<PAGE>
Supplement dated October 11, 1999
to the Prospectuses dated May 1, 1999,
of Flag Investors Short-Intermediate Income Fund, Inc.
The fourth paragraph of the section "INVESTMENT ADVISOR AND
SUB-ADVISOR" in the prospectuses for Flag Investors Short-Intermediate Income
Fund, Inc. (the "Fund") is amended and supplemented as follows:
Prior to June 4, 1999, the Advisor was an indirect subsidiary of
Bankers Trust Corporation. On June 4, 1999, Bankers Trust Corporation merged
with a subsidiary of Deutsche Bank A.G. ("Deutsche Bank"). Deutsche Bank is a
major global banking institution that is engaged in a wide range of financial
services, including investment management, mutual funds, retail and commercial
banking, investment banking and insurance.
A Special Meeting of Shareholders was held on October 7, 1999, at which
time shareholders voted to approve a new investment advisory agreement (the
"Advisory Agreement") between the Fund and Investment Company Capital Corp.
("ICC") and a new sub-advisory agreement (the "Sub-Advisory Agreement) among the
Fund, ICC and Brown Investment Advisory & Trust Company ("Brown Trust").
Approval of the Advisory Agreement and Sub-Advisory Agreement was sought because
Deutsche Bank indirectly became ICC's parent company and, therefore, controls
its operations as investment advisor. The services provided to the Fund under
the Advisory Agreement and Sub-Advisory Agreement are the same as those provided
under the previous investment advisory agreement with ICC and sub-advisory
agreement with Brown Trust.
* * *
PLEASE RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
SUPPSI (10/99)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND, INC.
One South Street
Baltimore, Maryland 21202
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A
PROSPECTUS. IT SHOULD BE READ IN CONJUNCTION WITH A
PROSPECTUS WHICH MAY BE OBTAINED FROM YOUR SECURITIES
DEALER OR SHAREHOLDER SERVICING AGENT OR BY WRITING
OR CALLING THE FUND, ONE SOUTH STREET, BALTIMORE,
MARYLAND 21202, OR BY CALLING (800) 767-FLAG.
Statement of Additional Information Dated:
May 1, 1999 as supplemented through October 11, 1999
Relating to the Prospectuses Dated:
May 1, 1999 as supplemented through October 11, 1999
<PAGE>
TABLE OF CONTENTS
Page
1. GENERAL INFORMATION AND HISTORY..................................1
2. INVESTMENT OBJECTIVES AND POLICIES...............................1
3. VALUATION OF SHARES AND REDEMPTION...............................7
4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS.............8
5. MANAGEMENT OF THE FUND..........................................11
6. INVESTMENT ADVISORY AND OTHER SERVICES..........................16
7. DISTRIBUTION OF FUND SHARES.....................................17
8. BROKERAGE.......................................................20
9. CAPITAL STOCK...................................................22
10. SEMI-ANNUAL REPORTS.............................................23
11. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES...............23
12. INDEPENDENT AUDITORS............................................23
13. LEGAL MATTERS...................................................23
14. PERFORMANCE INFORMATION.........................................24
15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.............26
16. FINANCIAL STATEMENTS............................................27
APPENDIX ...............................................................A-1
<PAGE>
1. GENERAL INFORMATION AND HISTORY
Flag Investors Short-Intermediate Income Fund, Inc. (the "Fund") is an
open-end diversified management investment company. The Fund currently offers
two classes of shares: Flag Investors Short-Intermediate Income Fund Class A
Shares (the "Flag Investors Class A Shares") and Flag Investors
Short-Intermediate Income Fund Institutional Shares (the "Flag Investors
Institutional Shares") (collectively, the "Shares"). The Flag Investors Class A
Shares were formerly known as the Flag Investors Shares. Prior to February 14,
1997, the Fund was known as Flag Investors Intermediate-Term Income Fund, Inc.
As used herein, the "Fund" refers to Flag Investors Short-Intermediate Income
Fund, Inc. and specific references to any class of the Fund's Shares will be
made using the name of such class.
Important information concerning the Fund is included in the Fund's
Prospectuses, which may be obtained without charge from the Fund's distributor
(the "Distributor"), or, from Participating Dealers that offer Shares to
prospective investors. Prospectuses may also be obtained from Shareholder
Servicing Agents. Some of the information required to be in this Statement of
Additional Information is also included in the Fund's current Prospectuses. To
avoid unnecessary repetition, references are made to related sections of the
Prospectuses. In addition, the Prospectuses and this Statement of Additional
Information omit certain information about the Fund and its business that is
contained in the Registration Statement for the Fund and its Shares filed with
the SEC. Copies of the Registration Statement as filed, including such omitted
items, may be obtained from the SEC by paying the charges prescribed under its
rules and regulations.
The Fund was 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 began 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.
Under a license agreement dated May 10, 1991 between the Fund and Alex.
Brown & Sons Incorporated (predecessor to BT Alex. Brown Incorporated), Alex.
Brown & Sons Incorporated licenses to the Fund the "Flag Investors" name and
logo but retains 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. In seeking this objective the Fund will, under normal circumstances,
invest at least 65% of its total assets in U.S. Government Securities (including
certain mortgage-backed securities) and in collateralized mortgage obligations
("CMOs") and corporate debt securities. The Fund may also invest in other
asset-backed securities and (subject to an overall 20% limit) non-U.S.
dollar-denominated securities. Quality criteria applicable to certain of the
Fund's investments are as follows:
-1-
<PAGE>
<TABLE>
<CAPTION>
Type of Permitted Investment Minimum Rating(1)
---------------------------- -----------------
S&P(2) Moody's(3)
<S> <C> <C>
U.S. Government and Agency Securities...................... N/A N/A
CMO's...................................................... AAA Aaa4
Corporate Debt............................................. A or better(4) A or better(4)
Other Asset-Backed Securities.............................. AAA4 Aaa4
Securities of Non-U.S. Governmental Issuers................ AAA4 Aaa4
Securities of Designated International Organization........ AAA4 Aaa4
Non-Dollar U.S. Government Securities...................... AAA4 Aaa4
Securities of Foreign Corporations......................... AAA4 Aaa4
</TABLE>
- --------------------
1. In the event any security owned by the Fund is downgraded, the Fund's
investment 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 to the Statement of
Additional Information.
2. Standard & Poor's Ratings Group.
3. Moody's Investors Service, Inc.
4. Or, if unrated, determined to be of comparable quality by the Fund's
investment advisor.
To meet its short-term liquidity needs, the Fund may invest in
repurchase agreements 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 Fund's investment advisor (the "Advisor"). For
temporary, defensive purposes, the Fund may invest up to 100% of its assets in
such instruments.
Risk Considerations
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. Prices of longer term securities generally increase or decrease more
sharply in response to interest rate changes than those of shorter term
securities.
Mortgage-backed securities are subject to special risks due to the
possibility that prepayments on home mortgages will alter their cash flow.
During periods of declining interest rates, prepayments are passed through to
holders of mortgage-backed securities who may then have to reinvest at lower
interest rates. In periods of rising interest rates, prepayments tend to slow,
with the result that the average life of mortgage-backed securities may be
lengthened. Consequently, the possibility of prepayment makes it difficult to
assess the actual maturity and duration of mortgage-backed securities, which, in
turn, makes it difficult to predict both the direction and magnitude of changes
in the value of mortgage-backed securities in response to changes in interest
rates.
Purchases of 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
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<PAGE>
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.
U.S. Government Securities.
U.S. Government securities include obligations issued and backed by the
full faith and credit of the United States Treasury, as well as obligations
issued by agencies or instrumentalities of the U.S. Government (including
securities of the Government National Mortgage Association ("GNMA")). 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 ("FNMA")) are
supported only by the credit of the agency or instrumentality.
Mortgage-Backed Securities
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 that 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 the 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 that
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 that 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
-3-
<PAGE>
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 mortgage-backed securities differ from other forms of debt
securities, which typically provide for periodic payment of interest in fixed
amounts with principal payments at maturity or specified call dates.
Mortgage-backed securities provide monthly payments to the certificate holders,
consisting of both interest and principal payments, which in effect
"pass-through" the monthly interest and principal payments made on the
underlying mortgage loans. Although the underlying mortgage loans are for
specified periods of time (such as 20 or 30 years), borrowers can repay their
loans sooner and the certificate holders would receive any such prepayment of
principal in addition to the principal that is part of the monthly payment. A
borrower is more likely to prepay a mortgage that 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 that underlie
securities purchased at a premium could result in capital losses.
Collateralized Mortgage Obligations
The Fund may invest in collateralized mortgage obligations ("CMOs") that
are collateralized by mortgage-backed securities issued by GNMA, FHLMC or FNMA
(collectively, "Mortgage Assets").
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 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. Through the use of trusts and
-4-
<PAGE>
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. 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 and sub-advisor (the "Advisors"). A repurchase
agreement is a short-term investment in which the Fund acquires ownership of a
debt security and the seller agrees to repurchase the obligation at a future
time and set price, usually not more than seven days from the date of purchase,
thereby determining the yield during the Fund's holding period. The value of
underlying securities will be at least equal at all times to the total amount of
the repurchase obligation, including the interest factor. The Fund makes payment
for such securities only upon physical delivery or evidence of book entry
transfer to the account of a custodian or bank acting as agent. The underlying
securities, which in the case of the Fund are securities of the U.S. 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 is authorized to use forward foreign currency exchange
contracts to protect against uncertainty in the level of future foreign exchange
rates. 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 Advisors
believe the Fund should fix the U.S. dollar price of the foreign security when
the Fund enters into a contract for the purchase of sale, at a future date, of a
security denominated in a foreign currency. Second, if the Advisors believe the
Fund should hedge against risk of loss in the value of those portfolio
securities denominated in foreign currencies.
-5-
<PAGE>
Variable Amount Master Demand Notes.
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 quality criteria discussed
above. All variable amount master demand notes acquired by the Fund will be
payable within a prescribed notice period not to exceed seven days.
Non-U.S. Dollar-Denominated Securities.
Non-U.S. dollar-denominated securities include 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 World Bank and the European Steel
and Coal Community); (iii) the U.S. Government (non-dollar securities only); and
(iv) foreign corporations.
Rule 144A Securities
Subject to the Fund's overall investment limitations on investment 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 in these securities may affect their
value. The Fund's Board of Directors has established guidelines and procedures
to be utilized to determine the liquidity of such securities.
Purchase of When-Issued Securities
The Fund may purchase securities at their current market value on a
forward commitment or "when-issued" basis. A segregated account of the Fund,
consisting of cash or other liquid 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. 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 choose to sell the securities before the settlement
date. The value of securities so purchased or sold is subject to market
fluctuation and no interest accrues to the purchaser during this period.
Investment Restrictions
The Fund's investment program is subject to a number of investment
restrictions that reflect self-imposed standards as well as federal 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. 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 for extraordinary or
emergency purposes in an amount not exceeding 10% of the value of the total
assets at the time of such borrowing;
-6-
<PAGE>
4. Invest in real estate or mortgages on real estate;
5. Purchase or sell commodities or commodities contracts provided that
the Fund may invest in financial futures and options on such futures;
6. Act as an underwriter of securities within the meaning of the U.S.
federal securities laws except insofar as it might be deemed to be an
underwriter upon disposition of certain portfolio securities acquired within the
limitation on purchases of restricted securities;
7. Issue senior securities; or
8. Make loans, except that the Fund may purchase or hold debt
instruments in accordance with its investment objectives and policies, and may
loan portfolio securities and enter into repurchase agreements.
The following investment restrictions may be changed by a vote of the
majority of the Board of Directors. The Fund will not:
1. Invest in shares of any other investment company registered under the
Investment Company Act, except as permitted by federal law.
2. Invest more than 10% of the value of its net assets in illiquid
securities (as defined under federal and state securities laws).
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, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The Fund may enter into agreements that allow a third party, as agent
for the Fund, to accept orders from its customers up until the Fund's close of
business which is ordinarily 4:00 p.m. (Eastern Time). So long as a third party
receives an order prior to the Fund's close of business, the order is
-7-
<PAGE>
deemed to have been received by the Fund and, accordingly, may receive the NAV
computed at the close of business that day. These "late day" agreements are
intended to permit shareholders placing orders with third parties to place
orders up to the same time as other shareholders.
Redemption
The Fund may suspend the right of redemption or postpone the date of
payment during any period when (a) trading on the New York Stock Exchange is
restricted by applicable rules and regulations of the SEC; (b) the New York
Stock Exchange is closed for other than customary weekend and holiday closings;
(c) the SEC has by order permitted such suspension; or (d) an emergency exists
as determined by the SEC so that valuation of the net assets of the Fund is not
reasonably practicable.
Under normal circumstances, the Fund will redeem Shares by check or wire
transfer of funds. However, if the Board of Directors determines that it would
be in the best interests of the remaining shareholders, the Fund will make
payment of the redemption price in whole or in part by a distribution of
securities from the portfolio of the Fund in lieu of cash, in conformity with
applicable rules of the SEC. If Shares are redeemed in kind, the redeeming
shareholder will incur brokerage costs in later converting the assets into cash.
The method of valuing portfolio securities is described under "Valuation of
Shares" and such valuation will be made as of the same time the redemption price
is determined. The Fund has elected to be governed by Rule 18f-1 under the
Investment Company Act pursuant to which the Fund is obligated to redeem Shares
solely in cash up to the lesser of $250,000 or 1% of the net asset value of the
Fund during any 90-day period for any one shareholder.
4. FEDERAL TAX TREATMENT OF DIVIDENDS AND DISTRIBUTIONS
The following is only a summary of certain additional federal income tax
considerations generally affecting the Fund and its shareholders that are not
described in the Fund's Prospectuses. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Fund's Prospectuses is not intended as a substitute
for careful tax planning. For example, under certain specified circumstances,
state income tax laws may exempt from taxation distributions of a regulated
investment company to the extent that such distributions are derived from
interest on federal obligations. Investors are urged to consult with their tax
advisor regarding whether such exemption is available.
The following general discussion of certain federal income tax
consequences is based on the Internal Revenue Code of 1986, as amended (the
"Code") and the regulations issued thereunder as in effect on the date of this
Statement of Additional Information. New legislation, as well as administrative
changes or court decisions, may significantly change the conclusions expressed
herein, and may have a retroactive effect with respect to the transactions
contemplated herein.
Qualification as a Regulated Investment Company
The Fund intends to qualify and elect to be treated for each taxable
year as a regulated investment company ("RIC") under Subchapter M of the Code.
Accordingly, the Fund must, among other things, (a) derive at least 90% of its
gross income each taxable year from dividends, interest, payments with respect
to securities loans, gains from the sale or other disposition of stock,
securities or foreign currencies, and certain other related income, including,
generally, certain gains from options, futures and forward contracts; and (b)
diversify its holdings so that, at the end of each fiscal quarter of the Fund's
taxable year, (i) at least 50% of the market value of the Fund's total assets is
represented by cash and cash items, United States Government securities,
securities of other RICs, and other securities, with such other
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<PAGE>
securities limited, in respect to any one issuer, to an amount not greater than
5% of the value of the Fund's total assets or 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities (other than United States Government
securities or securities of other RICs) of any one issuer or two or more issuers
that the Fund controls and which are engaged in the same, similar, or related
trades or business. For purposes of the 90% gross income requirement described
above, foreign currency gains that are not directly related to the Fund's
principal business of investing in stock or securities (or options or futures
with respect to stock or securities) may be excluded from income that qualifies
under the 90% requirement.
In addition to the requirements described above, in order to qualify as
a RIC, the Fund must distribute at least 90% of its net investment income (that
generally includes dividends, taxable interest, and the excess of net short-term
capital gains over net short-term capital losses less operating expenses) and at
least 90% of its net tax-exempt interest income, for each tax year, if any, to
its shareholders. If the Fund meets all of the RIC requirements, it will not be
subject to federal income tax on any of its net investment income or capital
gains that it distributes to shareholders.
Although the Fund intends to distribute substantially all of its net
investment income and may distribute its capital gains for any taxable year, the
Fund will be subject to federal income taxation to the extent any such income or
gains are not distributed.
If the Fund fails to qualify for any taxable year as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate income tax rates without any deduction for distributions to
shareholders, and such distributions generally will be taxable to shareholders
as ordinary dividends to the extent of the Fund's current and accumulated
earnings and profits. In this event, such distributions generally will be
eligible for the dividends-received deduction for corporate shareholders.
Fund Distributions
Distributions of investment company taxable income will be taxable to
shareholders as ordinary income, regardless of whether such distributions are
paid in cash or are reinvested in additional Shares to the extent of the Fund's
earnings and profits. The Fund anticipates that it will distribute substantially
all of its investment company taxable income for each taxable year.
The Fund may either retain or distribute to shareholders its excess of
net long-term capital gains over net short-term capital losses ("net capital
gains"). If such gains are distributed as a capital gains distribution, they are
taxable to shareholders that are individuals at a maximum rate of 20%,
regardless of the length of time the shareholder has held Shares. If any such
gains are retained, the Fund will pay federal income tax thereon, and, if the
Fund makes an election, the shareholders will include such undistributed gains
in their income, will increase their basis in Fund shares by the difference
between the amount of such includable gains and the tax deemed paid by such
shareholder and will be able to claim their share of the tax paid by the Fund as
a refundable credit.
In the case of corporate shareholders, Fund distributions (other than
capital gains distributions) generally qualify for the dividends-received
deduction to the extent of the gross amount of qualifying dividends received by
the Fund for the year. Generally, and subject to certain limitations, a dividend
will be treated as a qualifying dividend if it has been received from a domestic
corporation. Accordingly, it is not expected that any Fund distribution will
qualify for the corporate dividends-received deduction.
Ordinarily, investors should include all dividends as income in the year
of payment. However, dividends declared payable to shareholders of record in
December of one year, but paid in January of the
-9-
<PAGE>
following year, will be deemed for tax purposes to have been received by the
shareholder and paid by the Fund in the year in which the dividends were
declared.
Investors should be careful to consider the tax implications of
purchasing Shares just prior to the ex-dividend date of any ordinary income
dividend or capital gains distribution. Those investors will be taxable on the
entire amount of the dividend or distribution received, even though the net
asset value per share on the date of such purchase may have reflected the amount
of such distribution.
The Fund will provide an annual statement to shareholders as to the
federal tax status of distributions paid (or deemed to be paid) by the Fund
during the year, including the amount of dividends eligible for the corporate
dividends-received deduction.
Sale or Exchange of Fund Shares
The sale or exchange of a share is a taxable event for the shareholder.
Generally, gain or loss on the sale or exchange of a Share will be capital gain
or loss that will be long-term if the Share has been held for more than twelve
months and otherwise will be short-term. For individuals, long-term capital
gains are currently taxed at a rate of 20% and short-term capital gains are
currently taxed at ordinary income tax rates. However, if a shareholder realizes
a loss on the sale, exchange or redemption of a Share held for six months or
less and has previously received a capital gains distribution with respect to
the Share (or any undistributed net capital gains of the Fund with respect to
such Share are included in determining the shareholder's long-term capital
gains), the shareholder must treat the loss as a long-term capital loss to the
extent of the amount of the prior capital gains distribution (or any
undistributed net capital gains of the Fund that have been included in
determining such shareholder's long-term capital gains). In addition, any loss
realized on a sale or other disposition of Shares will be disallowed to the
extent an investor repurchases (or enters into a contract or option to
repurchase) Shares within a period of 61 days (beginning 30 days before and
ending 30 days after the disposition of the Shares). This loss disallowance rule
will apply to Shares received through the reinvestment of dividends during the
61-day period.
In certain cases, the Fund will be required to withhold and remit to the
United States Treasury 31% of distributions payable to any shareholder who (1)
has failed to provide a correct tax identification number, (2) is subject to
backup withholding by the Internal Revenue Service for failure to properly
report receipt of interest or dividends, or (3) has failed to certify to the
Fund that such shareholder is not subject to backup withholding.
Federal Excise Tax; Miscellaneous Considerations; Effect of Future Legislation
If the Fund fails to distribute in a calendar year at least 98% of its
ordinary income for the year and 98% of its capital gain net income (the excess
of short and long term capital gains over short and long term capital losses)
for the one-year period ending on October 31 of that year (and any retained
amount from the prior calendar year), the Fund will be subject to a
nondeductible 4% Federal excise tax on the undistributed amounts. The Fund
intends to make sufficient distributions to avoid imposition of this tax, or to
retain, at most, its net capital gains and pay tax thereon.
State and Local Tax Considerations
Rules of state and local taxation of dividend and capital gains
distributions from regulated investment companies often differ from the rules
for federal income taxation described above. Shareholders are urged to consult
their tax advisors as to the consequences of these and other state and local tax
rules affecting an investment in the Fund.
-10-
<PAGE>
5. MANAGEMENT OF THE FUND
Directors and Officers
The overall business and affairs of the Fund are managed by its Board
of Directors. The Board approves all significant agreements between the Fund and
persons or companies furnishing services to the Fund, including the Fund's
agreements with its investment advisor, sub-advisor, distributor, custodian and
transfer agent.
The Directors and executive officers of the Fund, their respective
dates of birth and their principal occupations during the last five years are
set forth below. Unless otherwise indicated, the address of each Director and
executive officer is One South Street, Baltimore, Maryland 21202.
*RICHARD T. HALE, Chairman and Director (7/17/45)
Managing Director, Deutsche Asset Management Americas; Director and
President, Investment Company Capital Corp. (registered investment
advisor); and Chartered Financial Analyst.
RICHARD R. BURT, Director (2/3/47)
IEP Advisors, LLP, 1275 Pennsylvania Avenue, NW, 10th Floor,
Washington, DC 20004. Chairman, IEP Advisors, Inc.; Chairman of the
Board, Weirton Steel Corporation; Member of the Board, Archer Daniels
Midland Company, Hollinger International, Inc., Homestake Mining, HCL
Technologies and Anchor Technologies, Director, Mitchell Hutchins
family of funds; and Member, Textron Corporation International Advisory
Council. Formerly, partner McKinsey & Company, 1991-1994; U.S. Chief
Negotiator in Strategic Arms Reduction Talks (START) with former Soviet
Union and U.S. Ambassador to the Federal Republic of Germany,
1985-1991.
JOSEPH R. HARDIMAN, Director (5/27/37)
8 Bowen Mill Road, Baltimore, Maryland 21212. Private Equity Investor
and Capital Markets Consultant; Director, The Nevis Fund (registered
investment company) and Circon Corp. (medical instruments). Formerly,
President and Chief Executive Officer, The National Association of
Securities Dealers, Inc. and The NASDAQ Stock Market, Inc., 1987-1997;
Chief Operating Officer of Alex. Brown & Sons Incorporated (now BT
Alex. Brown Incorporated), 1985-1987; General Partner, Alex. Brown &
Sons Incorporated (now BT Alex. Brown Incorporated), 1976-1985.
LOUIS E. LEVY, Director (11/16/32)
26 Farmstead Road, Short Hills, New Jersey 07078. Director,
Kimberly-Clark Corporation (personal consumer products) and Household
International (banking and finance); 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; and Partner, KPMG Peat Marwick, retired 1990.
EUGENE J. MCDONALD, Director (7/14/32)
Duke Management Company, Erwin Square, Suite 1000, 2200 West Main
Street, Durham, North Carolina 27705. President, Duke Management
Company (investments); Executive Vice President, Duke University
(education, research and health care); Executive Vice Chairman and
Director, Central Carolina Bank & Trust (banking) and Director, Victory
Funds (registered investment companies). Formerly, Director AMBAC
Treasurers Trust (registered investment company) and DP Mann Holdings
(insurance).
-11-
<PAGE>
REBECCA W. RIMEL, Director (4/10/51)
The Pew Charitable Trusts, One Commerce Square, 2005 Market Street,
Suite 1700, Philadelphia, Pennsylvania 19103-7017. President and Chief
Executive Officer, The Pew Charitable Trusts; Director and Executive
Vice President, The Glenmede Trust Company. Formerly, Executive
Director, The Pew Charitable Trusts.
*TRUMAN T. SEMANS, Director (10/27/26)
Brown Investment Advisory & Trust Company, 19 South Street, Baltimore,
Maryland 21202. Vice Chairman, Brown Investment Advisory & Trust
Company (formerly, Alex. Brown Capital Advisory & Trust Company);
Director, Investment Company Capital Corp. (registered investment
advisor) and Virginia Hot Springs Inc. (property management). Formerly,
Managing Director and Vice Chairman, Alex. Brown Incorporated (now BT
Alex. Brown Incorporated).
ROBERT H. WADSWORTH, Director (1/29/40)
4455 E. Camelback Road, Suite 261 E., Phoenix, Arizona 85018.
President, The Wadsworth Group, First Fund Distributors, Inc. and
Guiness Flight Investments Funds, Inc.; Director, The Germany Fund,
Inc., The Central European Equity Fund, Inc.; and Vice President,
Professionally Managed Portfolios and Advisors Series Trust.
CARL W. VOGT, Esq., President (4/20/36)
Fulbright & Jaworski L.L.P., 801 Pennsylvania Avenue, N.W., Washington,
D.C. 20004-2604. Senior Partner, Fulbright & Jaworski L.L.P. (law);
Interim President of Williams College; Director, Yellow Corporation
(trucking) and American Science & Engineering (x-ray detection
equipment). Formerly, Chairman and Member, National Transportation
Safety Board; Director, National Railroad Passenger Corporation
(Amtrak); and Member, Aviation System Capacity Advisory Committee
(Federal Aviation Administration).
CHARLES A. RIZZO, Treasurer (8/5/57)
Vice President and Department Head, Deutsche Asset Management Americas,
since 1999; and Vice President and Department Head, BT Alex. Brown
Incorporated, 1998-1999. Formerly, Senior Manager,
PricewaterhouseCoopers LLP, 1993-1998.
AMY M. OLMERT, Secretary (5/14/63)
Vice President, Deutsche Asset Management Americas, since 1999; and
Vice President, BT Alex. Brown Incorporated, 1997-1999. Formerly,
Senior Manager, PricewaterhouseCoopers LLP, 1988-1997.
DANIEL O. HIRSCH, Assistant Secretary (3/27/54)
Director, Deutsche Asset Management Americas, since 1999. Principal, BT
Alex. Brown Incorporated, 1998-1999. Formerly, Assistant General
Counsel, United States Securities and Exchange Commission, 1993-1998.
- -------------------
* Messrs. Semans and Hale are directors who are "interested persons," as
defined in the 1940 Act.
Directors and officers of the Fund are also directors and officers of
some or all of the other investment companies managed, administered or advised
by BT Alex. Brown Incorporated ("BT Alex. Brown") or its affiliates. There are
currently eight funds in the Flag Investors Funds and Deutsche Banc Alex. Brown
Cash Reserve Fund, Inc. fund complex (the "Fund Complex"). Mr. Semans serves as
Chairman of five funds and as a Director of three other funds in the Fund
Complex. Mr. Hale serves as Chairman of three funds and as Director of four
funds in the Fund Complex. Ms. Rimel serves as Director of seven funds in the
Fund Complex. Messrs. Burt, Hardiman, Levy, McDonald and Wadsworth serve as
Directors of each of the funds in the Fund Complex. Mr. Vogt serves as President
of each of the funds in the Fund Complex. Mr. Rizzo serves as Treasurer, Ms.
Olmert serves as Secretary, and Mr. Hirsch serves as Assistant Secretary, for
each of the funds in the Fund Complex.
-12-
<PAGE>
Some of the Directors of the Fund are customers of, and have had normal
brokerage transactions with, BT 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.
With the exception of the Fund's President, officers of the Fund
receive no direct remuneration in such capacity from the Fund. Officers and
Directors of the Fund who are officers or directors of BT Alex. Brown or its
affiliates may be considered to have received remuneration indirectly. As
compensation for his or her services as Director, each Director who is not an
"interested person" of the Fund (as defined in the Investment Company Act) (an
"Independent Director") and Mr. Vogt receives an aggregate annual fee (plus
reimbursement for reasonable out-of-pocket expenses incurred in connection with
his or her attendance at Board and committee meetings) from each fund in the
Fund Complex for which he or she serves. In addition, the Chairmen of the Fund
Complex's Audit Committee and Executive Committee receive an annual fee from the
Fund Complex. Payment of such fees and expenses are allocated among all such
funds described above in direct proportion to their relative net assets. For the
fiscal year ended December 31, 1998, Independent Directors' fees attributable to
the assets of the Fund totaled approximately $2,441.
The following table shows aggregate compensation payable to each of the
Fund's Directors by the Fund and the Fund Complex, respectively, and pension or
retirement benefits accrued as part of Fund expenses in the fiscal year ended
December 31, 1998.
-13-
<PAGE>
<TABLE>
<CAPTION>
COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------------
Name of Person, Position Aggregate Compensation Pension or Retirement Total Compensation
From the Fund Payable to Benefits Accrued As From the Fund
Directors for the Fiscal Year Part of Fund Expenses and Fund Complex
Ended December 31, 1998 Payable to Directors
for the Fiscal Year
Ended December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Richard T. Hale, Chairman(1) $ 0 $0 $0
Truman T. Semans, Director(1) $ 0 $0 $0
James J. Cunnane, Director(8) $446(2) (3) $39,000 for service on 13(4)
Boards in the Fund Complex
Joseph R. Hardiman, Director(5) $ 0 (3) $19,500 for services on 11(6)
Boards in the Fund Complex
John F. Kroeger, Director(7) $560 (3) $49,000 for service on 13(4)
Boards in the Fund Complex
Louis E. Levy, Director $503(2) (3) $44,000 for service on 13(4)
Boards in the Fund Complex
Eugene J. McDonald, Director $446(2) (3) $39,000 for service on 13(4)
Boards in the Fund Complex
Rebecca W. Rimel, Director $453(2) (3) $39,000 for service on 12(4,6)
Boards in the Fund Complex
Carl W. Vogt, Esq., Director $456(2) (3) $39,000 for service on 13(4,6)
Boards in the Fund Complex
Richard R. Burt(9) $ 0 $0 $0
Robert H. Wadsworth(9) $ 0 $0 $0
</TABLE>
- -----------
(1) A Director who is an "interested person" as defined in the Investment
Company Act.
(2) Of the amounts payable to Messrs. Cunnane, Levy, McDonald and Vogt and Ms.
Rimel, $446, $0, $446, $456, and $453 respectively, was deferred pursuant
to a deferred compensation plan.
(3) The Fund Complex has adopted a Retirement Plan for eligible Directors, as
described below. The actuarially computed pension expense for the Fund for
the year ended December 31, 1998 was approximately $5,362.
(4) One of these funds ceased operations on July 29, 1998.
(5) Elected to Fund's board effective October 1, 1998.
(6) Ms. Rimel receives and Messrs. Hardiman and Vogt, prior to their
appointment or election as Director to all 12 Funds in the Fund Complex,
received proportionately higher compensation from each fund for which they
serve as Director.
(7) Retired from the Fund's board on October 1, 1998; Deceased, November 26,
1998.
(8) Retired, effective October 7, 1999.
(9) Elected to the Fund's board effective October 7, 1999.
The Fund Complex has adopted a Retirement Plan (the "Retirement Plan")
for Directors who are not employees of the Fund, the 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 or her last year of
service. Upon retirement, each Participant will receive annually 10% of such fee
for each year that he or she served after completion of the first five years, up
to a maximum annual benefit of 50% of the fee earned by the Participant in his
or her last year of service. The fee will be paid quarterly, for life, by each
Fund for which he or she serves. The Retirement Plan is unfunded and unvested.
The Fund has two Participants, a Director who retired effective December 31,
1994 and another Director, who retired effective December 31, 1996, who have
qualified for the Retirement Plan by serving thirteen years and fourteen years,
respectively, as Directors in the Fund Complex and each of whom will be paid a
quarterly fee of $4,875 by the Fund Complex for the rest of his life. Such fees
are
-14-
<PAGE>
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 or her last year of
service, as described above. The approximate credited years of service at
December 31, 1998 was as follows: for Mr. Levy, 4 years; for Mr. McDonald, 6
years; for Ms. Rimel, 3 years; for Mr. Vogt, 3 years; and for Mr. Hardiman, 0
years.
Years of Service Estimated Annual Benefits Payable By
- ---------------- Fund Complex Upon Retirement
------------------------------------
Chairmen of Audit and
Executive Committees Other Participants
---------------------- ------------------
6 years $4,900 $3,900
7 years $9,800 $7,800
8 years $14,700 $11,700
9 years $19,600 $15,600
10 years or more $24,500 $19,500
Any Director who receives fees from the Fund is permitted to defer 50%
to 100% of his or her annual compensation pursuant to a Deferred Compensation
Plan. Messrs. Levy, McDonald and Vogt, and Ms. Rimel have each executed a
Deferred Compensation Agreement. Currently, the deferring Directors may select
from among various Flag Investors funds, Deutshe Banc Alex. Brown Cash Reserve
Fund, Inc. and BT International Equity Fund in which all or part of their
deferral account shall be deemed to be invested. Distributions from the
deferring Directors' deferral accounts will be paid in cash, in generally equal
quarterly installments over a period of ten years.
Code of Ethics
The Board of Directors of the Fund has adopted a Code of Ethics
pursuant to Rule 17j-1 under the Investment Company Act. The Code of Ethics
applies to the personal investing activities of all directors and officers of
the Fund, as well as to designated officers, directors and employees of the
Advisors and the Distributor. As described below, the Code of Ethics imposes
significant restrictions on the Advisors' investment personnel, including the
portfolio managers and employees who execute or help execute a portfolio
manager's decisions or who obtain contemporaneous information regarding the
purchase or sale of a security by the Fund.
The Code of Ethics requires that any officer, director or employee of
the Fund or the Advisors preclear any personal securities investments (with
certain exceptions, such as non-volitional purchases or purchases that are part
of an automatic dividend reinvestment plan). The foregoing would apply to any
officer, director or employee of the Distributor that is an access person. The
preclearance requirement and associated procedures are designed to identify any
substantive prohibition or limitation applicable to the proposed investment. The
substantive restrictions applicable to investment personnel include a ban on
acquiring any securities in an initial public offering, a prohibition from
profiting on short-term trading in securities and special preclearance of the
acquisition of securities in private placements. Furthermore, the Code of Ethics
provides for trading "blackout periods" that prohibit trading by investment
personnel and certain other employees within periods of trading by the Fund in
the same security. Trading by investment personnel and certain other employees
of the Advisor or Sub-Advisor, as appropriate, would be exempt from this
"blackout period" provided that (1) the market capitalization of a particular
security exceeds $2 billion; and (2) orders of such entity (including trades of
both clients
-15-
<PAGE>
and covered persons) do not exceed ten percent of the daily average trading
volume of the security for the prior 15 days. Officers, directors and employees
of the Advisors and the Distributor may comply with codes of ethics instituted
by those entities so long as they contain similar requirements and restrictions.
6. INVESTMENT ADVISORY AND OTHER SERVICES
On March 30, 1999, the Board of Directors of the Fund, including a
majority of the Independent Directors, approved an Investment Advisory Agreement
between the Fund and Investment Company Capital Corp. ("ICC" or the "Advisor")
The Investment Advisory Agreement was approved by a vote of shareholders of the
Fund on October 7, 1999. On October 7, 1999, a Sub-Advisory Agreement among the
Fund, ICC and Brown Investment Advisory & Trust Company (formerly, Alex. Brown
Capital Advisory & Trust Company) ("Brown Trust") was approved by a vote of
shareholders of the Fund. ICC, the investment advisor, is an indirect subsidiary
of Deutsche Bank AG. Brown Trust is a trust company chartered under the laws of
the State of Maryland. Brown Trust is a wholly-owned subsidiary of Brown Capital
Holdings Incorporated ("Brown Capital Holdings"), a Maryland corporation whose
principal executive officer is Michael D. Hankin. Brown Capital Holdings is
owned by management and employees of Brown Trust and outside investors. ICC also
serves as investment advisor and Brown Trust serves as sub-advisor to other
funds in the Flag Investors family of funds.
Under the Investment Advisory Agreement, ICC obtains and evaluates
economic, statistical and financial information to formulate and implement
investment policies for the Fund. ICC has delegated this responsibility to Brown
Trust provided that ICC continues to supervise the performance of Brown Trust
and report thereon to the Fund's Board of Directors. Any investment program
undertaken by ICC or Brown Trust will at all times be subject to policies and
control of the Fund's Board of Directors. ICC will provide the Fund with office
space for managing its affairs, with the services of required executive
personnel and with certain clerical and bookkeeping services and facilities.
These services are provided by ICC without reimbursement by the Fund for any
costs. Neither ICC nor Brown Trust shall be liable to the Fund or its
shareholders for any act or omission by ICC or Brown Trust or any losses
sustained by the Fund or its shareholders except in the case of willful
misfeasance, bad faith, gross negligence, or reckless disregard of duty. The
services of ICC and Brown Trust to the Fund are not exclusive and ICC and Brown
Trust are free to render similar services to others. Investment advisory fees
paid to ICC for the last three fiscal years are shown below:
Advisory Fees For the Fiscal Year Ended December 31,
1998 1997 1996
Contractual Fee $323,196 $268,092 $245,318
Less amount waived ($208,010) ($203,590) ($201,059)
Fee after waivers $115,186* $64,502* $44,259*
- ---------------
* Absent fee waivers for the fiscal years ended December 31, 1998, December
31, 1997 and December 31, 1996, the Fund's Total Operating Expenses would
have been 0.93%, 0.96% and 0.99%, respectively, of the Flag Investors Class
A Shares' average daily net assets.
For the period from October 1, 1998 through December 31, 1998, Brown
Trust received $24,083 ( net of fee waivers of $32,281) for sub-advisory
services.
-16-
<PAGE>
As compensation for its services, ICC receives an annual fee from the
Fund, payable 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. ICC has
contractually agreed to reduce its annual fee, if necessary, or to reimburse
expenses of the Fund to the extent so that the Fund's annual expenses do not
exceed 0.70% of the Flag Investors Class A Shares' average daily net assets and
0.45% of the Flag Investors Institutional Shares' average daily net assets. This
agreement will continue until at least April 30, 2000 and may be extended. As
compensation for providing sub-advisory services, Brown Trust is entitled to
receive a fee from ICC, calculated daily and payable monthly, at the annual rate
of 0.23% of the first $1 billion of the Fund's average daily net assets, 0.20%
of the next $500 million of the Fund's average daily net assets, and 0.16% of
that portion of the Fund's average daily net assets in excess of $1.5 billion.
Brown Trust has voluntarily agreed to waive its fees in proportion to any fee
waivers by ICC.
Each of the Investment Advisory Agreement and the Sub-Advisory
Agreement has an initial term of two years and will continue in effect from year
to year thereafter if such continuance is specifically approved at least
annually by the Fund's Board of Directors, including a majority of the
Independent Directors who have no direct or indirect financial interest in such
agreements, by votes cast in person at a meeting called for such purpose, and by
a vote of a majority of the outstanding Shares (as defined under "Capital
Stock"). The Fund or ICC may terminate the Investment Advisory Agreement on
sixty days' written notice without penalty. The Investment Advisory Agreement
will terminate automatically in the event of assignment (as defined in the
Investment Company Act). The Sub-Advisory Agreement has similar termination
provisions.
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. An affiliate of ICC provides custody services. (See
"Custodian, Transfer Agent and Accounting Services.")
7. DISTRIBUTION OF FUND SHARES
ICC Distributors, Inc. ("ICC Distributors" or the "Distributor") serves
as the distributor of each class of the Fund's Shares pursuant to a Distribution
Agreement (the "Distribution Agreement") effective August 31, 1997.
The Distribution Agreement provides that ICC Distributors shall; (i)
use reasonable efforts to sell Shares upon the terms and conditions contained in
the Distribution Agreement and the Fund's then current Prospectus; (ii) use its
best efforts to conform with the requirements of all federal and state laws
relating to the sale of the Shares; (iii) adopt and follow procedures as may be
necessary to comply with the requirements of the National Association of
Securities Dealers, Inc. and any other applicable self-regulatory organization;
(iv) perform its duties under the supervision of and in accordance with the
directives of the Fund's Board of Directors and the Fund's Articles of
Incorporation and By-Laws; and (v) provide the Fund's Board of Directors with a
written report of the amounts expended in connection with the Distribution
Agreement. ICC Distributors shall devote reasonable time and effort to effect
sales of Shares but shall not be obligated to sell any specific number of
Shares. The services of ICC Distributors are not exclusive and ICC Distributors
shall not be liable to the Fund or its shareholders for any error of judgment or
mistake of law, for any losses arising out of any investment, or for any action
or inaction of ICC Distributors in the absence of bad faith, willful misfeasance
or gross negligence in the performance of its duties or obligations under the
Distribution Agreement or by reason of its reckless disregard of its duties and
obligations under the Distribution Agreement. The Distribution Agreement further
provides that the Fund and ICC Distributors will mutually indemnify each other
for losses relating to disclosures in the Fund's registration statement.
-17-
<PAGE>
The Distribution Agreement may be terminated at any time upon 60 days'
written notice by the Fund, without penalty, by the vote of a majority of the
Fund's Independent Directors or by a vote of a majority of the Fund's
outstanding Shares of the related class (as defined under "Capital Stock") or
upon 60 days' written notice by the Distributor and shall automatically
terminate in the event of an assignment. The Distribution Agreement has an
initial term of one year from the date of effectiveness. It shall continue in
effect thereafter with respect to each class of the Fund provided that it is
approved at least annually by (i) a vote of a majority of the outstanding voting
securities of the related class of the Fund or (ii) a vote of a majority of the
Fund's Board of Directors including a majority of the Independent Directors and,
with respect to each class of the Fund for which there is a plan of
distribution, so long as such plan of distribution is approved at least annually
by the Independent Directors in person at a meeting called for the purpose of
voting on such approval. The Distribution Agreement, including the form of
Sub-Distribution Agreement, was most recently approved by the Board of
Directors, including a majority of the Independent Directors, on September 27,
1999.
ICC Distributors and certain broker-dealers ("Participating Dealers")
have entered into Sub-Distribution Agreements under which such broker-dealers
have agreed to process investor purchase and redemption orders and respond to
inquiries from shareholders concerning the status of their accounts and the
operations of the Fund. Any Sub-Distribution Agreement may be terminated in the
same manner as the Distribution Agreement at any time and shall automatically
terminate in the event of assignment.
In addition, the Fund may enter into Shareholder Servicing Agreements
with certain financial institutions, including BT Alex. Brown and certain banks,
to act as Shareholder Servicing Agents, pursuant to which ICC Distributors will
allocate a portion of its distribution fee as compensation for such financial
institutions' ongoing shareholder services. The Fund may also enter into
Shareholder Servicing Agreements pursuant to which the Advisor, the Distributor,
or their respective affiliates, will provide compensation out of their own
resources for ongoing shareholder services. Although banking laws and
regulations prohibit banks from distributing shares of open-end investment
companies such as the Fund, according to interpretations by various bank
regulatory authorities, financial institutions are not prohibited from acting in
other capacities for investment companies, such as the shareholder servicing
capacities described above. Should future legislative, judicial or
administrative action prohibit or restrict the activities of the Shareholder
Servicing Agents in connection with the Shareholder Servicing Agreements, the
Fund may be required to alter materially or discontinue its arrangements with
the Shareholder Servicing Agents.
As compensation for providing distribution services for the Flag
Investors Class A Shares as described above, ICC Distributors receives an annual
fee, paid monthly, equal to 0.25% of the average daily net assets of the Flag
Investors Class A Shares. ICC Distributors expects to allocate most of its
annual fee to Participating Dealers and Shareholder Servicing Agents. ICC
Distributors receives no compensation for distributing the Flag Investors
Institutional Shares.
As compensation for providing distribution and shareholder services to
the Fund for the last three fiscal years, the Fund's distributor received fees
in the following amounts:
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
Class 1998 1997 1996
<S> <C> <C> <C>
Class A 12b-1 Fee $124,577(1) $136,962(2) $151,753(3)
</TABLE>
- ------------
1 Received by ICC Distributors, the Fund's distributor.
-18-
<PAGE>
2 Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $93,060 and ICC Distributors, the Fund's distributor
effective August 31, 1997, received $43,902.
3 Received by Alex. Brown, the Fund's distributor.
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 "Plan"). Under the Plan, the
Fund pays a fee to ICC Distributors for distribution and other shareholder
servicing assistance as set forth in the Distribution Agreement, and ICC
Distributors is authorized to make payments out of its fee to Participating
Dealers and Shareholder Servicing Agents. The Plan was most recently approved by
the Fund's Board of Directors, including a majority of the Independent
Directors, on September 29, 1998. The Plan 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 Independent
Directors by votes cast in person at a meeting called for such purpose.
In approving the Plan, the Directors concluded, in the exercise of
reasonable business judgment, that there was a reasonable likelihood that the
Plan would benefit the Fund and its shareholders. The Plan will be renewed only
if the Directors make a similar determination in each subsequent year. The Plan
may not be amended to increase materially the fee to be paid pursuant to the
Distribution Agreement without the approval of the shareholders of the Fund. The
Plan may be terminated at any time upon sixty days' notice, without penalty, by
the vote of a majority of the Fund's Independent Directors or by a vote of a
majority of the outstanding Shares (as defined under "Capital Stock").
During the continuance of the Plan, the Fund's Board of Directors will
be provided for their review, at least quarterly, a written report concerning
the payments made under the Plan to ICC Distributors pursuant to the
Distribution Agreement and to broker-dealers pursuant to Sub-Distribution
Agreements. Such reports shall be made by the persons authorized to make such
payments. In addition, during the continuance of the Plan, the selection and
nomination of the Fund's Independent Directors shall be committed to the
discretion of the Independent Directors then in office.
Under the Plan, amounts allocated to Participating Dealers and
Shareholder Servicing Agents may not exceed amounts payable to ICC Distributors
under the Plan with respect to shares held by or on behalf of customers of such
entities. Payments under the Plan are made as described above regardless of ICC
Distributors' actual cost of providing distribution services and may be used to
pay ICC Distributors' 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 0.25% of the Flag Investors Class A Shares' average daily
net assets for any period, the unexpended portion of the distribution fee may be
retained by ICC Distributors. The Plan does not provide for any charges to the
Fund for excess amounts expended by ICC Distributors and, if the Plan is
terminated in accordance with its terms, the obligation of the Fund to make
payments to ICC Distributors pursuant to the Plan will cease and the Fund will
not be required to make any payments past the date the Distribution Agreement
terminates with respect to the class of the Fund. In return for payments
received pursuant to the Plan for the last three years, the fund's distributor
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.
The Fund's distributor received commissions on the sale of Class A
Shares (of which only a portion was retained) in the following amounts:
-19-
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
Class 1998 1997 1996
Received Retained Received Retained Received Retained
<S> <C> <C> <C> <C> <C> <C>
Class A $35,645(1) $0 $13,144(2) $6,190(3) $26,849(3) $24,060(3)
Commissions
</TABLE>
- -------------
1 By ICC Distributors, the Fund's distributor.
2 Of this amount, Alex. Brown, the Fund's distributor prior to August 31,
1997, received $6,926 and ICC Distributors, the Fund's distributor
effective August 31, 1997 received $6,188.
3 By Alex. Brown, the Fund's distributor.
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 Independent
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 that inure to its benefit;
extraordinary expenses (including, but not limited to, legal claims and
liabilities and litigation costs and any indemnification related thereto); and
all other charges and costs of the Fund's operation unless otherwise explicitly
assumed by ICC Distributors or ICC.
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, its affiliates and ICC Distributors.
-20-
<PAGE>
In over-the-counter transactions, orders are placed directly with a
principal market maker and such purchases normally include a mark up over the
bid to the broker-dealer based on the spread between the bid and asked price for
the security. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter. On occasion,
certain money market instruments may be purchased directly from an issuer
without payment of a commission or concession. The Fund will not deal with
affiliates of the Advisor in any transaction in which they act as a principal.
If affiliates of the Advisor are participating in an underwriting or
selling group, the Fund may not buy portfolio securities from the group except
in accordance with rules of the SEC. The Fund believes that the limitation will
not affect its ability to carry out its present investment objective.
ICC's primary consideration in effecting securities transactions is to
obtain best price and execution of orders on an overall basis. As described
below, however, ICC may, in its discretion, effect brokerage transactions with
broker-dealers that furnish statistical, research or other information or
services that 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 affiliates of
the Advisor higher commissions than other brokers might have charged on
brokerage transactions for the Fund for brokerage or research services. The
allocation of orders among broker-dealers and the commission rates paid by the
Fund will be reviewed periodically by the Board of Directors. For the fiscal
years ended December 31, 1998, December 31, 1997 and December 31, 1996, 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 affiliates of the Advisor. At the time of such authorization, the Board
adopted certain policies and procedures incorporating the standards of Rule
17e-1 under the Investment Company Act, which requires that the commissions paid
to affiliates of the Advisor 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. For the
fiscal year ended December 31, 1998 and the period from September 1, 1997
through December 31, 1997, the Fund did not pay brokerage commissions to BT
Alex. Brown or its affiliates. For the period from January 1, 1997 through
August 31, 1997 and for the fiscal year ended December 31, 1996, the Fund did
not pay 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) that the Fund has acquired during its most recent
fiscal year. As of December 31, 1998, the Fund held a 4.5% repurchase agreement
issued by Goldman Sachs & Co. valued at $1,482,845. Goldman Sachs & Co. is a
"regular broker or dealer" of the Fund.
-21-
<PAGE>
ICC manages other investment accounts. It is possible that, at times,
identical securities will be acceptable for the Fund and one or more of such
other accounts; however, the position of each account in the securities of the
same issuer may vary and the length of time that each account may choose to hold
its investment in such securities may likewise vary. The timing and amount of
purchase by each account will also be determined by its cash position. If the
purchase or sale of securities consistent with the investment policies of the
Fund or one or more of these accounts is considered at or about the same time,
transactions in such securities will be allocated among the accounts in a manner
deemed equitable by ICC. ICC may combine such transactions, in accordance with
applicable laws and regulations, in order to obtain the best net price and most
favorable execution. Such simultaneous transactions, however, could adversely
affect the ability of the Fund to obtain or dispose of the full amount of a
security that it seeks to purchase or sell.
9. CAPITAL STOCK
The Fund is authorized to issue 85 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 Short-Intermediate Income
Fund Class A Shares, Flag Investors Short-Intermediate Income Fund Class B
Shares, Flag Investors Short-Intermediate Income Fund Class C Shares and Flag
Investors Short-Intermediate Income Fund Institutional Shares. The Flag
Investors Class B Shares and the Flag Investors Class C 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. 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.
-22-
<PAGE>
10. SEMI-ANNUAL REPORTS
The Fund furnishes shareholders with semi-annual reports containing
information about the Fund and its operations, including a list of investments
held in the Fund's portfolio and financial statements. The annual financial
statements are audited by the Fund's independent auditors.
11. CUSTODIAN, TRANSFER AGENT AND ACCOUNTING SERVICES
Bankers Trust Company ("Bankers Trust"), 130 Liberty Street, New York,
New York 10006, has been retained to act as custodian of the Fund's investments.
Bankers Trust receives such compensation from the Fund for its services as
custodian as may be agreed to from time to time by Bankers Trust and the Fund.
For the fiscal year ended December 31, 1998, Bankers Trust was paid $24,372 as
compensation for providing custody services to the Fund. Investment Company
Capital Corp. 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 compensation for providing dividend and
transfer agency services, the Fund pays ICC up to $15.62 per account per year,
plus reimbursement for out-of-pocket expenses incurred in connection therewith.
For the fiscal year ended December 31, 1998, ICC received transfer agency fees
of $17,722.
As compensation for providing accounting services, ICC receives an
annual fee, calculated daily and paid monthly, as shown below.
Average Net Assets Incremental Annual Accounting Fee
$ 0 - $ 10,000,000 $15,000 (fixed fee)
$ 10,000,000 - $ 25,000,000 0.080%
$ 25,000,000 - $ 50,000,000 0.077%
$ 50,000,000 - $ 75,000,000 0.050%
$ 75,000,000 - $ 100,000,000 0.030%
$ 100,000,000 - $ 500,000,000 0.020%
$ 500,000,000 - $ 1,000,000,000 0.008%
over $1,000,000,000 0.003%
In addition, the Fund reimburses ICC for certain out-of-pocket expenses.
For the fiscal year ended December 31, 1998, ICC received accounting fees of
$63,952.
12. INDEPENDENT AUDITORS
The annual financial statements of the Fund are audited by Deloitte &
Touche LLP, independent auditors, whose report thereon appears elsewhere herein,
and have been included herein in reliance upon the report of such firm given on
their authority as experts in accounting and auditing. Deloitte & Touche LLP has
offices at University Square, 117 Campus Drive, Princeton, New Jersey 08540.
13. LEGAL MATTERS
Morgan, Lewis & Bockius LLP acts as counsel to the Fund.
-23-
<PAGE>
14. PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of the Fund to
that of other open-end diversified management investment companies and to stock
or other relevant indices in advertisements 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:
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). In calculating the ending redeemable value,
the maximum sales load is deducted from the initial $1,000 payment and all
dividends and distributions by the Fund are assumed to have been reinvested at
net asset value as described in the Prospectuses on the reinvestment dates
during the period. "T" in the formula above is calculated by finding the average
annual compounded rate of return over the period that would equate an assumed
initial payment of $1,000 to the ending redeemable value. Any sales loads that
might in the future be made applicable at the time to reinvestments would be
included as would any recurring account charges that might be imposed by the
Fund.
Calculated according to SEC rules, the ending redeemable value and
average annual total return of a hypothetical $1,000 payment for the periods
ended December 31, 1998 were as follows:
-24-
<PAGE>
<TABLE>
<CAPTION>
One-Year Period Ended Five-Year Period Ended Inception Through
December 31, 1998 December 31, 1998 December 31, 1998
------------------- ------------------- ------------------
Ending Ending Average Ending Average
Class Redeemable Redeemable Annual Total Redeemable Annual Total
Value Total Return Value Return Value Return
<S> <C> <C> <C> <C> <C> <C>
Flag Investors Class A $1,052 5.20% $1,309 5.54% $1,656 6.83%
May 13, 1991 +
Flag Investors Institutional $1,071 7.07% N/A N/A $1,222 6.56%
November 2, 1995 +
</TABLE>
+ Inception Date.
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 the Lehman Brothers Intermediate Aggregate Bond
Index, the Lehman Brothers Government Intermediate-Term Bond Index or the
Merrill Lynch 1-3 Year Treasury 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. 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.
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, 1998 was
5.00% and 5.33%, 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 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
-25-
<PAGE>
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 that, at the end of the
base period, has not been declared as a dividend, but is reasonably expected to
be and is declared as a dividend shortly thereafter.
The Fund's annual portfolio turnover rate (the lesser of the value of
the purchases or sales for the year divided by the average monthly market value
of the portfolio during the year, excluding U.S. Government securities and
securities with maturities of one year or less) may vary from year to year, as
well as within a year, depending on market conditions. The Fund's portfolio
turnover rate was 40% for the fiscal year ended December 31, 1998 and 65% for
the fiscal year ended December 31, 1997. 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.
15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
To Fund management's knowledge, the following persons owned of record or
beneficially 5% or more of the outstanding shares of a class of the Fund, as of
February 1, 1999*:
-26-
<PAGE>
<TABLE>
<CAPTION>
Owned of Beneficially
Name and Address Record Owned Percentage Owned
---------------- ------ ----- ----------------
<S> <C> <C> <C>
Mercantile TR X 5.15% of Class A Shares
U/A 08/01/96
Keswick Pension Plan
FBO Keswick Home Pension Plan
P.O. Box 17002
Baltimore, MD 21297-0300
BT Alex. Brown Incorporated X 5.60% of Class A Shares
FBO 204-16943-12
The Gettysburg Hospital Operating
Investment Acct.
P.O. Box 1346
Baltimore, MD 21203-1346
Chase Manhattan Bank TR X 6.74% of Institutional Shares
Well Aluminum Corp
Master Trust 29400333
770 Broadway
New York, NY 10003-9522
Brown Investment Advisory X 8.73% of Institutional Shares
FBO 170-7036337
19 South Street
Baltimore, MD 21202
Brown Investment Advisory X 6.69% of Institutional Shares
FBO 170-7118000
19 South Street
Baltimore, MD 21202
</TABLE>
The following amounts represent shares held by Brown Trust in
discretionary accounts. Accordingly, Brown Trust may be deemed to be controlling
person of the Fund.
<TABLE>
<CAPTION>
Owned of Beneficially
Name and Address Record Owned Percentage Owned
---------------- ------ ----- ----------------
<S> <C> <C> <C>
BT Alex. Brown Incorporated X X 37.95% of the Fund
FBO 250-10788-16
Brown Investment Advisory
House Acct.
P.O. Box 1346
Baltimore, MD 21203-1346
</TABLE>
*As of such date, BT Alex. Brown owned beneficially less than 1% of such Shares.
Directors and officers as a group owned less than 1% of the Fund's
total outstanding Shares, as of February 1, 1999.
16. FINANCIAL STATEMENTS
(See next page.)
-27-
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Statement of Net Assets December 31, 1998
S&P Par
Security Rating* (000) Market Value
- ------------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE NOTES--38.7%
Atlantic City Electric
6.00%, 1/15/03 ............................. A- $ 2,000 $ 2,040,000
Baltimore Gas & Electric
6.75%, 6/5/12 .............................. A 1,000 1,110,000
Bear Stearns Company Incorporated
6.50%, 8/1/02 .............................. A 2,000 2,040,000
Block Financial Corporation
6.75%, 11/1/04 ............................. A 2,000 2,057,500
Computer Associates International
6.375%, 4/15/05 ............................ A- 2,805 2,769,937
Countrywide Home Loan
7.26%, 5/10/04 ............................. A 2,900 3,034,125
Dana Corporation
6.50%, 3/15/08 ............................. A- 2,000 2,090,000
First Maryland Bancorp
7.20%, 7/1/07 .............................. A- 3,000 3,258,750
Ford Motor Credit
6.00%, 1/14/03 ............................. A 2,000 2,037,500
General Motors Acceptance Corporation
5.625%, 2/15/01 ............................ A- 1,000 1,003,750
International Lease Finance
6.43%, 9/15/00 ............................. A+ 2,000 2,037,500
New York Telephone
7.375%, 12/15/11 ........................... A+ 1,700 1,736,125
Pacific Gas & Electric
6.25%, 3/1/04 .............................. A 2,000 2,062,500
Philip Morris, Inc. ...........................
6.95%, 6/1/06 .............................. A 2,000 2,052,500
Sears Roebuck Acceptance Corporation
6.34%, 9/19/00 ............................. A- 2,290 2,324,350
Sony Corporation
6.125%, 3/4/03 ............................. A 2,000 2,047,500
Tyco International Corporation
5.875%, 11/1/04 ............................ A- 2,000 2,007,500
-----------
Total Corporate Notes
(Cost $34,980,231) .......................... 35,709,537
-----------
</TABLE>
-28-
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
S&P Par
Security Rating* (000) Market Value
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCY SECURITIES--37.0%
Federal Home Loan Banks Board - 2.2%
Debentures
FHLB Board
5.12%, 9/15/03 .............................. AAA $ 2,000 $2,003,560
FEDERAL NATIONAL MORTGAGE ASSOC. - 4.4%
Debentures
FNMA-Govt
7.12%, 4/19/02 .............................. AAA 2,000 2,011,820
5.75%, 2/15/08 .............................. AAA 2,000 2,074,500
FEDERAL HOME LOAN MORTGAGE CORP. - 2.2%
Debentures
FHLMC
5.12%, 10/15/08 ............................. AAA 2,000 1,982,400
MORTGAGE BACKED-SECURITIES - 27.3%
FHLMC Pool #C00210
8.00%, 1/1/23 ............................... AAA 555 574,480
FHLMC Pool #E20099
6.50%, 5/1/09 ............................... AAA 3,674 3,729,189
FHLMC Pool #G10049
8.00%, 10/1/07 .............................. AAA 579 596,820
FHLMC Pool #G10543
6.00%, 6/1/11 ............................... AAA 2,271 2,280,797
FHLMC Pool #G50334
6.50%, 2/1/01 ............................... AAA 1,070 1,080,838
FHLMC T-5 A3
7.15%, 1/25/12 .............................. AAA 2,500 2,546,250
FHLMC T-9 A2
6.43%, 2/25/13 .............................. AAA 3,000 3,002,250
FNMA Pool #326570
7.00%, 2/1/08 ............................... AAA 2,340 2,392,213
FNMA Pool #362537
6.50%, 10/1/03 .............................. AAA 2,079 2,106,256
FNMA Pool #433646
6.00%, 10/1/13 .............................. AAA 5,508 5,527,069
FNGL Pool #409589
9.50%, 11/1/15 .............................. AAA 1,287 1,374,594
</TABLE>
-29-
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Statement of Net Assets (concluded) December 31, 1998
S&P Par
Security Rating* (000) Market Value
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GUARANTEED EXPORT TRUST - 0.9%
Guaranteed Export Trust , 94-F-A
8.18%, 12/15/04 .............................. AAA $ 764 $ 821,776
-----------
Total U.S. Government Agency Securities
(Cost $33,863,955) ............................ 34,104,812
-----------
U.S. TREASURY SECURITIES--2.3%
U.S. Treasury Notes
5.75%, 8/15/03 ............................... AAA 2,000 2,089,460
-----------
Total U.S. Treasury Securities
(Cost $1,913,253) ............................. 2,089,460
-----------
ASSET BACKED SECURITIES--20.9%
Aesop Funding II Limited Liability
Company, 1997-1-A1
6.22%, 10/20/01 .............................. AAA 3,000 3,049,680
CPS Auto Trust , 1998-2-A
6.09%, 11/15/03 .............................. AAA 2,753 2,766,196
Discover Card Master , Trust I, 1998-4-A
5.75%, 10/15/03 .............................. AAA 3,500 3,537,625
Green Tree Financial Corporation, 1994-6-A5
8.25%, 1/15/20 ............................... NR** 3,000 3,089,010
Metris Master Trust , 97-1-A
6.87%, 10/20/05 .............................. AAA 3,000 3,099,240
PG&E Rate Reduction Bonds, California
Infrastructure, 97-1-A4
6.16%, 6/25/03 ............................... AAA 3,700 3,761,050
-----------
Total Asset Backed Securities
(Cost $19,100,826) ............................ 19,302,801
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS--0.6%
FEDERAL NATIONAL MORTGAGE ASSOC. - 0.1%
FNMA Series 1988-18B
9.40%, 7/25/03 ............................... AAA 84 86,649
</TABLE>
See Notes to Financial Statements
-30-
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
S&P Par
Security Rating* (000) Market Value
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation - 0.5%
FHLMC Series 106-F
8.50%, 12/15/20 ................................ AAA $ 518 $ 519,760
------------
Total Collateralized Mortgage Obligations
(Cost $613,489) ................................. 606,409
------------
REPURCHASE AGREEMENT--1.6%
Goldman Sachs & Co., 4.50%
Dated 12/31/98, to be repurchased on
01/04/99, collateralized by U.S. Treasury
Bond with a par value of $1,447,000,
Coupon rate of 4.50%, due 1/11/01
with a market value of $1,482,845
(Cost $1,453,000) .............................. NR 1,453 1,453,000
------------
Total Investments--101.1%
(Cost $91,924,754) *** .......................... $ 93,266,019
------------
Other Liabilities in Excess of Other
Assets--(1.1%).................................. (1,047,540)
------------
Total Net Assets--100.0% .......................... $ 92,218,479
============
Net Asset Value and Redemption Price Per:
Class A Share
($47,106,899 divided 4,496,031 shares
outstanding).................................... $ 10.48
============
Institutional Share
($45,111,580 divided 4,254,449 shares
outstanding).................................... $ 10.60
============
Maximum Offering Price Per:
Class A Share ($10.48 divided 0.985)............ $ 10.64
============
Institutional Share ............................ $ 10.60
============
</TABLE>
- ---------
* The Standard & Poor's rating indicated is believed to be the most
recent rating available as of December 31, 1998. The U.S. Government Agency
Securities and U.S. Treasury Securities are assumed to have AAA ratings
because they are backed by the full faith and credit of the U.S.
government. These ratings have not been audited by Deloitte & Touche LLP.
** Although this holding is not rated by S&P, it is rated Aaa by Moody's
and AAA by Fitch.
*** Also aggregate cost for federal tax purposes.
See Notes to Financial Statements.
-31-
<PAGE>
<TABLE>
<CAPTION>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the
Year Ended
December 31,
- --------------------------------------------------------------------------------
1998
<S> <C>
Investment Income:
Interest ...................................................... $ 5,779,577
-----------
Expenses:
Investment advisory fee ....................................... 323,196
Distribution fee .............................................. 124,577
Professional fees ............................................. 111,420
Accounting fee ................................................ 63,952
Registration fees ............................................. 43,180
Custodian fee ................................................. 24,372
Printing and postage .......................................... 24,178
Transfer agent fee ............................................ 17,722
Miscellaneous ................................................. 15,548
-----------
Total expenses ....................................... 748,145
Less: Fees waived ................................................ (208,010)
-----------
Net expenses ......................................... 540,135
-----------
Net investment income ............................................ 5,239,442
-----------
Realized and unrealized gain on investments:
Net realized gain from security transactions .................. 626,662
Change in unrealized appreciation/depreciation of investments.. 281,972
-----------
Net gain on investments .............................. 908,634
-----------
Net increase in net assets resulting from operations ............. $ 6,148,076
===========
</TABLE>
See Notes to Financial Statements.
-32-
<PAGE>
<TABLE>
<CAPTION>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the Year Ended December 31,
- --------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
Increase/(Decrease) in Net Assets:
Operations:
Net investment income ........................ $ 5,239,442 $ 4,590,636
Net gain from security transactions .......... 626,662 95,306
Change in unrealized appreciation/
depreciation of investments ................ 281,972 680,823
------------ ------------
Net increase in net assets resulting
from operations ............................ 6,148,076 5,366,765
------------ ------------
Dividends to Shareholders from:
Net investment income:
Class A Shares ............................. (2,783,314) (3,165,854)
Institutional Shares ....................... (2,456,128) (1,359,289)
Distributions in excess of net investment income:
Class A Shares ............................. (84,080) --
Institutional Shares ....................... (74,196) --
------------ ------------
Total distributions .......................... (5,397,718) (4,525,143)
------------ ------------
Capital Share Transactions:
Proceeds from sale of shares ................. 46,758,290 23,594,729
Value of shares issued in reinvestment of
dividends .................................. 2,730,265 2,514,042
Cost of shares repurchased ................... (35,645,932) (25,416,223)
------------ ------------
Increase in net assets derived from
capital share transactions ................. 13,842,623 692,548
------------ ------------
Total increase in net assets ................. 14,592,981 1,534,170
Net Assets:
Beginning of year ............................ 77,625,498 76,091,328
------------ ------------
End of year .................................. $ 92,218,479 $ 77,625,498
============ ============
</TABLE>
See Notes to Financial Statements.
-33-
<PAGE>
<TABLE>
<CAPTION>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CLASS A SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
For the
Year Ended
December 31, For the Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of year ............... $ 10.39 $ 10.28 $ 10.48 $ 9.62 $ 10.57
------------- ------------- ------------- ------------- -------------
Income from Investment Operations:
Net investment income .............................. 0.58 0.61 0.63 0.62 0.57
Net realized and unrealized gain/(loss) on
investments........................................ 0.11 0.10 (0.23) 0.84 (0.92)
------------- ------------- ------------- ------------- -------------
Total from Investment Operations ................... 0.69 0.71 0.40 1.46 (0.35)
Less Distributions:
Distributions from net investment income ........... (0.58) (0.60) (0.60) (0.60) (0.57)
Distributions in excess of net investment income ... (0.02) -- -- -- --
Return of capital .................................. -- -- -- -- (0.03)
------------- ------------- ------------- ------------- -------------
Total distributions ................................ (0.60) (0.60) (0.60) (0.60) (0.60)
------------- ------------- ------------- ------------- -------------
Net asset value at end of year ..................... $ 10.48 $ 10.39 $ 10.28 $ 10.48 $ 9.62
============= ============= ============= ============= =============
Total Return(1) ....................................... 6.81% 7.13% 4.04% 15.43% (3.32)%
Ratios to Average Daily Net Assets:
Expenses(2) ........................................ 0.70% 0.70% 0.70% 0.70% 0.70%
Net investment income(3) ........................... 5.57% 5.92% 6.11% 6.00% 5.57%
Supplemental Data:
Net assets at end of year (000) .................... $ 47,107 $ 45,569 $ 58,584 $ 67,116 $ 78,789
Portfolio turnover rate ............................ 40% 65% 42% 46% 50%
</TABLE>
- ----------------
1 Total return excludes the effect of sales charge.
2 Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 0.93%, 0.96%, 0.99%, 0.93%, and
0.84%, for the years ended December 31, 1998, 1997, 1996, 1995 and 1994,
respectively.
3 Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 5.34%, 5.66%, 5.83%,
5.77%, and 5.43%, for the years ended December 31, 1998, 1997, 1996, 1995
and 1994, respectively.
See Notes to Financial Statements.
34 and 35
<PAGE>
<TABLE>
<CAPTION>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- INSTITUTIONAL SHARES
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
For the For the Period
Year Ended For the Years November 2, 1995(1)
December 31, Ended December 31, through December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995
<S> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value at beginning of period ................ $ 10.50 $ 10.38 $ 10.58 $ 10.42
--------- --------- --------- ----------
Income from Investment Operations:
Net investment income ................................. 0.61 0.61 0.59 0.09
Net realized and unrealized gain/(loss) on investments. 0.11 0.13 (0.17) 0.12
--------- --------- --------- ----------
Total from Investment Operations ...................... 0.72 0.74 0.42 0.21
Less Distributions:
Distributions from net investment income .............. (0.61) (0.62) (0.62) (0.05)
Distributions in excess of net investment income ...... (0.01) -- -- --
--------- --------- --------- ----------
Total distributions ................................... (0.62) (0.62) (0.62) (0.05)
--------- --------- --------- ----------
Net asset value at end of period ...................... $ 10.60 $ 10.50 $ 10.38 $ 10.58
========= ========= ========= ==========
Total Return(2)........................................... 7.07% 7.40% 4.20% 12.47%
Ratios to Average Daily Net Assets:
Expenses(3)............................................ 0.45% 0.45% 0.45% 0.45%(5)
Net investment income(4)............................... 5.81% 6.17% 6.35% 6.52%(5)
Supplemental Data:
Net assets at end of period (000) ..................... $ 45,112 $ 32,056 $ 17,507 $ 2,186
Portfolio turnover rate ............................... 40% 65% 42% 46%
</TABLE>
- --------------
1 Commencement of operations
2 Total return excluded the effect of sales charge.
3 Without the waiver of advisory fees (Note 2), the ratio of expenses to
average daily net assets would have been 0.67%, 0.72%, 0.76%, and 0.72%
(annualized) for the years ended December 31, 1998, 1997 and 1996 and for the
period ended December 31, 1995, respectively.
4 Without the waiver of advisory fees (Note 2), the ratio of net investment
income to average daily net assets would have been 5.58%, 5.90%, 6.04%, and
6.27% (annualized) for the years ended December 31, 1998, 1997 and 1996, and
for the period ended December 31, 1995, respectively.
5 Annualized
See Notes to Financial Statements.
36 and 37
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
Notes to Financial Statements
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
Flag Investors Short-Intermediate Income Fund, Inc. (the "Fund"), was
organized as a Maryland Corporation on April 16, 1990 and commenced operations
May 13, 1991. The Fund is registered under the Investment Company Act of 1940 as
a diversified, open-end investment management company. It is designed to provide
a high level of current income consistent with preservation of principal within
an intermediate-term maturity structure.
The Fund consists of two share classes: Class A Shares, which commenced May
13, 1991, and Institutional Shares, which commenced November 2, 1995.
The Class A Shares have a 1.50% maximum front-end sales charge and a 0.25%
distribution fee. The Institutional Shares have neither a front-end sales charge
nor a distribution fee.
When preparing the Fund's financial statements, management makes estimates
and assumptions in accordance with generally accepted accounting principles.
These estimates affect 1) the assets and liabilities that we report at the date
of the financial statements; 2) the contingent assets and liabilities that we
disclose at the date of the financial statements; and 3) the revenues and
expenses that we report for the period. Our estimates could be different from
the actual results. The Fund's significant accounting policies are:
A. SECURITY VALUATION--The Fund values debt securities based on
quotations provided by a pricing service, which uses transactions on
bonds, quotations from bond dealers, market transactions in comparable
securities and various relationships between securities to determine
value. The Fund values portfolio securities that are primarily traded
on a national exchange by using the last sale price reported for the
day. When a market quotation is unavailable, the Investment Advisor
determines a fair value using procedures that the Board of Directors
establishes and monitors. At December 31, 1998 there are no Board
valued securities. The Fund values short-term obligations with
maturities of 60 days or less at amortized cost.
B. REPURCHASE AGREEMENTS--The Fund may enter into tri-party repurchase
agreements with broker-dealers and domestic banks. A repurchase
agreement is a short-term investment in which the Fund buys a debt
security that the broker agrees to repurchase at a set time and price.
The third party, which is the broker's custodial bank, holds the
collateral in a separate account until the repurchase agreement
-38-
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
NOTE 1--concluded
matures. The agreement requires that the collateral's market value,
including any accrued interest, exceeds the broker's repurchase
obligation. The Fund's access to the collateral may be delayed or
limited if the broker defaults and the value of the collateral declines
or if the broker enters into an insolvency proceeding.
C. FEDERAL INCOME TAXES--The Fund determines its distributions
according to income tax regulations, which may be different from
generally accepted accounting principles. As a result, the Fund
occasionally makes reclassifications within its capital accounts to
reflect income and gains that are available for distribution under
income tax regulations.
The Fund is organized as a regulated investment company. As long as
it maintains this status and distributes to its shareholders
substantially all of its taxable net investment income and net realized
capital gains, it will be exempt from most, if not all, federal income
and excise taxes. As a result, the Fund has made no provisions for
income taxes.
D. SECURITY TRANSACTIONS, INVESTMENT INCOME, DISTRIBUTIONS AND
OTHER--The Fund uses the trade date to account for security
transactions and the specific identification method for financial
reporting and income tax purposes to determine the cost of investments
sold or redeemed. Interest income is recorded on an accrual basis and
includes the pro rata scientific method for amortization of premiums
and accretion of discounts when appropriate. Income and common expenses
are allocated to each class based on its respective average net assets.
Class specific expenses are charged directly to each class. Dividends
from net investment income are declared and paid monthly. Distributions
of capital gains are recorded on the ex-dividend dates. Distributions
in excess of net investment income occur when taxable income exceeds
income under generally accepted accounting principles.
NOTE 2--INVESTMENT ADVISORY FEE, TRANSACTIONS WITH AFFILIATES AND
OTHER FEES
Investment Company Capital Corp. ("ICC"), an indirect subsidiary of Bankers
Trust Corporation, is the Fund's investment advisor. As compensation for its
advisory services, the Fund pays ICC an annual fee. This fee is based on the
Fund's average daily net assets and is calculated daily and paid monthly at the
following annual rates: 0.35% of the first $1 billion, 0.30% of the next $500
-39-
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--CONTINUED
million and 0.25% of the amount over $1.5 billion. For the year ended December
31, 1998, ICC's advisory fees amounted to $323,196, of which $8,697 was payable
at the end of the period.
ICC has agreed to reduce its aggregate fees so that ordinary Fund expenses
for any fiscal year do not exceed 0.70% of the Class A Shares' average daily net
assets and 0.45% of the Institutional Shares' average daily net assets. For the
year ended December 31, 1998, ICC waived fees of $208,010.
ICC also provides accounting services to the Fund for which the Fund pays
ICC an annual fee that is calculated daily and paid monthly from the Fund's
average daily net assets. For the year ended December 31, 1998 ICC's fees were
$63,952, of which $5,504 was payable at the end of the period.
ICC also provides transfer agent services to the Fund for which the Fund
pays ICC a per account fee that is calculated and paid monthly. For the year
ended December 31, 1998 ICC's fees were $17,722, of which $3,450 was payable at
the end of the period.
Certain officers and directors of the Fund are also officers or directors
of ICC.
ICC Distributors, Inc., a member of the Forum Group of companies, provides
distribution services to the Fund for which the Fund pays ICC Distributors an
annual fee, pursuant to rule 12b-1, that is calculated daily and paid monthly.
This fee is paid at an annual rate equal to 0.25% of the Class A Shares' average
daily net assets. Prior to September 1, 1997, Alex. Brown & Sons, Incorporated
served as the Fund's distributor for the same compensation and on substantially
the same terms as ICC Distributors.
Effective September 22, 1997 Bankers Trust Corporation became the Fund's
custodian. For the year ended December 31, 1998 Bankers Trust fees were $24,372
of which $3,272 was payable at the end of the period.
The Fund's complex offers a retirement plan for eligible Directors. The
actuarially computed pension expense allocated to the Fund for the year ended
December 31, 1998 was approximately $5,362, and the accrued liability was
approximately $12,254.
-40-
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
NOTE 3--CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue up to 60 million shares of $.001 par value
capital stock (45 million Class A, 2 million Class B, 5 million Institutional, 5
million Alex. Brown Capital Advisory & Trust and 3 million undesignated).
Transactions in shares of the Fund are listed below.
Class A Shares
---------------------------
For the For the
Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997
------------ -------------
Shares sold .................................... 1,491,889 643,871
Shares issued to shareholders on
reinvestment of dividends ................... 203,462 188,623
Shares redeemed ................................ (1,585,950) (2,147,036)
------------ ------------
Net increase/(decrease) in shares outstanding .. 109,401 (1,314,542)
============ ============
Proceeds from sale of shares ................... $ 15,616,738 $ 6,656,537
Value of reinvested dividends .................. 2,128,706 1,939,315
Cost of shares redeemed ........................ (16,609,172) (22,186,651)
------------ ------------
Net increase/(decrease) from capital share
transactions ................................ $ 1,136,272 $(13,590,799)
============ ============
Institutional Shares
----------------------------
For the For the
Year Ended Year Ended
Dec. 31, 1998 Dec. 31, 1997
------------ -------------
Shares sold .................................... 2,941,098 1,621,803
Shares issued to shareholders on
reinvestment of dividends ................... 56,983 55,315
Shares redeemed ................................ (1,796,192) (310,716)
------------ ------------
Net increase in shares outstanding ............. 1,201,889 1,366,402
============ ============
Proceeds from sale of shares ................... $ 31,141,552 $ 16,938,192
Value of reinvested dividends .................. 601,559 574,727
Cost of shares redeemed ........................ (19,036,760) (3,229,572)
------------ ------------
Net increase from capital share transactions ... $ 12,706,351 $ 14,283,347
============ ============
-41-
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
NOTE 4--INVESTMENT TRANSACTIONS
Excluding short-term obligations, purchases of investment securities
aggregated $64,786,573 and sales of investment securities aggregated $34,192,004
for the year ended December 31, 1998.
At December 31, 1998, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $1,484,580,
and aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over value was $143,315.
NOTE 5--NET ASSETS
At December 31, 1998, net assets consisted of:
Paid-in Capital:
Flag Investors Class A Shares ............................ $ 49,449,406
Flag Investors Institutional Shares ...................... 44,425,466
Distributions in excess of net investment income ............. (214,183)
Accumulated net realized loss from security transactions ..... (2,783,475)
Net unrealized appreciation of investments ................... 1,341,265
------------
$ 92,218,479
============
NOTE 6--FEDERAL INCOME TAX INFORMATION
At December 31, 1998, there was a tax capital loss carryforward of
$2,757,728, of which $2,722,604 expires in 2003 and $35,124 expires in 2004.
This carryforward will be used to offset future net capital gains, if any.
-42-
<PAGE>
FLAG INVESTORS SHORT-INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Flag Investors Short-Intermediate Income Fund, Inc.
We have audited the accompanying statement of net assets of the Flag
Investors Short-Intermediate Income Fund, Inc. as of December 31, 1998, and 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 five-year period then ended.
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 financial
highlights are free from 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, 1998, by correspondence with the custodian and broker. 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
Short-Intermediate Income Fund, Inc. at December 31, 1998, the results of its
operations, the changes in its net assets, and the financial highlights for the
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
February 2, 1999
-43-
<PAGE>
APPENDIX
Corporate Bond Rating Definitions
- --------------------------------------------------------------------------------
Standard & Poor's Ratings Group
AAA - Highest rating assigned by Standard & Poor's to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Qualify as high-quality debt obligations. Capacity to pay principal and
interest is very strong, and in the majority of instances they differ from AAA
issues only to a small degree.
A - Strong capacity to pay interest and repay principal although they are
somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
bonds in higher rated categories.
- --------------------------------------------------------------------------------
Moody's Investors Service, Inc.
Aaa - 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 by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa - Judged to be of high quality by all standards. Together with the Aaa group
they comprise what are generally known as high-grade bonds. They are rated lower
than the best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risk appear
somewhat larger than Aaa securities.
A - Possess many favorable investment attributes and are to be considered as
upper-medium-grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present which suggest a
susceptibility to impairment some time in the future.
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 "extremely strong" safety characteristics. Those rated A-1
reflect a " 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-1
