 184 191,503
Pool #371200, 8.00%, Due 12/15/23 AAA 1,618 1,687,303
Pool #371206, 8.00%, Due 12/15/23 AAA 2,019 2,105,216
Guaranteed Export Trust -- 1.7%
8.187%, 12/15/04 AAA 1,060 1,148,055
----------
Total U.S. Government Agency Securities (Cost $13,700,276) 13,909,640
----------
U.S. TREASURY SECURITIES -- 16.6%
U.S. Treasury Notes
4.75%, 9/30/98 AAA 4,000 3,952,120
5.50%, 4/15/00 AAA 2,500 2,521,550
5.75%, 8/15/03 AAA 5,000 5,067,200
----------
Total U.S. Treasury Securities (Cost $11,205,039) 11,540,870
----------
</TABLE>
-25-
<PAGE>
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND
Statement of Net Assets (concluded) December 31, 1995
<TABLE>
<CAPTION>
S&P Par Value
Security Rating(1) (000) (Note A)
<S> <C> <C> <C>
ASSET-BACKED SECURITIES -- 11.3%
Premier Auto Trust, 94-1-A3, 4.75%, 2/2/00 AAA $ 944 $ 937,160
Discover Credit Card, 93-A-A, 6.25%, 8/16/00 AAA 3,000 3,052,620
Sears Credit Account Master Trust, II 95-2-A, 8.10%, 6/15/04 AAA 3,500 3,808,770
----------
Total Asset-Backed Securities (Cost $7,481,229) 7,798,550
COLLATERALIZED MORTGAGE OBLIGATIONS -- 22.8%
Federal Home Loan Mortgage Corp. -- 11.9%
Multi-Class Mortgage Certificates
Series 21-H, 5.85%, 1/25/19 AAA 4,000 3,941,361
Series 1163-I, 6.95%, 12/15/20 AAA 600 610,782
Series 106-F, 8.50%, 12/15/20 AAA 3,562 3,670,704
Federal National Mortgage Assoc. -- 10.8%
Multi-Class Mortgage Certificates
Series 1988-18-B, 9.40%, 7/25/03 AAA 237 248,636
Series 1992-149-D, 12.00%, 4/25/19 AAA 2,068 2,139,593
Series 1991-11-G, 7.00%, 11/25/19 AAA 3,052 3,069,546
Series 1995-W-1--A2, 8.20%, 4/25/25 AAA 2,000 2,058,200
Goldman Sachs Trust Series 3 -- 0.1%
Remic, Series 3 E-4, 8.00%, 5/27/15 AAA 66 67,321
----------
Total Collateralized Mortgage Obligations (Cost $15,609,443) 15,806,143
----------
REPURCHASE AGREEMENT -- 2.6%
Goldman Sachs & Co., 5.70%
Dated 12/29/95, to be repurchased on 1/2/96, collateralized
by U.S. Treasury Bonds with a market value of $1,834,529.
(Cost $1,806,000) NR* 1,806 1,806,000
---------
Total Investment in Securities -- 99.5%
(Cost $67,285,831)** 68,931,828
Other Assets in Excess of Liabilities, Net -- 0.5% 369,866
----------
Net Assets -- 100.0% $69,301,694
==========
Net Asset Value Per:
Class A Share ($67,115,974 / 6,406,450 shares outstanding) $10.48
=====
Institutional Share ($2,185,720 / 206,585 shares outstanding) $10.58
=====
Maximum Offering Price Per:
Class A Share ($10.48 / .985) $10.64
=====
Institutional Share $10.58
=====
</TABLE>
(1) The Standard & Poor's rating indicated is believed to be the most
recent rating available as of December 31, 1995.
* Not rated.
** Also aggregate cost for federal tax purposes.
See accompanying Notes to Financial Statements.
-26-
<PAGE>
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND
Statement of Operations For the Year Ended December 31, 1995
INVESTMENT INCOME (NOTE A):
Interest $ 4,829,563
-----------
EXPENSES:
Investment advisory fee (Note B) 252,372
Distribution fee (Note B) 179,666
Accounting fee (Note B) 57,172
Printing and postage 32,168
Custodian fees 25,999
Transfer agent fees (Note B) 24,999
Legal 24,999
Audit 23,999
Registration fees 19,998
Organizational expense (Note A) 9,092
Miscellaneous 8,500
Directors' fees 5,000
Insurance 3,680
-----------
Total expenses 667,644
Less: Fees waived (Note B) (162,943)
-----------
Net expenses 504,701
-----------
Net investment income 4,324,862
-----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (NOTE A):
Net realized loss from securities transactions (1,018,416)
Change in unrealized appreciation of investments 7,179,328
Change in unrealized appreciation of assets and liabilities
denominated in foreign currency 1,216
-----------
Net gain on investments 6,162,128
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $10,486,990
===========
See accompanying Notes to Financial Statements.
-27-
<PAGE>
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the Year Ended December 31,
1995 1994
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 4,324,862 $ 5,692,067
Net loss from security transactions (1,018,416) (2,533,036)
Change in unrealized appreciation/(depreciation)
of investments 7,179,328 (6,950,668)
Change in unrealized appreciation/(depreciation) of assets
and liabilities denominated in foreign currency 1,216 --
---------- ------------
Net increase/(decrease) in net assets
resulting from operations 10,486,990 (3,791,637)
---------- ------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income:
Flag Investors Class A Shares (4,208,250) (5,690,349)
Flag Investors Institutional Shares (7,962) --
Return of capital:
Flag Investors Class A Shares -- (324,493)
Flag Investors Institutional Shares -- --
---------- ------------
Total distributions (4,216,212) (6,014,842)
---------- ------------
CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of shares 4,986,795 18,470,875
Value of shares issued in reinvestment of dividends 2,635,861 4,067,306
Cost of shares repurchased (23,380,739) (46,462,862)
---------- ------------
Decrease in net assets derived from
capital share transactions (15,758,083) (23,924,681)
---------- ------------
Total decrease in net assets (9,487,305) (33,731,160)
NET ASSETS:
Beginning of year 78,788,999 112,520,159
---------- ------------
End of year $69,301,694 $ 78,788,999
========== ============
</TABLE>
See accompanying Notes to Financial Statements.
-28-
<PAGE>
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND
FINANCIAL HIGHLIGHTS -- FLAG INVESTORS CLASS A SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Period
May 13, 1991*
For the Year Ended December 31, through
1995 1994 1993 1992 Dec. 31, 1991
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period $ 9.62 $ 10.57 $ 10.37 $ 10.54 $ 10.00
------- ------- -------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.62 0.57 0.57 0.63 0.32
Net realized and unrealized gain/(loss)
on investments 0.84 (0.92) 0.34 (0.05) 0.64
------- ------- -------- ------- -------
Total from Investment Operations 1.46 (0.35) 0.91 0.58 0.96
------- ------- -------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment
income and short-term gains (0.60) (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) (0.60) (0.71) (0.75) (0.42)
------- ------- -------- ------- -------
Net asset value at end of period $ 10.48 $ 9.62 $ 10.57 $ 10.37 $ 10.54
======= ======= ======== ======= =======
TOTAL RETURN(1) 15.43% (3.32)% 8.98% 5.68% 9.79%
RATIOS TO AVERAGE NET ASSETS:
Expenses(2) 0.70% 0.70% 0.70% 0.70% 0.70%**
Net investment income(3) 6.00% 5.57% 5.43% 6.01% 5.97%**
SUPPLEMENTAL DATA:
Net assets at end of period (000) $67,116 $78,789 $112,520 $78,706 $64,327
Portfolio turnover rate 46% 50% 86% 107% 46%
</TABLE>
* Commencement of operations.
** Annualized.
(1) Total return excludes the effect of sales loads.
(2) Without the waiver of advisory fees (Note B), the ratio of expenses
to average net assets would have been 0.93%, 0.84%, 0.85%, 0.87% and
1.73% (annualized) for the years ended December 31, 1995, 1994, 1993,
1992, and for the period ended December 31, 1991, respectively.
(3) Without the waiver of advisory fees (Note B), the ratio of net
investment income to average net assets would have been 5.77%,
5.43%, 5.28%, 5.83% and 4.94% (annualized) for the years ended
December 31, 1995, 1994, 1993, 1992, and for the period ended
December 31, 1991, respectively.
See accompanying Notes to Financial Statements.
-29-
<PAGE>
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SHARES
(For a share outstanding during the period)
For the Period
November 2, 1995*
through
December 31, 1995
PER SHARE OPERATING PERFORMANCE:
Net asset value at beginning of period $ 10.42
-------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.09
Net realized and unrealized gain on investments 0.12
-------
Total from Investment Operations 0.21
-------
Less Distributions:
Dividends from net investment income and
short-term capital gains (0.05)
-------
Net asset value at end of period $ 10.58
=======
Total Return 12.47%**
Ratios to Average Net Assets:
Expenses(1) 0.47%**
Net investment income(2) 6.52%**
Supplemental Data:
Net assets at end of period (000) $ 2,186
Portfolio turnover rate 46%
* Commencement of operations.
** Annualized.
(1) Without the waiver of advisory fees (Note B), the ratio of expenses
to average net assets would have been 0.72% (annualized) for the
period ending December 31, 1995.
(2) Without the waiver of advisory fees (Note B), the ratio of net
investment income to average net assets would have been 6.27%
(annualized) for the period ending December 31, 1995.
See accompanying Notes to Financial Statements.
-30-
<PAGE>
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND
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, consisting of Class A Shares, which are subject to a maximum front-end
sales charge of 1.50% and a 0.25% distribution fee. On November 2, 1995, the
Fund began offering Institutional Shares, which are not subject to a front-end
sales charge or a distribution fee. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The following is a summary of significant accounting policies followed by the
Fund.
SECURITY VALUATION - Debt securities are valued on the basis of quotations
provided by a pricing service, which uses information with respect to
transactions on bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining value. Portfolio securities that are listed on a national securities
exchange are valued on the basis of their last sale price or, in the absence of
recorded sales, at the average of readily available closing bid and asked
prices. Securities or other assets for which market quotations are not readily
available are valued at their fair value so determined in good faith by the
investment advisor under procedures established and monitored by the Board of
Directors. Short-term obligations with maturities of 60 days or less are valued
at amortized cost which approximates market.
FEDERAL INCOME TAX - No provision is made for federal income taxes as it is the
Fund's intention to continue to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code and to make requisite distributions to
the shareholders that will be sufficient to relieve it from all or substantially
all federal income and excise taxes. The Fund's policy is to distribute to
shareholders substantially all of its taxable net investment income on a monthly
basis and net realized long-term capital gains annually, if any.
OTHER - Security transactions are accounted for on the trade date and the cost
of investments sold or redeemed is determined by use of the specific
identification method for both financial reporting and income tax purposes.
Interest income is recorded on an accrual basis and includes amortization of
premiums and accretion of discounts.
Costs incurred by the Fund in connection with its organization, registration and
the initial public offering of shares have been deferred and are being amortized
on the straight-line method over a five-year period beginning on the date on
which the Fund commenced its investment activities.
B. INVESTMENT ADVISORY FEES, TRANSACTIONS WITH AFFILIATES AND OTHER FEES -
Investment Company Capital Corp. ("ICC"), a subsidiary of Alex. Brown & Sons
Incorporated ("Alex. Brown"), serves as the Fund's investment advisor. As
compensation for its advisory services, ICC receives from the Fund an annual
fee, calculated daily and paid monthly, at an annual rate of 0.35% of the first
$1 billion of the Fund's average daily net assets; 0.30% of the Fund's average
daily net assets in excess of $1 billion but not exceeding $1.5 bil-
-31-
<PAGE>
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND
NOTES TO FINANCIAL STATEMENTS (continued)
lion; and 0.25% 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, 1995, ICC waived fees of $162,943.
As compensation for its transfer agent services, ICC receives from the Fund a
per account fee, calculated and paid monthly. ICC received $24,999 for transfer
agent services for the year ended December 31, 1995.
As compensation for its accounting services, ICC receives from the Fund an
annual fee, calculated daily and paid monthly, from the Fund's average daily net
assets. ICC received $57,172 for accounting services for the year ended December
31, 1995.
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 of Class A Shares. For the year
ended December 31, 1995, distribution fees aggregated $179,666.
Flag Investors/ISI Fund complex has adopted a retirement plan for eligible
Directors. The pension expense as of the year ended December 31, 1995 was not
material.
C. CAPITAL SHARE TRANSACTIONS - The Fund is authorized to issue up to 55 million
shares of capital stock (45 million Class A, 5 million Institutional, 2 million
Class B and 3 million undesignated), par value $.001 per share, all of which are
designated as common stock. Transactions in shares of the Fund were as follows:
Flag Investors Class A Shares
-------------------------------
For the Year Ended December 31,
1995 1994
--------- ----------
Shares sold 267,783 1,793,782
Shares issued to
shareholders on
reinvestment of
dividends 261,580 404,005
Shares redeemed (2,317,104) (4,649,437)
---------- ----------
Net decrease in shares
outstanding (1,787,741) (2,451,650)
========== ==========
Proceeds from sale
of shares $ 2,690,780 $18,470,875
Value of reinvested
dividends 2,635,861 4,067,306
Cost of shares
redeemed (23,241,599) (46,462,862)
---------- ----------
Net decrease from
capital share
transactions $(17,914,958) $(23,924,681)
========== ==========
-32-
<PAGE>
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND
NOTES TO FINANCIAL STATEMENTS (concluded)
Institutional Shares
--------------------------------
For the Period November 2, 1995*
through December 31, 1995
--------------------------------
Shares sold 219,797
Shares issued to
shareholders on
reinvestment of
dividends --
Shares redeemed (13,212)
-----------
Net increase in shares
outstanding 206,585
===========
Proceeds from sale
of shares $2,296,015
Value of reinvested
dividends --
Cost of shares
redeemed (139,140)
----------
Net increase from
capital share
transactions $2,156,875
==========
* Commencement of operations.
D. INVESTMENT TRANSACTIONS - Purchases and sales of investment securities, other
than short-term obligations, aggregated $31,389,840 and $42,317,826,
respectively, for the year ended December 31, 1995.
At December 31, 1995, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $1,747,187,
and aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over value was $101,190.
E. CAPITAL LOSS CARRYFORWARD - At December 31, 1995, there was a tax capital
loss carryforward of $3,494,748, of which $383,359 expires in 2002 and
$3,111,389 expires in 2003. This carryforward will be used to offset future net
capital gains, if any.
F. NET ASSETS - At December 31, 1995, net assets consisted of:
Paid-in capital:
Flag Investors Class A Shares $69,160,420
Flag Investors Institutional Shares 2,156,875
Accumulated net realized loss from
security transactions (3,514,478)
Unrealized appreciation of
investments 1,645,997
Overdistribution of net investment
income (147,120)
-----------
$69,301,694
===========
-33-
<PAGE>
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders, Flag
Investors Intermediate-Term Income Fund, Inc.:
We have audited the accompanying statement of net assets of Flag Investors
Intermediate-Term Income Fund, Inc. as of December 31, 1995, 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 four-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 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, 1995 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, 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, 1995, 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 26, 1996
-34-
<PAGE>
[Flag Logo]
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND
- --------------------------------------------------------------------------------
Statement of Net Assets June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
S&P Par Value
Security Rating** (000) (Note A)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS -- 21.8%
Banc One Columbus
7.375%, 12/1/02 AA- $1,000 $ 1,032,501
Countrywide Funding
8.25%, 7/15/02 A- 3,250 3,408,419
Elf Aquitaine
7.75%, 5/1/99 AA- 2,000 2,060,001
Fund America Enterprise
7.75%, 2/1/03 BBB+ 2,000 1,974,978
General Motors Acceptance Corp.
5.625%, 2/15/01 A- 1,000 953,751
Guaranteed Export Trust
8.187%, 12/15/04 AAA 995 1,037,899
Pacific Gas & Electric
6.25%, 3/1/04 A 2,000 1,884,999
Philip Morris Cos., Inc.
6.95%, 6/1/06 A 2,000 2,002,500
- ---------------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds (Cost $13,424,381) 14,355,048
- ---------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY SECURITIES -- 46.3%
Federal Home Loan Bank -- 4.5%
Consolidated System-wide Bonds
7.151%, Due 9/13/05 AAA 3,000 2,928,867
Federal Home Loan Mortgage Corp. -- 12.1%
Multi-Class Mortgage Certificates
Series 21-H, 5.85%, Due 1/25/19 AAA 4,000 3,796,122
Series 106-F, 8.50%, Due 12/15/20 AAA 2,893 2,968,349
Participation Certificate
Pool #G10049, 8.00%, Due 10/1/07 AAA 1,209 1,233,864
Federal National Mortgage Assoc. -- 19.6%
Debenture
6.250%, Due 8/12/03 AAA 3,500 3,333,859
Mortgage-Backed Securities
Pool #326570, 7.00%, Due 2/1/08 AAA 3,846 3,797,479
Multi-Class Mortgage Certificates
Series 88-18-B, 9.40%, 7/25/03 AAA 203 213,150
Series 149-D, 12.00%, 4/25/19 AAA 1,298 1,330,813
Series 91-11-G, 7.00%, 11/25/19 AAA 2,187 2,182,636
Series W-1, 8.20%, 4/25/25 AAA 2,000 2,049,200
Government National Mortgage Assoc. -- 10.1%
"Pass Throughs"
Pool #194615, 8.00%, Due 3/15/17 AAA 164 165,329
Pool #204405, 8.00%, Due 4/15/17 AAA 171 172,358
Pool #371200, 8.00%, Due 12/15/23 AAA 1,604 1,619,111
</TABLE>
-35-
<PAGE>
[Flag Logo]
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND
- --------------------------------------------------------------------------------
Statement of Net Assets (concluded) June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
S&P Par Value
Security Rating** (000) (Note A)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Government National Mortgage Assoc. (continued)
Pool #371206, 8.00%, Due 12/15/23 AAA $1,832 $ 1,848,725
Pool #780195, 8.00%, Due 7/15/25 AAA 2,828 2,865,269
- ---------------------------------------------------------------------------------------------------------------------------
Total U.S. Government Agency Securities (Cost $31,835,588) 30,505,131
- ---------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY SECURITIES -- 17.5%
U.S. Treasury Notes
4.750%, 9/30/98 AAA 4,000 3,885,320
5.250%, 1/31/01 AAA 2,000 1,911,283
5.750%, 8/15/03 AAA 2,000 1,905,516
5.875%, 2/15/04 AAA 4,000 3,823,473
- ---------------------------------------------------------------------------------------------------------------------------
Total U.S. Treasury Securities (Cost $11,833,220) 11,525,592
- ---------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES -- 10.0%
Banc One Credit Card Master Trust
6.300%,10/15/02 AAA 3,000 2,943,900
Discover Credit Card, 93-A-A
6.25%, 8/15/00 AAA 3,000 2,988,893
Premier Auto Trust, 94-1-A3
4.75%, 2/2/00 AAA 655 648,703
- ---------------------------------------------------------------------------------------------------------------------------
Total Asset-Backed Securities (Cost $6,691,492) 6,581,496
- ---------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 2.9%
Goldman Sachs & Co., 5.25%
Dated 6/28/96, to be repurchased on 7/1/96, collateralized
by U.S. Treasury Bonds with a market value of $1,979,189.
(Cost $1,940,000) NR* 1,940 1,940,000
- ---------------------------------------------------------------------------------------------------------------------------
Total Investment in Securities -- 98.5%
(Cost $65,724,681)*** 64,907,267
Other Assets in Excess of Liabilities, Net-- 1.5% 1,019,975
- ---------------------------------------------------------------------------------------------------------------------------
Net Assets-- 100.0% $65,927,242
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value and Redemption Price Per:
Class A Share ($58,008,812 / 5,694,472 shares outstanding) $10.19
Institutional Share ($7,918,430 / 769,405 shares outstanding) $10.29
Maximum Offering Price Per:
Class A Share ($10.19 / .985) $10.35
Institutional Share $10.29
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Not rated.
** The Standard & Poor's rating indicated is believed to be the most recent
rating available as of June 30, 1996.
*** Also aggregate cost for federal tax purposes.
See accompanying Notes to Financial Statements.
-36-
<PAGE>
[Flag Logo]
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND
- --------------------------------------------------------------------------------
Statement of Operations For the Six Months Ended June 30, 1996
(Unaudited)
INVESTMENT INCOME (NOTE A):
Interest $ 2,305,962
EXPENSES:
Investment advisory fee (Note B) 115,889
Distribution fee (Note B) 76,984
Accounting fee (Note B) 27,007
Printing and postage 17,165
Transfer agent fee (Note B) 14,794
Custodian fee 12,821
Legal 12,328
Audit 11,835
Registration fees 9,862
Miscellaneous 6,604
Organizational expense (Note A) 4,484
Directors' fees 2,466
Insurance 1,247
Total expenses 313,486
Less: Fees waived (Note B) (83,277)
Net expenses 230,209
Net investment income 2,075,753
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (NOTE A):
Net realized gain from security transactions 124,699
Change in unrealized depreciation of investments (2,463,411)
Net loss on investments (2,338,712)
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (262,959)
- --------------------------------------------------------------------------------
See accompanying Notes to Financial Statements.
-37-
<PAGE>
[Flag Logo]
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Six
Months Ended For the Year
June 30, 1996 Ended
(Unaudited) December 31, 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 2,075,753 $ 4,324,862
Net realized gain/(loss) from security transactions 124,699 (1,018,416)
Change in appreciation/(depreciation) of
investments (2,463,411) 7,179,328
Change in unrealized appreciation of assets
and liabilities denominated in foreign currency -- 1,216
Net increase/(decrease) in net assets
resulting from operations (262,959) 10,486,990
Dividends to Shareholders from:
Net investment income:
Flag Investors Class A Shares (1,518,214) (4,208,250)
Flag Investors Institutional Shares (118,077) (7,962)
Total distributions (1,636,291) (4,216,212)
CAPITAL SHARE TRANSACTIONS (NOTE C):
Proceeds from sale of shares 10,355,231 4,986,795
Value of shares issued in reinvestment of dividends 1,170,669 2,635,861
Cost of shares repurchased (13,001,102) (23,380,739)
Decrease in net assets derived from
capital share transactions (1,475,202) (15,758,083)
Total decrease in net assets (3,374,452) (9,487,305)
NET ASSETS:
Beginning of period 69,301,694 78,788,999
End of period $65,927,242 $69,301,694
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Financial Statements.
-38-
<PAGE>
[Flag Logo]
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Financial Highlights -- Flag Investors Class A Shares
(For a share outstanding throughout each period)
For the Six For the Period
Months Ended May 13, 1991*
June 30, 1996 For the Year Ended December 31, through
(Unaudited) 1995 1994 1993 1992 Dec. 31, 1991
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of
period $ 10.48 $ 9.62 $ 10.57 $ 10.37 $ 10.54 $ 10.00
Income from Investment
Operations:
Net investment income 0.37 0.62 0.57 0.57 0.63 0.32
Net realized and unrealized
gain/(loss) on investments (0.36) 0.84 (0.92) 0.34 (0.05) 0.64
Total from Investment
Operations 0.01 1.46 (0.35) 0.91 0.58 0.96
Less Distributions:
Dividends from net investment
income and short-term gains (0.30) (0.60) (0.57) (0.69) (0.75) (0.42)
Return of capital -- -- (0.03) -- -- --
Distributions from net realized
long-term gains -- -- -- (0.02) -- --
Total distributions (0.30) (0.60) (0.60) (0.71) (0.75) (0.42)
Net asset value at end of period $ 10.19 $ 10.48 $ 9.62 $ 10.57 $ 10.37 $ 10.54
Total Return(1) (0.43)% 15.43% (3.32)% 8.98% 5.68% 9.79%
Ratios to Average Daily Net Assets:
Expenses(2) 0.70%** 0.70% 0.70% 0.70% 0.70% 0.70%**
Net investment income(3) 6.16%** 6.00% 5.57% 5.43% 6.01% 5.97%**
Supplemental Data:
Net assets at end of period (000) $58,009 $67,116 $78,789 $112,520 $78,706 $64,327
Portfolio turnover rate 23% 46% 50% 86% 107% 46%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
**Annualized.
(1) Total return excludes the effect of sales charge.
(2) Without the waiver of advisory and administration fees (Note B), the ratio
of expenses to average daily net assets would have been 0.96% (annualized),
0.93%, 0.84%, 0.85%, 0.87% and 1.73% (annualized) for the six months
ended June 30, 1996, the years ended December 31, 1995, 1994, 1993, 1992,
and the period ended December 31, 1991, respectively.
(3) Without the waiver of advisory and administration fees (Note B), the ratio
of net investment income to average daily net assets would have
been 5.91% (annualized), 5.77%, 5.43%, 5.28%, 5.83% and 4.94%
(annualized) for the six months ended June 30, 1996, the years ended
December 31, 1995, 1994, 1993, 1992, and the period ended December 31,
1991, respectively.
See accompanying Notes to Financial Statements.
-39-
<PAGE>
[Flag Logo]
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Financial Highlights -- Flag Investors Institutional Shares
(For a share outstanding throughout each period)
For the Six For the Period
Months Ended November 2, 1995*
June 30, 1996 through
(Unaudited) December 31, 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period $10.58 $10.42
Income from Investment Operations:
Net investment income 0.36 0.09
Net realized and unrealized gain/(loss) on investments (0.34) 0.12
Total from Investment Operations 0.02 0.21
Less Distributions:
Dividends from net investment income and short-term gains (0.31) (0.05)
Net asset value at end of period $10.29 $10.58
Total Return(1) (0.43)% 12.47%
Ratios to Average Daily Net Assets:
Expenses(2) 0.45%** 0.45%**
Net investment income(3) 6.51%** 6.52%**
Supplemental Data:
Net assets at end of period (000) $7,918 $2,186
Portfolio turnover rate 23% 46%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
** Annualized.
(1) Total return excludes the effect of sales charge.
(2) Without the waiver of advisory and administration fees (Note B), the ratio
of expenses to average daily net assets would have been 0.71%
(annualized) and 0.72% (annualized) for the six months ended June 30,
1996, and the period ended December 31, 1995, respectively.
(3) Without the waiver of advisory and administration fees (Note B), the ratio
of net investment income to average daily net assets would have been 6.26%
(annualized) and 6.25% (annualized) for the six months ended June 30, 1996,
and the period ended December 31, 1995, respectively.
See accompanying Notes to Financial Statements.
-40-
<PAGE>
[Flag Logo]
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND
- --------------------------------------------------------------------------------
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, consisting of Class A Shares, which are subject
to a maximum front-end sales charge of 1.50% and a 0.25% distribution fee.
On November 2, 1995, the Fund began offering Institutional Shares, which are
not subject to a front-end sales charge or a distribution fee.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
following is a summary of significant accounting policies followed by the
Fund.
Security Valuation - Debt securities are valued on the basis of quotations
provided by a pricing service, which uses information with respect to
transactions on bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining value. Portfolio securities that are listed on a national
securities exchange are valued on the basis of their last sale price or, in
the absence of recorded sales, at the average of readily available closing
bid and asked prices. Securities or other assets for which market quotations
are not readily available are valued at their fair value so determined in
good faith by the investment advisor under procedures established and
monitored by the Board of Directors. Short-term obligations with maturities
of 60 days or less are valued at amortized cost which approximates market.
Federal Income Tax - No provision is made for federal income taxes as it is
the Fund's intention to continue to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code and to make
requisite distributions to the shareholders that will be sufficient to
relieve it from all or substantially all federal income and excise taxes.
The Fund's policy is to distribute to shareholders substantially all of its
taxable net investment income on a monthly basis and net realized long-term
capital gains annually, if any.
Other - Security transactions are accounted for on the trade date and the
cost of investments sold or redeemed is determined by use of the specific
identification method for both financial reporting and income tax purposes.
Interest income is recorded on an accrual basis and includes amortization of
premiums and accretion of discounts.
Costs incurred by the Fund in connection with its organization, registration
and the initial public offering of shares have been deferred and are being
amortized on the straight-line method over a five-year period beginning on
the date on which the Fund commenced its investment activities.
B. Investment Advisory Fees, Transactions with Affiliates and Other Fees -
Investment Company Capital Corp. ("ICC"), a subsidiary of Alex. Brown
Financial Corp., 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 the following annual rates based upon
the Fund's average daily net assets:0.35% of the first $1 billion, 0.30% of
the next $500 million and 0.25% of that portion in excess of $1.5 billion.
-41-
<PAGE>
[Flag Logo]
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
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 Class A Shares and 0.45% for Institutional Shares. For the six
months ended June 30, 1996, ICCwaived fees of $83,277.
As compensation for its transfer agent services, ICC receives from the Fund
a per account fee, calculated and paid monthly. ICC received $14,794 for
transfer agent services for the six months ended June 30, 1996.
As compensation for its accounting services, ICC receives from the Fund an
annual fee, calculated daily and paid monthly, from the Fund's average daily
net assets. ICC received $27,007 for accounting services for the six months
ended June 30, 1996.
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 of Class A Shares. For
the six months ended June 30, 1996, distribution fees aggregated $76,984.
The Fund complex of which the Fund is a part has adopted a retirement plan
for eligible Directors. The actuarially computed pension expense allocated
to the Fund for the six months ended June 30, 1996 was $1,098.
C. Capital Share Transactions - The Fund is authorized to issue up to 55 million
shares of capital stock (45 million Class A, 5 million Institutional,
2 million Class B and 3 million undesignated), par value, $.001 per share,
all of which shares are designated as common stock. Transactions in shares
of the Fund were as follows:
Class A Shares
For the Six
Months Ended For the Year
June 30, 1996 Ended
(Unaudited) Dec. 31, 1995
Shares sold 419,564 267,783
Shares issued to
shareholders on
reinvestment of
dividends 106,326 261,580
Shares redeemed (1,237,868) (2,317,104)
Net decrease in
shares outstanding (711,978) (1,787,741)
Proceeds from sale
of shares $ 4,358,719 $ 2,690,780
Value of reinvested
dividends 1,092,017 2,635,861
Cost of shares
redeemed (12,773,834) (23,241,599)
Net decrease from
capital share
transactions $ (7,323,098) $(17,914,958)
Institutional Shares
For the Six For the Period
Months Ended Nov. 2, 1995*
June 30, 1996 through
(Unaudited) Dec. 31, 1995
Shares sold 576,651 219,797
Shares issued to
shareholders on
reinvestment of
dividends 7,645 --
Shares redeemed (21,476) (13,212)
Net increase in shares
outstanding 562,820 206,585
Proceeds from sale
of shares $5,996,512 $2,296,015
Value of reinvested
dividends 78,652 --
Cost of shares
redeemed (227,268) (139,140)
Net increase from
capital share
transactions $5,847,896 $2,156,875
- --------------------------------------------------------------------------------
*Commencement of operations.
-42-
<PAGE>
[Flag Logo]
FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements (concluded)
D. Investment Transactions - Purchases and sales of investment securities,
other than short-term obligations, aggregated $14,943,948 and $16,757,354,
respectively, for the six months ended June 30, 1996.
At June 30, 1996, aggregate gross unrealized appreciation for all securities
in which there is an excess of market value over tax cost was $362,855, and
aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over market value was $1,180,269.
E. Net Assets - At June 30, 1996, net assets consisted of:
Paid-in capital:
Flag Investors Class A Shares $61,690,202
Flag Investors Institutional
Shares 8,004,771
Accumulated net realized loss from
security transactions (3,389,779)
Undistributed net investment
income 439,462
Unrealized depreciation of
investments (817,414)
$65,927,242
-43-
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
List all financial statements and exhibits filed as part of the
Registration Statement.
(a) Financial statements:
(1) Included in Part A of the Registration Statement:
- Financial Highlights for Flag Investors
Class A Shares for the six months ended
June 30, 1996 (unaudited) and for the
years ended December 31, 1995, December
31, 1994, December 31, 1993 and
December 31, 1992 and for the period
May 13, 1991 through December 31, 1991.
- Financial Highlights for Flag Investors
Institutional Shares for the six months
ended June 30, 1996 (unaudited) and for
the period November 2, 1995
(commencement of operations) through
December 31, 1995.
(2) Included in Part B of the Registration Statement:
- Statement of Net Assets as of December 31,
1995.
- Statement of Operations for the year ended
December 31, 1995.
- Statements of Changes in Net Assets for
the years ended December 31, 1995 and
December 31, 1994.
- Financial Highlights for Flag Investors
Class A Shares for the years ended
December 31, 1995, December 31, 1994,
December 31, 1993 and December 31, 1992
and for the period ended December 31,
1991.
- Financial Highlights for Flag Investors
Institutional Shares for the period
November 2, 1995 (commencement of
operations) through December 31, 1995.
- Notes to Financial Statements.
- Statement of Net Assets as of June 30, 1996
(unaudited).
- Statement of Operations for the six months
ended June 30, 1996 (unaudited).
- Statement of Changes in Net Assets for
the six months ended June 30, 1996
(unaudited) and for the year ended
December 31, 1995.
- Financial Highlights for Flag Investors
Class A Shares for the six months ended
June 30, 1996 (unaudited), for the
years ended December 31, 1995, December 31,
1994, December 31, 1993, December 31, 1992
and for the period ended December 31,
1991.
C-1
<PAGE>
- Financial Highlights for Flag Investors
Institutional Shares for the six months
ended June 30, 1996 (unaudited) and for
the period November 2, 1995
(commencement of operations) through
December 31, 1995
- Notes to Financial Statements.
(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)3 Articles of Incorporation.
(b)4 Amended Articles of Incorporation.
(c)4 Amendment to Amended Articles of
Incorporation.
(d)4 Articles Supplementary dated April 23,
1992.
(e)4 Articles Supplementary dated October 6,
1995.
(f)1 Articles Supplementary dated April 25,
1996.
(g)1 Form of Articles Supplementary with
respect to creation of ABCAT Shares
Class.
(2)3 By-Laws, as amended.
(3) Not Applicable.
(4)2 Specimen Security.
(5)4 Investment Advisory Agreement between Registrant
and Flag Investors Management Corp. (now known as
Investment Company Capital Corp).
(6) (a)4 Distribution Agreement between Registrant
and Alex. Brown & Sons Incorporated with
respect to Registrant's Flag Investors
Class A Shares.
(b)3 Form of Sub-Distribution Agreement between
Alex. Brown & Sons Incorporated and
Participating Dealers.
(c)3 Form of Shareholder Servicing Agreement
between Registrant and Shareholder
Servicing Agents.
C-2
<PAGE>
(d)4 Distribution Agreement between Registrant
and Alex. Brown & Sons Incorporated with
respect to Registrant's Flag Investors
Institutional Shares.
(e)1 Form of Distribution Agreement between
Registrant and Alex. Brown & Sons
Incorporated with respect to Registrant's
Alex. Brown Capital Advisory & Trust
Shares.
(7) Not Applicable.
(8) (a)4 Custodian Agreement between Registrant and
Provident National Bank (now known as PNC
Bank).
(b)4 Master Services Agreement between
Registrant and Investment Company Capital
Corp.
(9) Not Applicable.
(10)4 Opinion of Counsel.
(11) (a)1 Consent of Deloitte & Touche LLP.
(b)4 Consents to Serve as Directors.
(12) Not Applicable.
(13)3 Form of Subscription Agreement re: initial
$100,000 capital.
(14) Not Applicable.
(15)4 Distribution Plan with respect to Class A Shares.
(16)3 Schedule of Computation of Performance
Quotations (unaudited).
(18)1 Rule 18f-3 Plan.
(24)1 Powers of Attorney.
(27)1 Financial Data Schedule.
- -----------------------
1 Filed herewith.
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 Post-Effective Amendment No. 6 to
Registrant's Registration Statement on Form N-1A (Registration No.
33-34275), filed with the Securities and Exchange Commission on August
18, 1995.
4 Incorporated by reference to Post-Effective Amendment No. 7 to
Registrant's Registration Statement on Form N-1A (Registration No.
33-34275), filed with the Securities and Exchange Commission on April 26,
1996.
C-3
<PAGE>
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 September 20, 1996:
Title of Class Number of Record Holders
Flag Investors Class A Shares 1,114
Flag Investors Institutional Shares 62
Item 27. Indemnification.
State the general effect of any contract, arrangements or
statute under which any director, officer, underwriter or affiliated person of
the Registrant is insured or indemnified in any manner against any liability
which may be incurred in such capacity, other than insurance provided by any
director, officer, affiliated person or underwriter for their own protection.
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.
C-4
<PAGE>
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.
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.,
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
- ------------------ --------------- --------------
Alvin B. Krongard Chairman, Chief None
Executive
Officer,
Director
Mayo A. Shattuck III President, Director None
C-5
<PAGE>
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.
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>
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940 the Registrant certifies that it 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 18th day of October, 1996.
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.
<TABLE>
<CAPTION>
<S> <C> <C>
*/s/ Richard T. Hale Director October 18, 1996
- ----------------------------- ----------------
Richard T. Hale Date
*/s/ W. James Price Director October 18, 1996
- ----------------------------- ----------------
W. James Price Date
*/s/ James J. Cunnane Director October 18, 1996
- ----------------------------- ----------------
James J. Cunnane Date
*/s/ John F. Kroeger Director October 18, 1996
- ----------------------------- ----------------
John F. Kroeger Date
*/s/ Louis E. Levy Director October 18, 1996
- ----------------------------- ----------------
Louis E. Levy Date
*/s/ Eugene J. McDonald Director October 18, 1996
- ----------------------------- ----------------
Eugene J. McDonald Date
*/s/ Harry Woolf Director October 18, 1996
- ----------------------------- ----------------
Harry Woolf Date
/s/ M. Elliott Randolph, Jr. President October 18, 1996
- ----------------------------- ----------------
M. Elliott Randolph, Jr. Date
/s/ Joseph A. Finelli Chief Financial October 18, 1996
- ----------------------------- and Accounting ----------------
Joseph A. Finelli Officer Date
*By: /s/ Edward J. Stoken
---------------------
Edward J. Stoken
Attorney-in-Fact
</TABLE>
<PAGE>
FLAG INVESTORS INTERMEDIATE-TERM INCOME FUND, INC.
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EDGAR
Exhibit Number Document
- -------------- --------
<S> <C> <C> <C>
(1) (a) Registrant's Articles of Incorporation.3
(1) (b) Registrant's Amended Articles of Incorporation.4
(1) (c) Amendment to Amended Articles of Incorporation.4
(1) (d) Articles Supplementary dated April 23, 1992.4
(1) (e) Articles Supplementary dated October 6, 1995.4
EX-99.B (1) (f) Articles Supplementary dated April 25, 1996.1
EX-99.B (1) (g) Form of Articles Supplementary with respect to
creation of ABCAT Shares Class.
(2) Registrant's By-Laws, as amended.3
(3) Not Applicable.
(4) Specimen Security.2
(5) Investment Advisory Agreement between Registrant and Flag Investors
Management Corp. (now known as Investment Company Capital Corp.).4
(6) (a) Distribution Agreement between Registrant and
Alex. Brown & Sons Incorporated with respect to
Registrant's Flag Investors Class A Shares.4
(6) (b) Registrant's Form of Sub-Distribution Agreement
between Alex. Brown & Sons Incorporated and
Participating Broker-Dealers.3
(6) (c) Registrant's Form of Shareholder Servicing
Agreement.3
(6) (d) Distribution Agreement between Registrant and
Alex. Brown & Sons Incorporated with respect to
Registrant's Flag Investors Institutional Shares.4
EX-99.B (6) (e) Form of Distribution Agreement between Registrant
and Alex. Brown & Sons Incorporated with respect
to Registrant's Alex. Brown Capital Advisory &
Trust Shares.1
(7) Not Applicable.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EDGAR
Exhibit Number Document
- -------------- --------
<S> <C> <C> <C>
(8) (a) Custodian Agreement between Registrant and
Provident National Bank (now known as PNC
Bank).4
(8) (b) Master Services Agreement between Registrant
and Investment Company Capital Corp.4
(9) Not Applicable.
(10) Opinion of Counsel.4
EX-99.B (11) (a) Consent of Deloitte & Touche LLP.1
(11) (b) Consents of Directors to serve.4
(12) Not Applicable.
(13) Form of Subscription Agreement re: initial capitalization of the Funds.3
(14) Not Applicable.
(15) Registrant's Distribution Plan with respect to the Class A Shares.4
(16) Schedule of Computation of Performance Quotations (unaudited).3
EX-99.B (18) Rule 18f-3 Plan.1
EX-99.B (24) Powers of Attorney.1
EX-27 Financial Data Schedule.1
</TABLE>
- --------------------
1 Filed herewith.
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 Inrporated by reference to Post-Effective Amendment No. 6 to Registrant's
Registration Statement on Form N-1A (Registration No. 33-34275), filed with
the Securities and Exchange Commission on August 18, 1995.
4 Incorporated by reference to Post-Effective Amendment No. 7 to Registrant's
Registration Statement on Form N-1A (Registration No. 33-34275), filed with
the Securities and Exchange Commission on April 26, 1996.
<PAGE>
EX-99.B(1)(f)
FLAG INVESTORS INTERMEDIATE-TERM INCOME FUND, INC.
ARTICLES SUPPLEMENTARY
FLAG INVESTORS INTERMEDIATE-TERM INCOME FUND, INC. (the
"Corporation"), having its principal office in the City of Baltimore, certifies
that:
FIRST: The Corporation's Board of Directors in
accordance with Section 2-105(c) of the Maryland General Corporation Law has
adopted a resolution redesignating and reclassifying the Corporation's
forty-five million (45,000,000) previously designated and classified "Flag
Investors Intermediate-Term Income Fund Shares" the "Flag Investors
Intermediate-Term Income Fund Class A Shares."
SECOND: Immediately before the redesignation and
reclassification of the Corporation's Flag Investors Intermediate-Term Income
Fund Shares, the Corporation was authorized to issue fifty-five million
(55,000,000) shares of Common Stock, of the par value of 1 mil ($.001) per share
and of the aggregate par value of fifty-five thousand dollars ($55,000)
classified and designated as follows: forty-five million (45,000,000) shares
were designated "Flag Investors Intermediate Term Income Fund Shares," two
million (2,000,000) shares were designated "Flag Investors Intermediate Term
Income Fund Class B Shares," five million (5,000,000) shares were designated
"Flag Investors Intermediate Term Income Fund Institutional Shares" and three
million (3,000,000) shares remained undesignated.
THIRD: The Corporation is registered as an open-end
investment company under the Investment Company Act of 1940, as amended.
<PAGE>
IN WITNESS WHEREOF, Flag Investors Intermediate Term Income
Fund, Inc. has caused these Articles Supplementary to be executed by one of its
Vice Presidents and its corporate seal to be affixed and attested by its
Secretary on this 25th day of April, 1996.
[CORPORATE SEAL]
FLAG INVESTORS INTERMEDIATE TERM
INCOME FUND, INC.
By: /s/ Brian C. Nelson
-------------------------
Vice President
Attest: /s/ Laurie D. DePrine
---------------------
Secretary
The undersigned, Vice President of FLAG INVESTORS INTERMEDIATE-
TERM INCOME FUND, INC., who executed on behalf of said corporation the foregoing
Articles Supplementary to the Articles of Incorporation of which this
certificate is made a part, hereby acknowledges, in the name and on behalf of
said corporation, the foregoing Articles Supplementary to the Articles of
Incorporation to be the corporate act of said corporation and further certifies
that, to the best of his knowledge, information and belief, the matters and
facts set forth therein with respect to the approval thereof are true in all
material respects, under the penalties of perjury.
By: /s/ Brian C. Nelson
----------------------------
Vice President
<PAGE>
EX-99.B(1)(g)
FLAG INVESTORS INTERMEDIATE-TERM INCOME FUND, INC.
FORM OF
ARTICLES SUPPLEMENTARY
FLAG INVESTORS INTERMEDIATE-TERM INCOME FUND, INC. (the
"Corporation"), having its principal office in the City of Baltimore, certifies
that:
FIRST: The Corporation's Board of Directors in
accordance with Section 2-105(c) of the Maryland General Corporation Law has
adopted a resolution increasing the total number of shares of capital stock
which the Corporation has the authority to issue to sixty million (60,000,000)
shares of Common Stock, of the par value of 1 mil ($.001) per share and of the
aggregate par value of sixty thousand dollars ($60,000), all of which shares are
designated and classified as follows: forty-five million (45,000,000) shares are
designated "Flag Investors Intermediate-Term Income Fund Class A Shares," two
million (2,000,000) shares are designated "Flag Investors Intermediate-Term
Income Fund Class B Shares," five million (5,000,000) shares are designated
"Flag Investors Intermediate-Term Income Fund Institutional Shares," five
million (5,000,000) shares are designated "Alex. Brown Capital Advisory & Trust
Intermediate-Term Income Shares" and three million (3,000,000) shares remain
undesignated.
SECOND: Immediately before the increase, the
Corporation was authorized to issue fifty-five million (55,000,000) shares of
Common Stock, of the par value of 1 mil ($.001) per share and of the aggregate
par value of fifty-five thousand dollars ($55,000), all of which shares were
designated and classified as follows: forty-five million (45,000,000) shares
were designated "Flag Investors Intermediate-Term Income Fund Class A Shares,"
two million (2,000,000) shares were designated "Flag Investors Intermediate-Term
Income Fund Class B Shares," five million (5,000,000) shares were designated
"Flag Investors Intermediate-Term Income Fund Institutional Shares" and three
million (3,000,000) shares remained undesignated.
THIRD: The Corporation is registered as an open-end
investment company under the Investment Company Act of 1940, as amended.
IN WITNESS WHEREOF, Flag Investors Intermediate-Term Income
Fund, Inc. has caused these Articles Supplementary to be executed by one of its
Vice Presidents and its corporate seal to be affixed and attested by its
Secretary on this 2nd day of October, 1996.
<PAGE>
[CORPORATE SEAL]
FLAG INVESTORS INTERMEDIATE-TERM INCOME FUND,
INC.
By:
-----------------------------
Edward J. Veilleux
Vice President
Attest:
------------------------
Edward J. Stoken
Secretary
The undersigned, Vice President of FLAG INVESTORS
INTERMEDIATE-TERM INCOME FUND, INC., who executed on behalf of said corporation
the foregoing Articles Supplementary to the Articles of Incorporation of which
this certificate is made a part, hereby acknowledges, in the name and on behalf
of said corporation, the foregoing Articles Supplementary to the Articles of
Incorporation to be the corporate act of said corporation and further certifies
that, to the best of his knowledge, information and belief, the matters and
facts set forth therein with respect to the approval thereof are true in all
material respects, under the penalties of perjury.
By:
-----------------------------
Edward J. Veilleux
Vice President
<PAGE>
EX-99.B(6)(e)
FLAG INVESTORS INTERMEDIATE-TERM INCOME FUND, INC.
ALEX. BROWN CAPITAL ADVISORY & TRUST SHARES
FORM OF
DISTRIBUTION AGREEMENT
AGREEMENT, made as of the ____ day of ___________, 19___,
by and between FLAG INVESTORS INTERMEDIATE-TERM INCOME FUND, INC., a Maryland
corporation (the "Fund"), and ALEX. BROWN & SONS INCORPORATED, a Maryland
corporation ("Alex. Brown").
W I T N E S S E T H
WHEREAS, the Fund is registered as an open-end,
diversified, management investment company under the Investment Company Act of
1940, as amended (the "1940 Act"); and
WHEREAS, the Fund's Articles of Incorporation, filed with
the Secretary of State of the State of Maryland on April 16, 1990 (the
"Articles"), authorize the Board of Directors of the Fund to increase or
decrease the number of shares of capital stock of the Fund and the number of
shares of any class of capital stock of the Fund; and
WHEREAS, the Fund's Board of Directors has authorized the
designation of three classes of shares of the Fund known respectively as the
Flag Investors Intermediate-Term Income Fund Class A Shares, the Flag Investors
Intermediate-Term Income Fund Class B Shares, and the Flag Investors
Intermediate-Term Income Fund Institutional Shares; and
WHEREAS, the Fund's Board of Directors has further
authorized the creation of an additional class of shares of the Fund known as
the Alex. Brown Capital Advisory & Trust Intermediate-Term Income Shares (the
"Shares") ; and
WHEREAS, the Fund wishes to appoint Alex. Brown as the
exclusive distributor of the Shares and Alex. Brown wishes to become the
distributor of the Shares.
NOW, THEREFORE, in consideration of the mutual covenants
herein contained and of other good and valuable consideration, the receipt
whereof is hereby acknowledged, the parties hereto agree as follows:
-1-
<PAGE>
1. Appointment. The Fund appoints Alex. Brown as
Distributor for the Shares for the period and on the terms set forth in this
Agreement. Alex. Brown accepts such appointment and agrees to render the
services set forth herein.
2. Delivery of Documents. The Fund has furnished Alex.
Brown with copies properly certified or authenticated of each of the following:
(a) The Fund's Articles and all amendments thereto;
(b) The Fund's By-Laws and all amendments thereto (such
By-Laws, as presently in effect and as they shall from time to time be amended,
are herein called the "By-Laws");
(c) Resolutions of the Fund's Board of Directors and
shareholders authorizing the appointment of Alex. Brown as the Fund's
Distributor of the Shares and approving this Agreement;
(d) The Fund's Notification of Registration filed
pursuant to Section 8(a) of the 1940 Act on Form N-8A under the 1940 Act, as
filed with the Securities and Exchange Commission (the "SEC") on April 17, 1990;
(e) The Fund's Registration Statement on Form N-1A
under the Securities Act of 1933, as amended (the "1933 Act") (File No.
33-34275) and under the 1940 Act as filed with the SEC on April 17, 1990
relating to the Shares of the Fund, and all amendments thereto; and
(f) The Fund's most recent prospectus for the Shares
(such prospectus and all amendments and supplements thereto are herein called
"Prospectus").
The Fund will furnish Alex. Brown from time to time with
copies, properly certified or authenticated, of all amendments or supplements to
the foregoing, if any, and all documents, notices and reports filed with the
SEC.
3. Duties as Distributor. Alex. Brown shall give the Fund
the benefit of its best judgment, efforts and facilities in rendering its
services as Distributor of the Shares. Alex. Brown shall:
(a) respond to inquiries from the Fund's shareholders
concerning the status of their accounts with the Fund; and
(b) take, on behalf of the Fund, all actions deemed
necessary to carry into effect the distribution of the Shares.
-2-
<PAGE>
4. Distribution of Shares. Alex. Brown shall be the
exclusive distributor of the Shares. It is mutually understood and agreed that
Alex. Brown does not undertake to sell all or any specific portion of the
Shares. The Fund shall not sell any of the Shares except through Alex. Brown.
Notwithstanding the provisions of the foregoing sentence,
(a) the Fund may issue its Shares at their net asset
value to any shareholder of the Fund purchasing such Shares with dividends or
other cash distributions received from the Fund pursuant to an offer made to all
shareholders;
(b) Alex. Brown may enter into shareholder processing
and servicing agreements;
(c) Alex. Brown may, and when requested by the Fund
shall, suspend its efforts to effectuate sales of the Shares at any time when in
the opinion of Alex. Brown or of the Fund no sales should be made because of
market or other economic considerations or abnormal circumstances of any kind;
and
(d) the Fund may withdraw the offering of the Shares
(i) at any time with the consent of Alex. Brown, or (ii) without such consent
when so required by the provisions of any statute or of any order, rule or
regulation of any governmental body having jurisdiction.
5. Control by Board of Directors. Any distribution
activities undertaken by Alex. Brown pursuant to this Agreement, as well as any
other activities undertaken by Alex. Brown on behalf of the Fund pursuant
hereto, shall at all times be subject to any directives of the Board of
Directors of the Fund. The Board of Directors may agree, on behalf of the Fund,
to amendments to this Agreement.
6. Compliance with Applicable Requirements. In carrying
out its obligations under this Agreement, Alex. Brown shall at all times conform
to:
(a) all applicable provisions of the 1940 Act and any
rules and regulations adopted thereunder as amended;
(b) the provisions of the Registration Statement of the
Fund under the 1933 Act and the 1940 Act and any amendments and supplements
thereto;
(c) the provisions of the Articles of Incorporation of
the Fund and any amendments thereto;
(d) the provisions of the By-Laws of the Fund;
-3-
<PAGE>
(e) the rules and regulations of the National
Association of Securities Dealers, Inc. ("NASD") and all other self-regulatory
organizations applicable to the sale of investment company shares; and
(f) any other applicable provisions of Federal and
State law.
7. Expenses. The expenses connected with the Fund shall be
allocable between the Fund and Alex. Brown as follows:
(a) Alex. Brown shall furnish, at its expense and
without cost to the Fund, the services of personnel to the extent that such
services are required to carry out their obligations under this Agreement;
(b) Alex. Brown shall bear the expenses of any
promotional or sales literature used by Alex. Brown or furnished by Alex. Brown
to purchasers or dealers in connection with the public offering of the Shares,
the expenses of advertising in connection with such public offering and all
legal expenses in connection with the foregoing;
(c) the Fund assumes and shall pay or cause to be paid
all other expenses of the Fund, including, without limitation: the fees of the
Fund's investment advisor; the charges and expenses of any registrar, custodian
or depositary appointed by the Fund for the safekeeping of its cash, portfolio
securities and other property, and any stock 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
corporate fees payable by the Fund to Federal, State or other governmental
agencies; all costs and expenses in connection with maintenance of registration
of the Fund and the Shares with the SEC and various states and other
jurisdictions (including filing fees and legal fees and disbursements of
counsel) except as provided in subparagraph (a) above; the expenses of printing,
including typesetting, and distributing prospectuses of the Fund and supplements
thereto to the Fund's shareholders; all expenses of shareholders' and Directors'
meetings and of preparing, printing and mailing of proxy statements and reports
to shareholders; fees and travel expenses of Directors who are not "interested
persons" of the Fund (as defined in the 1940 Act) or 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; charges and
expenses of legal counsel, including counsel to the Directors who are not
"interested persons" of the Fund (as defined in the 1940 Act), and of
independent accountants, in connection with any matter relating to the Fund;
membership dues of industry associations; interest payable on Fund borrowings;
postage; insurance premiums on property or personnel (including officers and
Directors) of the Fund which inure to its benefit; extraordinary expenses
(including, but not limited to, legal claims and liabilities and litigation
costs and any indemnification related thereto); and all other charges and costs
of the Fund's operation unless otherwise explicitly provided herein.
-4-
<PAGE>
8. Delegation of Responsibilities. Alex. Brown may, but
shall be under no duty to, perform services on behalf of the Fund which are not
required by this Agreement upon the request of the Fund's Board of Directors.
Such services will be performed on behalf of the Fund and Alex. Brown's charge
in rendering such services may be billed monthly to the Fund, subject to
examination by the Fund's independent accountants. Payment or assumption by
Alex. Brown of any Fund expense that Alex. Brown is not required to pay or
assume under this Agreement shall not relieve Alex. Brown of any of its
obligations to the Fund or obligate Alex. Brown to pay or assume any similar
Fund expense on any subsequent occasions.
9. Compensation. Alex. Brown shall receive no compensation
for the services to be rendered and the expenses assumed by it pursuant to this
Agreement.
10. Compensation for Servicing Shareholder Accounts. The
Fund acknowledges that Alex. Brown may, from its own resources, compensate its
investment representatives for opening accounts, processing investor letters of
transmittals and applications and withdrawal and redemption orders, responding
to inquiries from Fund shareholders concerning the status of their accounts and
the operations of the Fund, and communicating with the Fund and its transfer
agent on behalf of the Fund shareholders.
11. Sub-Distribution Agreements. Alex. Brown may enter
into Sub- Distribution Agreements (the "Sub-Distribution Agreements") with any
securities dealer who is registered under the Securities Exchange Act of 1934
and a member in good standing of the NASD, who may wish to act as a
Participating Dealer in connection with the proposed offering. All
Sub-Distribution Agreements shall be in substantially the form of the agreement
attached hereto as Exhibit "A". For processing Fund shareholders' redemption
orders, responding to the inquiries from Fund shareholders concerning the status
of their accounts and the operations of the Fund and communicating with the
Fund, its transfer agent and Alex. Brown, Alex. Brown may, from its own
resources, compensate each such Participating Dealer for such services.
12. Non-Exclusivity. The services of Alex. Brown to the
Fund are not to be deemed exclusive and Alex. Brown shall be free to render
distribution or other services to others (including other investment companies)
and to engage in other activities. It is understood and agreed that Directors,
officers or employees of Alex. Brown may serve as Directors or officers of the
Fund, and that Directors or officers of the Fund may serve as Directors,
officers and employees of Alex. Brown to the extent permitted by law; and that
Directors, officers and employees of Alex. Brown are not prohibited from
engaging in any other business activity or from rendering services to any other
person, or from serving as partners, Directors or officers of any other firm or
corporation, including other investment companies.
13. Term and Approval. This Agreement shall become
effective at the close of business on the date hereof and shall remain in force
and effect for an initial term of two years and from year to year thereafter,
provided that such continuance is specifically approved at least annually:
-5-
<PAGE>
(a) (i) by the Fund's Board of Directors or (ii) by the
vote of a majority of the outstanding voting securities of the Shares (as
defined in the 1940 Act), and
(b) by the affirmative vote of a majority of the
Directors who are not "interested persons" of the Fund (as defined in the 1940
Act) and do not have a financial interest in the operation of this Agreement, by
votes cast in person at a meeting specifically called for such purpose.
14. Termination. This Agreement may be terminated at any
time, on sixty (60) days' written notice to the other party without the payment
of any penalty, (i) by vote of the Fund's Board of Directors, (ii) by vote of a
majority of the Directors who are not "interested persons" of the Fund (as
defined in the 1940 Act) and do not have a financial interest in the operation
of this Agreement, (iii) by vote of a majority of the Fund's outstanding voting
securities (as defined in the 1940 Act) or (iv) by Alex. Brown. The notice
provided for herein may be waived by each party. This Agreement shall
automatically terminate in the event of its assignment (as the term is defined
in the 1940 Act).
15. Liability. In the performance of its duties hereunder,
Alex. Brown shall be obligated to exercise care and diligence and to act in good
faith and to use its best efforts within reasonable limits in performing all
services provided for under this Agreement, but shall not be liable for any act
or omission which does not constitute willful misfeasance, bad faith or gross
negligence on the part of Alex. Brown or reckless disregard by Alex. Brown of
its duties under this Agreement.
16. Notices. Any notices under this Agreement shall be in
writing, addressed and delivered or mailed postage paid to the other party at
such address as such other party may designate for the receipt of such notice.
Until further notice to the other parties, it is agreed that the address of both
Alex. Brown and the Fund for this purpose shall be 135 East Baltimore Street,
Baltimore, Maryland 21202.
17. Questions of Interpretation. Any question of
interpretation of any term or provision of this Agreement having a counterpart
in or otherwise derived from a term or provision of the 1940 Act shall be
resolved by reference to such term or provision of the 1940 Act and to
interpretations thereof, if any, by the United States courts or in the absence
of any controlling decision of any such court, by rules, regulations or orders
of the SEC issued pursuant to the 1940 Act. In addition, where the effect of a
requirement of the 1940 Act reflected in any provision of this Agreement is
revised by rule, regulation or order of the SEC, such provision shall be deemed
to incorporate the effect of such rule, regulation or order. Otherwise the
provisions of this Agreement shall be interpreted in accordance with the laws of
Maryland.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in duplicate by their respective officers as of the day
and year first above written.
-6-
<PAGE>
[SEAL] FLAG INVESTORS INTERMEDIATE-TERM
INCOME FUND, INC.
Attest: By
------------------ -------------------------------------
Title:
[SEAL] ALEX. BROWN & SONS INCORPORATED
Attest: By
------------------ -------------------------------------
Title:
-7-
<PAGE>
Exhibit A
FLAG INVESTORS FAMILY OF FUNDS
135 East Baltimore Street
Baltimore, Maryland 21202
FORM OF
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.
-8-
<PAGE>
2. Limitation of Authority. No person is authorized to
make any representations concerning the Funds or the Shares except those
contained in the Prospectus of each Fund and in such printed information as the
Distributor may subsequently prepare. No person is authorized to distribute any
sales material relating to any Fund without the prior written approval of the
Distributor.
3. Compensation. As compensation for such services, you
will look solely to the Distributor, and you acknowledge that the Funds shall
have no direct responsibility for any compensation. In addition to any sales
charge payable to you by your customer pursuant to a Prospectus, the Distributor
will pay you no less often than annually a shareholder processing and service
fee (as we may determine from time to time in writing) computed as a percentage
of the average daily net assets maintained with each Fund during the preceding
period by shareholders who purchase their shares through you or with your
assistance, provided that said assets are at least $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 NASD's
Conduct Rules, including, without limitation, the provisions of Rule 2830 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.
-9-
<PAGE>
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
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.
-10-
<PAGE>
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:
----------------------------------
-11-
<PAGE>
EX-99.B(11)(a)
CONSENT OF INDEPENDENT AUDITORS
Flag Investors Intermediate-Term Income Fund, Inc.
We consent to the use in Post-Effective Amendment No. 8 to Registration
Statement No. 33-34275 of our report dated January 26, 1996 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 also is a part of such Registration
Statement.
/s/ Deloitte & Touche LLP
- ------------------------------
DELOITTE & TOUCHE LLP
Princeton, New Jersey
October 18, 1996
<PAGE>
EX-99.B(18)
Flag Investors Intermediate-Term Income Fund, Inc.
Rule 18f-3 Multiple Class Plan
for
Flag Investors Class A, Flag Investors Class B, Flag Investors Institutional
and Alex. Brown Capital Advisory & Trust Shares Classes
Adopted December 13, 1995
I. Introduction.
A. Authority. This Rule 18f-3 Multiple Class Plan (the "Plan") has been
adopted by the Board of Directors (the "Board") of Flag Investors
Intermediate-Term Income Fund, Inc. (the "Fund"), including a majority of the
Directors of the Fund who are not "interested persons" of the Fund (the
"Independent Directors") pursuant to Rule 18f-3 under the Investment Company Act
of 1940, as amended (the "1940 Act").
B. History. The Fund is entitled to rely on an exemptive order dated
December 30, 1994, which amended and supplemented prior multi-class exemptive
orders dated August 27, 1985 and February 27, 1987, respectively, (Inv. Co. Act
Releases Nos. IC-20813, IC-14695 and IC-15592, respectively) (collectively, the
"Order"). On December 13, 1995, the Fund elected to rely on Rule 18f-3 rather
than the Order, as permitted by Rule 18f-3 subject to certain conditions, and
created a multiple class distribution arrangement for its classes of shares of
the common stock of the Fund's one existing series (the "Series"). The multiple
class distribution arrangement will be effective on the date of effectiveness of
the post-effective amendment to the Fund's registration statement that
incorporates the arrangement. The multi-class distribution arrangement will
apply to all existing (Flag Investors Class A, Flag Investors Class B, Flag
Investors Institutional and Alex. Brown Capital Advisory & Trust) and future
classes of Fund shares. The Flag Investors Class A Shares have been offered
since the Fund's inception on May 13, 1991 and the Flag Investors Institutional
Shares have been offered since November 2, 1995. The Alex. Brown Capital
Advisory & Trust Shares and the Flag Investors Class B Shares have not yet been
offered.
C. Adoption of Plan; Amendment of Plan; and Periodic Review. Pursuant
to Rule 18f-3, the Fund is required to create a written plan specifying all of
the differences among the Fund's classes, including shareholder services,
distribution arrangements, expense allocations, and any related conversion
features or exchange options. The Board has created the Plan to meet this
requirement. The Board, including a majority of the Independent Directors, must
periodically review the Plan for its continued appropriateness, and must approve
any material amendment of the Plan as it relates to any class of any Series
covered by the Plan. This Plan must be amended to properly describe (through
additional exhibits hereto or otherwise) each additional class of shares
approved by the Fund's Board of Directors after the date hereof. Before any
material amendment of the Plan, the Fund is required to obtain a finding by a
majority of the Board, and a majority of the Independent Directors, that the
Plan as proposed to be amended, including the expense allocations, is in the
best interests of each class individually and the Fund as a whole.
<PAGE>
II. Attributes of Share Classes
A. The rights of each existing class of the Fund are not being changed
hereby, and the rights, obligations and features of each of the classes of the
Fund shall be as set forth in the Fund's Articles of Incorporation and Bylaws,
as each such document is amended or restated to date, the resolutions that are
adopted with respect to the classes of the Fund and that are adopted pursuant to
the Plan to date, and related materials of the Board, as set forth in Exhibit A
hereto.
B. With respect to any class of shares of a Series, the following
requirements shall apply. Each share of a particular Series shall represent an
equal pro rata interest in the Series and shall have identical voting,
dividend, liquidation and other rights, preferences, powers, restrictions,
limitations, qualifications, designations and terms and conditions, except that
(i) each class shall have a different class designation (e.g., Class A, Class B,
Class C, etc.); (ii) each class of shares shall separately bear any distribution
expenses in connection with the plan adopted pursuant to Rule 12b-1 under the
1940 Act (a "Rule 12b-1 Plan"), if any, for such class (and any other costs
relating to obtaining shareholder approval of the Rule 12b-1 Plan for such
class, or an amendment of such plan) and shall separately bear any expenses
associated with any non-Rule 12b-1 Plan service payments ("service fees") that
are made under any servicing agreement, if any, entered into with respect to
that class; (iii) holders of the shares of the class shall have exclusive voting
rights regarding the Rule 12b-1 Plan relating to such class (e.g., the adoption,
amendment or termination of a Rule 12b-1 Plan), regarding the servicing
agreements relating to such class and regarding any matter submitted to
shareholders in which the interests of that class differ from the interests of
any other class; (iv) each new class of shares may bear, to the extent
consistent with rulings and other published statements of position by the
Internal Revenue Service, the expenses of the Fund's operation that are directly
attributable to such class ("Class Expenses")(1); and (v) each class may have
conversion features unique to such class, permitting conversion of shares of
such class to shares of another class, subject to the requirements set forth in
Rule 18f-3.
- --------
(1) Class Expenses are limited to any or all of the following: (i) transfer
agent fees identified as being attributable to a specific class of shares, (ii)
stationery, printing, postage, and delivery expenses related to preparing and
distributing materials such as shareholder reports, prospectuses, and proxy
statements to current shareholders of a specific class, (iii) Blue Sky
registration fees incurred by a class of shares, (iv) SEC registration fees
incurred by a class of shares, (v) expenses of administrative personnel and
services as required to support the shareholders of a specific class, (vi)
directors' fees or expenses incurred as a result of issues relating solely to a
class of shares, (vii) account expenses relating solely to a class of shares,
(viii) auditors' fees, litigation expenses, and legal fees and expenses relating
solely to a class of shares, and (ix) expenses incurred in connection with
shareholder meetings as a result of issues relating solely to a class of shares.
<PAGE>
III. Expense Allocations
Expenses of each class created after the date hereof must be allocated
as follows: (i) distribution and shareholder servicing payments associated with
any Rule 12b-1 Plan or servicing agreement, if any, relating to each respective
class of shares (including any costs relating to implementing such plans or any
amendment thereto) will be borne exclusively by that class; (ii) any incremental
transfer agency fees relating to a particular class will be borne exclusively by
that class; and (iii) Class Expenses relating to a particular class will be
borne exclusively by that class.
The methodology and procedures for calculating the net asset value and
dividends and distributions of the various classes of shares of the Fund and the
proper allocation of income and expenses among the various classes of shares of
the Fund are required to comply with the Fund's internal control structure
pursuant to applicable auditing standards, including Statement on Auditing
Standards No. 55, and to be reviewed as part of the independent accountants'
review of such internal control structure. The independent accountants' report
on the Fund's system of internal controls required by Form N-SAR, Item 77B, is
not required to refer expressly to the procedures for calculating the classes'
net asset values.
<PAGE>
Class A Shares
Date Approved: March 20, 1991
Resolutions of Board Approving Distribution Agreement, Plan of Distribution and
Form of Sub-Distribution Agreement
RESOLVED, that the proposed Distribution Agreement, between the Fund
and Alex. Brown & Sons Incorporated for distribution of the Fund's shares be,
and the same hereby is, approved, and that the appropriate officers of the Fund
be, and they hereby are, authorized and directed to enter into and execute such
Distribution Agreement with such modifications as said officers shall deem
necessary or appropriate or as may be required to conform with the requirements
of any applicable statute, regulation or regulatory body;
FURTHER RESOLVED, that the proposed Plan of Distribution (the"Plan") is
determined to be reasonably likely to benefit the Fund and its shareholders;
FURTHER RESOLVED, that the Plan be, and the same hereby is, approved by
the Board of Directors and by the Directors who are not "interested persons" (as
such term is defined in the Investment Company Act of 1940) of the Fund and have
no direct or indirect financial interest in the operation of the Plan;
FURTHER RESOLVED, that the proposed form of Sub-Distribution Agreement
of the Fund be, and the same hereby is, approved.
RESOLVED, that the filing of the Articles of Incorporation of the Fund
and the Articles of Amendment thereto by the Fund's incorporator be, and the
same hereby is, ratified.
Date Approved: September 23, 1994
Resolutions of Board Creating Flag Investors Shares
FURTHER RESOLVED, that the previously undesignated shares of common
stock, par value $.001 per share, of Flag Investors Intermediate-Term Income
Fund, Inc. be, and they hereby are, designated as the "Flag Investors Shares"
FURTHER RESOLVED, that the proper officers of the foregoing Fund be,
and each of them hereby is, authorized and directed to file articles
supplementary to the Fund's Articles of Incorporation and to take such other
action as may be necessary to designate and reclassify shares in the foregoing
matter.
<PAGE>
Date Approved: April 1, 1996
Resolutions of Board Renaming Flag Investors Shares
RESOLVED, that the Fund's forty-five million (45,000,000) shares of
common stock, par value $.001 per share, previously designated and classified as
the "Flag Investors Shares" be, and hereby are, renamed the "Flag Investors
Class A Shares";
FURTHER RESOLVED, that the Articles Supplementary to the Fund's
Articles of Incorporation be, and they hereby are, approved and adopted;
FURTHER RESOLVED, that the proper officers of the Fund be, and they
hereby are, authorized and directed in the name and on behalf of the Fund to
take any other action that the officer so acting may deem necessary or
appropriate to effectuate the renaming of the Flag Investors Shares and the
filing and recording of the Articles Supplementary in the appropriate offices in
the State of Maryland.
Date Approved: September 23, 1994
Resolutions of Board Creating Flag Investors Class B Shares
FURTHER RESOLVED, that an additional class of shares of Flag Investors
Intermediate-Term Income Fund, Inc. (the "Fund") be, and hereby is, classified
and designated as the "Flag Investors Class B Shares" (the "Class B Shares") and
that unissued shares of common stock, par value $.001 per share of the Fund be,
and the same hereby are, reclassified as follows:
<TABLE>
<CAPTION>
Total No. of Shares Class A Shares Class B Shares Unclassified Shares
- ------------------- -------------- -------------- -------------------
<C> <C> <C> <C>
50,000,000 45,000,000 2,000,000 3,000,000
</TABLE>
FURTHER RESOLVED, that the proper officers of the Fund be, and each of
them hereby is, authorized and directed to file articles supplementary to the
Fund's Articles of Incorporation and to take such other action as may be
necessary to designate and reclassify shares in the foregoing manner.
RESOLVED, that the Distribution Agreement between Flag Investors
Intermediate-Term Income Fund, Inc. and Alex. Brown & Sons Incorporated for the
Class B Shares of the Fund be, and the same hereby is, approved;
FURTHER RESOLVED, that at such time as the Fund offers the Class B
Shares, the Plan of Distribution shall govern the payment of 12b-1 fees by that
class;
<PAGE>
FURTHER RESOLVED, that the Plan of Distribution for the Class B Shares
of the Fund is determined to be reasonably likely to benefit the Fund and its
shareholders; and that based on information reasonably available to the
Directors, expenditures contemplated by such Plan are comparable to expenditures
for similar plans;
FURTHER RESOLVED, that said Plan be, and the same hereby is, approved.
Date Approved: September 26, 1995
Resolutions of Board Creating Flag Investors Institutional Shares
RESOLVED, that the total number of shares of common stock, par value
$.001 per share, that Flag Investors Intermediate-Term Income Fund, Inc. (the
"Fund") is authorized to issue is hereby increased from fifty million
(50,000,000) to fifty-five million (55,000,000) and that from such amount, five
million (5,000,000) authorized and unissued shares be, and hereby are,
designated and classified as the "Flag Investors Intermediate-Term Income Fund
Institutional Shares" ("Institutional Shares");
FURTHER RESOLVED, that the proper officers of the Fund be, and each of
them hereby is, authorized and directed to file Articles Supplementary to the
Fund's Articles of Incorporation to effectuate the increase in authorized shares
and to designate and classify the new class;
FURTHER RESOLVED, that the Distribution Agreement between Flag
Investors Intermediate-Term Income Fund, Inc. and Alex. Brown & Sons
Incorporated for the Institutional Shares of said Fund be, and the same hereby
is, approved in substantially the form presented to this meeting;
FURTHER RESOLVED, that the proper officers of Flag Investors
Intermediate- Term Income Fund, Inc. be, and they hereby are, authorized and
directed to enter into and execute the Distribution Agreement on behalf of the
Fund, and to take all other actions that such officer deems necessary or
appropriate in connection with the execution of such agreement, the taking of
any action to establish conclusively such officer's authority therefore and the
approval and ratification thereof by the Fund.
<PAGE>
Date Approved: October 1, 1996
Resolutions of Board Creating Alex. Brown
Capital Advisory & Trust Shares
RESOLVED, that the total number of shares of common stock, par value
$.001 per share, that Flag Investors Intermediate-Term Income Fund, Inc. is
authorized to issue is hereby increased from fifty-five million (55,000,000) to
sixty million (60,000,000) and that from such amount, five million (5,000,000)
authorized and unissued shares be, and hereby are, designated and classified as
the "Alex. Brown Advisory & Trust Intermediate-Term Income Shares";
FURTHER RESOLVED, that the proper officers of Flag Investors
Intermediate-Term Income Fund, Inc. be, and each of them hereby is, authorized
and directed to file Articles Supplementary to the Fund's Articles of
Incorporation to effectuate the increase in authorized shares and to designate
and classify the new class;
FURTHER RESOLVED, that any filings previously made and any actions
previously taken by the appropriate officers of each Fund in connection with the
establishment and registration of the new class be, and they hereby are
ratified, confirmed and approved as the act and deed of such Fund.
Date Approved: October 1, 1996
Resolutions of Board Approving Distribution Agreement for
New Alex. Brown Capital Advisory & Trust Shares
FURTHER RESOLVED, that the Distribution Agreement between Flag
Investors Intermediate-Term Income Fund, Inc. and Alex. Brown & Sons
Incorporated for the Alex. Brown Capital & Advisory Trust Shares of said Fund
be, and the same hereby is, approved in substantially the form presented to this
meeting;
FURTHER RESOLVED, that the proper officers of Flag Investors
Intermediate-Term Income Fund, Inc. be, and they hereby are, authorized and
directed to enter into and execute the Distribution Agreement on behalf of the
Fund, and to take all other actions that such officer deems necessary or
appropriate in connection with the execution of such agreement, the taking of
any action to establish conclusively such officer's authority therefore and the
approval and ratification thereof by the Fund.
<PAGE>
New Class B Shares
FLAG INVESTORS INTERMEDIATE-TERM INCOME FUND, INC.
FLAG INVESTORS CLASS B SHARES
FORM OF
DISTRIBUTION AGREEMENT
AGREEMENT, made as of the ____ day of ___________, 19___, by and
between FLAG INVESTORS INTERMEDIATE-TERM INCOME FUND, INC., a Maryland
corporation (the "Fund"), and ALEX. BROWN & SONS INCORPORATED, a Maryland
corporation ("Alex. Brown").
W I T N E S S E T H
WHEREAS, the Fund is registered as an open-end, diversified, management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Fund wishes to appoint Alex. Brown as the exclusive
distributor of the class of shares of the Fund known as the Flag Investors Class
B Shares (the "Shares") and Alex. Brown wishes to become the distributor of the
Shares; and
WHEREAS, the compensation to Alex. Brown hereunder and the payments
contemplated by paragraph 9 constitute the financing of activities intended to
result in the sale of Shares, and this Agreement is entered into pursuant to a
"written plan" pursuant to Rule 12b-1 under the Act (the "Plan") allowing the
Fund to make such payments.
NOW, THEREFORE, in consideration of the premises herein and of other
good and valuable consideration the receipt whereof is hereby acknowledged, the
parties hereto agree as follows:
1. Appointment. The Fund appoints Alex. Brown as Distributor for the
Shares for the period and on the terms set forth in this Agreement. The Fund may
from time to time issue separate series or classes of its shares of common
stock, or classify and reclassify shares of such series as classes, and the
appointment effected hereby shall constitute appointment for the distribution of
such additional series and classes unless the parties shall otherwise agree in
writing. Alex. Brown accepts such appointment and agrees to render the services
herein set forth, for the compensation herein provided.
2. Delivery of Documents. The Fund has furnished Alex. Brown with
copies properly certified or authenticated, of each of the following:
<PAGE>
(a) The Fund's Articles of Incorporation, filed with the Secretary
of State of Maryland on April 16, 1990 and all amendments thereto (the "Articles
of Incorporation");
(b) The Fund's By-Laws and all amendments thereto (such By-Laws, as
presently in effect and as they shall from time to time be amended, are herein
called the "ByLaws");
(c) Resolutions of the Fund's Board of Directors and shareholders
authorizing the appointment of Alex. Brown as the Fund's Distributor of the
Shares and approving this Agreement;
(d) The Fund's Notification of Registration filed pursuant to
Section 8(a) of the 1940 Act on Form N-8A under the 1940 Act, as filed with the
Securities and Exchange Commission (the "SEC") on April 17, 1990;
(e) The Fund's Registration Statement on Form N-1A under the
Securities Act of 1933, as amended (the "1933 Act") (File No. 33-34275) and
under the 1940 Act as filed with the SEC on April 17, 1990 relating to the
Shares of the Fund, and all amendments thereto; and
(f) The Fund's most recent prospectus for the Shares (such
prospectus and all amendments and supplements thereto are herein called
"Prospectus").
The Fund will furnish Alex. Brown from time to time with copies,
properly certified or authenticated, of all amendments or supplements to the
foregoing, if any, and all documents, notices and reports filed with the SEC.
3. Duties as Distributor. Alex. Brown shall give the Fund the benefit
of its best judgment, efforts and facilities in rendering its services as
Distributor of the Shares. Alex. Brown shall:
(a) respond to inquiries from the Fund's shareholders concerning the
status of their accounts with the Fund;
(b) take, on behalf of the Fund, all actions deemed necessary to
carry into effect the distribution of the Shares;
(c) provide the Board of Directors of the Fund with quarterly
reports as required by Rule 12b-1 under the 1940 Act.
4. Distribution of Shares. Alex. Brown shall be the exclusive
distributor of the Shares. It is mutually understood and agreed that Alex. Brown
does not undertake to sell all or any specific portion of the Shares. The Fund
shall not sell any of the Shares except through Alex. Brown and securities
dealers who have valid Sub-Distribution Agreements with Alex. Brown.
Notwithstanding the provisions of the foregoing sentence, the Fund may issue its
<PAGE>
Shares at their net asset value to any shareholder of the Fund purchasing such
Shares with dividends or other cash distributions received from the Fund
pursuant to an offer made to all shareholders.
5. Control by Board of Directors. Any distribution activities
undertaken by Alex. Brown pursuant to this Agreement, as well as any other
activities undertaken by Alex. Brown on behalf of the Fund pursuant hereto,
shall at all times be subject to any directives of the Board of Directors of the
Fund. The Board of Directors may agree, on behalf of the Fund, to amendments to
this Agreement, provided that the Fund must obtain prior approval of the
shareholders of the Fund to any amendment which would result in a material
increase in the amount expended by the Fund.
6. Compliance with Applicable Requirements. In carrying out its
obligations under this Agreement, Alex. Brown shall at all times conform to:
(a) all applicable provisions of the 1940 Act and any rules and
regulations adopted thereunder as amended;
(b) the provisions of the Registration Statement of the Fund under
the 1933 Act and the 1940 Act and any amendments and supplements thereto;
(c) the provisions of the Articles of Incorporation of the Fund and
any amendments thereto;
(d) the provisions of the By-Laws of the Fund;
(e) the rules and regulations of the National Association of
Securities Dealers, Inc. ("NASD") and all other self-regulatory organizations
applicable to the sale of investment company shares; and
(f) any other applicable provisions of Federal and State law.
7. Expenses. The expenses connected with the Fund shall be allocable
between the Fund and Alex. Brown as follows:
(a) Alex. Brown shall furnish, at its expense and without cost to
the Fund, the services of personnel to the extent that such services are
required to carry out their obligations under this Agreement;
(b) Alex. Brown shall bear the expenses of any promotional or sales
literature used by Alex. Brown or furnished by Alex. Brown to purchasers or
dealers in connection with the public offering of the Shares, the expenses of
advertising in connection with such public offering and all legal expenses in
connection with the foregoing;
<PAGE>
(c) the Fund assumes and shall pay or cause to be paid all other
expenses of the Fund, including, without limitation: the fees of the Fund's
investment advisor; the charges and expenses of any registrar, custodian or
depositary appointed by the Fund for the safekeeping of its cash, portfolio
securities and other property, and any stock 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
corporate fees payable by the Fund to Federal, State or other governmental
agencies; the cost and expense of engraving or printing of stock certificates
representing Shares; all costs and expenses in connection with maintenance of
registration of the Fund and the Shares with the SEC and various states and
other jurisdictions (including filing fees and legal fees and disbursements of
counsel) except as provided in subparagraph (a) above, the expenses of printing,
including typesetting, and distributing prospectuses of the Fund and supplements
thereto to the Fund's shareholders; all expenses of shareholders' and Directors'
meetings and of preparing, printing and mailing of proxy statements and reports
to shareholders; fees and travel expenses of Directors who are not "interested
persons" of the Fund (as defined in the 1940 Act) or 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; charges and
expenses of legal counsel, including counsel to the Directors who are not
"interested persons" of the Fund (as defined in the 1940 Act), and of
independent accountants, in connection with any matter relating to the Fund;
membership dues of industry associations; interest payable on Fund borrowings;
postage; insurance premiums on property or personnel (including officers and
Directors) of the Fund which inure to its benefit; extraordinary expenses
(including, but not limited to, legal claims and liabilities and litigation
costs and any indemnification related thereto); and all other charges and costs
of the Fund's operation unless otherwise explicitly provided herein.
8. Delegation of Responsibilities. Alex. Brown may, but shall be under
no duty to, perform services on behalf of the Fund which are not required by
this Agreement upon the request of the Fund's Board of Directors. Such services
will be performed on behalf of the Fund and Alex. Brown's charge in rendering
such services may be billed monthly to the Fund, subject to examination by the
Fund's independent accountants. Payment or assumption by Alex. Brown of any Fund
expense that Alex. Brown is not required to pay or assume under this Agreement
shall not relieve Alex. Brown of any of its obligations to the Fund or obligate
Alex. Brown to pay or assume any similar Fund expense on any subsequent
occasions.
9. Compensation. For the services to be rendered and the expenses
assumed by Alex. Brown, the Fund shall pay to Alex. Brown, compensation at the
annual rate of .75% of the average daily net assets of the shares of the Fund.
Except as hereinafter set forth, continuing compensation under this Agreement
shall be calculated and accrued daily and the amounts of the daily accruals
shall be paid monthly. If this Agreement becomes effective subsequent to the
first day of a month or shall terminate before the last day of a month
compensation for that part of the month this Agreement is in effect shall be
prorated in a manner consistent with the calculations of the fees as set forth
above. Payment of Alex. Brown's compensation for the preceding month shall be
made as promptly as possible.
<PAGE>
10. Service Fee. The Fund shall pay Alex. Brown a service fee (as such
term is defined in the NASD Rules of Fair Practice) equal to .25% of the average
daily net assets of the Shares of the Fund. Such fee shall be calculated and
accrued daily and the amounts of the daily accruals shall be paid monthly in the
manner described in paragraph 9 above.
11. Compensation for Servicing Shareholder Accounts. The Fund
acknowledges that Alex. Brown may compensate its investment representatives for
opening accounts, processing investor letters of transmittals and applications
and withdrawal and redemption orders, responding to inquiries from Fund
shareholders concerning the status of their accounts and the operations of the
Fund, and communicating with the Fund and its transfer agent on behalf of the
Fund shareholders.
12. Sub-Distribution Agreements. Alex. Brown may enter into
Sub-Distribution Agreements (the "Sub-Distribution Agreements") with any
securities dealer who is registered under the Securities Exchange Act of 1934
and a member in good standing of the NASD, who may wish to act as a
Participating Dealer in connection with the proposed offering. All Sub-
Distribution Agreements shall be in substantially the form of the agreement
attached hereto as Exhibit "A". For processing Fund shareholders' redemption
orders, responding to the inquiries from Fund shareholders concerning the status
of their accounts and the operations of the Fund and communicating with the
Fund, its transfer agent and Alex. Brown, Alex. Brown may pay each such
Participating Dealer an amount not to exceed that portion of the compensation
paid to Alex. Brown hereunder that is attributable to accounts of Fund
shareholders who are customers of such Participating Dealer.
13. Non-Exclusivity. The services of Alex. Brown to the Fund are not to
be deemed exclusive and Alex. Brown shall be free to render distribution or
other services to others (including other investment companies) and to engage in
other activities. It is understood and agreed that directors, officers or
employees of Alex. Brown may serve as directors or officers of the Fund, and
that directors or officers of the Fund may serve as directors, officers and
employees of Alex. Brown to the extent permitted by law; and that directors,
officers and employees of Alex. Brown are not prohibited from engaging in any
other business activity or from rendering services to any other person, or from
serving as partners, directors or officers of any other firm or corporation,
including other investment companies.
14. Term and Approval. This Agreement shall become effective at the
close of business on the date hereof and shall remain in force and effect for an
initial term of two years and from year to year thereafter, provided that such
continuance is specifically approved at least annually:
(a) (i) by the Fund's Board of Directors or (ii) by the vote of a
majority of the outstanding voting securities (as defined in the 1940 Act), and
(b) by the affirmative vote of a majority of the Directors who are
not "interested persons" of the Fund (as defined in the 1940 Act) and do not
have a financial interest in the operation of this Agreement, by votes cast in
person at a meeting specifically called for such purpose.
<PAGE>
15. Termination. This Agreement may be terminated at any time, on sixty
(60) days' written notice to the other party without the payment of any penalty,
(i) by vote of the Fund's Board of Directors, (ii) by vote of a majority of the
directors who are not "interested persons" of the Fund (as defined in the 1940
Act) and do not have a financial interest in the operation of this Agreement,
(iii) by vote of a majority of the Fund's outstanding voting securities (as
defined in the 1940 Act) or (iv) by Alex. Brown. The notice provided for herein
may be waived by each party. This Agreement shall automatically terminate in the
event of its assignment (as the term is defined in the 1940 Act).
16. Liability. In the performance of its duties hereunder, Alex. Brown
shall be obligated to exercise care and diligence and to act in good faith and
to use its best efforts within reasonable limits in performing all services
provided for under this Agreement, but shall not be liable for any act or
omission which does not constitute willful misfeasance, bad faith or gross
negligence on the part of Alex. Brown or reckless disregard by Alex. Brown of
its duties under this Agreement.
17. Notices. Any notices under this Agreement shall be in writing,
addressed and delivered or mailed postage paid to the other party at such
address as such other party may designate for the receipt of such notice. Until
further notice to the other parties, it is agreed that the address of both Alex.
Brown and the Fund for this purpose shall be 135 East Baltimore Street,
Baltimore, Maryland 21202.
18. Questions of Interpretation.
Any question of interpretation of any term or provision of this
Agreement having a counterpart in or otherwise derived from a term or provision
of the 1940 Act shall be resolved by reference to such term or provision of the
1940 Act and to interpretations thereof, if any, by the United States courts or
in the absence of any controlling decision of any such court, by rules,
regulations or orders of the SEC issued pursuant to the 1940 Act. In addition,
where the effect of a requirement of the 1940 Act reflected in any provision of
this Agreement is revised by rule, regulation or order of the SEC, such
provision shall be deemed to incorporate the effect of such rule, regulation or
order. Otherwise the provisions of this Agreement shall be interpreted in
accordance with the laws of Maryland.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their respective officers as of the day and year first
above written.
[SEAL] FLAG INVESTORS INTERMEDIATE-TERM
INCOME FUND, INC.
Attest: By
----------------------- -------------------------------------
Title:
[SEAL] ALEX. BROWN & SONS INCORPORATED
Attest: By
----------------------- -------------------------------------
Title:
<PAGE>
FLAG INVESTORS INTERMEDIATE-TERM INCOME FUND, INC.
FLAG INVESTORS CLASS B SHARES
FORM OF
DISTRIBUTION PLAN
1. The Plan. This Plan (the "Plan") is a written plan as described in
Rule 12b-1 (the "Rule") under the Investment Company Act of 1940, as amended
(the "1940 Act") of the Flag Investors Class B Shares (the "Shares") of Flag
Investors Intermediate-Term Income Fund, Inc. (the "Fund"). Other capitalized
terms herein have the meaning given to them in the Fund's prospectus.
2. Payments Authorized. (a) Alex. Brown & Sons Incorporated ("Alex.
Brown") is authorized, pursuant to the Plan, to make payments to any
Participating Dealer under a Sub-Distribution Agreement, to accept payments made
to it under the Distribution Agreement and to make payments on behalf of the
Fund to Shareholder Servicing Agents under Shareholder Servicing Agreements.
(b) Alex. Brown may make payments in any amount, provided that the
total amount of all payments made during a fiscal year of the Fund do not
exceed, in any fiscal year of the Fund, the amount paid to Alex. Brown under the
Distribution Agreement with respect to distribution of the Shares which is an
annual fee, calculated on an average daily net basis and paid monthly, equal to
.75% of the average daily net assets of the Shares of the Fund.
3. Expenses Authorized. Alex. Brown is authorized, pursuant to the
Plan, from sums paid to it under the Distribution Agreement, to purchase
advertising for the Shares, to pay for promotional or sales literature and to
make payments to sales personnel affiliated with it for their efforts in
connection with sales of Shares. Any such advertising and sales material may
include references to other open-end investment companies or other investments,
provided that expenses relating to such advertising and sales material will be
allocated among such other investment companies or investments in an equitable
manner, and any sales personnel so paid are not required to devote their time
solely to the sale of Shares.
4. Certain Other Payments Authorized. As set forth in the Distribution
Agreement, the Fund assumes certain expenses, which Alex. Brown as distributor
for the Shares is authorized to pay or cause to be paid on its behalf and such
payments shall not be included in the limitations contained in this Plan. These
expenses include: the fees of the Fund's investment advisor and Alex. Brown; the
charges and expenses of any registrar, any custodian or depository appointed by
the Fund for the safekeeping of its cash, portfolio securities and other
property, and any transfer, dividend or accounting agent or agents appointed
<PAGE>
by the Fund; brokers' commissions chargeable to the Fund in connection with
portfolio securities transactions to which the Fund is a party; all taxes,
including securities issuance and transfer taxes, and fees payable by the Fund
to federal, state or other governmental agencies; the costs and expenses of
engraving or printing of certificates representing shares of the Fund; all costs
and expenses in connection with maintenance of registration of the Fund and its
shares with the Securities and Exchange Commission and various states and other
jurisdictions (including filing fees and legal fees and disbursements of
counsel); the costs and expenses of printing, including typesetting, and
distributing prospectuses and statements of additional information of the Fund
supplements thereto to the Fund's shareholders; all expenses of shareholders'
and Directors' meetings and of preparing, printing and mailing of proxy
statements and reports to shareholders; fees and travel expenses of Directors or
Director members of any advisory board or committee; all expenses incident to
the payment of any dividend, distribution, withdrawal or redemption, whether in
shares or in cash; charges and expenses of any outside service used for pricing
of the Fund's shares; charges and expenses of legal counsel, including counsel
to the Directors of the Fund who are not interested persons (as defined in the
1940 Act) of the Fund and of independent certified public accountants, in
connection with any matter relating to the Fund; membership dues of industry
associations; interest payable on Fund borrowings; postage; insurance premiums
on property or personnel (including officers and Directors) of the Fund which
inure to its benefit; extraordinary expenses (including, but not limited to,
legal claims and liabilities and litigation costs and any indemnification
related thereto); and all other charges and costs of the Fund's operation unless
otherwise explicitly provided herein.
5. Other Distribution Resources. Alex. Brown and Participating Dealers
may expend their own resources separate and apart from amounts payable under the
Plan to support the Fund's distribution effort. Alex. Brown will report to the
Board of Directors on any such expenditures as part of its regular reports
pursuant to Section 6 of this Plan.
6. Reports. While this Plan is in effect, Alex. Brown shall report in
writing at least quarterly to the Fund's Board of Directors, and the Board shall
review, the following: (i) the amounts of all payments under the Plan, the
identity of the recipients of each such payment; (ii) the basis on which the
amount of the payment to such recipient was made; (iii) the amounts of expenses
authorized under this Plan and the purpose of each such expense; and (iv) all
costs of each item specified in Section 4 of this Plan (making estimates of such
costs where necessary or desirable), in each case during the preceding calendar
or fiscal quarter.
7. Effectiveness, Continuation, Termination and Amendment. This Plan
has been approved (i) by a vote of the Board of Directors of the Fund and of a
majority of the Directors who are not interested persons (as defined in the 1940
Act), cast in person at a meeting called for the purpose of voting on this Plan;
and (ii) by a vote of holders of at least a majority of the Fund's outstanding
voting securities (as defined in the 1940 Act). This Plan shall, unless
terminated as hereinafter provided, continue in effect from year to year only so
long as such continuance is specifically approved at least annually by the vote
of the Fund's Board of Directors and by the vote of a majority of the Directors
of the Fund who are not interested persons (as defined in the 1940 Act), cast in
person at a meeting called for the purpose of voting on such continuance. This
Plan may be terminated at any time by a vote of a majority of the Directors who
are not interested persons (as defined in the 1940 Act) or by the vote of the
holders of a majority of the Fund's outstanding voting securities (as defined in
the 1940 Act). This Plan may not be amended to increase materially the amount of
payments to be made without shareholder approval, as set forth in (ii) above,
and all amendments must be approved in the manner set forth under (i) above.
<PAGE>
Flag Investors Intermediate-Term Income Fund, Inc.
18f-3 Plan Exhibits
1. Registrant's Form of Articles Supplementary establishing the ABCAT Shares is
filed as Exhibit (1)(g) to this Registration Statement on Form N-1A
(Registration No. 33-34275) and is incorporated herein by reference.
2. Registrant's By-Laws filed as Exhibit (2) to Post-Effective Amendment No. 6
to Registrant's Registration Statement on Form N-1A (Registration No. 33-34275),
filed with the Securities and Exchange Commission via EDGAR (Accession No.
0000950116-95- 000390) on August 18, 1995 is incorporated herein by reference.
3. Registrant's Distribution Agreement between Registrant and Alex. Brown & Sons
Incorporated with respect to Registrant's Class A Shares filed as Exhibit (6)(a)
to Post-Effective Amendment No. 7 to Registrant's Registration Statement on
Form N-1A (Registration No. 33-34275), filed with the Securities and Exchange
Commission via EDGAR (Accession No. 0000950116-96-000268) on April 26, 1996 is
incorporated herein by reference.
4. Registrant's Form of Sub-Distribution Agreement between Alex. Brown & Sons
Incorporated and Participating Broker-Dealers filed as Exhibit (6)(b) to Post
Effective Amendment No. 6 to Registrant's Registration Statement on Form N-1A
(Registration No. 33- 34275), filed with the Securities and Exchange Commission
via EDGAR (Accession No. 0000950116-95-000390) on August 18, 1995 is
incorporated herein by reference.
5. Registrant's Distribution Agreement between Registrant and Alex. Brown & Sons
Incorporated with respect to Registrant's Institutional Shares filed as Exhibit
(6)(d) to Post-Effective Amendment No. 7 to Registrant's Registration Statement
on Form N-1A (Registration No. 33-34275), filed with the Securities and Exchange
Commission via EDGAR (Accession No. 0000950116-96-000268) on April 26, 1996 is
incorporated herein by reference.
6. Registrant's Form of Distribution Agreement between Registrant and Alex.
Brown & Sons Incorporated with respect to Registrant's Alex. Brown Capital
Advisory & Trust Shares is filed as Exhibit (6)(e) to this Registration
Statement on Form N-1A (Registration No. 33-34275), and is incorporated herein
by reference.
7. Registrant's Distribution Plan with respect to the Class A Shares filed as
Exhibit (15) to Post-Effective Amendment No. 7 to Registrant's Registration
Statement on Form N-1A (Registration No. 33-34275) filed with the Securities and
Exchange Commission via EDGAR (Accession No. 0000950116-96-000268) on April 26,
1996 is incorporated herein by reference.
<PAGE>
EX-99.B(24)
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 Edward J. Stoken, 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: October 17, 1996
----------------
<PAGE>
FLAG INVESTORS INTERMEDIATE-TERM
INCOME FUND, INC.
POWER OF ATTORNEY
-----------------
KNOW ALL PERSONS BY THESE PRESENTS, that, Joseph A. Finelli, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Edward J. Stoken, 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 Chief
Financial and Accounting Officer 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/ Joseph A. Finelli
-------------------------------
Joseph A. Finelli
Date: October 17, 1996
----------------
<PAGE>
FLAG INVESTORS INTERMEDIATE-TERM
INCOME FUND, INC.
POWER OF ATTORNEY
-----------------
KNOW ALL PERSONS BY THESE PRESENTS, that, Richard T. Hale, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Edward J. Stoken, 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/ Richard T. Hale
----------------------------
Richard T. Hale
Date: October 17, 1996
----------------
33865.1
<PAGE>
FLAG INVESTORS INTERMEDIATE-TERM
INCOME FUND, INC.
POWER OF ATTORNEY
-----------------
KNOW ALL PERSONS BY THESE PRESENTS, that, John F. Kroeger, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Edward J. Stoken, 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/ John F. Kroeger
--------------------------------
John F. Kroeger
Date: October 17, 1996
----------------
<PAGE>
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 Edward J. Stoken, 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: October 17, 1996
----------------
<PAGE>
FLAG INVESTORS INTERMEDIATE-TERM
INCOME FUND, INC.
POWER OF ATTORNEY
-----------------
KNOW ALL PERSONS BY THESE PRESENTS, that, Eugene J. McDonald, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Edward J. Stoken, 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/ Eugene J. McDonald
---------------------------
Eugene J. McDonald
Date: October 17, 1996
----------------
<PAGE>
FLAG INVESTORS INTERMEDIATE-TERM
INCOME FUND, INC.
POWER OF ATTORNEY
-----------------
KNOW ALL PERSONS BY THESE PRESENTS, that, W. James Price, whose
signature appears below, does hereby constitute and appoint Edward J. Veilleux
and Edward J. Stoken, 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/ W. James Price
-----------------------
W. James Price
Date: October 17, 1996
----------------
<PAGE>
FLAG INVESTORS INTERMEDIATE-TERM
INCOME FUND, INC.
POWER OF ATTORNEY
-----------------
KNOW ALL PERSONS BY THESE PRESENTS, that, M. Elliott Randolph, Jr.,
whose signature appears below, does hereby constitute and appoint Edward J.
Veilleux and Edward J. Stoken, 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 President
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/ M. Elliott Randolph, Jr.
-----------------------------
M. Elliott Randolph, Jr.
Date: October 17, 1996
----------------
<PAGE>
FLAG INVESTORS INTERMEDIATE-TERM
INCOME FUND, INC.
POWER OF ATTORNEY
-----------------
KNOW ALL PERSONS BY THESE PRESENTS, that, Harry Woolf, whose signature
appears below, does hereby constitute and appoint Edward J. Veilleux and Edward
J. Stoken, 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/ Harry Woolf
-------------------------------
Harry Woolf
Date: October 17, 1996
----------------
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000862473
<NAME> INTERMEDIATE TERM INCOME
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 65,724,681
<INVESTMENTS-AT-VALUE> 64,907,267
<RECEIVABLES> 811,523
<ASSETS-OTHER> 332,133
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 66,050,923
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 123,681
<TOTAL-LIABILITIES> 123,681
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 69,694,973
<SHARES-COMMON-STOCK> 6,463,877
<SHARES-COMMON-PRIOR> 6,613,035
<ACCUMULATED-NII-CURRENT> 439,462
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,389,779)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (817,414)
<NET-ASSETS> 65,927,242
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,305,962
<OTHER-INCOME> 0
<EXPENSES-NET> 230,209
<NET-INVESTMENT-INCOME> 2,075,753
<REALIZED-GAINS-CURRENT> 124,699
<APPREC-INCREASE-CURRENT> (2,463,411)
<NET-CHANGE-FROM-OPS> (262,959)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,636,291
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 996,215
<NUMBER-OF-SHARES-REDEEMED> 1,259,344
<SHARES-REINVESTED> 113,971
<NET-CHANGE-IN-ASSETS> (3,374,452)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (3,514,478)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 115,889
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 197,597
<AVERAGE-NET-ASSETS> 67,310,304
<PER-SHARE-NAV-BEGIN> 10.48
<PER-SHARE-NII> 0.37
<PER-SHARE-GAIN-APPREC> (0.36)
<PER-SHARE-DIVIDEND> (0.30)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.19
<EXPENSE-RATIO> 0.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
