<PAGE>
As Filed with the Securities and Exchange Commission on December 29, 2000
1933 Act File No. 333-7008
1940 Act File No. 811-8227
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
-------
Pre-Effective Amendment No.
------- -------
Post-Effective Amendment No. 10 X
------- -------
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
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Amendment No. 16 X
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FLAG INVESTORS FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
One South Street
BALTIMORE, MD 21202
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (800) 553-8080
Daniel O. Hirsch, Esq. Copy to: Richard W. Grant, Esq.
One South Street Morgan, Lewis & Bockius LLP
Baltimore, MD 21202 1701 Market Street
(Name and address of agent for service) Philadelphia, PA 19103
It is proposed that this filing will become effective:
--- immediately upon filing pursuant to paragraph (b)
X
--- on January 1, 2001 pursuant to paragraph (b)
--- 60 days after filing pursuant to paragraph (a)(i)
--- on________________ pursuant to paragraph (a)(i)
--- 75 days after filing pursuant to paragraph (a)(ii)
--- on________________ pursuant to paragraph (a)(ii) of Rule 485.
If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
--- previously filed post-effective amendment.
<PAGE>
[LOGO]
FLAG INVESTORS
INVESTING WITH A DIFFERENCE-REGISTERED TRADEMARK-
[GRAPHIC]
-------------------------------------------------
EUROPEAN MID-CAP FUND
CLASS A SHARES, CLASS B SHARES AND CLASS C SHARES
-------------------------------------------------
PROSPECTUS
JANUARY 1, 2001
The Securities and Exchange Commission (SEC) has neither approved nor
disapproved these securities nor has it passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
<PAGE>
[LOGO]
FLAG INVESTORS
INVESTING WITH A DIFFERENCE -REGISTERED TRADEMARK-
THIS MUTUAL FUND (THE `FUND') SEEKS HIGH CAPITAL APPRECIATION AND, AS A
SECONDARY OBJECTIVE, REASONABLE DIVIDEND INCOME, THROUGH ITS INVESTMENT IN THE
EUROPEAN MID-CAP PORTFOLIO.
The Fund invests all of its assets in the European Mid-Cap Portfolio of Flag
Investors Portfolios Trust (the `Portfolio'), a separate mutual fund with
identical investment objectives and policies, through a master-feeder investment
fund structure. Therefore, all discussions in the prospectus regarding
investments relate to the Fund and the Portfolio.
The Fund offers shares through securities dealers and financial institutions
that act as shareholder servicing agents. You may also buy shares through the
Fund's Transfer Agent. This Prospectus describes Flag Investors Class A Shares
(`Class A Shares'), Flag Investors Class B Shares (`Class B Shares') and Flag
Investors Class C Shares (`Class C Shares') of the Fund. These separate classes
give you a choice of sales charges and Fund expenses. (See the section entitled
`Sales Charges.')
TABLE OF CONTENTS
-----------------
INVESTMENT SUMMARY ......................................... 1
FEES AND EXPENSES OF THE FUND .............................. 3
INVESTMENT PROGRAM ......................................... 4
THE FUND'S NET ASSET VALUE ................................. 5
HOW TO BUY SHARES .......................................... 6
HOW TO REDEEM SHARES ....................................... 7
TELEPHONE TRANSACTIONS ..................................... 7
SALES CHARGES .............................................. 8
HOW TO CHOOSE THE CLASS THAT IS
RIGHT FOR YOU ...........................................10
DIVIDENDS AND TAXES ........................................10
ORGANIZATIONAL STRUCTURE ...................................11
INVESTMENT ADVISOR AND SUB-ADVISOR .........................11
ADMINISTRATOR ..............................................13
FINANCIAL HIGHLIGHTS .......................................13
<PAGE>
INVESTMENT SUMMARY
--------------------------------------------------------------------------------
OBJECTIVES AND STRATEGIES
The Fund seeks high capital appreciation and, as a secondary objective,
reasonable dividend income, through its investment in the Portfolio. The Fund,
through the Portfolio, seeks to achieve its objective by investing at least 65%
of its total assets in equity securities (primarily common and preferred stocks)
of European companies with market capitalizations of between $115 million and
$19 billion. The investment advisor and sub-advisor (the `Advisors') seek
investments in companies believed to have higher than average growth rates for
European companies.
RISK PROFILE
The Fund may be suited for you if you are willing to accept the risks of
investing in a particular foreign country or region in the hope of achieving
high capital appreciation and, secondarily, reasonable dividend income.
GENERAL STOCK RISK. The value of an investment in the Fund will vary from
day to day based on changes in the prices of the securities that the Fund holds.
Those prices, in turn, reflect investor perceptions of the economy, the markets
and the companies held by the Fund.
STYLE RISK. As with any investment strategy, the strategy used in managing
the Fund will, at times, perform better than or worse than other investment
styles and the overall market. If the Advisors overestimate the return potential
of one or more foreign stocks, the Fund may underperform in the international
equities markets.
FOREIGN INVESTING RISK. Investing in foreign companies may entail different
risks than investing in U.S. companies. The prices of foreign securities may be
affected by adverse political, economic or social developments unique to a
country or region. Accounting and financial reporting standards differ from
those in the US and could convey incomplete information when compared to
information typically provided by US companies. Foreign securities may trade
infrequently and be subject to greater price fluctuations than other securities.
FOREIGN CURRENCY RISKS. Since the Fund's investments are denominated in
foreign currencies, any change in the value of those currencies in relation to
the US dollar will result in a corresponding change in the value of the Fund's
investments and may cause the Fund's investments to lose money.
RISKS OF INVESTING IN A PARTICULAR FOREIGN COUNTRY OR REGION. Since the
Fund may invest a significant portion of its assets in a particular foreign
country or geographic region, the Fund is subject to greater currency risk and
is more susceptible to adverse impact from negative economic events or actions
of foreign governments in such countries or regions.
RISK RELATED TO COMPANY SIZE. The Fund invests in securities of small and
mid-market capitalization companies that, as compared to larger companies, tend
to have fewer shareholders, less liquidity, more volatility, unproven track
records, limited products or services and limited access to capital, which could
cause the prices of these securities to vary, perhaps dramatically.
NON-DIVERSIFICATION RISKS. The Fund is non-diversified. As compared to a
diversified fund, the Fund is allowed to invest a higher percentage of its
assets in just a few issuers. This increases the Fund's risks by magnifying the
impact (positively or negatively) that any one issuer has on the Fund's
performance. The Fund generally attempts to maintain exposure to 50 issuers.
If you invest in the Fund, you could lose money. An investment in the Fund
is not a bank deposit and is not insured or guaranteed by the FDIC or any other
government agency.
1
<PAGE>
FUND PERFORMANCE
The following bar chart and table show the performance of the Fund both
year-by-year and as an average over different periods of time. The variability
of performance over time provides an indication of the risks of investing in the
Fund. This is an historical record and does not necessarily indicate how the
Fund will perform in the future.
CLASS A SHARES*
FOR YEARS ENDED DECEMBER 31,*
[CHART]
<TABLE>
<CAPTION>
<S> <C>
1998 24.98%
1999 28.83%
</TABLE>
* The bar chart does not reflect sales charges. If it did, returns would be
less than those shown. For the period from December 31, 1999 through
September 30, 2000, the return for Class A Shares was 9.38%.
During the two-year period shown in the bar chart, the highest return for a
quarter was 26.67% (quarter ended 12/31/99) and the lowest return for a quarter
was (15.56%) (quarter ended 9/30/98).
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1999)
<TABLE>
<CAPTION>
CLASS A SHARES(1) MDAX(2) CLASS B SHARES(1) MDAX(2) CLASS C SHARES(1) MDAX(2)
----------------- ------- ----------------- ------- ----------------- -------
<S> <C> <C> <C> <C> <C> <C>
Past One Year..... 21.74% 4.58% 21.41% 4.58% 26.58% 4.58%
Since Inception... 18.29%(3) 5.44%(4) 15.45%(5) 20.81%(6) 26.08%(7) 2.70%(8)
</TABLE>
------------------
(1) These figures assume the reinvestment of dividends and capital gains
distributions and include the impact of the maximum sales charges.
(2) The Midcap Index (`MDAX') is a broad-based market index of 70 mid-sized
German companies with established operating histories.
(3) October 17, 1997.
(4) As of October 31, 1997.
(5) March 30, 1998.
(6) As of March 31, 1998.
(7) September 2, 1998.
(8) As of August 31, 1998.
2
<PAGE>
<TABLE>
<CAPTION>
FEES AND EXPENSES OF THE FUND
-----------------------------------------------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
SHAREHOLDER FEES: INITIAL SALES DEFERRED SALES DEFERRED SALES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT) CHARGE CHARGE CHARGE
-------------- -------------- --------------
<S> <C> <C> <C>
Maximum sales charge (load) imposed on purchases (as a percentage
of offering price) .................................................. 5.50% None None
Maximum deferred sales charge (load) (as a percentage of original
purchase price or redemption proceeds, whichever is lower) .......... 1.00%(1) 5.00%(2) 1.00%(3)
Maximum sales charge (load) imposed on reinvested dividends ............ None None None
Redemption fee ......................................................... None None None
Exchange fee ........................................................... None None None
ANNUAL FUND OPERATING EXPENSES(4):
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management fee ......................................................... 0.85% 0.85% 0.85%
Distribution and/or service (12b-1) fees(5) ............................ 0.25% 1.00% 1.00%
Other expenses ......................................................... 1.42% 1.43% 1.43%
------ ------ ------
Total annual fund operating expenses (before fee waivers and expense
reimbursements) ..................................................... 2.52% 3.28% 3.28%
Total fee waivers and reimbursements of fund expenses(6) ............... (0.92)% (0.93)% (0.93)%
------ ------ ------
Total net annual fund operating expenses (after fee waivers and
expense reimbursements) ............................................. 1.60% 2.35% 2.35%
====== ====== ======
</TABLE>
-------------------------------------
(1) You will pay no sales charge on purchases of $1 million or more of Class A
Shares, but you may pay a deferred sales charge if you redeem your shares
within two years after your purchase unless you are otherwise eligible for
a sales charge waiver or reduction. (See section entitled `Sales
Charges--Redemption Price.')
(2) You will pay a deferred sales charge if you redeem your shares within six
years after your purchase. The amount of the charge declines over time and
eventually reaches zero. Seven years after your purchase, your Class B
Shares automatically convert to Class A Shares. (See section entitled
`Sales Charges--Redemption Price.')
(3) You will pay a deferred sales charge if you redeem your shares within one
year after purchase. (See section entitled `Sales Charges--Redemption
Price.')
(4) Information on the annual operating expenses reflects the expenses of both
the Fund and the Portfolio, the master fund in which the Fund invests its
assets. (See the section entitled `Organizational Structure.')
(5) A portion of the shareholder servicing fee is allocated to your securities
dealer and to qualified banks for services provided and expenses incurred
in maintaining your account, responding to your inquiries, and providing
you with information about your investment.
(6) The Advisor has contractually agreed to waive its fees and reimburse
expenses of the Fund through January 1, 2002 to the extent necessary to
maintain the Fund's expense ratio at the level indicated as `Total net
annual fund operating expenses (after fee waivers and expense
reimbursements).'
3
<PAGE>
EXAMPLE:
This Example is intended to help you compare the cost of investing in each
class of the Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR* 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
<S> <C> <C> <C> <C>
Class A Shares........................................ $704 $1,213 $1,758 $3,290
Class B Shares........................................ $738 $1,229 $1,858 $3,381
Class C Shares........................................ $338 $ 929 $1,658 $3,655
You would pay the following expenses if you did
not redeem your shares:
Class A Shares........................................ $704 $1,213 $1,758 $3,290
Class B Shares........................................ $238 $ 929 $1,658 $3,381
Class C Shares........................................ $238 $ 929 $1,658 $3,655
</TABLE>
-------------------
* Based on Total Annual Fund Operating Expenses after fee waivers and expense
reimbursements for year one only.
Federal regulations require that the table above reflect the maximum sales
charge. However, you may qualify for reduced sales charges or no sales charge at
all. (See the section entitled `Sales Charges.') If you hold your shares for a
long time, the combination of the initial sales charge you paid and the
recurring 12b-1 fees may exceed the maximum sales charges permitted by the
Conduct Rules of the National Association of Securities Dealers, Inc.
INVESTMENT PROGRAM
-------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks high capital appreciation and, as a secondary objective,
reasonable dividend income, through its investment in the Portfolio. The Fund,
through the Portfolio, seeks to achieve its objective by investing at least 65%
of its total assets in equity securities (primarily common and preferred stocks)
of European companies with market capitalizations of between $115 million and
$19 billion. European countries include those that are members of the European
Union, the Convention on the European Economic Area (CEEA), Poland, Switzerland,
Slovakia, the Czech Republic and Hungary.
The Advisors are responsible for managing the Fund's investments. (See the
section entitled `Investment Advisor and Sub-Advisor.') There can be no
guarantee that the Fund will achieve its goals.
The Advisors seek investments in companies believed to have higher than
average growth rates for European companies. The Fund invests in companies with
ideas and plans for new products, new services or new markets that offer the
potential for fast growth with diversifiable risks. Many of these companies are
characterized as small and mid-capitalization and are seeking equity capital to
finance their growth. The Fund tends to have a heavier weighting of its assets
in German issuers, although this can change. The Fund may also invest in
securities in the intitial public offering (`IPO') market.
In assessing which investments to sell, the Advisors consider the following
factors, among others:
- Whether the company continues to meet the Fund's criteria for an
initial investment in a security; and
- Negative changes in the economy or the company's business that impact
the attractiveness of the security as an investment.
The Advisors may also use hedging transactions to attempt to reduce
specific risks. For example, to protect the Fund against circumstances that
would normally cause the Fund's securities to decline in value, the Fund may buy
or sell a derivative contract that would normally increase in value under the
same circumstances. The Fund may also attempt to hedge currency and other risks
by using forward contracts, combinations of different derivatives contracts, or
of derivatives contracts and securities. The Fund's ability to hedge may be
limited by the costs of the derivatives contracts. The Fund may attempt to lower
the cost of hedging by entering into transactions that provide only limited
protection, including transactions that (1) hedge only a portion of the Fund,
(2) use derivatives contracts that cover a narrow range of circumstances or (3)
involve the sale of derivatives contracts with different terms.
4
<PAGE>
RISK CONSIDERATIONS
An investment in the Fund involves risk. Over time, common stocks have
shown greater potential for growth than other types of securities, but in the
short run stocks can be more volatile than other types of securities. Stock
prices are sensitive to developments affecting particular companies and to
general economic conditions that affect particular industry sectors as a whole.
No one can predict how the markets or stock prices will behave in the future.
Investing in foreign companies may have different risks than investing in
US companies. An investment in a foreign company may be affected by
developments, including political developments, that are unique to that market.
These developments may not affect the US economy or the prices of US securities
in the same manner. Therefore, the prices of foreign common stocks may, at
times, move in a different direction than the prices of US common stocks.
Financial reporting standards for companies based in foreign markets may differ
from those in the United States.
From time to time, foreign capital markets may exhibit more volatility than
those in the United States. Stocks that trade less frequently can be more
difficult or more costly to buy or to sell than more liquid or active stocks. On
the whole, foreign exchanges are smaller and less liquid than the US market.
Additionally, some foreign governments regulate their exchanges less
stringently, and the rights of shareholders may not be as firmly established.
The Fund's investments are usually denominated in the currencies of the
countries in which they are traded. As a result, the Fund may be affected by
changes in the value of foreign currencies in relation to the value of the US
dollar. The value of a foreign currency may change in response to events that do
not affect the value of the investment in its home country.
The Fund invests a significant portion of its assets in specific regions or
countries in Europe. The Fund is therefore exposed to the risks associated with
that region or country and could be subject to greater risk due to unanticipated
and negative economic events, actions by foreign governments, currency movements
and/or market action in such countries or regions. For example, the Fund invests
a substantial portion of its assets in Germany.
The Fund invests in the shares of small and mid-sized companies. Investing
in small and mid-sized companies poses unique risks. The stocks of small and
mid-sized companies tend to experience steeper fluctuations in price than the
stocks of larger companies. A shortage of reliable information can also pose
added risk. Industry-wide reversals may have a greater impact on small and
mid-sized companies, since they lack a large company's financial resources to
deal with setbacks. Managers of small and mid-sized companies may have less
experience coping with adversity or capitalizing on opportunity than their
counterparts at larger companies. Finally, the stocks of small and mid-sized
companies are typically less liquid than large company stocks.
IPOs may be very volatile, rising and falling rapidly based on, among other
reasons, investor perceptions rather than economic reasons. Additionally, IPOs
may have a magnified performance effect on a portfolio with a small asset base.
The Fund may not experience a similar impact on its performance as its assets
grow, as it is unlikely that the Fund will be able to obtain proportionately
larger IPO allocations.
The Fund's ability to successfully use hedging techniques and derivative
transactions, including currency transactions, will depend on the ability of the
Advisors to predict the direction of the market and the correlation of the
transactions with changes in the value of the Fund's assets. Nevertheless,
hedging transactions will not eliminate risk even if they work as intended. In
addition, hedging strategies are not always successful, and could result in
increased expenses and losses to the Fund. Hedging transactions could expose the
Fund to the effect of leverage, which could increase the Fund's exposure to the
market and potential losses it could have had if it had not entered into these
transactions.
To reduce the Fund's risk under adverse market conditions, the Advisors may
make temporary defensive investments in cash, cash items, and shorter-term,
higher-quality debt securities, money market instruments, and similar
obligations, such as repurchase agreements and reverse repurchase agreements.
While engaged in a temporary defensive strategy, the Fund may not achieve its
investment objective. The Advisors would follow such a strategy only if they
believed the risk of loss in pursuing the Fund's primary investment strategies
outweighed the opportunity for gain.
THE FUND'S NET ASSET VALUE
--------------------------------------------------------------------------------
The price you pay when you buy shares or receive when you redeem shares is
based on the Fund's net asset value per share. When you buy Class A Shares, the
price you pay may be increased by a sales charge. When you redeem any class of
shares, the amount you receive may be reduced by a sales charge. See the section
entitled `Sales Charges' for details on how and when these charges may or may
not be imposed.
5
<PAGE>
The net asset value per share of the Fund is determined at the close of
regular trading on the New York Stock Exchange on each day the Exchange is open
for business. While regular trading ordinarily closes at 4:00 pm (Eastern Time),
it could be earlier, particularly on the day before a holiday. Contact the
Transfer Agent to determine whether the Fund will close early before a
particular holiday. Because the Fund owns foreign securities that trade in
foreign markets on days the Exchange may be closed, the value of the Fund's
assets may change on days you cannot purchase, redeem or exchange shares.
The net asset value per share is calculated by subtracting the liabilities
attributable to a class from its proportionate share of the Fund's assets and
dividing the result by the number of outstanding shares of the class. Because
the different classes have different distribution or service fees, their net
asset values may differ.
In valuing its assets, the Fund's investments are priced at their market
value. When price quotes for a particular security are not readily available or
may be unreliable, the security is priced at its `fair value' using procedures
approved by the Fund's Board of Directors.
You may buy or redeem shares on any day the New York Stock Exchange is open
for business (a `business day'). If your order is entered before the net asset
value per share is determined for that day, the price you pay or receive will be
based on that day's net asset value per share. If your order is entered after
the net asset value per share is determined for that day, the price you pay or
receive will be based on the next business day's net asset value per share.
The following sections describe how to buy and redeem shares.
HOW TO BUY SHARES
--------------------------------------------------------------------------------
You may buy any class of the Fund's shares through your securities dealer
or through any financial institution that is authorized to act as a shareholder
servicing agent. Contact them for details on how to enter and pay for your
order. You may also buy shares by sending your check (along with a completed
Application Form) directly to the Fund.
You may buy Class A Shares unless you are in a defined contribution plan
with assets of $75 million or more.
Your purchase order may not be accepted if the sale of Fund shares has been
suspended or if it is determined that your purchase would be detrimental to the
interests of the Fund's shareholders. In this connection, the Fund specifically
reserves the right to refuse (i) any purchase or exchange request or (ii)
multiple purchase or exchange requests, submitted by a shareholder, group of
shareholders, commonly controlled accounts or a dealer, that are deemed by the
Fund, in its sole discretion, to involve excessive trading or to be part of a
market timing strategy. For these purposes, the Fund may consider, among other
factors, an investor's trading history in the Fund or an affiliated fund, the
funds involved, the amount of the investment and the background of the investors
or dealers involved.
INVESTMENT MINIMUMS
- Your initial investment must be at least $2,000. Subsequent
investments must be at least $100. The following are exceptions to
these minimums:
- If you are investing in an IRA account, your initial investment may be
as low as $1,000.
- If you are a shareholder of any other Flag Investors fund, your
initial investment may be as low as $500.
- If you are a participant in the Fund's Automatic Investing Plan, your
initial investment may be as low as $250. If you participate in the
monthly plan, your subsequent investments may be as low as $100. If
you participate in the quarterly plan, your subsequent investments may
be as low as $250. See the section entitled `Automatic Investing Plan'
for details.
- There is no minimum investment requirement for qualified retirement
plans such as 401(k), pension or profit sharing plans.
INVESTING REGULARLY
You may make regular investments in the Fund through any of the following
methods. If you wish to enroll in any of these programs or if you need any
additional information, complete the appropriate section of the Application Form
or contact your securities dealer, your servicing agent, or the Transfer Agent.
AUTOMATIC INVESTING PLAN. You may elect to make a regular monthly or
quarterly investment in any class of shares. The amount you decide upon will be
withdrawn from your checking account using a pre-authorized check. When the
money is received by the Transfer Agent, it will be invested in the class of
shares selected at that day's offering price. Either you or the Fund may
discontinue your participation upon 30 days' notice.
DIVIDEND REINVESTMENT PLAN. Unless you elect otherwise, all income and
capital gains distributions will be reinvested in additional Fund shares at net
asset value.
6
<PAGE>
You may elect to receive your distributions in cash or to have your
distributions invested in shares of other Flag Investors funds. To make either
of these elections or to terminate automatic reinvestment, complete the
appropriate section of the Application Form or notify the Transfer Agent, your
securities dealer or your servicing agent at least five days before the date on
which the next dividend or distribution will be paid.
SYSTEMATIC PURCHASE PLAN. You may also purchase any class of shares through
a Systematic Purchase Plan. Contact your securities dealer or servicing agent
for details.
HOW TO REDEEM SHARES
--------------------------------------------------------------------------------
You may redeem any class of the Fund's shares through your securities
dealer or servicing agent. Contact them for details on how to enter your order
and for information as to how you will be paid. If you have an account with the
Fund that is in your name, you may also redeem shares by contacting the Transfer
Agent by mail or (if you are redeeming $50,000 or less) by telephone. The
Transfer Agent will mail your redemption check within seven days after it
receives your order in proper form. See the section entitled `Telephone
Transactions' for more information on this method of redemption.
Your securities dealer, your servicing agent, or the Transfer Agent may
require the following documents before they redeem your shares:
- A letter of instructions specifying your account number and the number
of shares or dollar amount you wish to redeem. The letter must be signed
by all owners of the shares exactly as their names appear on the
account.
- If you are redeeming more than $50,000, a guarantee of your signature.
You can obtain one from most banks or securities dealers.
- Any stock certificates representing the shares you are redeeming. The
certificates must be either properly endorsed or accompanied by a duly
executed stock power.
- Any additional documents that may be required if your account is in the
name of a corporation, partnership, trust or fiduciary.
OTHER REDEMPTION INFORMATION
Any dividends payable on shares you redeem will be paid on the next
dividend payable date. If you have redeemed all of your shares by that time, the
dividend will be paid to you in cash whether or not that is the payment option
you have selected.
If you redeem sufficient shares to reduce your investment to $500 or less,
the Fund reserves the right to redeem the remaining shares after giving you 60
days' notice. The Fund also reserves the right to redeem shares in-kind under
certain circumstances.
If you own Fund shares having a value of at least $10,000, you may arrange
to have some of your shares redeemed monthly or quarterly under the Fund's
Systematic Withdrawal Plan. Each redemption under this plan involves all the tax
and sales charge implications normally associated with Fund redemptions. Contact
your securities dealer, your servicing agent, or the Transfer Agent for
information on this plan.
TELEPHONE TRANSACTIONS
--------------------------------------------------------------------------------
If your shares are in an account with the Transfer Agent, you may redeem
them in any amount up to $50,000 or exchange them for shares in another Flag
Investors fund by calling the Transfer Agent on any business day between the
hours of 8:30 am and 7:00 pm (Eastern Time). You are automatically entitled to
telephone transaction privileges but you may specifically request that no
telephone redemptions or exchanges be accepted for your account. You may make
this election when you complete the Application Form or at any time thereafter
by completing and returning documentation supplied by the Transfer Agent.
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that telephoned instructions are genuine. These procedures include
requiring you to provide certain personal identification information when you
open your account and before you affect each telephone transaction. You may be
required to provide additional telecopied instructions. If these procedures are
employed, neither the Fund nor the Transfer Agent will bear any liability for
following telephone instructions that it reasonably believes to be genuine. Your
telephone transaction request will be recorded.
During periods of economic or market volatility, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by mail.
If you hold shares in certificate form, you may not exchange or redeem them
by telephone.
7
<PAGE>
SALES CHARGES
--------------------------------------------------------------------------------
PURCHASE PRICE
The price you pay to buy shares will be the Fund's offering price; this is
calculated by adding any applicable sales charges to the net asset value per
share of the class you are buying. The amount of any sales charge included in
your purchase price will be according to the following schedule:
<TABLE>
<CAPTION>
CLASS A SALES
CHARGE AS A % OF
------------------------
OFFERING NET AMOUNT CLASS B CLASS C
AMOUNT OF PURCHASE PRICE INVESTED SALES CHARGE SALES CHARGE
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $50,000 5.50% 5.82% None None
$50,000 - $99,999 4.50% 4.71% None None
---------------------------------------------------------------------------
$100,000 - $249,999 3.50% 3.63% None None
$250,000 - $499,999 2.50% 2.56% None None
$500,000 - $999,000 2.00% 2.04% None None
$1,000,000 and over None None None None
---------------------------------------------------------------------------
</TABLE>
Although you do not pay an initial sales charge when you invest $1,000,000
or more in Class A Shares or when you buy any amount of Class B or Class C
Shares, you may pay a sales charge when you redeem your shares. See the section
entitled `Redemption Price' for details. Your securities dealer may be paid a
commission at the time of your purchase.
The sales charge you pay on your current purchase of Class A Shares may be
reduced under the circumstances listed below.
RIGHTS OF ACCUMULATION. If you are purchasing additional Class A Shares of
this Fund or Class A shares of any other Flag Investors fund or if you already
have investments in Class A shares, you may combine the value of your purchases
with the value of your existing investments to determine whether you qualify for
a reduced sales charge. (For this purpose your existing investments will be
valued at the higher of cost or current value.) You may also combine your
purchases and investments with those of your spouse and your children under the
age of 21 for this purpose. You must be able to provide sufficient information
to verify that you qualify for this right of accumulation.
LETTER OF INTENT. If you anticipate making additional purchases of Class A
Shares over the next 13 months, you may combine the value of your current
purchase with the value of your anticipated purchases to determine whether you
qualify for a reduced sales charge. You will be required to sign a letter of
intent specifying the total value of your anticipated purchases and to initially
purchase at least 5% of the total. When you make each purchase during the
period, you will pay the sales charge applicable to their combined value. If, at
the end of the 13-month period, the total value of your purchases is less than
the amount you indicated, you will be required to pay the difference between the
sales charges you paid and the sales charges applicable to the amount you
actually did purchase. Some of the shares you own will be redeemed to pay this
difference.
PURCHASES AT NET ASSET VALUE. You may buy Class A Shares without paying a
sales charge under the following circumstances:
- If you are reinvesting some or all of the proceeds of a redemption of
Class A Shares made within the last 90 days.
- If you are exchanging an investment in another Flag Investors fund for
an investment in this Fund (See the section entitled `Purchases by
Exchange' for a description of the conditions).
- If you are a current or retired Director of this or any affiliated
fund, a director, an employee or a member of the immediate family of
an employee of any of the following (or their respective affiliates):
the Fund's distributor, the Advisors or a securities dealer authorized
to sell shares of the Fund.
- If you are buying shares in any of the following types of accounts:
-- A qualified retirement plan;
-- A Flag Investors fund payroll savings plan program;
-- A fiduciary or advisory account with a bank, bank trust
department, registered investment advisory company, financial
planner or securities dealer purchasing shares on your behalf. To
qualify for this provision you must be paying an account
management fee for the fiduciary or advisory services. Your
securities dealer or servicing agent may charge you an additional
fee if you buy shares in this manner.
PURCHASES BY EXCHANGE
You may exchange Class A, Class B or Class C shares of any other Flag
Investors fund for an equal dollar amount of Class A, Class B or Class C Shares,
respectively, without payment of the sales charges described above or any other
charge, up to four times a year. You may not exchange Flag Investors Cash
Reserve Prime Shares for shares of the Fund unless you acquired those shares
through a prior exchange from shares of another Flag Investors fund. You may
enter both your redemption and purchase orders on the same business day or, if
you have already redeemed the shares of the other fund, you may enter your
purchase order within 90 days of the redemption. The Fund may modify or
terminate these offers of exchange upon 60 days' notice.
8
<PAGE>
You may request an exchange through your securities dealer or servicing
agent. Contact them for details on how to enter your order. If your shares are
in an account with the Fund's Transfer Agent, you may also request an exchange
directly through the Transfer Agent by mail or by telephone.
REDEMPTION PRICE
The amount of any sales charge deducted from your redemption price will be
determined according to the following schedule.
<TABLE>
<CAPTION>
SALES CHARGE AS A PERCENTAGE OF
THE DOLLAR AMOUNT SUBJECT TO CHARGE
(AS A % OF COST OR VALUE)
----------------------------------------------
CLASS A CLASS B CLASS C
YEAR SINCE PURCHASE SALES CHARGE SALES CHARGE SALES CHARGE
-----------------------------------------------------------------------------
<S> <C> <C> <C>
First ........................ 1.00%* 5.00% 1.00%
Second ....................... 0.50%* 4.00% None
Third ........................ None 3.00% None
Fourth ....................... None 3.00% None
Fifth ........................ None 2.00% None
Sixth ........................ None 1.00% None
Seventh and Thereafter ....... None None None
-----------------------------------------------------------------------------
</TABLE>
* You will pay a sales charge when you redeem Class A Shares only if your
shares were purchased at net asset value because they were part of an
investment of $1 million or more.
DETERMINATION OF SALES CHARGE. The sales charge applicable to your
redemption is calculated in a manner that results in the lowest possible rate:
- No sales charge will be applied to shares you own as a result of
reinvesting dividends or distributions.
- If you have purchased shares at various times, the sales charge will
be applied first to shares you have owned for the longest period of
time.
- If you acquired your shares through an exchange of shares of another
Flag Investors fund, the period of time you held the original shares
will be combined with the period of time you held the shares being
redeemed to determine the years since purchase. If you bought your
shares prior to January 18, 2000, you will pay the sales charge in
effect at the time of your original purchase.
- The sales charge is applied to the lesser of the cost of the shares or
their value at the time of your redemption.
WAIVER OF SALES CHARGE. You may redeem shares without paying a sales charge
under any of the following circumstances:
- If you are exchanging your shares for shares of another Flag Investors
fund of the same class.
- If your redemption represents the minimum required distribution from
an individual retirement account (IRA) or other retirement plan.
- If your redemption represents a distribution from a Systematic
Withdrawal Plan. This waiver applies only if the annual withdrawals
under your Plan are 12% or less of your share balance.
- If shares are being redeemed in your account following your death or a
determination that you are disabled. This waiver applies only under
the following conditions:
-- The account is registered in your name either individually, as a
joint tenant with rights of survivorship, as a participant in
community property or as a minor child under the Uniform Gifts or
Uniform Transfers to Minors Acts.
-- Either you or your representative notifies your securities
dealer, servicing agent or the Transfer Agent that such
circumstances exist.
- If you are redeeming Class A Shares, your original investment was at
least $3,000,000 and your securities dealer has agreed to return to
the Fund's distributor any payments it received when you bought your
shares.
AUTOMATIC CONVERSION OF CLASS B SHARES. Your Class B Shares, along with any
reinvested dividends or distributions associated with those shares, will be
automatically converted to Class A Shares seven years after your purchase. If
you purchased your shares prior to January 18, 2000, your shares will be
converted to Class A Shares six years after your purchase. This conversion will
be made on the basis of the relative net asset values of the classes and will
not be a taxable event to you.
9
<PAGE>
HOW TO CHOOSE THE CLASS THAT IS RIGHT FOR YOU
--------------------------------------------------------------------------------
Your decision as to which class of the Fund's shares is best for you should
be based upon a number of factors including the amount of money you intend to
invest and the length of time you intend to hold your shares.
If you choose Class A Shares, you will pay a sales charge when you buy your
shares, but the amount of the charge declines as the amount of your investment
increases. You will pay lower expenses while you hold the shares and, except in
the case of investments of $1,000,000 or more, no sales charge if you redeem
them.
If you choose Class B Shares, you will pay no sales charge when you buy your
shares, but your annual expenses will be higher than Class A Shares. You will
pay a sales charge if you redeem your shares within six years of purchase, but
the amount of the charge declines the longer you hold your shares and, at the
end of seven years, your shares convert to Class A Shares, thus eliminating the
higher expenses.
If you choose Class C Shares, you will pay no sales charge when you buy
your shares or if you redeem them after holding them for at least a year. On
the other hand, expenses on Class C Shares are the same as those on Class B
Shares and, since there is no conversion to Class A Shares at the end of seven
years, the higher expenses continue for as long as you own your shares.
Your securities dealer is paid a fee when you buy shares and an annual fee
as long as you hold your shares. For Class A and Class B Shares, the annual fee
begins when you purchase your shares. For Class C Shares, it begins one year
after you purchase your shares. In addition to these payments, the investment
advisor may provide significant compensation to securities dealers and
servicing agents for distribution, administrative and promotional services.
Your securities dealer or servicing agent may receive different levels of
compensation depending upon which class of shares you buy.
DISTRIBUTION PLANS AND SHAREHOLDER SERVICING
The Fund has adopted plans under Rule 12b-1 that allow it to pay your
securities dealer or shareholder servicing agent distribution and other fees for
the sale of its shares. In addition, the Fund may pay shareholder servicing fees
on Class B and Class C Shares. Class A Shares pay an annual distribution fee
equal to 0.25% of average daily net assets. Class B and Class C Shares pay an
annual distribution fee equal to 0.75% of average daily net assets and an annual
shareholder servicing fee equal to 0.25% of average daily net assets. Because
these fees are paid out of net assets on an on-going basis, they will, over
time, increase the cost of your investment and may cost you more than paying
other types of sales charges.
DIVIDENDS AND TAXES
--------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute to shareholders substantially all of its
net investment income in the form of annual dividends and to distribute net
realized capital gains at least annually.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income and
net realized capital gains at least annually. The dividends and distributions
you receive may be subject to federal, state, local and foreign taxation,
depending on your tax situation. If so, they are taxable whether or not you
reinvest these. Income distributions are generally taxable at ordinary income
tax rates. Capital gains distributions are generally taxable at the rates
applicable to long-term capital gains regardless of how long you have owned your
shares. Each sale or exchange of the Fund's shares is generally a taxable event.
For tax purposes, an exchange of your Fund shares for shares of a different Flag
Investors fund is the same as a sale. The individual tax rate on any gain from
the sale or exchange of your shares depends upon your marginal tax rate and how
long you have held your shares.
If you have a tax-advantaged or other retirement account you will generally
not be subject to federal taxation of income and capital gains distributions
until you begin receiving your distributions from your retirement account. You
should consult your tax advisor regarding rules governing your own retirement
plan.
If you are a non-US investor in the Fund you may be subject to US
withholding and estate tax and are encouraged to consult your tax advisor prior
to investing in the Fund.
If more than 50% of the Fund's total assets at the end of the fiscal year
are invested in foreign securities, the Fund may elect to pass-through to you
your pro-rata share of foreign taxes paid by the Fund. The Fund will provide you
with the necessary information to reflect the credit on your individual income
tax return if this election is made.
More information about taxes is in the Statement of Additional Information.
Please contact your tax advisor if you have specific questions about federal,
state, local or foreign income taxes.
10
<PAGE>
ORGANIZATIONAL STRUCTURE
--------------------------------------------------------------------------------
The Fund is a `feeder fund' that invests substantially all of its assets in
the European Mid-Cap Portfolio. The Fund and the Portfolio have the same
investment objective. The Portfolio is advised by Deutsche Fund Management, Inc.
and sub-advised by DWS International Portfolio Management GmbH. (See the section
entitled `Investment Advisor and Sub-Advisor.')
The Portfolio accepts investments from other feeder funds. A feeder fund
bears the Portfolio's expenses in proportion to its assets. Each feeder fund can
set its own transaction minimums, fund-specific expenses and other conditions.
This arrangement allows the Fund's Directors to withdraw the Fund's assets from
the Portfolio if they believe doing so is in the shareholders' best interests.
If the Directors withdraw the Fund's assets, they would then consider whether
the Fund should hire its own investment advisor, invest in a different master
portfolio or take other action.
INVESTMENT ADVISOR AND SUB-ADVISOR
--------------------------------------------------------------------------------
Deutsche Fund Management, Inc. (`DFM'), the Portfolio's Advisor, is
responsible for managing the Portfolio's assets, including buying and selling
portfolio securities. The Advisor has delegated daily management of the
Portfolio's assets to the Sub-Advisor. DWS International Portfolio Management
GmbH (`DWS') is the Portfolio's Sub-Advisor. The address for the Advisor is 280
Park Avenue, New York, NY 10017. The address for DWS is Grueneburgweg 113-115,
60323 Frankfurt am Main, Germany.
The Advisor is entitled to receive an annual fee of 0.85% based on the
average daily net assets of the Portfolio. The Advisor pays the Sub-Advisor a
portion of this fee. The Advisor has contractually agreed to waive its fee and
reimburse expenses of the Fund and Portfolio in order to maintain the Fund's
total operating expenses (other than extraordinary expenses) at not more than
the following percentages of average annual net assets of the share classes
through January 1, 2002: 1.60% for Class A Shares; 2.35% for Class B Shares; and
2.35% for Class C Shares.
The Advisor and the Sub-Advisor are subsidiaries of Deutsche Bank AG, a
major global banking institution. With total assets the equivalent of $884.8
billion and 90,850 employees as of June 30, 2000, Deutsche Bank AG is one of
Europe's largest universal banks. It is engaged in a wide range of financial
services, including retail and commercial banking, investment banking and
insurance. Deutsche Bank AG and its affiliates may have commercial lending
relationships with companies whose securities may be held by the Portfolio.
Other subsidiaries of Deutsche Bank AG include Deutsche Asset Management
Europe GmbH (`DeAM Europe'), a company with limited liability organized under
the laws of Germany. DeAM Europe subsidiaries include German-based DWS
Investment GmbH (`DWS Investment') and others based in Luxembourg, Austria,
Switzerland, France, Poland and Italy. Together, DeAM Europe subsidiaries serve
as manager and/or investment advisor to more than 200 mutual funds, having
aggregate assets under management of more than the equivalent of $103.4 billion
as of June 30, 2000. DeAM Europe, along with its subsidiaries, employs
approximately 698 professionals and is one of the largest mutual fund operators
in Europe based on assets under management.
The primary subsidiary of DeAM Europe is DWS Investment. Founded in 1956,
DWS Investment is the largest mutual fund company in Germany, holding a 22.3%
share of the German mutual fund market based on assets under management as of
June 30, 2000. DeAM Europe and its subsidiaries are known in the financial
market as `DWS Group,' an Investment Group of Deutsche Bank.
DeAM Europe subsidiaries have received widespread industry recognition in
Europe. For example, Standard & Poor's/Micropal, Europe's leading fund rating
organization, has accorded DWS Investment the following awards: 1994: best fund
manager for one, three, and five-year periods; 1995: best fund manager for one,
three, and five-year periods; 1996: best fund manager for three and five-year
periods; 1997: best fund manager for three and five-year periods; 1998: best
fund manager for one, three and five-year periods; 1999: best fund manager for
one- and five-year periods. These awards were given to fund managers having ten
or more funds registered for sale in Germany, based on the manager with the
highest number of funds ranked first within various categories of investment
objectives defined by Micropal. Fund rankings are based on above-average
performance in Deutsche mark (DM) terms and below-average volatility.
PORTFOLIO MANAGEMENT
DWS uses a team approach to provide day-to-day portfolio management
services to the Portfolio in which the Fund invests. The DWS Portfolio
management team has five members, and includes Klaus Kaldemorgen and Klaus
Martini, who each have over 16 years of experience as an investment manager.
11
<PAGE>
HISTORICAL PERFORMANCE OF EUROPEAN MID-CAP PORTFOLIO
The Fund invests in an underlying Portfolio, the European Mid-Cap
Portfolio. This underlying Portfolio (and therefore the Fund) is designed to
produce investment results substantially the same as Provesta, which is also a
German-registered mutual fund (the `DWS Fund'). Provesta is the only fund
managed by DWS which has substantially similar investment objectives and
strategies as the Fund. The Portfolio seeks to accomplish this by duplicating to
the extent practical the portfolio holdings and transactions of the DWS Fund.
The Advisor manages the investment operations of the Portfolio with a portfolio
manager and a staff of investment professionals that is composed of the same
persons as those that manage and have full discretionary authority over the
selection of investments for the DWS Fund. Also, the investment objectives,
policies and restrictions of the DWS Fund are the same as those of the Portfolio
except as noted below.
Information about the performance of the Fund and the DWS Fund is set forth
below. Despite the similarity in investment objectives, policies and
restrictions, investment staff and portfolio managers, the DWS Fund is a
separate fund and you should not assume that the Fund will have the same future
performance as the DWS Fund. The DWS Fund operates under the German regulatory
and tax framework. The Fund and the Portfolio operate under the US regulatory
and tax framework. Each has different diversification requirements, specific tax
restrictions and investment limitations. Since the historical performance of the
DWS Fund would not have been materially affected by the differences in the
regulation of mutual funds under US federal securities and tax laws and
regulations, the differences in regulation are not expected to result in any
material differences in performance (net of fees) between the DWS Fund and the
Portfolio going forward. The past performance of the DWS Fund is not predictive
of the future performance of the Fund or the Portfolio.
The following table shows the actual total return for the Class A Shares of
the Fund for the period from the commencement of operations on October 17, 1997
to September 30, 2000, and for the one-year period ended September 30, 2000. The
Fund and its underlying Portfolio did not have operating or performance history
prior to that time.
Below the Fund's performance within the same table are the average
annualized total returns for the DWS Fund for the one, three, five and ten-year
periods ended September 30, 2000. The performance of the Fund and the DWS Fund
are accompanied by total returns for securities indices believed by the Advisor
to be suitable for performance comparisons.
These figures are unaudited and are based on the actual unadjusted
investment performance (net of fees and expenses) of the DWS Fund with the
adjustments indicated below. The figures for the DWS Fund and the indices were
not adjusted to reflect the expense ratio of the Fund which is higher than the
actual expenses of the DWS Fund (which bears a combined fund management and
expense fee of 0.50% per annum of net assets). Any such adjustment would reduce
the performance shown below.
EUROPEAN MID-CAP FUND AS COMPARED TO THE DWS FUND(1)
Average Annual Total Return for the Periods Ended September 30, 2000.
<TABLE>
<CAPTION>
HISTORICAL PERFORMANCE
BASED IN US DOLLARS
(UNAUDITED)
----------------------
WITH SALES WITHOUT SALES MDAX INDEX
EUROPEAN MID-CAP FUND LOAD(2) LOAD(3) (IN US DOLLARS)(4)
--------------------------------------------------------------------------------
<S> <C> <C> <C>
One Year ............... 30.94% 38.56% 0.19%
October 17, 1997 -
September 30, 2000 ..... 16.68% 19.12% 1.75%
DWS FUND(1)
One Year ............... 36.4% 41.8% 0.19%
Three Year ............. 19.3% 20.9% 0.9%
Five Year .............. 19.2% 20.1% 20.1%
Ten Year ............... 16.2% 16.7% 77.7%
--------------------------------------------------------------------------------
</TABLE>
(1) Net Assets as of 8/31/00 were DM 1,424 million ($640 million). The DWS Fund
began investment operations on July 11, 1985.
(2) Adjusted to reflect deduction for the maximum sales charge of 5.50%
applicable to Class A Shares.
(3) The sales load may be reduced or eliminated on the purchase of Class A
Shares in certain circumstances. See the section entitled "Sales Charges."
(4) The Midcap Index (`MDAX') is a broad-based market index of 70 mid-sized
German companies with established operating histories.
The above results are total returns calculated in US dollars based on the
month-end prevailing conversion rate of DM to US dollars. The results assume all
dividends and capital gain distributions have been reinvested with no sales
charge.
In calculating the historical performance of the DWS Fund shown above, the
first step was to calculate the historical performance according to a
methodology generally acknowledged in Germany and developed by the BVI
Bundesverband Deutscher Investment--Gesellschaften (Association of German Fund
Companies) (`BVI'). The BVI method measures total return by comparing the net
asset value per share of a
12
<PAGE>
fund in Deutsche marks at the beginning and at the end of the relevant
measurement period, assuming the reinvestment of distributions made by the fund
during such period. For this purpose, the reinvestment of distributions is
increased by including the corporate income tax credit that is available to
shareholders of German fund companies in connection with such distributions. The
BVI method does not take account of any sales load charged to an investor on the
initial investment.
Second, for purposes of calculating the equivalent US dollar returns from
the DM returns yielded by the BVI method, DWS made the following adjustments:
(1) The credit for the German corporate tax credit referred to above was
subtracted from the distributions reinvested since it will not be available to
shareholders of the Fund (but the effect of corporate income taxes incurred by
the DWS Fund was not eliminated); and
(2) the Deutsche mark returns (including capital gains and income) were
converted to US dollars at prevailing exchange rates as of the end of each
month.
These adjustments resulted in the performance indicated in the second
column, `Without Sales Load.' The first column, `With Sales Load,' made a
further adjustment by reducing the performance by assuming the maximum sales
load was charged to the investor on the initial investment.
It is not expected that there will be any material differences in the
securities held by the Portfolio and the DWS Fund and thus the investment
characteristics of the Portfolio, such as industry diversification, country
diversification, portfolio beta, portfolio quality, average maturity of
fixed-income assets and equity/non-equity mix will be substantially the same as
the investment characteristics of the DWS Fund. Consequently, there is no
regulatory or tax difference between the underlying Portfolio and the DWS Fund
that would be expected to have a material effect on the investment performance
of the Portfolio as compared to the DWS Fund.
ADMINISTRATOR
--------------------------------------------------------------------------------
Investment Company Capital Corp. (`ICCC') provides administration services
to the Fund. ICCC supervises the day-to-day operations of the Fund, including
the preparation of registration statements, proxy materials, shareholder
reports, compliance with all requirements of securities laws in the states in
which shares are distributed and, subject to the supervision of the Fund's Board
of Directors, oversight of the relationship between the Fund and its other
service providers. ICCC is also the Fund's Transfer Agent.
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand the
Fund's financial performance since the inception of the Fund's Class A, Class B
and Class C Shares. Certain information reflects financial results for a single
share. The total returns in the tables represent the rate an investor would have
earned on an investment in the Fund, assuming reinvestment of all dividends and
distributions.
This information has been audited by PricewaterhouseCoopers LLP, whose
report, along with the Fund's financial statements, is included in the Annual
Report, which is available upon request.
The following financial information is for the fiscal year ended August 31,
2000. The financial information for the fiscal year ended August 31, 1999
includes results for the Fund when it was known as the Deutsche European Mid-Cap
Fund.
13
<PAGE>
<TABLE>
<CAPTION>
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.)
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES
------------------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 17, 1997(1)
AUGUST 31, TO
------------------------------ AUGUST 31,
2000 1999 1998
---------- -------- -------------------
<S> <C> <C> <C>
Net asset value at beginning of period .................... $ 15.28 $ 14.22 $ 12.50
---------- -------- ---------
INVESTMENT OPERATIONS:
Net investment income (expenses in excess of income) ...... (0.14) (0.01) 0.01
Net realized and unrealized gain on investments and foreign
currencies allocated from European Mid-Cap Portfolio ... 7.09 1.26 1.71
---------- -------- ---------
Increase from investment operations ....................... 6.95 1.25 1.72
---------- -------- ---------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net realized gains ..................... (0.14) (0.19) --
---------- -------- ---------
Total distributions ....................................... (0.14) (0.19) --
---------- -------- ---------
NET ASSET VALUE AT END OF PERIOD ............................. $ 22.09 $ 15.28 $ 14.22
========== ======== =========
TOTAL RETURN (BASED ON NET ASSET VALUE)(2).................... 45.73% 8.86% 13.76%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ......................... $ 23,536 $ 13,907 $ 2,402
RATIOS TO AVERAGE NET ASSETS:
Expenses(3)................................................ 1.60% 1.60% 1.60%(4)
Net investment income (expenses in excess of income)(3).... (0.78)% (0.10)% 0.23%(4)
Portfolio turnover of European Mid-Cap Portfolio .......... 72% 89% 82%
</TABLE>
----------------------------------------
(1) Commencement of operations.
(2) Total return would have been lower had certain expenses not been
reimbursed by the Advisors. Total return has not been annualized for
the period ended August 31, 1998.
(3) Includes the Fund's allocated portion of the Portfolio's expenses net
of expense reimbursements. Had the Advisors not undertaken to
reimburse such expenses, the ratios of expenses and expenses in excess
of income to average net assets would have been as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Expenses to average net assets ....................... 2.52% 4.12% 18.86%(4)
Expenses in excess of income to average net assets ... (1.70)% (2.62)% (17.03)%(4)
</TABLE>
(4) Annualized.
14
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES
-----------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED MARCH 30, 1998(1)
AUGUST 31, TO
------------------------- AUGUST 31,
2000 1999 1998
------- ------ --------
<S> <C> <C> <C>
Net asset value at beginning of period ................................ $13.37 $12.55 $12.50
------- ------ ------
INVESTMENT OPERATIONS:
Expenses in excess of income .......................................... (0.20) (0.11) (0.02)
Net realized and unrealized gain on investments and foreign
currencies allocated from European Mid-Cap Portfolio ............... 6.09 1.12 0.07
------- ------ ------
Increase from investment operations ................................... 5.89 1.01 0.05
------- ------ ------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net realized gains ................................. (0.14) (0.19) --
------- ------ ------
Total distributions ................................................... (0.14) (0.19) --
------- ------ ------
NET ASSET VALUE AT END OF PERIOD ......................................... $19.12 $13.37 $12.55
======= ====== ======
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) ............................... 44.32% 8.12% 0.40%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ..................................... $12,656 $6,940 $4,287
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) ........................................................... 2.35% 2.35% 2.35%(4)
Expenses in excess of income(3) ....................................... (1.53)% (1.06)% (0.70)%(4)
Portfolio turnover of European Mid-Cap Portfolio ...................... 72% 89% 82%
</TABLE>
---------------------------------------
(1) Commencement of operations.
(2) Total return would have been lower had certain expenses not been
reimbursed by the Advisors. Total return has not been annualized for
the period ended August 31, 1998.
(3) Includes the Fund's allocated portion of the Portfolio's expenses net
of expense reimbursements. Had the Advisors not undertaken to
reimburse such expenses, the ratios of expenses and expenses in excess
of income to average net assets would have been as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Expenses to average net assets ........................ 3.28% 4.37% 19.61%(4)
Expenses in excess of income to average net assets .... (2.46)% (3.08)% (17.96)%(4)
</TABLE>
(4) Annualized.
15
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------------------------------------------------
CLASS C SHARES
----------------------------------
FOR THE PERIOD
FOR THE SEPTEMBER 2, 1998(1)
YEAR ENDED TO
AUGUST 31, AUGUST 31,
2000 1999
---------- -------------------
<S> <C> <C>
Net asset value at beginning of period ...................................... $13.57 $12.50
------ ------
INVESTMENT OPERATIONS:
Expenses in excess of income ................................................ (0.18) (0.06)
Net realized and unrealized gain on investments and foreign currencies
allocated from European Mid-Cap Portfolio ................................ 6.18 1.32
------ ------
Increase from investment operations ......................................... 6.00 1.26
------ ------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net realized gains ....................................... (0.14) (0.19)
------ ------
Total distributions ......................................................... (0.14) (0.19)
------ ------
NET ASSET VALUE AT END OF PERIOD ............................................... $19.43 $13.57
====== ======
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) ..................................... 44.42% 10.15%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ........................................... $3,598 $1,698
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) ................................................................. 2.35% 2.35%(4)
Expenses in excess of income(3) ............................................. (1.52)% (0.73)%(4)
Portfolio turnover of European Mid-Cap Portfolio ............................ 72% 89%
</TABLE>
--------------------------
(1) Commencement of operations.
(2) Total return would have been lower had certain expenses not been
reimbursed by the Advisors. Total return has not been annualized for
the period ended August 31, 1999.
(3) Includes the Fund's allocated portion of the Portfolio's expenses net
of expense reimbursements. Had the Advisors not undertaken to
reimburse such expenses, the ratios of expenses and expenses in excess
of income to average net assets would have been as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Expenses to average net assets .................................. 3.28% 4.89%(4)
Expenses in excess of income to average net assets .............. (2.45)% (3.27)%(4)
</TABLE>
(4) Annualized.
16
<PAGE>
DISTRIBUTOR
ICC DISTRIBUTORS, INC.
TRANSFER AGENT
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
1-800-553-8080
INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
250 W. Pratt Street
Baltimore, Maryland 21201
CUSTODIAN
INVESTORS BANK & TRUST COMPANY
200 Clarendon Street
Boston, Massachusetts 02116
FUND COUNSEL
MORGAN, LEWIS & BOCKIUS LLP
1701 Market Street
Philadelphia, Pennsylvania 19103
<PAGE>
[LOGO]
FLAG INVESTORS
INVESTING WITH A DIFFERENCE-Registered Trademark-
Flag Investors - P.O. Box 515 - Baltimore, MD 21203 - (800)767-FLAG
www.flaginvestors.com
--------------------------------------------------------------------------------
You may obtain the following additional information about the Fund, free of
charge, from your securities dealer or servicing agent or by calling
(800) 767-FLAG:
- A statement of additional information (SAI) about the Fund that is
incorporated by reference into the prospectus.
- The Fund's most recent annual and semi-annual reports containing detailed
financial information and, in the case of the annual report, a discussion
of market conditions and investment strategies that significantly affected
the Fund's performance during its last fiscal year.
In addition you may review information about the Fund (including the SAI) at the
Securities and Exchange Commission's Public Reference Room in Washington, D.C.
(Call 1-202-942-8090 to find out about the operation of the Public Reference
Room.) The EDGAR Database on the Commission's Internet site at
http://www.sec.gov has reports and other information about the Fund. Copies of
this information may be obtained, upon payment of a duplicating fee, by
electronic request at the following email address: [email protected], or by
writing the Public Reference Section of the Commission, Washington, D.C.
20549-0102.
For other shareholder inquiries, contact the Transfer Agent at (800) 553-8080.
For Fund information, call (800) 767-FLAG or your securities dealer or servicing
agent.
Investment Company Act File No. 811-8227 EMCPRO (01/01)
<PAGE>
[LOGO]
FLAG INVESTORS
INVESTING WITH A DIFFERENCE -REGISTERED TRADEMARK-
[GRAPHIC]
-------------------------------------------------
JAPANESE EQUITY FUND
CLASS A SHARES, CLASS B SHARES AND CLASS C SHARES
-------------------------------------------------
PROSPECTUS
JANUARY 1, 2001
The Securities and Exchange Commission (SEC) has neither approved nor
disapproved these securities or passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>
[LOGO]
FLAG INVESTORS
INVESTING WITH A DIFFERENCE -REGISTERED TRADEMARK-
THIS MUTUAL FUND (THE `FUND') SEEKS HIGH CAPITAL APPRECIATION THROUGH ITS
INVESTMENTS IN THE JAPANESE EQUITY PORTFOLIO.
The Fund invests all of its assets in the Japanese Equity Portfolio of Flag
Investors Portfolios Trust (the `Portfolio'), a separate mutual fund with
identical investment objectives and policies, through a master-feeder investment
fund structure. Therefore, all discussions in the prospectus regarding
investments relate to the Fund the Portfolio.
The Fund offers shares through securities dealers and financial institutions
that act as shareholder servicing agents. You may also buy shares through the
Fund's Transfer Agent. This Prospectus describes Flag Investors Class A Shares
(`Class A Shares'), Flag Investors Class B Shares (`Class B Shares') and Flag
Investors Class C Shares (`Class C Shares') of the Fund. These separate classes
give you a choice of sales charges and Fund expenses. (See the section entitled
`Sales Charges.')
TABLE OF CONTENTS
-----------------
INVESTMENT SUMMARY ......................................1
FEES AND EXPENSES OF THE FUND ...........................3
INVESTMENT PROGRAM ......................................4
THE FUND'S NET ASSET VALUE ..............................5
HOW TO BUY SHARES .......................................6
HOW TO REDEEM SHARES ....................................6
TELEPHONE TRANSACTIONS ..................................7
SALES CHARGES ...........................................7
HOW TO CHOOSE THE CLASS THAT IS RIGHT FOR YOU ...........9
DIVIDENDS AND TAXES ....................................10
ORGANIZATIONAL STRUCTURE ...............................10
INVESTMENT ADVISOR AND SUB-ADVISOR .....................10
ADMINISTRATOR ..........................................11
FINANCIAL HIGHLIGHTS ...................................11
<PAGE>
INVESTMENT SUMMARY
--------------------------------------------------------------------------------
OBJECTIVE AND STRATEGIES
The Fund seeks high capital appreciation through its investments in the
Portfolio. The Fund, through the Portfolio, seeks to achieve its objective by
investing at least 65% of its total assets in equity securities (primarily
common and preferred stocks) of companies located or having a business focus in
Japan. The investment advisor and sub-advisor (the `Advisors') seek investments
in large and mid-sized companies which have a clearly-defined competitive edge
based upon quality of management, product, service, balance sheet, innovation
and low costs. The target is to outperform the MSCI Japan Index, although there
is no guarantee that the Fund will do so.
RISK PROFILE
The Fund may be suited for you if you are willing to accept the risks of
investing in a particular foreign country or region in the hope of achieving
high capital appreciation.
GENERAL STOCK RISK. The value of an investment in the Fund will vary from
day to day based on changes in the prices of the securities that the Fund holds.
Those prices, in turn, reflect investor perceptions of the economy, the markets
and the companies held by the Fund.
STYLE RISK. As with any investment strategy, the strategy used in managing
the Fund will, at times, perform better than or worse than other investment
styles and the overall market. If the Advisors overestimate the return potential
of one or more foreign stocks, the Fund may underperform in the international
equities markets.
FOREIGN INVESTING RISK. Investing in foreign companies may entail different
risks than investing in US companies. The prices of foreign securities may be
affected by adverse political, economic or social developments unique to a
country or region. Accounting and financial reporting standards differ from
those in the US and could convey incomplete information when compared to
information typically provided by US companies. Foreign securities may trade
infrequently and be subject to greater price fluctuations than other securities.
FOREIGN CURRENCY RISKS. Since the Fund's investments are denominated in
foreign currencies, any change in the value of those currencies in relation to
the US dollar will result in a corresponding change in the value of the Fund's
investments and may cause the Fund's investments to lose money.
RISKS OF INVESTING IN A PARTICULAR FOREIGN COUNTRY OR REGION. Since the
Fund may invest a significant portion of its assets in a particular foreign
country or geographic region, the Fund is subject to greater currency risk and
is more susceptible to adverse impact from negative economic events or actions
of foreign governments in such countries or regions.
RISK RELATED TO COMPANY SIZE. The Fund invests in securities of mid-market
capitalization companies that, as compared to larger companies, tend to have
fewer shareholders, less liquidity, more volatility, unproven track records,
limited products or services and limited access to capital, which could cause
the prices of these securities to vary, perhaps dramatically.
NON-DIVERSIFICATION RISKS. The Fund is non-diversified. As compared to a
diversified fund, the Fund is allowed to invest a higher percentage of its
assets in just a few issuers. This increases the Fund's risks by magnifying the
impact (positively or negatively) that any one issuer has on the Fund's
performance. The Fund generally attempts to maintain exposure to a broad number
of issuers.
If you invest in the Fund, you could lose money. An investment in the Fund
is not a bank deposit and is not insured or guaranteed by the FDIC or any other
government agency.
FUND PERFORMANCE
The following bar chart and table show the performance of the Fund both
year-by-year and as an average over different periods of time. The variability
of performance over time provides an indication of the risks of investing in the
Fund. This is an historical record and does not necessarily indicate how the
Fund will perform in the future.
1
<PAGE>
CLASS A SHARES*
FOR YEARS ENDED DECEMBER 31,
<TABLE>
<S> <C>
1998 4.70%
1999 169.29%
</TABLE>
* The bar chart does not reflect sales charges. If it did, returns would be less
than those shown. For the period from December 31, 1999 through September 30,
2000, the return for Class A Shares was 19.86%.
During the two-year period shown in the bar chart, the highest return for a
quarter was 33.98% (quarter ended 12/31/99) and the lowest return for a quarter
was (7.02%) (quarter ended 9/30/98).
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1999)
<TABLE>
<CAPTION>
MSCI MSCI
JAPAN JAPAN
CLASS A SHARES(1) INDEX(2) CLASS B SHARES(1) INDEX(2)
----------------- -------- ----------------- --------
<S> <C> <C> <C> <C>
Past One Year ............ 154.48% 61.77% 154.21% 61.77%
Since Inception .......... 45.16%(3) 20.81%(4) 110.05%(5) 68.22%(6)
</TABLE>
---------------------
(1) These figures assume the reinvestment of dividends and capital gains
distributions and include the impact of the maximum sales charges.
(2) The MSCI Japan Index is a broad-based market index of equity securities
listed on the Tokyo Stock Exchange.
(3) October 20, 1997.
(4) As of October 31, 1997.
(5) August 10, 1998.
(6) As of August 31, 1998.
No performance information is provided for the Class C Shares because they
were not offered prior to December 31, 1999. However, the performance of the
Class C Shares is expected to be similar to that of the Fund's other classes and
will differ only to the extent that Class C Shares do not have the same
expenses.
2
<PAGE>
FEES AND EXPENSES OF THE FUND
--------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
SHAREHOLDER FEES: INITIAL SALES DEFERRED DEFERRED
(FEES PAID DIRECTLY FROM YOUR INVESTMENT) CHARGE SALES CHARGE SALES CHARGE
-------------- -------------- --------------
<S> <C> <C> <C>
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price) ............................... 5.50% None None
Maximum deferred sales charge (load)
(as a percentage of original purchase price or
redemption proceeds, whichever is lower) .......................... 1.00%(1) 5.00%(2) 1.00%(3)
Maximum sales charge (load) imposed on
reinvested dividends .............................................. None None None
Redemption fee ....................................................... None None None
Exchange fee ......................................................... None None None
ANNUAL FUND OPERATING EXPENSES(4):
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management fee ....................................................... 0.85% 0.85% 0.85%
Distribution and/or service (12b-1) fees(5) .......................... 0.25% 1.00% 1.00%
Other expenses ....................................................... 3.22% 3.50% 6.89%
---- ---- ----
Total annual fund operating expenses (before fee
waivers and expense reimbursements) ............................... 4.32% 5.35% 8.74%
---- ---- ----
Total fee waivers and reimbursements of fund expenses(6) ............. (2.72)% (3.00)% (6.39)%
---- ---- ----
Total net annual fund operating expenses (after
fee waivers and expense reimbursements) ........................... 1.60% 2.35% 2.35%
==== ==== ====
</TABLE>
---------------------
(1) You will pay no sales charge on purchases of $1 million or more of Class A
Shares, but you may pay a deferred sales charge if you redeem your shares
within two years after your purchase unless you are otherwise eligible for a
sales charge waiver or reduction. (See section entitled `Sales
Charges--Redemption Price.')
(2) You will pay a deferred sales charge if you redeem your shares within
six-years after your purchase. The amount of the charge declines over time
and eventually reaches zero. Seven-years after your purchase, your Class B
Shares automatically convert to Class A Shares. (See section entitled `Sales
Charges--Redemption Price.')
(3) You will pay a deferred sales charge if you redeem your shares within one
year after purchase. (See `Sales Charges--Redemption Price.')
(4) Information on the annual operating expenses reflects the expenses of both
the Fund and the Portfolio, the master fund in which the Fund invests its
assets.(See the section entitled `Organizational Structure.')
(5) A portion of the shareholder servicing fee is allocated to your securities
dealer and to qualified banks for services provided and expenses incurred in
maintaining your account, responding to your inquiries, and providing you
with information about your investment.
(6) The Advisor has contractually agreed to waive its fees and reimburse
expenses of the Fund through January 1, 2002 to the extent necessary to
maintain the Fund's expense ratio at the level indicated as `Total net
annual fund operating expenses (after fee waivers and expense
reimbursements).'
3
<PAGE>
EXAMPLE:
This Example is intended to help you compare the cost of investing in each
class of the Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR* 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A Shares ............................................. $704 $1,577 $2,511 $5,137
Class B Shares ............................................. $738 $1,666 $2,754 $5,443
Class C Shares ............................................. $338 $2,080 $4,021 $9,343
You would pay the following expenses if you did not redeem your shares:
Class A Shares ............................................. $704 $1,577 $2,511 $5,137
Class B Shares ............................................. $238 $1,366 $2,754 $5,443
Class C Shares ............................................. $238 $2,080 $4,021 $9,343
</TABLE>
---------------------
* Based on Total Annual Fund Operating Expenses after fee waivers and expense
reimbursements for year one only.
Federal regulations require that the table above reflect the maximum sales
charge. However, you may qualify for reduced sales charges or no sales charge at
all. (See the section entitled `Sales Charges.') If you hold your shares for a
long time, the combination of the initial sales charge you paid and the
recurring 12b-1 fees may exceed the maximum sales charges permitted by the
Conduct Rules of the National Association of Securities Dealers, Inc.
INVESTMENT PROGRAM
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks high capital appreciation through its investment in the
Portfolio. The Fund, through the Portfolio, seeks to achieve its objective by
investing at least 65% of its total assets in equity securities (primarily
common and preferred stocks) of companies located or having a business focus in
Japan.
The Advisors are responsible for managing the Fund's investments. (See the
section entitled `Investment Advisor and Sub-Advisor.') There can be no
guarantee that the Fund will achieve its goals.
The Advisors seek investments in large and mid-sized companies which have a
clearly-defined competitive edge based upon quality of management, product,
service, balance sheet, innovation and low costs. The target is to outperform
the MSCI Japan Index, although there is no guarantee that the Fund will do so.
In assessing which investments to sell, the Advisors consider the following
factors, among others:
- Whether the company continues to meet the Fund's criteria for an
initial investment in a security; and
- Changes in the economy or the company's business that negatively
impact the attractiveness of the security as an investment.
The Advisors may also use hedging transactions to attempt to reduce
specific risks. For example, to protect the Fund against circumstances that
would normally cause the Fund's portfolio securities to decline in value, the
Fund may buy or sell a derivative contract that would normally increase in value
under the same circumstances. The Fund may also attempt to hedge currency and
other risks by using forward contracts, combinations of different derivatives
contracts, or of derivatives contracts and securities. The Fund's ability to
hedge may be limited by the costs of the derivatives contracts. The Fund may
attempt to lower the cost of hedging by entering into transactions that provide
only limited protection, including transactions that (1) hedge only a portion of
the Fund, (2) use derivatives contracts that cover a narrow range of
circumstances or (3) involve the sale of derivatives contracts with different
terms.
RISK CONSIDERATIONS
An investment in the Fund involves risk. Over time, common stocks have
shown greater potential for growth than other types of securities, but in the
short run stocks can be more volatile than other types of securities. Stock
prices are sensitive to developments affecting particular companies and to
general economic conditions that affect particular industry sectors as a whole.
No one can predict how the markets or stock prices will behave in the future.
Investing in foreign companies may have different risks than investing in
US companies. An investment in a foreign company may be affected by
developments, including political developments, that are unique to that market.
These developments may not affect the US
4
<PAGE>
economy or the prices of US securities in the same manner. Therefore, the prices
of foreign common stocks may, at times, move in a different direction than the
prices of US common stocks. Financial reporting standards for companies based in
foreign markets may differ from those in the United States.
From time to time, foreign capital markets may exhibit more volatility than
those in the United States. Stocks that trade less frequently can be more
difficult or more costly to buy or to sell than more liquid or active stocks. On
the whole, foreign exchanges are smaller and less liquid than the US market.
Additionally, some foreign governments regulate their exchanges less
stringently, and the rights of shareholders may not be as firmly established.
The Fund's investments are usually denominated in the currencies of the
countries in which they are traded. As a result, the Fund may be affected by
changes in the value of foreign currencies in relation to the value of the US
dollar. The value of a foreign currency may change in response to events that do
not affect the value of the investment in its home country.
The Fund invests a significant portion of its assets in specific regions or
countries. The Fund is therefore exposed to the risks associated with that
region or country and could be subject to greater risk due to unanticipated and
negative economic events, actions by foreign governments, currency movements
and/or market action in such countries or regions. For example, the Fund invests
a substantial portion of its assets in Japan.
The Fund invests in the shares of large, well-established companies and
smaller mid-sized companies. Investing in mid-sized companies poses unique
risks. The stocks of mid-sized companies tend to experience steeper fluctuations
in price than the stocks of larger companies. A shortage of reliable information
can also pose added risk. Industry-wide reversals may have a greater impact on
mid-sized companies, since they lack a large company's financial resources to
deal with setbacks. Managers of mid-sized companies may have less experience
coping with adversity or capitalizing on opportunity than their counterparts at
larger companies. Finally, the stocks of mid-sized companies are typically less
liquid than large company stocks.
The Fund's ability to successfully use hedging techniques and derivative
transactions, including currency transactions, will depend on the ability of the
Advisors to predict the direction of the market and the correlation of the
transactions with changes in the value of the Fund's assets. Nevertheless,
hedging transactions will not eliminate all risk even if they work as intended.
In addition, hedging strategies are not always successful, and could result in
increased expenses and losses to the Fund. Hedging transactions could expose the
Fund to the effect of leverage, which could increase the Fund's exposure to the
market and potential losses that it could have had if it had not entered into
those transactions.
To reduce the Fund's risk under adverse market conditions, the Advisors may
make temporary defensive investments in cash, cash items, shorter-term,
higher-quality debt securities, money market instruments and similar
obligations, such as repurchase agreements and reverse repurchase agreements.
While engaged in a temporary defensive strategy, the Fund may not achieve its
investment objective. The Advisors would follow such a strategy only if they
believed the risk of loss in pursuing the Fund's primary investment strategies
outweighed the opportunity for gain.
THE FUND'S NET ASSET VALUE
--------------------------------------------------------------------------------
The price you pay when you buy shares or receive when you redeem shares is
based on the Fund's net asset value per share. When you buy Class A Shares, the
price you pay may be increased by a sales charge. When you redeem any class of
shares, the amount you receive may be reduced by a sales charge. See the section
entitled `Sales Charges' for details on how and when these charges may or may
not be imposed.
The net asset value per share of the Fund is determined at the close of
regular trading on the New York Stock Exchange on each day the Exchange is open
for business. While regular trading ordinarily closes at 4:00 pm (Eastern Time),
it could be earlier, particularly on the day before a holiday. Contact the
Transfer Agent to determine whether the Fund will close early before a
particular holiday. Because the Fund owns foreign securities that trade in
foreign markets on days the Exchange may be closed, the value of the Fund's
assets may change on days you cannot purchase, redeem or exchange shares.
The net asset value per share is calculated by subtracting the liabilities
attributable to a class from its proportionate share of the Fund's assets and
dividing the result by the number of outstanding shares of the class. Because
the different classes have different distribution or service fees, their net
asset values may differ.
In valuing its assets, the Fund's investments are priced at their market
value. When price quotes for a particular security are not readily available or
may be unreliable, the security is priced at its `fair value' using procedures
approved by the Fund's Board of Directors.
You may buy or redeem shares on any day the New York Stock Exchange is open
for business (a `business day'). If your order is entered before the net asset
value per share is determined for that day, the price you pay or
5
<PAGE>
receive will be based on that day's net asset value per share. If your order is
entered after the net asset value per share is determined for that day, the
price you pay or receive will be based on the next business day's net asset
value per share.
The following sections describe how to buy and redeem shares.
HOW TO BUY SHARES
--------------------------------------------------------------------------------
You may buy any class of the Fund's shares through your securities dealer
or through any financial institution that is authorized to act as a shareholder
servicing agent. Contact them for details on how to enter and pay for your
order. You may also buy shares by sending your check (along with a completed
Application Form) directly to the Fund.
You may buy Class A Shares unless you are in a defined contribution plan
with assets of $75 million or more.
Your purchase order may not be accepted if the sale of Fund shares has been
suspended or if it is determined that your purchase would be detrimental to the
interests of the Fund's shareholders. In this connection, the Fund specifically
reserves the right to refuse (i) any purchase or exchange request or (ii)
multiple purchase or exchange requests, submitted by a shareholder, group of
shareholders, commonly controlled accounts or a dealer, that are deemed by the
Fund, in its sole discretion, to involve excessive trading or to be part of a
market timing strategy. For these purposes, the Fund may consider, among other
factors, an investor's trading history in the Fund or an affiliated fund, the
funds involved, the amount of the investment and the background of the investors
or dealers involved.
INVESTMENT MINIMUMS
Your initial investment must be at least $2,000. Subsequent investments
must be at least $100. The following are exceptions to these minimums:
- If you are investing in an IRA account, your initial investment may be
as low as $1,000.
- If you are a shareholder of any other Flag Investors fund, your
initial investment may be as low as $500.
- If you are a participant in the Fund's Automatic Investing Plan, your
initial investment may be as low as $250. If you participate in the
monthly plan, your subsequent investments may be as low as $100. If
you participate in the quarterly plan, your subsequent investments may
be as low as $250. See the section entitled `Automatic Investing Plan'
for details.
- There is no minimum investment requirement for qualified retirement
plans such as 401(k), pension or profit sharing plans.
INVESTING REGULARLY
You may make regular investments in the Fund through any of the following
methods. If you wish to enroll in any of these programs or if you need any
additional information, complete the appropriate section of the Application Form
or contact your securities dealer, your servicing agent, or the Transfer Agent.
AUTOMATIC INVESTING PLAN. You may elect to make a regular monthly or
quarterly investment in any class of shares. The amount you decide upon will be
withdrawn from your checking account using a pre-authorized check. When the
money is received by the Transfer Agent, it will be invested in the class of
shares selected at that day's offering price. Either you or the Fund may
discontinue your participation upon 30 days' notice.
DIVIDEND REINVESTMENT PLAN. Unless you elect otherwise, all income and
capital gains distributions will be reinvested in additional Fund shares at net
asset value. You may elect to receive your distributions in cash or to have your
distributions invested in shares of other Flag Investors funds. To make either
of these elections or to terminate automatic reinvestment, complete the
appropriate section of the Application Form or notify the Transfer Agent, your
securities dealer or your servicing agent at least five days before the date on
which the next dividend or distribution will be paid.
SYSTEMATIC PURCHASE PLAN. You may also purchase any class of shares through
a Systematic Purchase Plan. Contact your securities dealer or servicing agent
for details.
HOW TO REDEEM SHARES
--------------------------------------------------------------------------------
You may redeem any class of the Fund's shares through your securities
dealer or servicing agent. Contact them for details on how to enter your order
and for information as to how you will be paid. If you have an account with the
Fund that is in your name, you may also redeem shares by contacting the Transfer
Agent by mail or (if you are redeeming $50,000 or less) by telephone. The
Transfer Agent will mail your redemption check within seven days after it
receives your order in proper form. See the section entitled `Telephone
Transactions' for more information on this method of redemption.
6
<PAGE>
Your securities dealer, your servicing agent, or the Transfer Agent may
require the following documents before they redeem your shares:
- A letter of instructions specifying your account number and the number
of shares or dollar amount you wish to redeem. The letter must be
signed by all owners of the shares exactly as their names appear on
the account.
- If you are redeeming more than $50,000, a guarantee of your signature.
You can obtain one from most banks or securities dealers.
- Any stock certificates representing the shares you are redeeming. The
certificates must be either properly endorsed or accompanied by a duly
executed stock power.
- Any additional documents that may be required if your account is in
the name of a corporation, partnership, trust or fiduciary.
OTHER REDEMPTION INFORMATION
Any dividends payable on shares you redeem will be paid on the next
dividend payable date. If you have redeemed all of your shares by that time, the
dividend will be paid to you in cash whether or not that is the payment option
you have selected.
If you redeem sufficient shares to reduce your investment to $500 or less,
the Fund reserves the right to redeem the remaining shares after giving you 60
days' notice. The Fund also reserves the right to redeem shares in-kind under
certain circumstances.
If you own Fund shares having a value of at least $10,000, you may arrange
to have some of your shares redeemed monthly or quarterly under the Fund's
Systematic Withdrawal Plan. Each redemption under this plan involves all the tax
and sales charge implications normally associated with Fund redemptions. Contact
your securities dealer, your servicing agent, or the Transfer Agent for
information on this plan.
TELEPHONE TRANSACTIONS
--------------------------------------------------------------------------------
If your shares are in an account with the Transfer Agent, you may redeem
them in any amount up to $50,000 or exchange them for shares in another Flag
Investors fund by calling the Transfer Agent on any Business Day between the
hours of 8:30 am and 7:00 pm (Eastern Time). You are automatically entitled to
telephone transaction privileges but you may specifically request that no
telephone redemptions or exchanges be accepted for your account. You may make
this election when you complete the Application Form or at any time thereafter
by completing and returning documentation supplied by the Transfer Agent.
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that telephoned instructions are genuine. These procedures include
requiring you to provide certain personal identification information when you
open your account and before you affect each telephone transaction. You may be
required to provide additional telecopied instructions. If these procedures are
employed, neither the Fund nor the Transfer Agent will bear any liability for
following telephone instructions that it reasonably believes to be genuine. Your
telephone transaction request will be recorded.
During periods of economic or market volatility, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by mail.
If you hold shares in certificate form, you may not exchange or redeem them
by telephone.
SALES CHARGES
--------------------------------------------------------------------------------
PURCHASE PRICE
The price you pay to buy shares will be the Fund's offering price; this is
calculated by adding any applicable sales charges to the net asset value per
share of the class you are buying. The amount of any sales charge included in
your purchase price will be according to the following schedule:
<TABLE>
<CAPTION>
CLASS A SALES
CHARGE AS A % OF
--------------------
OFFERING NET AMOUNT CLASS B CLASS C
AMOUNT OF PURCHASE PRICE INVESTED SALES CHARGE SALES CHARGE
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $50,000 .. 5.50% 5.82% None None
$50,000 - $99,999 .. 4.50% 4.71% None None
$100,000 - $249,999 . 3.50% 3.63% None None
$250,000 - $499,999 . 2.50% 2.56% None None
$500,000 - $999,999 . 2.00% 2.04% None None
$1,000,000 and over . None None None None
---------------------------------------------------------------------
</TABLE>
Although you do not pay an initial sales charge when you invest $1,000,000
or more in Class A Shares or when you buy any amount of Class B or Class C
Shares, you may pay a sales charge when you redeem your shares. See the section
entitled `Redemption Price' for details. Your securities dealer may be paid a
commission at the time of your purchase.
The sales charge you pay on your current purchase of Class A Shares may be
reduced under the circumstances listed below.
RIGHTS OF ACCUMULATION. If you are purchasing additional Class A Shares of
this Fund or Class A shares of any other Flag Investors fund or if you already
have investments in Class A shares, you may combine the value of your purchases
with the value of your existing investments to determine whether you qualify for
a reduced sales charge. (For this purpose your existing
7
<PAGE>
investments will be valued at the higher of cost or current value.) You may also
combine your purchases and investments with those of your spouse and your
children under the age of 21 for this purpose. You must be able to provide
sufficient information to verify that you qualify for this right of
accumulation.
LETTER OF INTENT. If you anticipate making additional purchases of Class A
Shares over the next 13 months, you may combine the value of your current
purchase with the value of your anticipated purchases to determine whether you
qualify for a reduced sales charge. You will be required to sign a letter of
intent specifying the total value of your anticipated purchases and to initially
purchase at least 5% of the total. When you make each purchase during the
period, you will pay the sales charge applicable to their combined value. If, at
the end of the 13-month period, the total value of your purchases is less than
the amount you indicated, you will be required to pay the difference between the
sales charges you paid and the sales charges applicable to the amount you
actually did purchase. Some of the shares you own will be redeemed to pay this
difference.
PURCHASES AT NET ASSET VALUE. You may buy Class A Shares without paying a
sales charge under the following circumstances:
- If you are reinvesting some or all of the proceeds of a redemption of
Class A Shares made within the last 90 days.
- If you are exchanging an investment in another Flag Investors fund for
an investment in this Fund (see the section entitled `Purchases by
Exchange' for a description of the conditions).
- If you are a current or retired Director of this or any affiliated
fund, a director, an employee or a member of the immediate family of
an employee of any of the following (or their respective affiliates):
the Fund's distributor, the Advisors or a securities dealer authorized
to sell shares of the Fund.
- If you are buying shares in any of the following types of accounts:
-- A qualified retirement plan;
-- A Flag Investors fund payroll savings plan program;
-- A fiduciary or advisory account with a bank, bank trust
department, registered investment advisory company, financial
planner or securities dealer purchasing shares on your behalf. To
qualify for this provision you must be paying an account
management fee for the fiduciary or advisory services. Your
securities dealer or servicing agent may charge you an additional
fee if you buy shares in this manner.
PURCHASES BY EXCHANGE
You may exchange Class A, Class B or Class C shares of any other Flag
Investors fund for an equal dollar amount of Class A, Class B or Class C Shares,
respectively, without payment of the sales charges described above or any other
charge, up to four times a year. You may not exchange Flag Investors Cash
Reserve Prime Shares for shares of the Fund unless you acquired those shares
through a prior exchange from a fund for which you paid a sales charge. You may
enter both your redemption and purchase orders on the same business day or, if
you have already redeemed the shares of the other fund, you may enter your
purchase order within 90 days of the redemption. The Fund may modify or
terminate these offers of exchange upon 60 days' notice.
You may request an exchange through your securities dealer or servicing
agent. Contact them for details on how to enter your order. If your shares are
in an account with the Fund's Transfer Agent, you may also request an exchange
directly through the Transfer Agent by mail or by telephone.
REDEMPTION PRICE
The amount of any sales charge deducted from your redemption price will be
determined according to the following schedule.
<TABLE>
<CAPTION>
SALES CHARGE AS A
PERCENTAGE OF THE DOLLAR
AMOUNT SUBJECT TO CHARGE
(AS A % OF COST OR VALUE)
---------------------------------------
CLASS A CLASS B CLASS C
YEAR SINCE PURCHASE SALES CHARGE SALES CHARGE SALES CHARGE
-----------------------------------------------------------------
<S> <C> <C> <C>
First .................. 1.00%* 5.00% 1.00%
Second ................. 0.50%* 4.00% None
Third .................. None 3.00% None
Fourth ................. None 3.00% None
Fifth .................. None 2.00% None
Sixth .................. None 1.00% None
Seventh and Thereafter . None None None
-----------------------------------------------------------------
</TABLE>
* You will pay a sales charge when you redeem Class A Shares only if your
shares were purchased at net asset value because they were part of an
investment of $1 million or more.
DETERMINATION OF SALES CHARGE. The sales charge applicable to your
redemption is calculated in a manner that results in the lowest possible rate:
- No sales charge will be applied to shares you own as a result of
reinvesting dividends or distributions.
- If you have purchased shares at various times, the sales charge will
be applied first to shares you have owned for the longest period of
time.
- If you acquired your shares through an exchange of shares of another
Flag Investors fund, the period of time you held the original shares
will
8
<PAGE>
be combined with the period of time you held the shares being redeemed
to determine the years since purchase. If you bought your shares prior
to January 18, 2000, you will pay the sales charge in effect at the
time of your original purchase.
- The sales charge is applied to the lesser of the cost of the shares or
their value at the time of your redemption.
WAIVER OF SALES CHARGE. You may redeem shares without paying a sales charge
under any of the following circumstances:
- If you are exchanging your shares for shares of another Flag Investors
fund of the same class.
- If your redemption represents the minimum required distribution from
an individual retirement account (IRA) or other retirement plan.
- If your redemption represents a distribution from a Systematic
Withdrawal Plan. This waiver applies only if the annual withdrawals
under your Plan are 12% or less of your share balance.
- If shares are being redeemed in your account following your death or a
determination that you are disabled. This waiver applies only under
the following conditions:
-- The account is registered in your name either individually, as a
joint tenant with rights of survivorship, as a participant in
community property or as a minor child under the Uniform Gifts or
Uniform Transfers to Minors Acts.
-- Either you or your representative notifies your securities
dealer, servicing agent or the Transfer Agent that such
circumstances exist.
- If you are redeeming Class A Shares, your original investment was at
least $3,000,000 and your securities dealer has agreed to return to
the Fund's distributor any payments it received when you bought your
shares.
AUTOMATIC CONVERSION OF CLASS B SHARES. Your Class B Shares, along with any
reinvested dividends or distributions associated with those shares, will be
automatically converted to Class A Shares seven years after your purchase. If
you purchased your shares prior to January 18, 2000, your shares will be
converted to Class A Shares six years after your purchase. This conversion will
be made on the basis of the relative net asset values of the classes and will
not be a taxable event to you.
HOW TO CHOOSE THE CLASS THAT IS RIGHT FOR YOU
--------------------------------------------------------------------------------
Your decision as to which class of the Fund's shares is best for you should
be based upon a number of factors including the amount of money you intend to
invest and the length of time you intend to hold your shares.
If you choose Class A Shares, you will pay a sales charge when you buy your
shares, but the amount of the charge declines as the amount of your investment
increases. You will pay lower expenses while you hold the shares and, except in
the case of investments of $1,000,000 or more, no sales charge if you redeem
them.
If you choose Class B Shares, you will pay no sales charge when you buy
your shares, but your annual expenses will be higher than Class A Shares. You
will pay a sales charge if you redeem your shares within six years of purchase,
but the amount of the charge declines the longer you hold your shares and, at
the end of seven years, your shares convert to Class A Shares, thus eliminating
the higher expenses.
If you choose Class C Shares, you will pay no sales charge when you buy
your shares or if you redeem them after holding them for at least a year. On the
other hand, expenses on Class C Shares are the same as those on Class B Shares
and, since there is no conversion to Class A Shares at the end of seven years,
the higher expenses continue for as long as you own your shares.
Your securities dealer is paid a fee when you buy shares and an annual fee
as long as you hold your shares. For Class A and Class B Shares, the annual fee
begins when you purchase your shares. For Class C Shares, it begins one year
after you purchase your shares. In addition to these payments, the investment
advisor may provide significant compensation to securities dealers and servicing
agents for distribution, administrative and promotional services.
Your securities dealer or servicing agent may receive different levels of
compensation depending upon which class of shares you buy.
DISTRIBUTION PLANS AND SHAREHOLDER SERVICING
The Fund has adopted plans under Rule 12b-1 that allow the Fund to pay your
securities dealer or shareholder servicing agent distribution and other fees for
the sale of its shares. In addition, the Fund may pay shareholder servicing fees
on Class B and Class C Shares. Class A Shares pay an annual distribution fee
equal to 0.25% of average daily net assets. Class B and Class C Shares pay an
annual distribution fee equal to 0.75% of average daily net assets and an annual
shareholder servicing fee equal to 0.25% of average daily net assets. Because
these fees are paid out of net assets on an ongoing basis, they will, over time,
increase the cost of your investment and may cost you more than paying other
types of sales charges.
9
<PAGE>
DIVIDENDS AND TAXES
--------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute to shareholders substantially all of its
net investment income in the form of annual dividends and to distribute net
realized capital gains at least annually.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income and
net realized capital gains at least annually. The dividends and distributions
you receive may be subject to federal, state, local and foreign taxation,
depending on your tax situation. If so, they are taxable whether or not you
reinvest them. Income distributions are generally taxable at ordinary income tax
rates. Capital gains distributions are generally taxable at the rates applicable
to long-term capital gains regardless of how long you have owned your shares.
Each sale or exchange of the Fund's shares is generally a taxable event. For tax
purposes, an exchange of your Fund shares for shares of a different Flag
Investors fund is the same as a sale. The individual tax rate on any gain from
the sale or exchange of your shares depends upon your marginal tax rate and how
long you have held your shares.
If you have a tax-advantaged or other retirement account you will generally
not be subject to federal taxation of income and capital gains distributions
until you begin receiving your distributions from your retirement account. You
should consult your tax advisor regarding rules governing your own retirement
plan.
If you are a non-US investor in the Fund you may be subject to US
withholding and estate tax and are encouraged to consult your tax advisor prior
to investing in the Fund.
If more than 50% of the Fund's total assets at the end of the fiscal year
are invested in foreign securities, the Fund may elect to pass-through to you
your pro-rata share of foreign taxes paid by the Fund. The Fund will provide you
with the necessary information to reflect the credit on your individual income
tax return if this election is made.
More information about taxes is in the Statement of Additional Information.
Please contact your tax advisor if you have specific questions about
federal, state, local or foreign income taxes.
ORGANIZATIONAL STRUCTURE
--------------------------------------------------------------------------------
The Fund is a "feeder fund" that invests substantially all of its assets in
the Japanese Equity Portfolio. The Fund and the Portfolio have the same
investment objective. The Portfolio is advised by Deutsche Fund Management, Inc.
and sub-advised by DWS International Portfolio Management GmbH. (See the section
entitled `Investment Advisor and Sub-Advisor'.)
The Portfolio accepts investments from other feeder funds. A feeder fund
bears the Portfolio's expenses in proportion to its assets. Each feeder fund can
set its own transaction minimums, fund-specific expenses, and other conditions.
This arrangement allows the Fund's Directors to withdraw the Fund's assets from
the Portfolio if they believe doing so is in the shareholders' best interests.
If the Directors withdraw the Fund's assets, they would then consider whether
the Fund should hire its own investment advisor, invest in a different master
portfolio, or take other action.
INVESTMENT ADVISOR AND SUB-ADVISOR
--------------------------------------------------------------------------------
Deutsche Fund Management, Inc. (`DFM'), the Portfolio's Advisor, is
responsible for managing the Portfolio's assets, including buying and selling
portfolio securities. The Advisor has delegated daily management of the
Portfolio's assets to the Sub-Advisor. DWS International Portfolio Management
GmbH (`DWS') is the Portfolio's Sub-Advisor. The address for the Advisor is 280
Park Avenue, New York, NY 10017. The address for DWS is Grueneburgweg 113-115,
60323 Frankfurt am Main, Germany.
The Advisor is entitled to receive an annual fee of 0.85% based on the
average daily net assets of the Portfolio. The Advisor pays the Sub-Advisor a
portion of this fee. The Advisor has contractually agreed to waive its fee and
reimburse expenses of the Fund and Portfolio in order to maintain the Fund's
total operating expenses (other than extraordinary expenses) at not more than
the following percentages of average annual net assets of the share classes
through January 1, 2002: 1.60% for Class A Shares; 2.35% for Class B Shares; and
2.35% for Class C Shares.
The Advisor and the Sub-Advisor are subsidiaries of Deutsche Bank AG, a
major global banking institution. With total assets the equivalent of $884.8
billion and 90,850 employees as of June 30, 2000, Deutsche Bank AG is one of
Europe's largest universal banks. It is engaged in a wide range of financial
services, including retail and commercial banking, investment banking and
insurance.
10
<PAGE>
Deutsche Bank AG and its affiliates may have commercial lending relationships
with companies whose securities may be held by the Portfolio.
Other subsidiaries of Deutsche Bank AG include Deutsche Asset Management
Europe GmbH (`DeAM Europe'), a company with limited liability organized under
the laws of Germany. DeAM Europe subsidiaries include German-based DWS
Investment GmbH (`DWS Investment') and others based in Luxembourg, Austria,
Switzerland, France, Poland and Italy. Together, DeAM Europe subsidiaries serve
as manager and/or investment advisor to more than 200 mutual funds, having
aggregate assets under management of more than the equivalent of $103.4 billion
as of June 30, 2000. DeAM Europe, along with its subsidiaries, employs
approximately 698 professionals and is one of the largest mutual fund operators
in Europe based on assets under management.
The primary subsidiary of DeAM Europe is DWS Investment. Founded in 1956,
DWS Investment is the largest mutual fund company in Germany, holding a 22.3%
share of the German mutual fund market based on assets under management as of
June 30, 2000. DeAM Europe and its subsidiaries are known in the financial
market as `DWS Group', an Investment Group of Deutsche Bank.
DeAM Europe subsidiaries have received widespread industry recognition in
Europe. For example, Standard & Poor's/Micropal, Europe's leading fund rating
organization, has accorded DWS Investment the following awards: 1994: best fund
manager for one-, three-, and five-year periods; 1995: best fund manager for
one-, three-, and five-year periods; 1996: best fund manager for three- and
five-year periods; 1997: best fund manager for three- and five-year periods;
1998: best fund manager for one-, three- and five-year periods; and 1999: best
fund manager for one- and five-year periods. These awards were given to fund
managers having ten or more funds registered for sale in Germany, based on the
manager with the highest number of funds ranked first within various categories
of investment objectives defined by Micropal. Fund rankings are based on
above-average performance in Deutsche mark (DM) terms and below- average
volatility.
PORTFOLIO MANAGEMENT
DWS uses a team approach to provide day-to-day portfolio management
services to the Portfolio in which the Fund invests. The DWS Portfolio
management team has three members, and includes Klaus Kaldemorgen and Klaus
Martini, who each have over 16 years of experience as an investment manager.
ADMINISTRATOR
--------------------------------------------------------------------------------
Investment Company Capital Corp. (`ICCC') provides administration services
to the Fund. ICCC supervises the day-to-day operations of the Fund, including
the preparation of registration statements, proxy materials, shareholder
reports, compliance with all requirements of securities laws in the states in
which shares are distributed and, subject to the supervision of the Fund's Board
of Directors, oversight of the relationship between the Fund and its other
service providers. ICCC is also the Fund's Transfer Agent.
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand the
Fund's financial performance since the inception of the Fund's Class A, Class B
and Class C Shares. Certain information reflects financial results for a single
share. The total returns in the tables represent the rate an investor would have
earned on an investment in the Fund, assuming reinvestment of all dividends and
distributions.
This information has been audited by PricewaterhouseCoopers LLP, whose
report, along with the Fund's financial statements, is included in the Annual
Report, which is available upon request.
The following financial information is for the fiscal year ended August 31,
2000. The financial information for fiscal year ended August 31, 1999 includes
results for the Fund when it was known as the Deutsche Japanese Equity Fund.
11
<PAGE>
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.)
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A SHARES
---------------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 20, 1997(1)
AUGUST 31, TO
------------------------ AUGUST 31,
2000 1999 1998
------ ------- ------
<S> <C> <C> <C>
Net asset value at beginning of period .............................. $20.12 $9.85 $12.50
------ ------- ------
INVESTMENT OPERATIONS:
Net investment income (expenses in excess of income) ................ (0.28) 0.00(4) (0.07)
Net realized and unrealized gain (loss) on investments and
foreign currencies allocated from Japanese
Equity Portfolio ................................................. 5.82 10.27 (2.58)
------ ------- ------
Increase (decrease) from investment operations ...................... 9.22 10.27 (2.65)
------ ------- ------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income ................................ -- -- --
Distributions from net realized gains ............................... (5.81) -- --
------ ------- ------
Total distributions ................................................. (5.81) -- --
------ ------- ------
NET ASSET VALUE AT END OF PERIOD ....................................... $19.85 $ 20.12 $ 9.85
====== ======= ======
TOTAL RETURN (BASED ON NET ASSET VALUE)(3) ............................. 25.57% 104.26% (21.20)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ................................... $3,262 $11,010 $ 14
RATIOS TO AVERAGE NET ASSETS:
Expenses(4) ......................................................... 1.60% 1.60% 1.60%(5)
Expenses in excess of income(4) ..................................... (1.23)% (1.29)% (1.00)%(5)
Portfolio turnover of Japanese Equity Portfolio ..................... 120% 133% 95%
</TABLE>
---------------------
(1) Commencement of operations.
(2) Total return would have been lower had certain expenses not been reimbursed
by the Advisors. Total Return has not been annualized for the period ended
August 31, 1998.
(3) Includes the Fund's allocated portion of the Portfolio's expenses net of
expense reimbursements. Had the Advisors not undertaken to reimburse such
expenses, the ratios of expenses and expenses in excess of income to
average net assets would have been as follows:
<TABLE>
<S> <C> <C> <C>
Expenses to average net assets .................................... 4.32% 5.88% 454.24%(4)
Expenses in excess of income to average net assets ................ (3.95)% (5.57)% (453.64)%(4)
</TABLE>
(4) Annualized.
12
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B SHARES
----------------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED AUGUST 10, 1998(1)
AUGUST 31, TO
-------------------------- AUGUST 31,
2000 1999 1998
-------- ------ ------
<S> <C> <C> <C>
Net asset value at beginning of period ................................ $ 24.58 $12.11 $12.50
-------- ------ ------
INVESTMENT OPERATIONS:
Expenses in excess of income .......................................... (0.63) (0.12) (0.01)
Net realized and unrealized gain (loss) on investments
and foreign currencies allocated from Japanese
Equity Portfolio ................................................... 6.71 12.59 (0.38)
-------- ------ ------
Increase (decrease) from investment operations ........................ 6.08 12.47 (0.39)
-------- ------ ------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income .................................. -- -- --
Distributions from net realized gains ................................. (5.81) -- --
-------- ------ ------
Total distributions ................................................... (5.81) -- --
-------- ------ ------
NET ASSET VALUE AT END OF PERIOD ......................................... $ 24.85 $24.58 $12.11
======== ====== ======
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) ............................... 22.66% 102.97% (3.12)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ..................................... $5,621 $4,604 $ 283
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) ........................................................... 2.35% 2.35% 2.35%(4)
Expenses in excess of income(3) ....................................... (1.90)% (1.74)% (1.25)%(4)
Portfolio turnover of Japanese Equity Portfolio ....................... 120% 133% 95%
</TABLE>
---------------------
(1) Commencement of operations.
(2) Total return would have been lower had certain expenses not been reimbursed
by the Advisors. Total return has not been annualized for the period ended
August 31, 1998.
(3) Includes the Fund's allocated portion of the Portfolio's expenses net of
expense reimbursements. Had the Advisors not undertaken to reimburse such
expenses, the ratios of expenses and expenses in excess of income to
average net assets would have been as follows:
<TABLE>
<S> <C> <C> <C>
Expenses to average net assets ............................. 5.35% 14.99% 454.99%(4)
Expenses in excess of income to average net assets ......... (4.90)% (14.38)% (453.89)%(4)
</TABLE>
(4) Annualized.
13
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C SHARES
--------------
FOR THE PERIOD
MAY 31, 2000(1)
TO
AUGUST 31,
2000
--------------
<S> <C>
Net asset value at beginning of period .............................................................. $24.10
------
INVESTMENT OPERATIONS:
Expenses in excess of income ........................................................................ (0.04)
Net realized and unrealized gain on investments and foreign currencies
allocated from Japanese Equity Portfolio ......................................................... (0.79)
------
Increase from investment operations ................................................................. (0.75)
------
NET ASSET VALUE AT END OF PERIOD ....................................................................... $24.85
======
TOTAL RETURN (BASED ON NET ASSET VALUE)(2).............................................................. 3.11%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ................................................................... $110
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) ......................................................................................... 2.35%(4)
Net investment income (expenses in excess of income)(3) ............................................. (2.07)%(4)
Portfolio turnover of Japanese Equity Portfolio ..................................................... 120%
</TABLE>
-----------------------------
(1) Commencement of operations.
(2) Total return would have been lower had certain expenses not been reimbursed
by the Advisors. Total return has not been annualized for the period ended
August 31, 2000.
(3) Includes the Fund's allocated portion of the Portfolio's expenses net of
expense reimbursements. Had the Advisors not undertaken to reimburse such
expenses, the ratios of expenses and expenses in excess of income to
average net assets would have been as follows:
<TABLE>
<S> <C>
Expenses to average net assets............................................ 8.74%(4)
Expenses in excess of income to average net assets........................ (8.46)%(4)
</TABLE>
(4) Annualized.
14
<PAGE>
DISTRIBUTOR
ICC DISTRIBUTORS, INC.
TRANSFER AGENT
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
1-800-553-8080
INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
250 W. Pratt Street
Baltimore, Maryland 21201
CUSTODIAN
INVESTORS BANK & TRUST COMPANY
200 Clarendon Street
Boston, Massachusetts 02116
FUND COUNSEL
MORGAN, LEWIS & BOCKIUS LLP
1701 Market Street
Philadelphia, Pennsylvania 19103
<PAGE>
[LOGO]
FLAG INVESTORS
INVESTING WITH A DIFFERENCE -Registered Trademark-
Flag Investors - P.O. Box 515 - Baltimore, MD 21203 - (800) 767-FLAG
www.flaginvestors.com
--------------------------------------------------------------------------------
You may obtain the following additional information about the Fund, free of
charge, from your securities dealer or servicing agent or by calling
(800) 767-FLAG:
- A statement of additional information (SAI) about the Fund that is
incorporated by reference into the prospectus.
- The Fund's most recent annual and semiannual reports containing detailed
financial information and, in the case of the annual report, a discussion
of market conditions and investment strategies that significantly affected
the Fund's performance during its last fiscal year.
In addition you may review information about the Fund (including the SAI) at the
Securities and Exchange Commission's Public Reference Room in Washington, D.C.
(Call 1-202-942-8090 to find out about the operation of the Public Reference
Room.) The EDGAR Database on the Commission's Internet site at
http://www.sec.gov has reports and other information about the Fund. Copies of
this information may be obtained, upon payment of a duplicating fee, by
electronic request at the following email address: [email protected], or by
writing the Public Reference Section of the Commission, Washington, D.C.
20549-0102.
For other shareholder inquiries, contact the Transfer Agent at (800) 553-8080.
For Fund information, call (800) 767-FLAG or your securities dealer or servicing
agent.
Investment Company Act File No. 811-8227 JEFPRO (01/01)
<PAGE>
[LOGO]
FLAG INVESTORS
INVESTING WITH A DIFFERENCE -REGISTERED TRADEMARK-
[GRAPHIC]
-------------------------------------------------
TOP 50 ASIA
CLASS A SHARES, CLASS B SHARES AND CLASS C SHARES
-------------------------------------------------
PROSPECTUS
JANUARY 1, 2001
The Securities and Exchange Commission (SEC) has neither approved nor
disapproved these securities or passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>
[LOGO]
FLAG INVESTORS
INVESTING WITH A DIFFERENCE -REGISTERED TRADEMARK-
THIS MUTUAL FUND (THE 'FUND') SEEKS HIGH CAPITAL APPRECIATION AND, AS A
SECONDARY OBJECTIVE, REASONABLE DIVIDEND INCOME THROUGH ITS INVESTMENT IN THE
TOP 50 ASIA PORTFOLIO.
The Fund invests all of its assets in the Top 50 Asia Portfolio of Flag
Investors Portfolios Trust (the 'Portfolio'), a separate mutual fund with
identical investment objectives and policies, through a master-feeder investment
fund structure. Therefore, all discussions in the prospectus regarding
investments relate to the Fund and the Portfolio.
The Fund offers shares through securities dealers and through financial
institutions that act as shareholder servicing agents. You may also buy shares
through the Fund's Transfer Agent. This Prospectus describes Flag Investors
Class A Shares ('Class A Shares'), Flag Investors Class B Shares ('Class B
Shares') and Flag Investors Class C Shares ('Class C Shares') of the Fund. These
separate classes give you a choice of sales charges and Fund expenses. (See the
section entitled 'Sales Charges.')
TABLE OF CONTENTS
-------------------
INVESTMENT SUMMARY ..........................................1
FEES AND EXPENSES OF THE FUND ...............................3
INVESTMENT PROGRAM ..........................................4
THE FUND'S NET ASSET VALUE ..................................6
HOW TO BUY SHARES ...........................................6
HOW TO REDEEM SHARES ........................................7
TELEPHONE TRANSACTIONS ......................................7
SALES CHARGES ...............................................8
HOW TO CHOOSE THE CLASS THAT IS RIGHT
FOR YOU .................................................10
DIVIDENDS AND TAXES ........................................10
ORGANIZATIONAL STRUCTURE ...................................11
INVESTMENT ADVISOR AND SUB-ADVISOR .........................11
ADMINISTRATOR ..............................................12
FINANCIAL HIGHLIGHTS .......................................12
<PAGE>
INVESTMENT SUMMARY
--------------------------------------------------------------------------------
OBJECTIVES AND STRATEGIES
The Fund seeks high capital appreciation and, as a secondary objective,
reasonable dividend income through its investment in the Portfolio. The Fund,
through the Portfolio, seeks to achieve its objective by investing at least 65%
of its total assets in equity securities (primarily common and preferred stocks)
of companies located or having a business focus (a majority of its profits or
sales made) in Asian countries. The Fund generally owns equity securities of 50
companies. The investment advisor and sub-advisor (the 'Advisors') seek
investments in companies considered to be of outstanding quality in their
particular field based on some or all of the following attributes:
- Strong market position within their market;
- Profitability, predictability and duration of earnings growth,
reflected in sound balance sheet ratios and financial statements;
- High quality management with an orientation toward strong, long-term
earnings;
- Long-range strategic plans in place; and
- Publicly-held with broad distribution of financial information related
to their operations.
RISK PROFILE
The Fund may be suited for you if you are willing to accept the risks of
investing in a particular foreign country or region in the hope of achieving
high capital appreciation and, secondarily, reasonable dividend income.
GENERAL STOCK RISK. The value of an investment in the Fund will vary from
day to day based on changes in the prices of the securities that the Fund holds.
Those prices, in turn, reflect investor perceptions of the economy, the markets
and the companies held by the Fund.
STYLE RISK. As with any investment strategy, the strategy used in managing
the Fund will, at times, perform better than or worse than other investment
styles and the overall market. If the Advisors overestimate the return potential
of one or more foreign stocks, the Fund may under-perform in the international
equities markets.
FOREIGN INVESTING RISK. Investing in foreign companies may entail different
risks than investing in US companies. The prices of foreign securities may be
affected by adverse political, economic or social developments unique to a
country or region. Accounting and financial reporting standards differ from
those in the US and could convey incomplete information when compared to
information typically provided by US companies. Foreign securities may trade
infrequently and be subject to greater price fluctuations than other securities.
FOREIGN CURRENCY RISKS. Since the Fund's investments are denominated in
foreign currencies, any change in the value of those currencies in relation to
the US dollar will result in a corresponding change in the value of the Fund's
investments and may cause the Fund's investments to lose money.
RISKS OF INVESTING IN A PARTICULAR FOREIGN COUNTRY OR REGION. Since the
Fund may invest a significant portion of its assets in a particular foreign
country or geographic region, the Fund is subject to greater currency risk and
is more susceptible to adverse impact from negative economic events or actions
of foreign governments in such countries or regions.
RISKS OF INVESTING IN EMERGING MARKETS. To the extent that the Fund invests
in emerging market countries, securities issued or traded in emerging markets
generally entail greater risk than securities issued or traded in developed
markets.
NON-DIVERSIFICATION RISKS. The Fund is non-diversified. As compared to a
diversified fund, the Fund is allowed to invest a higher percentage of its
assets in just a few issuers. This increases the Fund's risks by magnifying the
impact (positively or negatively) that any one issuer has on the Fund's
performance. The Fund generally attempts to maintain exposure to 50 issuers.
If you invest in the Fund, you could lose money. An investment in the Fund
is not a bank deposit and is not insured or guaranteed by the FDIC or any other
government agency.
1
<PAGE>
FUND PERFORMANCE
The following bar chart and table show the performance of the Fund both
year-by-year and as an average over different periods of time. The variability
of performance over time provides an indication of the risks of investing in the
Fund. This is an historical record and does not necessarily indicate how the
Fund will perform in the future.
CLASS A SHARES* FOR YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998 1999
<S> <C>
9.12% 122.03%
</TABLE>
* The bar chart does not reflect sales charges. If it did, returns would be less
than those shown. For the period from December 31, 1999 through September 30,
2000, the return for Class A Shares was (23.94)%.
During the two-year period shown in the bar chart, the highest return for a
quarter was 38.86% (quarter ended 12/31/99) and the lowest return for a quarter
was (19.84%) (quarter ended 6/30/98).
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1999)
<TABLE>
<CAPTION>
MSCI PACIFIC MSCI PACIFIC
EX-JAPAN EX-JAPAN
CLASS A SHARES(1) INDEX(2) CLASS B SHARES(1) INDEX(2)
----------------- ------------ ----------------- -----------
<S> <C> <C> <C> <C>
Past One Year ....... 109.92% 43.20% 109.47% 43.20%
Since Inception ..... 34.74%(3) 13.04%(4) 61.46%(5) 19.58%(6)
</TABLE>
----------
(1) These figures assume the reinvestment of dividends and capital gains
distributions and include the impact of the maximum sales charges.
(2) The MSCI Pacific ex-Japan Index is a broad-based market index of
Asia-Pacific (except Japan) equity securities.
(3) October 14, 1997.
(4) As of October 31, 1997.
(5) May 5, 1998.
(6) As of April 30, 1998.
No performance information is provided for the Class C Shares because they
were not offered prior to December 31, 1999. However, the performance of the
Class C Shares is expected to be similar to that of the Fund's other classes and
will differ only to the extent that Class C Shares do not have the same
expenses.
2
<PAGE>
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
INITIAL SALES DEFERRED SALES DEFERRED SALES
CHARGE CHARGE CHARGE
------------- -------------- --------------
<S> <C> <C> <C>
SHAREHOLDER FEES:
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price) ............................................ 5.50% None None
Maximum deferred sales charge (load) (as a percentage of original
purchase price or redemption proceeds, whichever is lower) ..................... 1.00%(1) 5.00%(2) 1.00%(3)
Maximum sales charge (load) imposed on reinvested dividends ....................... None None None
Redemption fee .................................................................... None None None
Exchange fee ...................................................................... None None None
ANNUAL FUND OPERATING EXPENSES(4):
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management fee .................................................................... 1.00% 1.00% 1.00%
Distribution and/or service (12b-1) fees(5) ....................................... 0.25% 1.00% 1.00%
Other expenses .................................................................... 1.03% 1.02% 1.54%
----- ----- -----
Total annual fund operating expenses (before fee waivers and expense
reimbursements) ................................................................ 2.28% 3.02% 3.54%
Total fee waivers and reimbursements of fund expenses(6) .......................... (0.68)% (0.67)% (1.19)%
----- ----- -----
Total net annual fund operating expenses (after fee waivers and
expense reimbursements) ........................................................ 1.60% 2.35% 2.35%
===== ===== =====
</TABLE>
----------
(1) You will pay no sales charge on purchases of $1 million or more of Class A
Shares, but you may pay a deferred sales charge if you redeem your shares
within two years after your purchase unless you are otherwise eligible for a
sales charge waiver or reduction. (See section entitled 'Sales
Charges--Redemption Price.')
(2) You will pay a deferred sales charge if you redeem your shares within six
years after your purchase. The amount of the charge declines over time and
eventually reaches zero. Seven years after your purchase, your Class B
Shares automatically convert to Class A Shares. (See section entitled 'Sales
Charges--Redemption Price.')
(3) You will pay a deferred sales charge if you redeem your shares within one
year after purchase. (See section entitled 'Sales Charges--Redemption
Price.')
(4) Information on the annual operating expenses reflects the expenses of both
the Fund and the Portfolio, the master fund in which the Fund invests its
assets. (See section entitled 'Organizational Structure.')
(5) A portion of the shareholder servicing fee is allocated to your securities
dealer and to qualified banks for services provided and expenses incurred in
maintaining your account, responding to your inquiries, and providing you
with information about your investment.
(6) The Advisor has contractually agreed to waive its fees and reimburse
expenses of the Fund through January 1, 2002 to the extent necessary to
maintain the Fund's expense ratio at the level indicated as 'Total net
annual fund operating expenses (after fee waivers and expense
reimbursements).'
3
<PAGE>
EXAMPLE:
This Example is intended to help you compare the cost of investing in each
class of the Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same during the period.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 YEAR* 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A Shares ................................................ $704 $1,165 $1,657 $3,043
Class B Shares ................................................ $738 $1,175 $1,745 $3,116
Class C Shares ................................................ $338 $ 984 $1,770 $3,926
You would pay the following expenses if you did
not redeem your shares:
Class A Shares ................................................ $704 $1,165 $1,657 $3,093
Class B Shares ................................................ $238 $ 875 $1,545 $3,116
Class C Shares ................................................ $238 $ 984 $1,770 $3,926
</TABLE>
* Based on Total Annual Fund Operating Expenses after fee waivers and expense
reimbursements for year one only.
Federal regulations require that the table above reflect the maximum sales
charge. However, you may qualify for reduced sales charges or no sales charge at
all. (See the section entitled 'Sales Charges.') If you hold your shares for a
long time, the combination of the initial sales charge you paid and the
recurring 12b-1 fees may exceed the maximum sales charges permitted by the
Conduct Rules of the National Association of Securities Dealers, Inc.
INVESTMENT PROGRAM
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks high capital appreciation and, as a secondary objective,
reasonable dividend income, through its investments in the Portfolio.
The Fund, through the Portfolio, seeks to achieve its objective by
investing at least 65% of its total assets in equity securities (primarily
common and preferred stocks) of companies located in or having a business focus
(a majority of its profits or sales made) in Asian countries, including China,
Hong Kong, India, Indonesia, Japan, South Korea, Malaysia, Philippines,
Singapore, Taiwan and Thailand. The Fund also invests in companies located in
Australia. Some of the countries in which the Fund invests may be considered
emerging market countries.
The Advisors are responsible for managing the Fund's investments. (See the
section entitled 'Investment Advisor and Sub-Advisor.') There can be no
guarantee that the Fund will achieve its goals.
The Fund generally owns equity securities of 50 companies. The Advisors
seek companies considered to be of outstanding quality in their particular field
based on some or all of the following attributes:
- Strong market position within their market;
- Profitability, predictability and duration of earnings growth,
reflected in sound balance sheet ratios and financial statements;
- High quality management with an orientation toward strong, long-term
earnings;
- Long-range strategic plans in place; and
- Generally publicly-held with broad distribution of financial
information related to their operations.
These companies may have one or more of the following attributes:
- Strong prospects for medium-term growth;
- Solid market position, with favorable financial performance and
indicators; and
- High quality management with an aim toward strong, long-term earnings
with a strategic view of their companies and markets.
Currently, a majority of the Fund's investments are in Japanese, Korean,
Taiwanese, Hong Kong and Singapore companies. Consistent with the Fund's
investment strategy, the Fund may invest in other Asian companies.
The Advisors monitor the companies selected for the Fund to assess risk by
analyzing possible changes in the earnings outlook and/or financial condition.
In order to assess risks, the Advisors monitor the annual and interim financial
statements of a broad universe of companies, conduct sector and industry
analyses, and maintain company contact, including company visits and attendance
at company meetings and analyst presentations. In addition, the Advisors assess
macroeconomic and stock market conditions in the various countries in which the
companies held by the Fund are domiciled or have their primary stock market
listings.
4
<PAGE>
The Advisors consider the geographic market focus of a company when
considering it for investment.
Although the Fund invests primarily in common and preferred stocks, the
Advisors may purchase other securities with equity characteristics, including
securities convertible into common stock and bonds with warrants. The Fund
invests principally in securities of companies that are listed on a stock
exchange or trade on a recognized, regulated market open to the public.
In assessing which investments to sell, the Advisors consider the following
factors, among others:
- Whether the company continues to meet the Fund's criteria for an
initial investment in a security; and
- Changes in the economy or the company's business that negatively
impact the attractiveness of the security as an investment.
The Advisors may use hedging transactions to attempt to reduce specific
risks. For example, to protect the Fund against circumstances that would
normally cause the Fund's portfolio securities to decline in value, the Fund may
buy or sell a derivative contract that would normally increase in value under
the same circumstances. The Fund may also attempt to hedge by using forward
contracts, combinations of different derivatives contracts, or of derivatives
contracts and securities. The Fund's ability to hedge may be limited by the
costs of the derivatives contracts. The Fund may attempt to lower the cost of
hedging by entering into transactions that provide only limited protection,
including transactions that (1) hedge only a portion of the Fund, (2) use
derivatives contracts that cover a narrow range of circumstances or (3) involve
the sale of derivatives contracts with different terms.
RISK CONSIDERATIONS
An investment in the Fund involves risk. Over time, common stocks have
shown greater potential for growth than other types of securities, but in the
short run stocks can be more volatile than other types of securities. Stock
prices are sensitive to developments affecting particular companies and to
general economic conditions that affect particular industry sectors as a whole.
No one can predict how the markets or stock prices will behave in the future.
Investing in foreign companies may have different risks than investing in
US companies. An investment in a foreign company may be affected by
developments, including political developments, that are unique to that market.
These developments may not affect the US economy or the prices of US securities
in the same manner. Therefore, the prices of foreign common stocks may, at
times, move in a different direction than the prices of US common stocks.
Financial reporting standards for companies based in foreign markets may differ
from those in the United States.
From time to time, foreign capital markets may exhibit more volatility than
those in the United States. Stocks that trade less frequently can be more
difficult or more costly to buy or to sell than more liquid or active stocks. On
the whole, foreign exchanges are smaller and less liquid than the US market.
Additionally, some foreign governments regulate their exchanges less
stringently, and the rights of shareholders may not be as firmly established.
The Fund's investments are usually denominated in the currencies of the
countries in which they are traded. As a result, the Fund may be affected by
changes in the value of foreign currencies in relation to the value of the US
dollar. The value of a foreign currency may change in response to events that do
not affect the value of the investment in its home country.
The Fund invests a significant portion of its assets in specific regions or
countries in Asia. The Fund is therefore exposed to the risks associated with
that region or country and could be subject to greater risk due to unanticipated
and negative economic events, actions by foreign governments, currency movements
and/or market action in such countries or regions. For example, the Fund invests
a substantial portion of its assets in Japanese, Korean, Taiwanese, Hong Kong,
and Singapore companies.
To the extent that the Fund invests in emerging markets to enhance overall
returns, it may face higher political, information and stock market risks. In
addition, profound social changes and business practices that depart from norms
in developed countries' economies have hindered the orderly growth of emerging
economies and their stock markets in the past. High levels of debt tend to make
emerging economies heavily reliant on foreign capital and vulnerable to capital
flight.
The Fund's ability to successfully use hedging techniques and derivative
transactions, including currency transactions, will depend on the ability of the
Advisors to predict the direction of the market and the correlation of the
transactions with changes in the value of the Fund's assets. Nevertheless,
hedging transactions will not eliminate risk even if they work as intended. In
addition, hedging strategies are not always successful, and could result in
increased expenses and losses to the Fund. Hedging transactions could expose the
Fund to the effect of leverage, which could increase the Fund's exposure to the
market and potential losses it could have had if it had not entered into these
transactions.
To reduce the Fund's risk under adverse market conditions the Advisors may
make temporary defensive investments in cash, cash items, shorter-term,
higher-quality debt securities, money market instruments and similar
obligations, such as repurchase agreements and reverse repurchase agreements.
While engaged in a temporary defensive strategy, the Fund may not achieve its
investment objective. The Advisors would follow such a strategy only if they
believed the risk of loss in pursuing the Fund's primary investment strategies
outweighed the opportunity for gain.
5
<PAGE>
THE FUND'S NET ASSET VALUE
--------------------------------------------------------------------------------
The price you pay when you buy shares or receive when you redeem shares is
based on the Fund's net asset value per share. When you buy Class A Shares, the
price you pay may be increased by a sales charge. When you redeem any class of
shares, the amount you receive may be reduced by a sales charge. See the section
entitled 'Sales Charges' for details on how and when these charges may or may
not be imposed.
The net asset value per share of the Fund is determined at the close of
regular trading on the New York Stock Exchange on each day the Exchange is open
for business. While regular trading ordinarily closes at 4:00 pm (Eastern Time),
it could be earlier, particularly on the day before a holiday. Contact the
Transfer Agent to determine whether the Fund will close early before a
particular holiday. Because the Fund owns foreign securities that trade in
foreign markets on days the Exchange may be closed, the value of the Fund's
assets may change on days you cannot purchase, redeem or exchange shares.
The net asset value per share is calculated by subtracting the liabilities
attributable to a class from its proportionate share of the Fund's assets and
dividing the result by the number of outstanding shares of the class. Because
the different classes have different distribution or service fees, their net
asset values may differ.
In valuing its assets, the Fund's investments are priced at their market
value. When price quotes for a particular security are not readily available or
may be unreliable, the security is priced at its 'fair value' using procedures
approved by the Fund's Board of Directors.
You may buy or redeem shares on any day the New York Stock Exchange is open
for business (a 'business day'). If your order is entered before the net asset
value per share is determined for that day, the price you pay or receive will be
based on that day's net asset value per share. If your order is entered after
the net asset value per share is determined for that day, the price you pay or
receive will be based on the next business day's net asset value per share.
The following sections describe how to buy and redeem shares.
HOW TO BUY SHARES
--------------------------------------------------------------------------------
You may buy any class of the Fund's shares through your securities dealer
or through any financial institution that is authorized to act as a shareholder
servicing agent. Contact them for details on how to enter and pay for your
order. You may also buy shares by sending your check (along with a completed
Application Form) directly to the Fund.
You may buy Class A Shares unless you are in a defined contribution plan
with assets of $75 million or more.
Your purchase order may not be accepted if the sale of Fund shares has been
suspended or if it is determined that your purchase would be detrimental to the
interests of the Fund's shareholders. In this connection, the Fund specifically
reserves the right to refuse (i) any purchase or exchange request or (ii)
multiple purchase or exchange requests, submitted by a shareholder, group of
shareholders, commonly controlled accounts or a dealer, that are deemed by the
Fund, in its sole discretion, to involve excessive trading or to be part of a
market timing strategy. For these purposes, the Fund may consider, among other
factors, an investor's trading history in the Fund or an affiliated fund, the
funds involved, the amount of the investment and the background of the investors
or dealers involved.
INVESTMENT MINIMUMS
Your initial investment must be at least $2,000. Subsequent investments
must be at least $100. The following are exceptions to these minimums:
- If you are investing in an IRA account, your initial investment may be
as low as $1,000.
- If you are a shareholder of any other Flag Investors fund, your
initial investment may be as low as $500.
- If you are a participant in the Fund's Automatic Investing Plan, your
initial investment may be as low as $250. If you participate in the
monthly plan, your subsequent investments may be as low as $100. If
you participate in the quarterly plan, your subsequent investments may
be as low as $250. See the section entitled 'Automatic Investing Plan'
for details.
- There is no minimum investment requirement for qualified retirement
plans such as 401(k), pension or profit sharing plans.
INVESTING REGULARLY
You may make regular investments in the Fund through any of the following
methods. If you wish to enroll in any of these programs or if you need any
addi-
6
<PAGE>
tional information, complete the appropriate section of the Application
Form or contact your securities dealer, your servicing agent, or the Transfer
Agent.
AUTOMATIC INVESTING PLAN. You may elect to make a regular monthly or
quarterly investment in any class of shares. The amount you decide upon will be
withdrawn from your checking account using a pre-authorized check. When the
money is received by the Transfer Agent, it will be invested in the class of
shares selected at that day's offering price. Either you or the Fund may
discontinue your participation upon 30 days' notice.
DIVIDEND REINVESTMENT PLAN. Unless you elect otherwise, all income and
capital gains distributions will be reinvested in additional Fund shares at net
asset value. You may elect to receive your distributions in cash or to have your
distributions invested in shares of other Flag Investors funds. To make either
of these elections or to terminate automatic reinvestment, complete the
appropriate section of the Application Form or notify the Transfer Agent, your
securities dealer or your servicing agent at least five days before the date on
which the next dividend or distribution will be paid.
SYSTEMATIC PURCHASE PLAN. You may also purchase any class of shares through
a Systematic Purchase Plan. Contact your securities dealer or servicing agent
for details.
HOW TO REDEEM SHARES
--------------------------------------------------------------------------------
You may redeem any class of the Fund's shares through your securities
dealer or servicing agent. Contact them for details on how to enter your order
and for information as to how you will be paid. If you have an account with the
Fund that is in your name, you may also redeem shares by contacting the Transfer
Agent by mail or (if you are redeeming $50,000 or less) by telephone. The
Transfer Agent will mail your redemption check within seven days after it
receives your order in proper form. See the section entitled 'Telephone
Transactions' for more information on this method of redemption.
Your securities dealer, your servicing agent, or the Transfer Agent may
require the following documents before they redeem your shares:
- A letter of instructions specifying your account number and the number
of shares or dollar amount you wish to redeem. The letter must be
signed by all owners of the shares exactly as their names appear on
the account.
- If you are redeeming more than $50,000, a guarantee of your signature.
You can obtain one from most banks or securities dealers.
- Any stock certificates representing the shares you are redeeming. The
certificates must be either properly endorsed or accompanied by a duly
executed stock power.
- Any additional documents that may be required if your account is in
the name of a corporation, partnership, trust or fiduciary.
OTHER REDEMPTION INFORMATION
Any dividends payable on shares you redeem will be paid on the next
dividend payable date. If you have redeemed all of your shares by that time, the
dividend will be paid to you in cash whether or not that is the payment option
you have selected.
If you redeem sufficient shares to reduce your investment to $500 or less,
the Fund reserves the right to redeem the remaining shares after giving you 60
days' notice. The Fund also reserves the right to redeem shares in-kind under
certain circumstances.
If you own Fund shares having a value of at least $10,000, you may arrange
to have some of your shares redeemed monthly or quarterly under the Fund's
Systematic Withdrawal Plan. Each redemption under this plan involves all the tax
and sales charge implications normally associated with Fund redemptions. Contact
your securities dealer, your servicing agent, or the Transfer Agent for
information on this plan.
TELEPHONE TRANSACTIONS
--------------------------------------------------------------------------------
If your shares are in an account with the Transfer Agent, you may redeem
them in any amount up to $50,000 or exchange them for shares in another Flag
Investors fund by calling the Transfer Agent on any Business Day between the
hours of 8:30 am and 7:00 pm (Eastern Time). You are automatically entitled to
telephone transaction privileges but you may specifically request that no
telephone redemptions or exchanges be accepted for your account. You may make
this election when you complete the Application Form or at any time thereafter
by completing and returning documentation supplied by the Transfer Agent.
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that telephoned instructions are genuine. These procedures include
requiring you to provide certain personal identification information when you
open your account and before you affect each telephone transaction. You may be
required to provide additional telecopied instructions. If these procedures are
employed, neither the Fund nor the Transfer Agent
7
<PAGE>
will bear any liability for following telephone instructions that it reasonably
believes to be genuine. Your telephone transaction request will be recorded.
During periods of economic or market volatility, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by mail.
If you hold shares in certificate form, you may not exchange or redeem them
by telephone.
SALES CHARGES
--------------------------------------------------------------------------------
PURCHASE PRICE
The price you pay to buy shares will be the Fund's offering price; this is
calculated by adding any applicable sales charges to the net asset value per
share of the class you are buying. The amount of any sales charge included in
your purchase price will be according to the following schedule:
<TABLE>
<CAPTION>
CLASS A
SALES CHARGE AS A % OF
----------------------
OFFERING NET AMOUNT CLASS B CLASS C
AMOUNT OF PURCHASE PRICE INVESTED SALES CHARGE SALES CHARGE
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $50,000 ..... 5.50% 5.82% None None
$50,000 - $99,999 ..... 4.50% 4.71% None None
$100,000 - $249,999 .... 3.50% 3.63% None None
$250,000 - $499,999 .... 2.50% 2.56% None None
$500,000 - $999,999 .... 2.00% 2.04% None None
$1,000,000 and over .... None None None None
--------------------------------------------------------------------------------
</TABLE>
Although you do not pay an initial sales charge when you invest $1,000,000
or more in Class A Shares or when you buy any amount of Class B or Class C
Shares, you may pay a sales charge when you redeem your shares. See the section
entitled 'Redemption Price' for details. Your securities dealer may be paid a
commission at the time of your purchase.
The sales charge you pay on your current purchase of Class A Shares may be
reduced under the circumstances listed below.
RIGHTS OF ACCUMULATION. If you are purchasing additional Class A Shares of
this Fund or Class A shares of any other Flag Investors fund or if you already
have investments in Class A shares, you may combine the value of your purchases
with the value of your existing investments to determine whether you qualify for
a reduced sales charge. (For this purpose your existing investments will be
valued at the higher of cost or current value.) You may also combine your
purchases and investments with those of your spouse and your children under the
age of 21 for this purpose. You must be able to provide sufficient information
to verify that you qualify for this right of accumulation.
LETTER OF INTENT. If you anticipate making additional purchases of Class A
Shares over the next 13 months, you may combine the value of your current
purchase with the value of your anticipated purchases to determine whether you
qualify for a reduced sales charge. You will be required to sign a letter of
intent specifying the total value of your anticipated purchases and to initially
purchase at least 5% of the total. When you make each purchase during the
period, you will pay the sales charge applicable to their combined value. If, at
the end of the 13-month period, the total value of your purchases is less than
the amount you indicated, you will be required to pay the difference between the
sales charges you paid and the sales charges applicable to the amount you
actually did purchase. Some of the shares you own will be redeemed to pay this
difference.
PURCHASES AT NET ASSET VALUE. You may buy Class A Shares without paying a
sales charge under the following circumstances:
- If you are reinvesting some or all of the proceeds of a redemption of
Class A Shares made within the last 90 days.
- If you are exchanging an investment in another Flag Investors fund for
an investment in this Fund (see the section entitled 'Purchases by
Exchange' for a description of the conditions).
- If you are a current or retired Director of this or any affiliated
fund, a director, an employee or a member of the immediate family of
an employee of any of the following (or their respective affiliates):
the Fund's distributor, the Advisors or a securities dealer authorized
to sell shares of the Fund.
- If you are buying shares in any of the following types of accounts:
-- A qualified retirement plan;
-- A Flag Investors fund payroll savings plan program;
-- A fiduciary or advisory account with a bank, bank trust
department, registered investment advisory company, financial
planner or securities dealer purchasing shares on your behalf. To
qualify for this provision you must be paying an account
management fee for the fiduciary or advisory services. Your
securities dealer or servicing agent may charge you an additional
fee if you buy shares in this manner.
PURCHASES BY EXCHANGE
You may exchange Class A, Class B or Class C shares of any other Flag
Investors fund for an equal dollar amount of Class A, Class B or Class C Shares,
respectively, without payment of the sales charges described above or any other
charge, up to four times a
8
<PAGE>
year. You may not exchange Flag Investors Cash Reserve Prime Shares for shares
of the Fund unless you acquired those shares through a prior exchange from a
fund for which you paid a sales charge. You may enter both your redemption and
purchase orders on the same business day or, if you have already redeemed the
shares of the other fund, you may enter your purchase order within 90 days of
the redemption. The Fund may modify or terminate these offers of exchange upon
60 days' notice.
You may request an exchange through your securities dealer or servicing
agent. Contact them for details on how to enter your order. If your shares are
in an account with the Fund's Transfer Agent, you may also request an exchange
directly through the Transfer Agent by mail or by telephone.
REDEMPTION PRICE
The amount of any sales charge deducted from your redemption price will be
determined according to the following schedule.
<TABLE>
<CAPTION>
SALES CHARGE AS A PERCENTAGE OF
THE DOLLAR AMOUNT SUBJECT TO CHARGE
(AS A % OF COST OR VALUE)
----------------------------------------
CLASS A CLASS B CLASS C
YEAR SINCE PURCHASE SALES CHARGE SALES CHARGE SALES CHARGE
--------------------------------------------------------------------------
<S> <C> <C> <C>
First ...................... 1.00%* 5.00% 1.00%
Second ..................... 0.50%* 4.00% None
Third ...................... None 3.00% None
Fourth ..................... None 3.00% None
Fifth ...................... None 2.00% None
Sixth ...................... None 1.00% None
Seventh and Thereafter ..... None None None
----------------------------------------------------------------------
</TABLE>
* You will pay a sales charge when you redeem Class A Shares only if your shares
were purchased at net asset value because they were part of an investment of $1
million or more.
DETERMINATION OF SALES CHARGE. The sales charge applicable to your
redemption is calculated in a manner that results in the lowest possible rate:
- No sales charge will be applied to shares you own as a result of
reinvesting dividends or distributions.
- If you have purchased shares at various times, the sales charge will
be applied first to shares you have owned for the longest period of
time.
- If you acquired your shares through an exchange of shares of another
Flag Investors fund, the period of time you held the original shares
will be combined with the period of time you held the shares being
redeemed to determine the years since purchase. If you bought your
shares prior to January 18, 2000, you will pay the sales charge in
effect at the time of your original purchase.
- The sales charge is applied to the lesser of the cost of the shares or
their value at the time of your redemption.
WAIVER OF SALES CHARGE. You may redeem shares without paying a sales charge
under any of the following circumstances:
- If you are exchanging your shares for shares of another Flag Investors
fund of the same class.
- If your redemption represents the minimum required distribution from
an individual retirement account (IRA) or other retirement plan.
- If your redemption represents a distribution from a Systematic
Withdrawal Plan. This waiver applies only if the annual withdrawals
under your Plan are 12% or less of your share balance.
- If shares are being redeemed in your account following your death or a
determination that you are disabled. This waiver applies only under
the following conditions:
-- The account is registered in your name either individually, as a
joint tenant with rights of survivorship, as a participant in
community property or as a minor child under the Uniform Gifts or
Uniform Transfers to Minors Acts.
-- Either you or your representative notifies your securities
dealer, servicing agent or the Transfer Agent that such
circumstances exist.
- If you are redeeming Class A Shares, your original investment was at
least $3,000,000 and your securities dealer has agreed to return to
the Fund's distributor any payments it received when you bought your
shares.
AUTOMATIC CONVERSION OF CLASS B SHARES. Your Class B Shares, along with any
reinvested dividends or distributions associated with those shares, will be
automatically converted to Class A Shares seven years after your purchase. If
you purchased your shares prior to January 18, 2000, your shares will be
converted to Class A Shares six years after your purchase. This conversion will
be made on the basis of the relative net asset values of the classes and will
not be a taxable event to you.
9
<PAGE>
HOW TO CHOOSE THE CLASS THAT IS RIGHT FOR YOU
--------------------------------------------------------------------------------
Your decision as to which class of the Fund's shares is best for you should
be based upon a number of factors including the amount of money you intend to
invest and the length of time you intend to hold your shares.
If you choose Class A Shares, you will pay a sales charge when you buy your
shares, but the amount of the charge declines as the amount of your investment
increases. You will pay lower expenses while you hold the shares and, except in
the case of investments of $1,000,000 or more, no sales charge if you redeem
them.
If you choose Class B Shares, you will pay no sales charge when you buy
your shares, but your annual expenses will be higher than Class A Shares. You
will pay a sales charge if you redeem your shares within six years of purchase,
but the amount of the charge declines the longer you hold your shares and, at
the end of seven years, your shares convert to Class A Shares, thus eliminating
the higher expenses.
If you choose Class C Shares, you will pay no sales charge when you buy
your shares or if you redeem them after holding them for at least a year. On the
other hand, expenses on Class C Shares are the same as those on Class B Shares
and, since there is no conversion to Class A Shares at the end of seven years,
the higher expenses continue for as long as you own your shares.
Your securities dealer is paid a fee when you buy shares and an annual fee
as long as you hold your shares. For Class A and Class B Shares, the annual fee
begins when you purchase your shares. For Class C Shares, it begins one year
after you purchase your shares. In addition to these payments, affiliates of the
Fund's investment advisor may provide significant compensation to securities
dealers and servicing agents for distribution, administrative and promotional
services.
Your securities dealer or servicing agent may receive different levels of
compensation depending upon which class of shares you buy.
DISTRIBUTION PLANS AND SHAREHOLDER SERVICING
The Fund has adopted plans under Rule 12b-1 that allow the Fund to pay your
securities dealer or shareholder servicing agent distribution and other fees for
the sale of its shares. In addition, the Fund may pay shareholder servicing fees
on Class B and Class C Shares. Class A Shares pay an annual distribution fee
equal to 0.25% of average daily net assets. Class B and Class C Shares pay an
annual distribution fee equal to 0.75% of average daily net assets and an annual
shareholder servicing fee equal to 0.25% of average daily net assets. Because
these fees are paid out of net assets on an on-going basis, they will, over
time, increase the cost of your investment and may cost you more than paying
other types of sales charges.
DIVIDENDS AND TAXES
--------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute to shareholders substantially all of its
net investment income in the form of annual dividends and to distribute net
realized capital gains at least annually.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income and
net realized capital gains at least annually. The dividends and distributions
you receive may be subject to federal, state, local and foreign taxation,
depending on your tax situation. If so, they are taxable whether or not you
reinvest them. Income distributions are generally taxable at ordinary income tax
rates. Capital gains distributions are generally taxable at the rates applicable
to long-term capital gains regardless of how long you have owned your shares.
Each sale or exchange of the Fund's shares is generally a taxable event. For tax
purposes, an exchange of your Fund shares for shares of a different Flag
Investors fund is the same as a sale. The individual tax rate on any gain from
the sale or exchange of your shares depends upon your marginal tax rate and how
long you have held your shares.
If you have a tax-advantaged or other retirement account you will generally
not be subject to federal taxation of income and capital gains distributions
until you begin receiving your distributions from your retirement account. You
should consult your tax advisor regarding rules governing your own retirement
plan.
If you are a non-US investor in the Fund you may be subject to US
withholding and estate tax and are encouraged to consult your tax advisor prior
to investing in the Fund.
If more than 50% of the Fund's total assets at the end of the fiscal year
are invested in foreign securities, the Fund may elect to pass-through to you
your pro-rata share of foreign taxes paid by the Fund. The Fund will provide you
with the necessary information to reflect the credit on your individual income
tax return if this election is made.
More information about taxes is in the Statement of Additional Information.
Please contact your tax advisor if you have specific questions about federal,
state, local or foreign income taxes.
10
<PAGE>
ORGANIZATIONAL STRUCTURE
--------------------------------------------------------------------------------
The Fund is a 'feeder fund' that invests substantially all of its assets in
the Top 50 Asia Portfolio. The Fund and the Portfolio have the same investment
objective. The Portfolio is advised by Deutsche Fund Management, Inc. and
sub-advised by DWS International Portfolio Management GmbH. (See the section
entitled 'Investment Advisor and Sub-Advisor.')
The Portfolio accepts investments from other feeder funds. A feeder fund
bears the Portfolio's expenses in proportion to its assets. Each feeder fund can
set its own transaction minimums, fund-specific expenses, and other conditions.
This arrangement allows the Fund's Directors to withdraw the Fund's assets from
the Portfolio if they believe doing so is in the shareholders' best interests.
If the Directors withdraw the Fund's assets, they would then consider whether
the Fund should hire its own investment advisor, invest in a different master
portfolio, or take other action.
INVESTMENT ADVISOR AND SUB-ADVISOR
--------------------------------------------------------------------------------
Deutsche Fund Management, Inc. ('DFM'), the Portfolio's Advisor, is
responsible for managing the Portfolio's assets, including buying and selling
portfolio securities. The Advisor has delegated daily management of the
Portfolio's assets to the Sub-Advisor. DWS International Portfolio Management
GmbH ('DWS') is the Portfolio's Sub-Advisor. The address for the Advisor is 280
Park Avenue, New York, NY 10017. The address for DWS is Grueneburgweg 113-115,
60323 Frankfurt am Main, Germany.
The Advisor is entitled to receive an annual fee of 1.00% based on the
average daily net assets of the Portfolio. The Advisor pays the Sub-Advisor a
portion of this fee. The Advisor has contractually agreed to waive its fee and
reimburse expenses of the Fund and Portfolio in order to maintain the Fund's
total operating expenses (other than extraordinary expenses) at not more than
the following percentages of average annual net assets of the share classes
through January 1, 2002: 1.60% for Class A Shares; 2.35% for Class B Shares; and
2.35% for Class C Shares.
The Advisor and the Sub-Advisor are subsidiaries of Deutsche Bank AG, a
major global banking institution. With total assets the equivalent of US $884.8
billion and 90,850 employees as of June 30, 2000, Deutsche Bank AG is one of
Europe's largest universal banks. It is engaged in a wide range of financial
services, including retail and commercial banking, investment banking and
insurance. Deutsche Bank AG and its affiliates may have commercial lending
relationships with companies whose securities may be held by the Portfolio.
Other subsidiaries of Deutsche Bank AG include Deutsche Asset Management
Europe GmbH ('DeAM Europe'), a company with limited liability organized under
the laws of Germany. DeAM Europe subsidiaries include German-based DWS
Investment GmbH ('DWS Investment') and others based in Luxembourg, Austria,
Switzerland, France, Poland and Italy. Together, DeAM Europe subsidiaries serve
as manager and/or investment advisor to more than 200 mutual funds, having
aggregate assets under management of more than the equivalent of $103.4 billion
as of June 30, 2000. DeAM Europe, along with its subsidiaries, employs
approximately 698 professionals and is one of the largest mutual fund operators
in Europe based on assets under management.
The primary subsidiary of DeAM Europe is DWS Investment. Founded in 1956,
DWS Investment is the largest mutual fund company in Germany, holding a 22.3%
share of the German mutual fund market based on assets under management as of
June 30, 2000. DeAM Europe and its subsidiaries in the financial market 'DWS
Group', an Investment Group of Deutsche Bank.
DeAM Europe subsidiaries have received widespread industry recognition in
Europe. For example, Standard & Poor's/Micropal, Europe's leading fund rating
organization, has accorded DWS Investment the following awards: 1994: best fund
manager for one-, three-, and five-year periods; 1995: best fund manager for
one-, three-, and five-year periods; 1996: best fund manager for three- and
five-year periods; 1997: best fund manager for three- and five-year periods;
1998: best fund manager for one-, three- and five-year periods, and 1999: best
fund manager for one- and five-year periods. These awards were given to fund
managers having ten or more funds registered for sale in Germany, based on the
manager with the highest number of funds ranked first within various categories
of investment objectives defined by Micropal. Fund rankings are based on
above-average performance in Deutsche mark (DM) terms and below-average
volatility.
PORTFOLIO MANAGEMENT
DWS uses a team approach to provide day-to-day portfolio management
services to the Portfolio in which the Fund invests. The DWS Portfolio
management team has three members, and includes Klaus Kaldemorgen and Klaus
Martini, who each have over 16 years of experience as an investment
manager.
11
<PAGE>
ADMINISTRATOR
--------------------------------------------------------------------------------
Investment Company Capital Corp. ('ICCC') provides administration services
to the Fund. ICCC supervises the day-to-day operations of the Fund, including
the preparation of registration statements, proxy materials, shareholder
reports, compliance with all requirements of securities laws in the states in
which shares are distributed and, subject to the supervision of the Fund's Board
of Directors, oversight of the relationship between the Fund and its other
service providers. ICCC is also the Fund's Transfer Agent.
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand the
Fund's financial performance since the inception of the Fund's Class A, Class B
and Class C Shares. Certain information reflects financial results for a single
share. The total returns in the tables represent the rate an investor would have
earned (or lost) on an investment in the Fund, assuming reinvestment of all
dividends and distributions.
This information has been audited by PricewaterhouseCoopers LLP, whose
report, along with the Fund's financial statements, is included in the Annual
Report which is available upon request.
The following financial information is for the fiscal year ended August 31,
2000. The financial information for the fiscal year ended August 31, 1999
includes results for the Fund when it was known as the Deutsche Top 50 Asia
Fund.
12
<PAGE>
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A SHARES
---------------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 14, 1997(1)
AUGUST 31, TO
----------------------------- AUGUST 31,
2000 1999 1998
----------- ----------- ----------
<S> <C> <C> <C>
Net asset value at beginning of period ................................ $ 18.79 $ 8.18 $ 12.50
----------- ----------- ----------
INVESTMENT OPERATIONS:
Net investment (expenses in excess of) income ......................... (0.10) (0.10) 0.01
Net realized and unrealized gain (loss) on investments
and foreign currencies allocated from Top 50 Asia Portfolio ........ 3.46 10.72 (4.33)
----------- ----------- ----------
Increase (decrease) from investment operations ........................ 3.36 10.62 (4.32)
----------- ----------- ----------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income .................................. (0.26) (0.01) --
Distributions from net realized gains ................................. (0.83) -- --
----------- ----------- ----------
Total distributions ................................................... (1.09) (0.01) --
----------- ----------- ----------
NET ASSET VALUE AT END OF PERIOD ......................................... $ 21.06 $ 18.79 $ 8.18
=========== =========== ==========
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) ............................... 17.54% 130.00% (34.56)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ..................................... $30,120 $23,954 $ 41
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) ........................................................... 1.60% 1.60% 1.60%(4)
Net investment income (expenses in excess of) income(3) ............... (0.58)% (0.34)% 0.15%(4)
Portfolio turnover of Top 50 Asia Portfolio ........................... 48% 51% 54%
</TABLE>
(1) Commencement of operations.
(2) Total return would have been lower had certain expenses not been reimbursed
by the Advisors. Total return has not been annualized for the period ended
August 31, 1998.
(3) Includes the Fund's allocated portion of the Portfolio's expenses net of
expense reimbursements. Had the Advisors not undertaken to reimburse such
expenses, the ratios of expenses and expenses in excess of income to
average net assets would have been as follows:
<TABLE>
<S> <C> <C> <C>
Expenses to average net assets ...................................... 2.28% 3.50% 247.05%(4)
Expenses in excess of income to average net assets .................. (1.26)% (2.24)% (245.30)%(4)
</TABLE>
(4) Annualized.
13
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B SHARES
---------------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED MAY 5, 1998(1)
AUGUST 31, TO
----------------------------- AUGUST 31,
2000 1999 1998
----------- ----------- ----------
<S> <C> <C> <C>
Net asset value at beginning of period ................................... $21.21 $ 9.28 $12.50
------ ------ ------
INVESTMENT OPERATIONS:
Expenses in excess of income ............................................. (0.45) (0.12) (0.02)
Net realized and unrealized gain (loss) on investments
and foreign currencies allocated from Top 50 Asia Portfolio ........... 4.05 12.06 (3.20)
------ ------ ------
Increase (decrease) from investment operations ........................... 3.60 11.94 (3.22)
------ ------ ------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income ..................................... (0.20) (0.01) --
Distributions from net realized gains .................................... (0.83) -- --
------ ------ ------
Total distributions ...................................................... (1.03) (0.01) --
------ ------ ------
NET ASSET VALUE AT END OF PERIOD ............................................ $23.78 $21.21 $ 9.28
====== ====== ======
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) .................................. 16.68% 128.65% (25.76)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ........................................ $4,867 $3,667 $ 50
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) .............................................................. 2.35% 2.35% 2.35%(4)
Expenses in excess of income(3) .......................................... (1.31)% (1.32)% (0.51)%(4)
Portfolio turnover of Top 50 Asia Portfolio .............................. 48% 51% 54%
</TABLE>
(1) Commencement of operations.
(2) Total return would have been lower had certain expenses not been reimbursed
by the Advisors. Total return has not been annualized for the period ended
August 31, 1998.
(3) Includes the Fund's allocated portion of the Portfolio's expenses net of
expense reimbursements. Had the Advisors not undertaken to reimburse such
expenses, the ratios of expenses and expenses in excess of income to average
net assets would have been as follows:
<TABLE>
<S> <C> <C> <C>
Expenses to average net assets ......................................... 3.02% 3.75% 247.80%(4)
Expenses in excess of income to average net assets ..................... (1.98)% (2.72)% (245.96)%(4)
</TABLE>
(4) Annualized.
14
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C SHARES
FOR THE PERIOD
MAY 31, 2000(1)
TO AUGUST 31,
2000
---------------
<S> <C>
Net asset value at beginning of period ................................................... $23.33
------
INVESTMENT OPERATIONS:
Expenses in excess of income ............................................................. (0.02)
Net realized and unrealized gain on investments and foreign currencies allocated from
Top 50 Asia Portfolio ................................................................. 0.48
------
Increase from investment operations ......................................................... 0.46
------
NET ASSET VALUE AT END OF PERIOD ............................................................ $23.79
======
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) .................................................. 1.97%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ........................................................ $124
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) .............................................................................. 2.35%(4)
Expenses in excess of income(3) .......................................................... (0.99)%(4)
Portfolio turnover of Top 50 Asia Portfolio .............................................. 48%
</TABLE>
-----------
(1) Commencement of operations.
(2) Total return would have been lower had certain expenses not been reimbursed
by the Advisors. Total return has not been annualized for the period ended
August 31, 2000.
(3) Includes the Fund's allocated portion of the Portfolio's expenses net of
expense reimbursements. Had the Advisors not undertaken to reimburse such
expenses, the ratios of expenses and expenses in excess of income to average
net assets would have been as follows:
<TABLE>
<S> <C>
Expenses to average net assets ......................................................... 3.54%(4)
Expenses in excess of income to average net assets ..................................... (2.18)%(4)
</TABLE>
(4) Annualized.
15
<PAGE>
DISTRIBUTOR
ICC DISTRIBUTORS, INC.
TRANSFER AGENT
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
1-800-553-8080
INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
250 W. Pratt Street
Baltimore, Maryland 21201
CUSTODIAN
INVESTORS BANK & TRUST COMPANY
200 Clarendon Street
Boston, Massachusetts 02116
FUND COUNSEL
MORGAN, LEWIS & BOCKIUS LLP
1701 Market Street
Philadelphia, Pennsylvania 19103
<PAGE>
[LOGO]
FLAG INVESTORS
INVESTING WITH A DIFFERENCE -Registered Trademark-
Flag Investors - P.O. Box 515 - Baltimore, MD 21203 - (800) 767-FLAG
www.flaginvestors.com
--------------------------------------------------------------------------------
You may obtain the following additional information about the Fund, free of
charge, from your securities dealer or servicing agent or by calling
(800) 767-FLAG:
- A statement of additional information (SAI) about the Fund that is
incorporated by reference into the prospectus.
- The Fund's most recent annual and semi-annual reports containing detailed
financial information and, in the case of the annual report, a discussion of
market conditions and investment strategies that significantly affected the
Fund's performance during its last fiscal year.
In addition you may review information about the Fund (including the SAI) at the
Securities and Exchange Commission's Public Reference Room in Washington, D.C.
(Call 1-202-942-8090 to find out about the operation of the Public Reference
Room.) The EDGAR Database on the Commission's Internet site at
http://www.sec.gov has reports and other information about the Fund. Copies of
this information may be obtained, upon payment of a duplicating fee, by
electronic request at the following email address: [email protected], or by
writing the Public Reference Section of the Commission, Washington, D.C.
20549-0102.
For other shareholder inquiries, contact the Transfer Agent at (800) 553-8080.
For Fund information, call (800) 767-FLAG or your securities dealer or servicing
agent.
Investment Company Act File No. 811-8227 TOP50APRO (01/01)
<PAGE>
[LOGO]
FLAG INVESTORS
INVESTING WITH A DIFFERENCE -REGISTERED TRADEMARK-
[GRAPHIC]
-------------------------------------------------
TOP 50 WORLD
CLASS A SHARES, CLASS B SHARES AND CLASS C SHARES
-------------------------------------------------
PROSPECTUS
JANUARY 1, 2001
The Securities and Exchange Commission (SEC) has neither approved nor
disapproved these securities or passed upon the adequacy of this Prospectus.
Any representation to the contrary is a criminal offense.
<PAGE>
[LOGO]
FLAG INVESTORS
INVESTING WITH A DIFFERENCE -REGISTERED TRADEMARK-
THIS MUTUAL FUND (THE 'FUND') SEEKS HIGH CAPITAL APPRECIATION AND, AS A
SECONDARY OBJECTIVE, REASONABLE DIVIDEND INCOME THROUGH ITS INVESTMENT IN THE
TOP 50 WORLD PORTFOLIO.
The Fund invests all of its assets in a Top 50 World Portfolio of Flag Investors
Portfolios Trust (the 'Portfolio'), a separate mutual fund with identical
investment objectives and policies, through a master-feeder investment fund
structure. Therefore, all discussions in the prospectus regarding investments
relate to the Fund and the Portfolio.
The Fund offers shares through securities dealers and through financial
institutions that act as shareholder servicing agents. You may also buy shares
through the Fund's Transfer Agent. This Prospectus describes Flag Investors
Class A Shares ('Class A Shares'), Flag Investors Class B Shares ('Class B
Shares') and Flag Investors Class C Shares ('Class C Shares') of the Fund. These
separate classes give you a choice of sales charges and Fund expenses. (See the
section entitled 'Sales Charges.')
TABLE OF CONTENTS
-----------------
Investment Summary ........................................ 1
Fees and Expenses of the Fund ............................. 3
Investment Program ........................................ 4
The Fund's Net Asset Value ................................ 6
How to Buy Shares ......................................... 6
How to Redeem Shares ...................................... 7
Telephone Transactions .................................... 8
Sales Charges ............................................. 8
How to Choose the Class
That is Right for You .................................. 10
Dividends and Taxes ....................................... 11
Organizational Structure .................................. 11
Investment Advisor and Sub-Advisor ........................ 11
Administrator ............................................. 12
Financial Highlights ..................................... 12
<PAGE>
INVESTMENT SUMMARY
--------------------------------------------------------------------------------
OBJECTIVES AND STRATEGIES
The Fund seeks high capital appreciation and, as a secondary objective,
reasonable dividend income, through its investment in the Portfolio. The Fund,
through the Portfolio, seeks to achieve its objective by investing at least 65%
of its total assets in equity securities (primarily common and preferred stocks)
with significant emphasis on North America, Europe and Asia. The Fund generally
owns equity securities of 50 companies which are large, creditworthy companies
renowned for the quality and wide acceptance of their products or services
('Blue Chip companies'). The investment advisor and sub-advisor (the 'Advisors')
seek investments in companies considered to be of outstanding quality in their
particular field based on some or all of the following attributes:
- Strong market position within their market;
- Profitability, predictability and duration of earnings growth,
reflected in sound balance sheet ratios and financial statements;
- High quality management with an orientation toward strong, long-term
earnings;
- Long-range strategic plans in place; and
- Publicly-held with broad distribution of financial information related
to their operations.
RISK PROFILE
The Fund may be suited for you if you are willing to accept the risks of
investing in a particular foreign country or region in the hope of achieving
high capital appreciation and, secondarily, reasonable dividend income.
GENERAL STOCK RISK. The value of an investment in the Fund will vary from
day to day based on changes in the prices of the securities that the Fund holds.
Those prices, in turn, reflect investor perceptions of the economy, the markets
and the companies held by the Fund.
STYLE RISK. As with any investment strategy, the strategy used in managing
the Fund will, at times, perform better than or worse than other investment
styles and the overall market. If the Advisors overestimate the return potential
of one or more foreign stocks, the Funds may underperform in the international
equities markets.
FOREIGN INVESTING RISK. Investing in foreign companies may entail different
risks than investing in US companies. The prices of foreign securities may be
affected by adverse political, economic or social developments unique to a
country or region. Accounting and financial reporting standards differ from
those in the US and could convey incomplete information when compared to
information typically provided by US companies. Foreign securities may trade
infrequently and be subject to greater price fluctuations than other securities.
FOREIGN CURRENCY RISKS. Since the Fund's investments are denominated in
foreign currencies, any change in the value of those currencies in relation to
the US dollar will result in a corresponding change in the value of the Fund's
investments and may cause the Fund's investments to lose money.
RISKS OF INVESTING IN A PARTICULAR FOREIGN COUNTRY OR REGION. Since the
Fund may invest a significant portion of its assets in a particular foreign
country or geographic region, the Fund is subject to greater currency risk and
is more susceptible to adverse impact from negative economic events or actions
of foreign governments in such countries or regions.
RISKS OF INVESTING IN EMERGING MARKETS. To the extent that the Fund invests
in emerging market countries, securities issued or traded in emerging markets
generally entail greater risk than securities issued or traded in developed
markets.
RISK RELATED TO COMPANY SIZE. The Fund may invest in securities of
mid-market capitalization companies that, as compared to larger companies, tend
to have fewer shareholders, less liquidity, more volatility, unproven track
records, limited products or services and limited access to capital, which could
cause the prices of these securities to vary, perhaps dramatically.
NON-DIVERSIFICATION RISKS. The Fund is non-diversified. As compared to a
diversified fund, the Fund is allowed to invest a higher percentage of its
assets in just a few issuers. This increases the Fund's risks by magnifying the
impact (positively or negatively) that any one issuer has on the Fund's
performance. The Fund generally attempts to maintain exposure to 50 issuers.
If you invest in the Fund, you could lose money. An investment in the Fund
is not a bank deposit and is not
1
<PAGE>
insured or guaranteed by the FDIC or any other government agency.
FUND PERFORMANCE
The following bar chart and table show the performance of the Fund both
year-by-year and as an average over different periods of time. The variability
of performance over time provides an indication of the risks of investing in the
Fund. This is an historical record and does not necessarily indicate how the
Fund will perform in the future.
Class A Shares*
For years ended December 31,
[CHART]
<TABLE>
<CAPTION>
1998 1999
<S> <C>
27.71% 30.50%
</TABLE>
* The bar chart does not reflect sales charges. If it did, returns would be
less than those shown. For the period from December 31, 1999 through
September 30, 2000, the return for Class A Shares was (8.91)%.
During the two-year period shown in the bar chart, the highest return for a
quarter was 23.20% (quarter ended 12/31/98) and the lowest return for a quarter
was (11.89)% (quarter ended 9/30/98).
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1999)
<TABLE>
<CAPTION>
MSCI MSCI
World World
Class A Shares(1) Index(2) Class B Shares(1) Index(2)
----------------- -------- ----------------- --------
<S> <C> <C> <C> <C>
Past One Year ........... 23.32% 25.34% 23.03% 25.34%
Since Inception ......... 42.10%(3) 20.71%(4) 22.37%(5) 19.88%(6)
</TABLE>
---------
(1) These figures assume the reinvestment of dividends and capital gains
distributions and include the impact of the maximum sales charges.
(2) The MSCI World Index is a broad-based market index of foreign equity
securities.
(3) October 2, 1997.
(4) As of September 30, 1997.
(5) May 4, 1998.
(6) As of April 30, 1998.
No performance information is provided for the Class C Shares because they
were not offered prior to December 31, 1999. However, the performance of the
Class C Shares is expected to be similar to that of the Fund's other classes and
will differ only to the extent that Class C Shares do not have the same
expenses.
2
<PAGE>
FEES AND EXPENSES OF THE FUND
--------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
SHAREHOLDER FEES: INITIAL SALES DEFERRED SALES DEFERRED SALES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT) CHARGE CHARGE CHARGE
------------- -------------- --------------
<S> <C> <C> <C>
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price) ......................................... 5.50% None None
Maximum deferred sales charge (load) (as a percentage of original
purchase price or redemption proceeds,whichever is lower) ................... 1.00%(1) 5.00%(2) 1.00%(3)
Maximum sales charge (load) imposed on reinvested dividends .................... None None None
Redemption fee ................................................................. None None None
Exchange fee ................................................................... None None None
ANNUAL FUND OPERATING EXPENSES(4):
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management fee ................................................................. 1.00% 1.00% 1.00%
Distribution and/or service (12b-1) fees(5) .................................... 0.25% 1.00% 1.00%
Other expenses ................................................................. 5.00% 5.07% 6.24%
----- ----- -----
Total annual fund operating expenses (before fee waivers and
expense reimbursements) ..................................................... 6.25% 7.07% 8.24%
Total fee waivers and reimbursements of fund expenses(6) ....................... (4.65)% (4.72)% (5.89)%
----- ----- -----
Total net annual fund operating expenses (after fee waivers and
expense reimbursements) ..................................................... 1.60% 2.35% 2.35%
===== ===== =====
</TABLE>
--------
(1) You will pay no sales charge on purchases of $1 million or more of Class A
Shares, but you may pay a deferred sales charge if you redeem your shares within
two years after your purchase unless you are otherwise eligible for a sales
charge waiver or reduction. (See section entitled 'Sales Charges--Redemption
Price.')
(2) You will pay a deferred sales charge if you redeem your shares within six
years after your purchase. The amount of the charge declines over time and
eventually reaches zero. Seven years after your purchase, your Class B Shares
automatically convert to Class A Shares. (See section entitled 'Sales
Charges--Redemption Price.')
(3) You will pay a deferred sales charge if you redeem your shares within one
year after purchase. (See section entitled 'Sales Charges--Redemption Price.')
(4) Information on the annual operating expenses reflects the expenses of both
the Fund and the Portfolio, the master fund in which the Fund invests its
assets. (See section entitled 'Organizational Structure.')
(5) A portion of the shareholder servicing fee is allocated to your securities
dealer and to qualified banks for services provided and expenses incurred in
maintaining your account, responding to your inquiries, and providing you with
information about your investment.
(6) The Advisor has contractually agreed to waive its fees and reimburse
expenses of the Fund through January 1, 2002 to the extent necessary to maintain
the Fund's expense ratio at the level indicated as 'Total net annual fund
operating expenses (after fee waivers and expense reimbursements).'
3
<PAGE>
EXAMPLE:
This Example is intended to help you compare the cost of investing in each
class of the Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your Shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR* 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
<S> <C> <C> <C> <C>
Class A Shares .................................................. $704 $1,967 $3,318 $7,117
Class B Shares .................................................. $738 $2,028 $3,499 $7,322
Class C Shares .................................................. $338 $1,975 $3,805 $8,822
You would pay the following expenses if you did not redeem your shares:
Class A Shares .................................................. $704 $1,967 $3,318 $7,117
Class B Shares .................................................. $238 $1,728 $3,299 $7,322
Class C Shares .................................................. $238 $1,975 $3,805 $8,822
</TABLE>
---------
* Based on Total Annual Fund Operating Expenses after fee waivers and expense
reimbursements for year one only.
Federal regulations require that the table above reflect the maximum sales
charge. However, you may qualify for reduced sales charges or no sales charge at
all. (See the section entitled `Sales Charges.') If you hold your shares for a
long time, the combination of the initial sales charge you paid and the
recurring 12b-1 fees may exceed the maximum sales charges permitted by the
Conduct Rules of the National Association of Securities Dealers, Inc.
INVESTMENT PROGRAM
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks high capital appreciation and, as a secondary objective,
reasonable dividend income, through its investment in the Portfolio. The Fund,
through the Portfolio, seeks to achieve its objective by investing at least 65%
of its total assets in equity securities (primarily common and preferred stocks)
of Blue Chip companies with significant emphasis on North America, Europe and
Asia. European countries include those that are members of the European Union,
the Convention on the European Economic Area (CEEA), Poland, Switzerland,
Slovakia, the Czech Republic and Hungary. Asian equity securities are those of
companies domiciled or with a business focus in Asian countries, including
China, Hong Kong, India, Indonesia, Japan, South Korea, Malaysia, Philippines,
Singapore, Taiwan and Thailand. Some of the countries in which the Fund invests
may be considered emerging market countries.
The Advisors are responsible for managing the Fund's investments. (See the
section entitled'Investment Advisor and Sub-Advisor.') There can be no guarantee
that the Fund will achieve its goals.
The Fund generally owns equity securities of 50 companies. The Advisors
seek companies considered to be of outstanding quality in their particular field
based on some or all of the following attributes:
- Strong market position within their market;
- Profitability, predictability and duration of earnings growth,
reflected in sound balance sheet ratios and financial statements;
- High quality management with an orientation toward strong, long-term
earnings;
- Long-range strategic plans in place; and
- Publicly-held with broad distribution of financial information related
to their operations.
The Fund seeks global diversification, although there is no specific
percentage limit on investments in a single country.
The Fund invests in companies with a strong market position that are
globally competitive, have outstanding growth potential and offer above-average
opportunities to take advantage of one or more of the following global future
trends ('megatrends'):
- Strong population growth in emerging markets;
- Aging population in industrialized nations, leading to growing demands
for the products and services of healthcare and related industries;
- Transition to an information and communications society;
- Growing demand for brand names;
- Growing oil/energy consumption worldwide.
The Advisors monitor the companies selected for the Fund to assess risk by
analyzing possible changes in their earnings outlook and/or financial condition.
In order to assess risks, the Advisors monitor the annual and interim financial
statements of a broad universe of companies, conduct sector and industry
analyses, and
4
<PAGE>
maintain company contact, including company visits and attendance at company
meetings and analyst presentations. In addition, the Advisors assess
macroeconomic and stock market conditions in the various countries in which the
companies held by the Fund are domiciled or have their primary stock market
listings.
The Advisors will consider the geographic market focus of a company when
considering it for investment.
Although the Fund invests primarily in common and preferred stocks, the
Advisors may purchase other securities with equity characteristics, including
securities convertible into common stock, and bonds with warrants. The Fund
invests principally in securities of companies that are listed on a stock
exchange or trade on a recognized, regulated market open to the public.
In assessing which investments to sell, the Advisors consider the following
factors, among others:
- whether the company continues to meet the Fund's criteria for an
initial investment in a security; and
- changes in the economy or the company's business that negatively
impact the attractiveness of the security as an investment.
The Advisors may use hedging transactions to attempt to reduce specific
risks. For example, to protect the Fund against circumstances that would
normally cause the Fund's portfolio securities to decline in value, the Fund may
buy or sell a derivative contract that would normally increase in value under
the same circumstances. The Fund may also attempt to hedge by using forward
contracts, combinations of different derivatives contracts, or of derivatives
contracts and securities. The Fund's ability to hedge may be limited by the
costs of the derivatives contracts. The Fund may attempt to lower the cost of
hedging by entering into transactions that provide only limited protection,
including transactions that (1) hedge only a portion of the Fund, (2) use
derivatives contracts that cover a narrow range of circumstances or (3) involve
the sale of derivatives contracts with different terms.
RISK CONSIDERATIONS
An investment in the Fund involves risk. Over time, common stocks have
shown greater potential for growth than other types of securities, but in the
short run stocks can be more volatile than other types of securities. Stock
prices are sensitive to developments affecting particular companies and to
general economic conditions that affect particular industry sectors as a whole.
No one can predict how the markets or stock prices will behave in the future.
Investing in foreign companies may have different risks than investing in
US companies. An investment in a foreign company may be affected by
developments, including political developments, that are unique to that market.
These developments may not affect the US economy or the prices of US securities
in the same manner. Therefore, the prices of foreign common stocks may, at
times, move in a different direction than the prices of US common stocks.
Financial reporting standards for companies based in foreign markets may differ
from those in the United States.
From time to time, foreign capital markets may exhibit more volatility than
those in the United States. Stocks that trade less frequently can be more
difficult or more costly to buy or to sell than more liquid or active stocks.
On the whole, foreign exchanges are smaller and less liquid than the US market.
Additionally, some foreign governments regulate their exchanges less
stringently, and the rights of shareholders may not be as firmly established.
The Fund's investments are usually denominated in the currencies of the
countries in which they are traded. As a result, the Fund may be affected by
changes in the value of foreign currencies in relation to the value of the US
dollar. The value of a foreign currency may change in response to events that do
not affect the value of the investment in its home country.
The Fund invests a significant portion of its assets in specific regions or
countries. The Fund is therefore exposed to the risks associated with that
region or country and could be subject to greater risk due to unanticipated and
negative economic events, actions by foreign governments, currency movements
and/or market action in such countries or regions. For example, the Fund has
invested a portion of its assets in Asia.
To the extent that the Fund invests in emerging markets to enhance overall
returns, it may face higher political, information, and stock market risks. In
addition, profound social changes and business practices that depart from norms
in developed countries' economies have hindered the orderly growth of emerging
economies and their stock markets in the past. High levels of debt tend to make
emerging economies heavily reliant on foreign capital and vulnerable to capital
flight.
The Fund invests in the shares of large, well-established companies and
smaller mid-sized companies. Investing in mid-sized companies poses unique
risks. The stocks of mid-sized companies tend to experience steeper fluctuations
in price than the stocks of larger companies. A shortage of reliable information
can also pose added risk. Industry-wide reversals may have a greater impact on
mid-sized companies, since they lack a large company's financial resources to
deal with setbacks. Managers of mid-sized companies may have less experience
coping with adversity or capitalizing on opportunity than their counterparts at
larger companies. Finally, stocks of mid-sized companies are typically less
liquid than large company stocks.
5
<PAGE>
The Fund's ability to successfully use hedging techniques and derivative
transactions, including currency transactions, will depend on the ability of the
Advisors to predict the direction of the market and the correlation of the
transactions with changes in the value of the Fund's assets. Nevertheless,
hedging transactions will not eliminate all risk even if they work as intended.
In addition, hedging strategies are not always successful, and could result in
increased expenses and losses to the Fund. Hedging transactions could expose the
Fund to the effect of leverage, which could increase the Fund's exposure to the
market and potential losses that it could have if it had not entered into these
transactions.
To reduce the Fund's risk under adverse market conditions, the Advisors may
make temporary defensive investments in cash, cash items, shorter-term,
higher-quality debt securities, money market instruments and similar
obligations, such as repurchase agreements and reverse repurchase agreements.
While engaged in a temporary defensive strategy, the Fund may not achieve its
investment objective. The Advisors would follow such a strategy only if they
believed the risk of loss in pursuing the Fund's primary investment strategies
outweighed the opportunity for gain.
THE FUND'S NET ASSET VALUE
--------------------------------------------------------------------------------
The price you pay when you buy shares or receive when you redeem shares is
based on the Fund's net asset value per share. When you buy Class A Shares, the
price you pay may be increased by a sales charge. When you redeem any class of
shares, the amount you receive may be reduced by a sales charge. See the section
entitled 'Sales Charges' for details on how and when these charges may or may
not be imposed.
The net asset value per share of the Fund is determined at the close of
regular trading on the New York Stock Exchange on each day the Exchange is open
for business, but no earlier than the latest close of regular trading that day
on any European securities exchange on which the Fund's portfolio securities may
trade. While regular trading on the New York Stock Exchange ordinarily closes at
4:00 pm (Eastern Time), it could be earlier, particularly on the day before a
holiday. Contact the Transfer Agent to determine whether the Fund will close
early before a particular holiday. Because the Fund owns foreign securities that
trade in foreign markets on days the Exchange may be closed, the value of the
Fund's assets may change on days you cannot purchase, redeem or exchange shares.
The net asset value per share is calculated by subtracting the liabilities
attributable to a class from its proportionate share of the Fund's assets and
dividing the result by the number of outstanding shares of the class. Because
the different classes have different distribution or service fees, their net
asset values may differ.
In valuing its assets, the Fund's investments are priced at their market
value. When price quotes for a particular security are not readily available or
may be unreliable, the security is priced at its 'fair value' using procedures
approved by the Fund's Board of Directors.
You may buy or redeem shares on any day the New York Stock Exchange is open
for business (a 'business day'). If your order is entered before the net asset
value per share is determined for that day, the price you pay or receive will be
based on that day's net asset value per share. If your order is entered after
the net asset value per share is determined for that day, the price you pay or
receive will be based on the next business day's net asset value per share.
The following sections describe how to buy and redeem shares.
HOW TO BUY SHARES
--------------------------------------------------------------------------------
You may buy any class of the Fund's shares through your securities dealer
or through any financial institution that is authorized to act as a shareholder
servicing agent. Contact them for details on how to enter and pay for your
order. You may also buy shares by sending your check (along with a completed
Application Form) directly to the Fund.
You may buy Class A Shares unless you are in a defined contribution plan
with assets of $75 million or more.
Your purchase order may not be accepted if the sale of Fund shares has been
suspended or if it is determined that your purchase would be detrimental to the
interests of the Fund's shareholders. In this connection, the Fund specifically
reserves the right to refuse (i) any purchase or exchange request or (ii)
multiple purchase or exchange requests, submitted by a shareholder, group of
shareholders, commonly controlled accounts or a dealer, that are deemed by the
Fund, in its sole discretion, to involve excessive trading or to be part of a
market timing strategy. For these purposes, the Fund may consider, among other
factors, an investor's trading history in the Fund or an affiliated fund, the
funds involved, the amount of the investment and the background of the investors
or dealers involved.
6
<PAGE>
INVESTMENT MINIMUMS
Your initial investment must be at least $2,000. Subsequent investments
must be at least $100. The following are exceptions to these minimums:
- If you are investing in an IRA account, your initial investment may be
as low as $1,000.
- If you are a shareholder of any other Flag Investors fund, your
initial investment may be as low as $500.
- If you are a participant in the Fund's Automatic Investing Plan, your
initial investment may be as low as $250. If you participate in the
monthly plan, your subsequent investments may be as low as $100. If
you participate in the quarterly plan, your subsequent investments may
be as low as $250. See the section entitled 'Automatic Investing Plan'
for details.
- There is no minimum investment requirement for qualified retirement
plans such as 401(k), pension or profit sharing plans.
INVESTING REGULARLY
You may make regular investments in the Fund through any of the following
methods. If you wish to enroll in any of these programs or if you need any
additional information, complete the appropriate section of the Application Form
or contact your securities dealer, your servicing agent, or the Transfer Agent.
AUTOMATIC INVESTING PLAN. You may elect to make a regular monthly or
quarterly investment in any class of shares. The amount you decide upon will be
withdrawn from your checking account using a pre-authorized check. When the
money is received by the Transfer Agent, it will be invested in the class of
shares selected at that day's offering price. Either you or the Fund may
discontinue your participation upon 30 days' notice.
DIVIDEND REINVESTMENT PLAN. Unless you elect otherwise, all income and
capital gains distributions will be reinvested in additional Fund shares at net
asset value. You may elect to receive your distributions in cash or to have your
distributions invested in shares of other Flag Investors funds. To make either
of these elections or to terminate automatic reinvestment, complete the
appropriate section of the Application Form or notify the Transfer Agent, your
securities dealer or your servicing agent at least five days before the date on
which the next dividend or distribution will be paid.
SYSTEMATIC PURCHASE PLAN. You may also purchase any class of shares through
a Systematic Purchase Plan. Contact your securities dealer or servicing agent
for details.
HOW TO REDEEM SHARES
--------------------------------------------------------------------------------
You may redeem any class of the Fund's shares through your securities
dealer or servicing agent. Contact them for details on how to enter your order
and for information as to how you will be paid. If you have an account with the
Fund that is in your name, you may also redeem shares by contacting the Transfer
Agent by mail or (if you are redeeming $50,000 or less) by telephone. The
Transfer Agent will mail your redemption check within seven days after it
receives your order in proper form. See the section entitled 'Telephone
Transactions' for more information on this method of redemption.
Your securities dealer, your servicing agent, or the Transfer Agent may
require the following documents before they redeem your shares:
- A letter of instructions specifying your account number and the number
of shares or dollar amount you wish to redeem. The letter must be
signed by all owners of the shares exactly as their names appear on
the account.
- If you are redeeming more than $50,000, a guarantee of your signature.
You can obtain one from most banks or securities dealers.
- Any stock certificates representing the shares you are redeeming. The
certificates must be either properly endorsed or accompanied by a duly
executed stock power.
- Any additional documents that may be required if your account is in
the name of a corporation, partnership, trust or fiduciary.
OTHER REDEMPTION INFORMATION
Any dividends payable on shares you redeem will be paid on the next
dividend payable date. If you have redeemed all of your shares by that time, the
dividend will be paid to you in cash whether or not that is the payment option
you have selected.
If you redeem sufficient shares to reduce your investment to $500 or less,
the Fund reserves the right to redeem the remaining shares after giving you 60
days' notice. The Fund also reserves the right to redeem shares in-kind under
certain circumstances.
If you own Fund shares having a value of at least $10,000, you may arrange
to have some of your shares redeemed monthly or quarterly under the Fund's
Systematic Withdrawal Plan. Each redemption under this plan involves all the tax
and sales charge implications normally associated with Fund redemptions. Contact
your securities dealer, your servicing agent, or the Transfer Agent for
information on this plan.
7
<PAGE>
TELEPHONE TRANSACTIONS
--------------------------------------------------------------------------------
If your shares are in an account with the Transfer Agent, you may redeem
them in any amount up to $50,000 or exchange them for shares in another Flag
Investors fund by calling the Transfer Agent on any Business Day between the
hours of 8:30 am and 7:00 pm (Eastern Time). You are automatically entitled to
telephone transaction privileges but you may specifically request that no
telephone redemptions or exchanges be accepted for your account. You may make
this election when you complete the Application Form or at any time thereafter
by completing and returning documentation supplied by the Transfer Agent.
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that telephoned instructions are genuine. These procedures include
requiring you to provide certain personal identification information when you
open your account and before you affect each telephone transaction. You may be
required to provide additional telecopied instructions. If these procedures are
employed, neither the Fund nor the Transfer Agent will bear any liability for
following telephone instructions that it reasonably believes to be genuine. Your
telephone transaction request will be recorded.
During periods of economic or market volatility, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by mail.
If you hold shares in certificate form, you may not exchange or redeem them
by telephone.
SALES CHARGES
--------------------------------------------------------------------------------
PURCHASE PRICE
The price you pay to buy shares will be the Fund's offering price; this is
calculated by adding any applicable sales charges to the net asset value per
share of the class you are buying. The amount of any sales charge included in
your purchase price will be according to the following schedule:
<TABLE>
<CAPTION>
CLASS A SALES
CHARGE AS A % OF
--------------------
OFFERING NET AMOUNT CLASS B CLASS C
AMOUNT OF PURCHASE PRICE INVESTED SALES CHARGE SALES CHARGE
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $50,000 ... 5.50% 5.82% None None
$50,000 - $99,999 ... 4.50% 4.71% None None
$100,000 - $249,999 ... 3.50% 3.63% None None
$250,000 - $499,999 ... 2.50% 2.56% None None
$500,000 - $999,999 ... 2.00% 2.04% None None
$1,000,000 and over ... None None None None
-----------------------------------------------------------------------
</TABLE>
Although you do not pay an initial sales charge when you invest $1,000,000
or more in Class A Shares or when you buy any amount of Class B or Class C
Shares, you may pay a sales charge when you redeem your shares. See the section
entitled 'Redemption Price' for details. Your securities dealer may be paid a
commission at the time of your purchase.
The sales charge you pay on your current purchase of Class A Shares may be
reduced under the circumstances listed below.
RIGHTS OF ACCUMULATION. If you are purchasing additional Class A Shares of
this Fund or Class A shares of any other Flag Investors fund or if you already
have investments in Class A shares, you may combine the value of your purchases
with the value of your existing investments to determine whether you qualify for
a reduced sales charge. (For this purpose your existing investments will be
valued at the higher of cost or current value.) You may also combine your
purchases and investments with those of your spouse and your children under the
age of 21 for this purpose. You must be able to provide sufficient information
to verify that you qualify for this right of accumulation.
LETTER OF INTENT. If you anticipate making additional purchases of Class A
Shares over the next 13 months, you may combine the value of your current
purchase with the value of your anticipated purchases to determine whether you
qualify for a reduced sales charge. You will be required to sign a letter of
intent specifying the total value of your anticipated purchases and to initially
purchase at least 5% of the total. When you make each purchase during the
period, you will pay the sales charge applicable to their combined value. If, at
the end of the 13-month period, the total value of your purchases is less than
the amount you indicated, you will be required to pay the difference between the
sales charges you paid and the sales charges applicable to the amount you
actually did purchase. Some of the shares you own will be redeemed to pay this
difference.
PURCHASES AT NET ASSET VALUE. You may buy Class A Shares without paying a
sales charge under the following circumstances:
- If you are reinvesting some or all of the proceeds of a redemption of
Class A Shares made within the last 90 days.
- If you are exchanging an investment in another Flag Investors fund for
an investment in this Fund (see the section entitled 'Purchases by
Exchange' for a description of the conditions).
- If you are a current or retired Director of this or any affiliated
fund, a director, an employee or a member of the immediate family of
an employee of any of the following (or their respective
8
<PAGE>
affiliates): the Fund's distributor, the Advisors or a securities dealer
authorized to sell shares of the Fund.
- If you are buying shares in any of the following types of accounts:
-- A qualified retirement plan;
-- A Flag Investors fund payroll savings plan program;
-- A fiduciary or advisory account with a bank, bank trust
department, registered investment advisory company, financial
planner or securities dealer purchasing shares on your behalf. To
qualify for this provision you must be paying an account
management fee for the fiduciary or advisory services. Your
securities dealer or servicing agent may charge you an additional
fee if you buy shares in this manner.
PURCHASES BY EXCHANGE
You may exchange Class A, Class B or Class C shares of any other Flag
Investors fund for an equal dollar amount of Class A, Class B or Class C Shares,
respectively, without payment of the sales charges described above or any other
charge, up to four times a year. You may not exchange Flag Investors Cash
Reserve Prime Shares for shares of the Fund unless you acquired those shares
through a prior exchange from a fund for which you paid a sales charge. You may
enter both your redemption and purchase orders on the same business day or, if
you have already redeemed the shares of the other fund, you may enter your
purchase order within 90 days of the redemption. The Fund may modify or
terminate these offers of exchange upon 60 days' notice.
You may request an exchange through your securities dealer or servicing
agent. Contact them for details on how to enter your order. If your shares are
in an account with the Fund's Transfer Agent, you may also request an exchange
directly through the Transfer Agent by mail or by telephone.
REDEMPTION PRICE
The amount of any sales charge deducted from your redemption price will be
determined according to the following schedule.
<TABLE>
<CAPTION>
SALES CHARGE AS A PERCENTAGE OF THE DOLLAR
AMOUNT SUBJECT TO CHARGE
(AS A % OF COST OR VALUE)
---------------------------------------------
CLASS A CLASS B CLASS C
YEAR SINCE PURCHASE SALES CHARGE SALES CHARGE SALES CHARGE
------------------------------------------------------------------------
<S> <C> <C> <C>
First .................... 1.00%* 5.00% 1.00%
Second ................... 0.50%* 4.00% None
Third .................... None 3.00% None
Fourth ................... None 3.00% None
Fifth .................... None 2.00% None
Sixth .................... None 1.00% None
Seventh and Thereafter.... None None None
------------------------------------------------------------------------
</TABLE>
* You will pay a sales charge when you redeem Class A Shares only if your shares
were purchased at net asset value because they were part of an investment of $1
million or more.
DETERMINATION OF SALES CHARGE. The sales charge applicable to your
redemption is calculated in a manner that results in the lowest possible rate:
- No sales charge will be applied to shares you own as a result of
reinvesting dividends or distributions.
- If you have purchased shares at various times, the sales charge will
be applied first to shares you have owned for the longest period of
time.
- If you acquired your shares through an exchange of shares of another
Flag Investors fund, the period of time you held the original shares
will be combined with the period of time you held the shares being
redeemed to determine the years since purchase. If you bought your
shares prior to January 18, 2000, you will pay the sales charge in
effect at the time of your original purchase.
- The sales charge is applied to the lesser of the cost of the shares or
their value at the time of your redemption.
WAIVER OF SALES CHARGE. You may redeem shares without paying a sales charge
under any of the following circumstances:
- If you are exchanging your shares for shares of another Flag Investors
fund of the same class.
- If your redemption represents the minimum required distribution from
an individual retirement account (IRA) or other retirement plan.
- If your redemption represents a distribution from a Systematic
Withdrawal Plan. This waiver
9
<PAGE>
applies only if the annual withdrawals under your Plan are 12% or less of
your share balance.
- If shares are being redeemed in your account following your death or a
determination that you are disabled. This waiver applies only under
the following conditions:
-- The account is registered in your name either individually, as a
joint tenant with rights of survivorship, as a participant in
community property or as a minor child under the Uniform Gifts or
Uniform Transfers to Minors Acts.
-- Either you or your representative notifies your securities
dealer, servicing agent or the Transfer Agent that such
circumstances exist.
- If you are redeeming Class A Shares, your original investment was at
least $3,000,000 and your securities dealer has agreed to return to
the Fund's distributor any payments it received when you bought your
shares.
AUTOMATIC CONVERSION OF CLASS B SHARES. Your Class B Shares, along with any
reinvested dividends or distributions associated with those shares, will be
automatically converted to Class A Shares seven years after your purchase. If
you purchased your shares prior to January 18, 2000, your shares will be
converted to Class A Shares six years after your purchase. This conversion will
be made on the basis of the relative net asset values of the classes and will
not be a taxable event to you.
HOW TO CHOOSE THE CLASS THAT IS RIGHT FOR YOU
--------------------------------------------------------------------------------
Your decision as to which class of the Fund's shares is best for you should
be based upon a number of factors including the amount of money you intend to
invest and the length of time you intend to hold your shares.
If you choose Class A Shares, you will pay a sales charge when you buy your
shares, but the amount of the charge declines as the amount of your investment
increases. You will pay lower expenses while you hold the shares and, except in
the case of investments of $1,000,000 or more, no sales charge if you redeem
them.
If you choose Class B Shares, you will pay no sales charge when you buy
your shares, but your annual expenses will be higher than Class A Shares. You
will pay a sales charge if you redeem your shares within six years of purchase,
but the amount of the charge declines the longer you hold your shares and, at
the end of seven years, your shares convert to Class A Shares, thus eliminating
the higher expenses.
If you choose Class C Shares, you will pay no sales charge when you buy
your shares or if you redeem them after holding them for at least a year. On the
other hand, expenses on Class C Shares are the same as those on Class B Shares
and, since there is no conversion to Class A Shares at the end of seven years,
the higher expenses continue for as long as you own your shares.
Your securities dealer is paid a fee when you buy shares and an annual fee
as long as you hold your shares. For Class A and Class B Shares, the annual fee
begins when you purchase your shares. For Class C Shares, it begins one year
after you purchase your shares. In addition to these payments, affiliates of the
Fund's investment advisor may provide significant compensation to securities
dealers and servicing agents for distribution, administrative and promotional
services.
Your securities dealer or servicing agent may receive different levels
of compensation depending upon which class of shares you buy.
DISTRIBUTION PLANS AND SHAREHOLDER SERVICING
The Fund has adopted plans under Rule 12b-1 that allow the Fund to pay your
securities dealer or shareholder servicing agent distribution and other fees for
the sale of its shares. In addition, the fund may pay shareholder servicing fees
on Class B and Class C Shares. Class A Shares pay an annual distribution fee
equal to 0.25% of average daily net assets. Class B and Class C Shares pay an
annual distribution fee equal to 0.75% of average daily net assets and an annual
shareholder servicing fee equal to 0.25% of average daily net assets. Because
these fees are paid out of net assets on an on-going basis, they will, over
time, increase the cost of your investment and may cost you more than paying
other types of sales charges.
10
<PAGE>
DIVIDENDS AND TAXES
--------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute to shareholders substantially all of its
net investment income in the form of annual dividends and to distribute net
realized capital gains at least annually.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income and
net realized capital gains at least annually. The dividends and distributions
you receive may be subject to federal, state, local and foreign taxation,
depending on your tax situation. If so, they are taxable whether or not you
reinvest them. Income distributions are generally taxable at ordinary income tax
rates. Capital gains distributions are generally taxable at the rates applicable
to long-term capital gains regardless of how long you have owned your shares.
Each sale or exchange of the Fund's shares is generally a taxable event. For tax
purposes, an exchange of your Fund shares for shares of a different Flag
Investors fund is the same as a sale. The individual tax rate on any gain from
the sale or exchange of your shares depends upon your marginal tax rate and how
long you have held your shares.
If you have a tax-advantaged or other retirement account you will generally
not be subject to federal taxation of income and capital gains distributions
until you begin receiving your distributions from your retirement account. You
should consult your tax advisor regarding rules governing your own retirement
plan.
If you are a non-US investor in the Fund you may be subject to US
withholding and estate tax and are encouraged to consult your tax advisor prior
to investing in the Fund.
More information about taxes is in the Statement of Additional Information.
Please contact your tax advisor if you have specific questions about federal,
state, local or foreign income taxes.
ORGANIZATIONAL STRUCTURE
--------------------------------------------------------------------------------
The Fund is a 'feeder fund' that invests substantially all of its assets in
the Top 50 World Portfolio. The Fund and the Portfolio have the same investment
objective. The Portfolio is advised by Deutsche Fund Management, Inc. and
sub-advised by DWS International Portfolio Management GmbH. (See the section
entitled 'Investment Advisor and Sub-Advisor'.)
The Portfolio accepts investments from other feeder funds. A feeder fund
bears the Portfolio's expenses in proportion to its assets. Each feeder fund can
set its own transaction minimums, fund-specific expenses, and other conditions.
This arrangement allows the Fund's Directors to withdraw the Fund's assets from
the Portfolio if they believe doing so is in the shareholders' best interests.
If the Directors withdraw the Fund's assets, they would then consider whether
the Fund should hire its own investment advisor, invest in a different master
portfolio, or take other action.
INVESTMENT ADVISOR AND SUB-ADVISOR
--------------------------------------------------------------------------------
Deutsche Fund Management, Inc. ('DFM'), the Portfolio's Advisor, is
responsible for managing the Portfolio's assets, including buying and selling
portfolio securities. The Advisor has delegated daily management of the
Portfolio's assets to the Sub-Advisor. DWS International Portfolio Management
GmbH ('DWS') is the Portfolio's Sub-Advisor. The address for the Advisor is 280
Park Avenue, New York, NY 10017. The address for DWS is Grueneburgweg 113-115,
60323 Frankfurt am Main, Germany.
The Advisor is entitled to receive an annual fee of 1.00% based on the
average daily net assets of the Portfolio. The Advisor pays the Sub-Advisor a
portion of this fee. The Advisor has contractually agreed to waive its fee and
reimburse expenses of the Fund and Portfolio in order to maintain the Fund's
total operating expenses (other than extraordinary expenses) at not more than
the following percentages of average annual net assets of the share classes
through January 1, 2002: 1.60% for Class A Shares; 2.35% for Class B Shares; and
2.35% for Class C Shares.
The Advisor and the Sub-Advisor are subsidiaries of Deutsche Bank AG, a
major global banking institution. With total assets the equivalent of US $884.8
billion and 90,850 employees as of June 30, 2000, Deutsche Bank AG is one of
Europe's largest universal banks. It is engaged in a wide range of financial
services, including retail and commercial banking, investment banking and
insurance. Deutsche Bank AG and its affiliates may have commercial lending
relationships with companies whose securities may be held by the Portfolio.
Other subsidiaries of Deutsche Bank AG include Deutsche Asset Management
Europe GmbH ('DeAM
11
<PAGE>
Europe'), a company with limited liability organized under the laws of Germany.
DeAM Europe subsidiaries include German-based DWS Investment GmbH ('DWS
Investment') and others based in Luxembourg, Austria, Switzerland, France,
Poland and Italy. Together, DeAM Europe subsidiaries serve as manager and/or
investment advisor to more than 200 mutual funds, having aggregate assets under
management of more than the equivalent of $103.4 billion as of June 30, 2000.
DeAM Europe, along with its subsidiaries, employs approximately 698
professionals and is one of the largest mutual fund operators in Europe based on
assets under management.
The primary subsidiary of DeAM Europe is DWS Investment. Founded in 1956,
DWS Investment is the largest mutual fund company in Germany, holding a 22.3%
share of the German mutual fund market based on assets under management as of
June 30, 2000. DeAM Europe and its subsidiaries are known in the financial
market as 'DWS Group', an Investment Group of Deutsche Bank.
DeAM Europe subsidiaries have received widespread industry recognition in
Europe. For example, Standard & Poor's/Micropal, Europe's leading fund rating
organization, has accorded DWS Investment the following awards: 1994: best fund
manager for one, three, and five-year periods; 1995: best fund manager for one,
three, and five-year periods; 1996: best fund manager for three and five-year
periods; 1997: best fund manager for three and five-year periods; 1998: best
fund manager for one, three and five-year periods; and 1999: best fund manager
for one and five-year periods. These awards were given to fund managers having
ten or more funds registered for sale in Germany, based on the manager with the
highest number of funds ranked first within various categories of investment
objectives defined by Micropal. Fund rankings are based on above-average
performance in Deutsche mark (DM) terms and below-average volatility.
PORTFOLIO MANAGEMENT
DWS uses a team approach to provide day-to-day portfolio management
services to the Portfolio in which the Fund invests. The DWS Portfolio
management team has five members, and includes Klaus Kaldemorgen and Klaus
Martini, who each have over 16 years of experience as an investment
manager.
ADMINISTRATOR
--------------------------------------------------------------------------------
Investment Company Capital Corp. ('ICCC')provides administration services
to the Fund. ICCC supervises the day-to-day operations of the Fund, including
the preparation of registration statements, proxy materials, shareholder
reports, compliance with all requirements of securities laws in the states in
which shares are distributed and, subject to the supervision of the Fund's
Board of Directors, oversight of the relationship between the Fund and its
other service providers. ICCC is also the Fund's Transfer Agent.
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand the
Fund's financial performance since the inception of the Fund's Class A, Class B
and Class C Shares. Certain information reflects financial results for a single
share. The total returns in the tables represent the rate an investor would have
earned (or lost) on an investment in the Fund, assuming reinvestment of all
dividends and distributions.
This information has been audited by PricewaterhouseCoopers LLP, whose
report, along with the Fund's financial statements, is included in the Annual
Report which is available upon request.
The following financial information is for the fiscal year ended August 31,
2000. The financial information for the year ended August 31, 1999 includes
results for the Fund when it was known as the Deutsche Top 50 World Fund.
12
<PAGE>
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A SHARES
---------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 2, 1997(1)
AUGUST 31, TO
--------------------- AUGUST 31,
2000 1999 1998
-------- --------- ---------------
<S> <C> <C> <C>
Net asset value at beginning of period ................................ $17.35 $12.35 $12.50
------ ------ ------
INVESTMENT OPERATIONS:
Net investment income (expenses in excess of income) .................. (0.09) 0.01 0.01
Net realized and unrealized gain (loss) on investments and
foreign currencies allocated from Top 50 World Portfolio ........... 2.34 5.18 (0.16)
------ ------ ------
Increase (decrease) from investment operations ........................ 2.25 5.19 (0.15)
------ ------ ------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income .................................. -- (0.00)(4) --
Distributions from net realized gains ................................. (0.16) (0.19) --
------ ------ ------
Total distributions ................................................... (0.16) (0.19) --
------ ------ ------
NET ASSET VALUE AT END OF PERIOD ......................................... $19.44 $17.35 $12.35
====== ====== ======
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) ............................... 12.95% 42.19% (1.20)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ..................................... $3,236 $2,776 $181
RATIOS TO AVERAGE NET ASSETS:
Expenses(4) ........................................................... 1.60% 1.60% 1.60%(5)
Net investment income (expenses in excess of income)(3) ............... (0.49)% 0.13% 0.13%(5)
Portfolio turnover of Top 50 World Portfolio .......................... 101% 79% 125%
</TABLE>
-------------------------------
(1) Commencement of operations.
(2) Total return would have been lower had certain expenses not been reimbursed
by the Advisors. Total return has not been annualized for the period ended
August 31, 1998.
(3) Includes the Fund's allocated portion of the Portfolio's expenses net of
expense reimbursements. Had the Advisors not undertaken to reimburse such
expenses, the ratios of expenses and net investment income (expenses in
excess of income) to average net assets would have been as follows:
<TABLE>
<S> <C> <C> <C>
Expenses to average net assets .................................. 6.25% 10.56% 127.49%(5)
Net investment income (expenses in excess of income) to average
net assets ...................................................... 5.14% (8.83)% (125.76)%(5)
</TABLE>
(4) Amount rounds to less than $0.01.
(5) Annualized.
13
<PAGE>
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B SHARES
------------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED MAY 4, 1998(1)
AUGUST 31, TO
------------------------- AUGUST 31,
2000 1999 1998
-------- -------- --------------
<S> <C> <C> <C>
Net asset value at beginning of period .................................. $15.43 $11.08 $12.50
------ ------ ------
INVESTMENT OPERATIONS:
Expenses in excess of income ............................................ (0.12) (0.02) (0.01)
Net realized and unrealized gain (loss) on investments and
foreign currencies allocated from Top 50 World Portfolio ............. 1.99 4.56 (1.41)
------ ------ ------
Increase (decrease) from investment operations .......................... 1.87 4.54 (1.42)
------ ------ ------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income .................................... -- (0.00)(4) --
Distributions from net realized gains ................................... (0.16) (0.19) --
------ ------ ------
Total distributions ..................................................... (0.16) (0.19) --
------ ------ ------
NET ASSET VALUE AT END OF PERIOD ........................................... $17.14 $15.43 $11.08
====== ====== ======
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) ................................. 12.10% 41.14% (11.36)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ....................................... $4,029 $2,131 $90
RATIOS TO AVERAGE NET ASSETS:
Expenses(3).............................................................. 2.35% 2.35% 2.35%(5)
Expenses in excess of income(3) ......................................... (1.25)% (0.64)% (0.84)%(5)
Portfolio turnover of Top 50 World Portfolio ............................ 101% 79% 125%
</TABLE>
--------------------------------
(1) Commencement of operations.
(2) Total return would have been lower had certain expenses not been reimbursed
by the Advisors. Total return has not been annualized for the period ended
August 31, 1998.
(3) Includes the Fund's allocated portion of the Portfolio's expenses net of
expense reimbursements. Had the Advisors not undertaken to reimburse such
expenses, the ratios of expenses and expenses in excess of income to
average net assets would have been as follows:
<TABLE>
<S> <C> <C> <C>
Expenses to average net assets .................................... 7.07% 12.29% 128.24%(5)
Net investment income (expenses in excess of income) to average
net assets ........................................................ (5.97)% (10.58)% (126.73)%(5)
</TABLE>
(4) Amount rounds to less than $0.01.
(5) Annualized.
14
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C SHARES
-----------------------
FOR THE PERIOD
MAY 31, 2000(1)
TO
AUGUST 31,
2000
----------------
<S> <C>
Net asset value at beginning of period ..................................................... $16.44
------
INVESTMENT OPERATIONS:
Expenses in excess of income ............................................................... (0.01)
Net realized and unrealized gain on investments and foreign currencies allocated from
Top 50 World Portfolio .................................................................. 0.71
------
Increase from investment operations ........................................................ 0.70
------
NET ASSET VALUE AT END OF PERIOD .............................................................. $17.14
======
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) (4.20)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) .......................................................... $103
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) ................................................................................ 2.35%(4)
Expenses in excess of income(3) ............................................................ (0.77)%(4)
Portfolio turnover of Top 50 World Portfolio ............................................... 101%
</TABLE>
--------
(1) Commencement of operations.
(2) Total Return would have been lower had certain expenses not been reimbursed
by the Advisors. Total return has not been annualized for the period ended
August 31, 2000.
(3) Includes the Fund's allocated portion of the Portfolio's expenses net of
expense reimbursements. Had the Advisors not undertaken to reimburse such
expenses, the ratios of expenses in excess of income to average net assets
would have been as follows:
<TABLE>
<S> <C>
Expenses to average net assets ....................................................... 8.24%(4)
Expenses in excess of income to average net assets ................................... (6.66)%(4)
</TABLE>
(4) Annualized.
15
<PAGE>
This page has been intentionally left blank.
<PAGE>
DISTRIBUTOR
ICC DISTRIBUTORS, INC.
TRANSFER AGENT
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
1-800-553-8080
INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
250 W. Pratt Street
Baltimore, Maryland 21201
CUSTODIAN
INVESTORS BANK & TRUST COMPANY
200 Clarendon Street
Boston, Massachusetts 02116
FUND COUNSEL
MORGAN, LEWIS & BOCKIUS LLP
1701 Market Street
Philadelphia, Pennsylvania 19103
<PAGE>
[LOGO]
FLAG INVESTORS
INVESTING WITH A DIFFERENCE-REGISTERED TRADEMARK-
Flag Investors - P.O. Box 515 - Baltimore, MD 21203 -(800) 767-FLAG
www.flaginvestors.com
-------------------------------------------------------------------------------
You may obtain the following additional information about the Fund, free of
charge, from your securities dealer or servicing agent or by calling
(800) 767-FLAG:
- A statement of additional information (SAI) about the Fund that is
incorporated by reference into the prospectus.
- The Fund's most recent annual and semi-annual reports containing detailed
financial information and, in the case of the annual report, a discussion of
market conditions and investment strategies that significantly affected the
Fund's performance during its last fiscal year.
In addition you may review information about the Fund (including the SAI) at the
Securities and Exchange Commission's Public Reference Room in Washington, D.C.
(Call 1-202-942-8090 to find out about the operation of the Public Reference
Room.) The EDGAR Database on the Commission's Internet site at
http://www.sec.gov has reports and other information about the Fund. Copies of
this information may be obtained, upon payment of a duplicating fee, by
electronic request at the following email address: [email protected], or by
writing the Public Reference Section of the Commission, Washington, D.C.
20549-0102.
For other shareholder inquiries, contact the Transfer Agent at (800) 553-8080.
For Fund information, call (800) 767-FLAG or your securities dealer or servicing
agent.
Investment Company Act File No. 811-8227 TOP50WPRO (01/01)
<PAGE>
[LOGO]
FLAG INVESTORS
INVESTING WITH A DIFFERENCE -REGISTERED TRADEMARK-
[GRAPHIC]
-------------------------------------------------
TOP 50 US
CLASS A SHARES, CLASS B SHARES AND CLASS C SHARES
-------------------------------------------------
PROSPECTUS
JANUARY 1, 2001
The Securities and Exchange Commission (SEC) has neither approved nor
disapproved these securities or passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>
[LOGO]
FLAG INVESTORS
INVESTING WITH A DIFFERENCE -REGISTERED TRADEMARK-
THIS MUTUAL FUND (THE `FUND') SEEKS HIGH CAPITAL APPRECIATION AND, AS A
SECONDARY OBJECTIVE, REASONABLE DIVIDEND INCOME THROUGH ITS INVESTMENT IN THE
TOP 50 US PORTFOLIO.
The Fund invests all of its assets in the Top 50 US Portfolio of Flag Investors
Portfolios Trust (the `Portfolio'), a separate mutual fund with identical
investment objectives and policies, through a master-feeder investment fund
structure. Therefore, all discussions in the prospectus regarding investments
relate to the Fund and the Portfolio.
The Fund offers shares through securities dealers and financial institutions
that act as shareholder servicing agents. You may also buy shares through the
Fund's Transfer Agent. This Prospectus describes Flag Investors Class A Shares
(`Class A Shares'), Flag Investors Class B Shares (`Class B Shares') and Flag
Investors Class C Shares (`Class C Shares') of the Fund. These separate classes
give you a choice of sales charges and Fund expenses. (See the section entitled
`Sales Charges.')
TABLE OF CONTENTS
-----------------
INVESTMENT SUMMARY ..........................................1
FEES AND EXPENSES OF THE FUND ...............................2
INVESTMENT PROGRAM ..........................................3
THE FUND'S NET ASSET VALUE ..................................4
HOW TO BUY SHARES ...........................................5
HOW TO REDEEM SHARES ........................................6
TELEPHONE TRANSACTIONS ......................................6
SALES CHARGES ...............................................7
HOW TO CHOOSE THE CLASS
THAT IS RIGHT FOR YOU ....................................8
DIVIDENDS AND TAXES .........................................9
ORGANIZATIONAL STRUCTURE ....................................9
INVESTMENT ADVISOR AND SUB-ADVISOR .........................10
ADMINISTRATOR ..............................................10
FINANCIAL HIGHLIGHTS .......................................10
<PAGE>
INVESTMENT SUMMARY
--------------------------------------------------------------------------------
OBJECTIVES AND STRATEGIES
The Fund seeks high capital appreciation and, as a secondary objective,
reasonable dividend income through its investment in the Portfolio. The Fund,
through the Portfolio, seeks to achieve its objective by investing at least 65%
of its total assets in equity securities (primarily common and preferred stocks)
of US companies. The Fund generally owns equity securities of 50 companies. The
investment advisor and sub-advisor (the `Advisors') seek investments in
companies considered to be of outstanding quality in their particular field
based on some or all of the following attributes:
- Strong market position within their market;
- Profitability, predictability and duration of earnings growth, reflected
in sound balance sheet ratios and financial statements;
- High quality management with an orientation toward strong, long-term
earnings;
- Long-range strategic plans in place; and
- Publicly-held with broad distribution of financial information related
to their operations.
RISK PROFILE
The Fund may be suited for you if you are willing to accept the risks and
uncertainties of the stock markets in the hope of achieving high capital
appreciation and, secondarily, reasonable dividend income.
GENERAL STOCK RISK. The value of an investment in the Fund will vary from
day to day based on changes in the prices of the securities that the Fund holds.
Those prices, in turn, reflect investor perceptions of the economy, the markets
and the companies held by the Fund.
STYLE RISK. As with any investment strategy, the strategy used in managing
the Fund will, at times, perform better than or worse than other investment
styles and the overall market. If the Advisors overestimate the return potential
of one sector of the stock market, the Fund may underperform in other sectors or
the market as a whole.
NON-DIVERSIFICATION RISKS. The Fund is nondiversified. As compared to a
diversified fund, the Fund is allowed to invest a higher percentage of its
assets in just a few issuers. This increases the Fund's risks by magnifying the
impact (positively or negatively) that any one issuer has on the Fund's
performance. The Fund generally attempts to maintain exposure to 50 issuers.
If you invest in the Fund, you could lose money. An investment in the Fund
is not a bank deposit and is not insured or guaranteed by the FDIC or any other
government agency.
FUND PERFORMANCE
The following bar chart and table show the performance of the Fund both
year-by-year and as an average over different periods of time. The variability
of performance over time provides an indication of the risks of investing in the
Fund. This is an historical record and does not necessarily indicate how the
Fund will perform in the future.
CLASS A SHARES*
FOR YEARS ENDED DECEMBER 31,
<TABLE>
<S> <C>
1998 33.88%
1999 28.01%
</TABLE>
* The bar chart does not reflect sales charges. If it did, returns would be
less than those shown. For the period from December 31, 1999 through
September 30, 2000, the return for Class A Shares was 3.85%.
During the two-year period shown in the bar chart, the highest return for a
quarter was 27.37% (quarter ended 12/31/98) and the lowest return for a quarter
was (11.04)% (quarter ended 9/30/98).
1
<PAGE>
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1999)
<TABLE>
<CAPTION>
S&P S&P S&P
CLASS A SHARES(1) 500 INDEX(2) CLASS B SHARES(1) 500 INDEX(2) CLASS C SHARES(1) 500 INDEX(2)
----------------- ------------ ----------------- ------------ ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Past One Year........... 20.97% 21.04% 20.66% 21.04% 25.34% 21.04%
Since Inception......... 24.91%(3) 23.27%(4) 22.64%(5) 19.50%(6) 44.89%(7) 39.83%(8)
</TABLE>
(1) These figures assume the reinvestment of dividends and capital gains
distributions and include the impact of the maximum sales charges.
(2) The Standard & Poor's (S&P) 500 Index is a broad-based market index of US
equity securities.
(3) October 2, 1997.
(4) As of September 30, 1997.
(5) March 18, 1998.
(6) As of March 31, 1998.
(7) September 2, 1998.
(8) As of August 31, 1998.
FEES AND EXPENSES OF THE FUND
-------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
SHAREHOLDER FEES: INITIAL SALES DEFERRED DEFERRED
(FEES PAID DIRECTLY FROM YOUR INVESTMENT) CHARGE SALES CHARGE SALES CHARGE
------- ------- -------
<S> <C> <C> <C>
Maximum sales charge (load) imposed on purchases (as a percentage of
offering price) .................................................................. 5.50% None None
Maximum deferred sales charge (load) (as a percentage of original purchase
price or redemption proceeds, whichever is lower) ................................ 1.00%(1) 5.00%(2) 1.00%(3)
Maximum sales charge (load) imposed on reinvested dividends ......................... None None None
Redemption fee ...................................................................... None None None
Exchange fee ........................................................................ None None None
ANNUAL FUND OPERATING EXPENSES(4):
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management fee ...................................................................... 0.85% 0.85% 0.85%
Distribution and/or service (12b-1) fees(5) ......................................... 0.25% 1.00% 1.00%
------- ------- -------
Other expenses ...................................................................... 3.71% 3.70% 3.68%
------- ------- -------
Total annual fund operating expenses (before fee waivers and
expense reimbursement) ........................................................... 4.81% 5.55% 5.53%
Total fee waivers and reimbursement of fund expenses(6),(7) ......................... (3.66)% (3.65)% (3.63)%
------- ------- -------
Total net annual fund operating expenses (after fee waivers and
expense reimbursements) .......................................................... 1.15% 1.90% 1.90%
======= ======= =======
</TABLE>
-----------------
(1) You will pay no sales charge on purchases of $1 million or more of Class A
Shares, but you may pay a deferred sales charge if you redeem your shares within
two years after your purchase unless you are otherwise eligible for a sales
charge waiver or reduction. (See section entitled `Sales Charges--Redemption
Price.')
(2) You will pay a deferred sales charge if you redeem your shares within six
years after your purchase. The amount of the charge declines over time and
eventually reaches zero. Seven years after your purchase, your Class B Shares
automatically convert to Class A Shares. (See section entitled `Sales
Charges--Redemption Price.')
(3) You will pay a deferred sales charge if you redeem your shares within one
year after purchase. (See section entitled `Sales Charges--Redemption Price.')
(4) Information on the annual operating expenses reflects the expenses of both
the Fund and the Portfolio, the master fund in which the Fund invests its
assets. (See section entitled `Organizational Structure.')
(5) A portion of the shareholder servicing fee is allocated to your securities
dealer and to qualified banks for services provided and expenses incurred in
maintaining your account, responding to your inquiries, and providing you with
information about your investment.
(6) Restated to reflect current fee structure.
(7) The Advisor has contractually agreed to waive its fees and reimburse
expenses of the Fund through January 1, 2002 to the extent necessary to maintain
the Fund's expense ratio at the level indicated as `Total net annual fund
operating expenses (after fee waivers and expense reimbursements).'
2
<PAGE>
EXAMPLE:
This Example is intended to help you compare the cost of investing in each
class of the Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR* 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A Shares .............................................. $659 $1,571 $2,487 $4,793
Class B Shares .............................................. $689 $1,587 $2,573 $4,839
Class C Shares .............................................. $290 $1,284 $2,367 $5,024
You would pay the following expenses if you did not redeem your shares:
Class A Shares .............................................. $659 $1,571 $2,487 $4,793
Class B Shares .............................................. $189 $1,287 $2,373 $3,780
Class C Shares .............................................. $190 $1,284 $2,367 $5,024
</TABLE>
-------------------
* Based on Total Annual Fund Operating Expenses after fee waivers and expense
reimbursements for year one only.
Federal regulations require that the table above reflect the maximum sales
charge. However, you may qualify for reduced sales charges or no sales charge at
all. (See the section entitled `Sales Charges.') If you hold your shares for a
long time, the combination of the initial sales charge you paid and the
recurring 12b-1 fees may exceed the maximum sales charges permitted by the
Conduct Rules of the National Association of Securities Dealers, Inc.
INVESTMENT PROGRAM
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks high capital appreciation and, as a secondary objective,
reasonable dividend income, through its investment in the Portfolio. The Fund,
through the Portfolio, seeks to achieve its objective by investing at least 65%
of its total assets in equity securities (primarily common and preferred stocks)
of US companies.
The Advisors are responsible for managing the Fund's investments. (See the
section entitled `Investment Advisor and Sub-Advisor.') There can be no
guarantee that the Fund will achieve its goals.
The Fund generally owns equity securities of 50 companies. The Advisors
seek companies considered to be of outstanding quality in their particular field
based on some or all of the following attributes:
- Strong market position within their market;
- Profitability, predictability and duration of earnings growth, reflected
in sound balance sheet ratios and financial statements;
- High quality management with an orientation toward strong, long-term
earnings;
- Long-range strategic plans in place; and
- Publicly-held with broad distribution of financial information related
to their operations.
These companies are primarily located or headquartered in the United
States, but may also conduct a substantial part of their business outside the
US. The Advisors emphasize investments in companies that dominate their markets
and maintain a leadership position through the combination of management talent,
product or service differentiation, economies of scale and financial strength.
The Advisors believe these companies are aggressive and tenacious. These
companies are leading-edge corporations and have a strong attitude geared toward
market share dominance.
In selecting investments, the Advisors will also emphasize the market
valuation of a company's earnings (ie, price/earnings or P/E ratio), as well as
the predictability and durability of its earnings growth. The analysis of
industry trends is also an important factor in the portfolio management process.
In assessing which investments to sell, the Advisors consider the following
factors, among others:
- Negative changes in those attributes used by the Advisors to assess
whether a company is of outstanding quality, as described above;
- A negative change in a company's earnings growth;
- The size of a particular holding relative to the Fund's overall
holdings; and
- Whether the target price of a particular holding has been met.
3
<PAGE>
The Advisors monitor the companies selected for the Fund to assess risk by
analyzing possible changes in the earnings outlook and/or financial condition.
In order to assess risks, the Advisors monitor the annual and interim financial
statements of a broad universe of companies, conduct sector and industry
analyses, and maintain company contact, including company visits and attendance
at company meetings and analyst presentations. In addition, the Advisors assess
macroeconomic and stock market conditions in the various countries in which the
companies held by the Fund, have their primary stock market listings or conduct
a substantial part of their business.
The Advisors consider the geographic market focus of the Fund when
considering companies for investment. Specifically, the Advisors assess the
level of operations that various companies currently held by the Fund have in a
country or region, and whether further investment in that region or country is
desirable.
Although the Fund invests primarily in common and preferred stocks, the
Advisors may purchase other securities with equity characteristics, including
securities convertible into common stock, and warrants. The Fund may invest only
in publicly traded securities and may participate in initial public offerings
from time to time.
The Advisors may use hedging transactions to attempt to reduce specific
risks. For example, to protect the Fund against circumstances that would
normally cause the Fund's portfolio securities to decline in value, the Fund may
buy or sell a derivative contract that would normally increase in value under
the same circumstances. The Fund may also attempt to hedge by using forward
contracts, combinations of different derivatives contracts, or of derivatives
contracts and securities. The Fund's ability to hedge may be limited by the
costs of the derivatives contracts. The Fund may attempt to lower the cost of
hedging by entering into transactions that provide only limited protection,
including transactions that (1) hedge only a portion of the Fund, (2) use
derivatives contracts that cover a narrow range of circumstances or (3) involve
the sale of derivatives contracts with different terms.
RISK CONSIDERATIONS
An investment in the Fund involves risk. Over time, common stocks have
shown greater potential for growth than other types of securities, but in the
short run stocks can be more volatile than other types of securities. Stock
prices are sensitive to developments affecting particular companies and to
general economic conditions that affect particular industry sectors as a whole.
No one can predict how the markets or stock prices will behave in the future.
As the Advisors allocate more of the Fund's portfolio holdings to a
particular sector of the stock market, the Fund's performance becomes more
susceptible to negative economic, business or other developments that generally
affect that sector. In the event of such negative developments, the Fund may
underperform other sectors of the stock market or the market as a whole.
The Fund's ability to successfully use hedging techniques and derivative
contracts, including futures, options, warrants and currency transactions, will
depend on the ability of the Advisors to predict the direction of the market and
the correlation of the transactions with changes in the value of the Fund's
assets. Nevertheless, hedging transactions will not eliminate risk even if they
work as intended. In addition, hedging strategies are not always successful, and
could result in increased expenses and losses to the Fund. Hedging transactions
could expose the Fund to the effect of leverage, and thereby increase the Fund's
exposure to the market and loss that it otherwise would have had if it had not
entered into these transactions.
To reduce the Fund's risk under adverse market conditions, the Advisors may
make temporary defensive investments in cash, cash items, shorter-term,
higher-quality debt securities, money market instruments and similar
obligations, such as repurchase agreements and reverse repurchase agreements.
While engaged in a temporary defensive strategy, the Fund may not achieve its
investment objective. The Advisors would follow such a strategy only if they
believed the risk of loss in pursuing the Fund's primary investment strategies
outweighed the opportunity for gain.
THE FUND'S NET ASSET VALUE
--------------------------------------------------------------------------------
The price you pay when you buy shares or receive when you redeem shares is
based on the Fund's net asset value per share. When you buy Class A Shares, the
price you pay may be increased by a sales charge. When you redeem any class of
shares, the amount you receive may be reduced by a sales charge. See the section
entitled `Sales Charges' for details on how and when these charges may or may
not be imposed.
The net asset value per share of the Fund is determined at the close of
regular trading on the New York Stock Exchange on each day the Exchange is open
for business. While regular trading ordinarily closes at 4:00 pm (Eastern Time),
it could be earlier, particularly on the day before a holiday. Contact the
Transfer Agent to determine whether the Fund will close early before a
particular holiday.
4
<PAGE>
The net asset value per share is calculated by subtracting the liabilities
attributable to a class from its proportionate share of the Fund's assets and
dividing the result by the number of outstanding shares of the class. Because
the different classes have different distribution or service fees, their net
asset values may differ.
In valuing its assets, the Fund's investments are priced at their market
value. When price quotes for a particular security are not readily available or
may be unreliable, the security is priced at its `fair value' using procedures
approved by the Fund's Board of Directors.
You may buy or redeem shares on any day the New York Stock Exchange is open
for business (a `business day'). If your order is entered before the net asset
value per share is determined for that day, the price you pay or receive will be
based on that day's net asset value per share. If your order is entered after
the net asset value per share is determined for that day the price you pay or
receive will be based on the next business day's net asset value per share.
The following sections describe how to buy and redeem shares.
HOW TO BUY SHARES
--------------------------------------------------------------------------------
You may buy any class of the Fund's shares through your securities dealer
or through any financial institution that is authorized to act as a shareholder
servicing agent. Contact them for details on how to enter and pay for your
order. You may also buy shares by sending your check (along with a completed
Application Form) directly to the Fund.
You may buy Class A Shares unless you are in a defined contribution plan
with assets of $75 million or more.
Your purchase order may not be accepted if the sale of Fund shares has been
suspended or if it is determined that your purchase would be detrimental to the
interests of the Fund's shareholders. In this connection, the Fund specifically
reserves the right to refuse (i) any purchase or exchange request or (ii)
multiple purchase or exchange requests, submitted by a shareholder, group of
shareholders, commonly controlled accounts or a dealer, that are deemed by the
Fund, in its sole discretion, to involve excessive trading or to be part of a
market timing strategy. For these purposes, the Fund may consider, among other
factors, an investor's trading history in the Fund or an affiliated fund, the
funds involved, the amount of the investment and the background of the investors
or dealers involved.
INVESTMENT MINIMUMS
Your initial investment must be at least $2,000. Subsequent investments
must be at least $100. The following are exceptions to these minimums:
- If you are investing in an IRA account, your initial investment may be as
low as $1,000.
- If you are a shareholder of any other Flag Investors fund, your initial
investment may be as low as $500.
- If you are a participant in the Fund's Automatic Investing Plan, your
initial investment may be as low as $250. If you participate in the
monthly plan, your subsequent investments may be as low as $100. If
you participate in the quarterly plan, your subsequent investments may
be as low as $250. See the section entitled `Automatic Investing Plan'
for details.
- There is no minimum investment requirement for qualified retirement
plans such as 401(k), pension or profit sharing plans.
INVESTING REGULARLY
You may make regular investments in the Fund through any of the following
methods. If you wish to enroll in any of these programs or if you need any
additional information, complete the appropriate section of the Application Form
or contact your securities dealer, your servicing agent, or the Transfer Agent.
AUTOMATIC INVESTING PLAN. You may elect to make a regular monthly or
quarterly investment in any class of shares. The amount you decide upon will be
withdrawn from your checking account using a pre-authorized check. When the
money is received by the Transfer Agent, it will be invested in the class of
shares selected at that day's offering price. Either you or the Fund may
discontinue your participation upon 30 days' notice.
DIVIDEND REINVESTMENT PLAN. Unless you elect otherwise, all income and
capital gains distributions will be reinvested in additional Fund shares at net
asset value. You may elect to receive your distributions in cash or to have your
distributions invested in shares of other Flag Investors funds. To make either
of these elections or to terminate automatic reinvestment, complete the
appropriate section of the Application Form or notify the Transfer Agent, your
securities dealer or your servicing agent at least five days before the date on
which the next dividend or distribution will be paid.
SYSTEMATIC PURCHASE PLAN. You may also purchase any class of shares through
a Systematic Purchase Plan. Contact your securities dealer or servicing agent
for details.
5
<PAGE>
HOW TO REDEEM SHARES
--------------------------------------------------------------------------------
You may redeem any class of the Fund's shares through your securities
dealer or servicing agent. Contact them for details on how to enter your order
and for information as to how you will be paid. If you have an account with the
Fund that is in your name, you may also redeem shares by contacting the Transfer
Agent by mail or (if you are redeeming $50,000 or less) by telephone. The
Transfer Agent will mail your redemption check within seven days after it
receives your order in proper form. See the section entitled `Telephone
Transactions' for more information on this method of redemption.
Your securities dealer, your servicing agent, or the Transfer Agent may
require the following documents before they redeem your shares:
- A letter of instructions specifying your account number and the number
of shares or dollar amount you wish to redeem. The letter must be signed
by all owners of the shares exactly as their names appear on the
account.
- If you are redeeming more than $50,000, a guarantee of your signature.
You can obtain one from most banks or securities dealers.
- Any stock certificates representing the shares you are redeeming. The
certificates must be either properly endorsed or accompanied by a duly
executed stock power.
- Any additional documents that may be required if your account is in the
name of a corporation, partnership, trust or fiduciary.
OTHER REDEMPTION INFORMATION
Any dividends payable on shares you redeem will be paid on the next
dividend payable date. If you have redeemed all of your shares by that time, the
dividend will be paid to you in cash whether or not that is the payment option
you have selected.
If you redeem sufficient shares to reduce your investment to $500 or less,
the Fund reserves the right to redeem the remaining shares after giving you 60
days' notice. The Fund also reserves the right to redeem shares in kind under
certain circumstances.
If you own Fund shares having a value of at least $10,000, you may arrange
to have some of your shares redeemed monthly or quarterly under the Fund's
Systematic Withdrawal Plan. Each redemption under this plan involves all the tax
and sales charge implications normally associated with Fund redemptions. Contact
your securities dealer, your servicing agent, or the Transfer Agent for
information on this plan.
TELEPHONE TRANSACTIONS
--------------------------------------------------------------------------------
If your shares are in an account with the Transfer Agent, you may redeem
them in any amount up to $50,000 or exchange them for shares in another Flag
Investors fund by calling the Transfer Agent on any Business Day between the
hours of 8:30 am and 7:00 pm (Eastern Time). You are automatically entitled to
telephone transaction privileges but you may specifically request that no
telephone redemptions or exchanges be accepted for your account. You may make
this election when you complete the Application Form or at any time thereafter
by completing and returning documentation supplied by the Transfer Agent.
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that telephoned instructions are genuine. These procedures include
requiring you to provide certain personal identification information when you
open your account and before you affect each telephone transaction. You may be
required to provide additional telecopied instructions. If these procedures are
employed, neither the Fund nor the Transfer Agent will bear any liability for
following telephone instructions that it reasonably believes to be genuine. Your
telephone transaction request will be recorded.
During periods of economic or market volatility, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by mail.
If you hold shares in certificate form, you may not exchange or redeem them
by telephone.
6
<PAGE>
SALES CHARGES
--------------------------------------------------------------------------------
PURCHASE PRICE
The price you pay to buy shares will be the Fund's offering price; this is
calculated by adding any applicable sales charges to the net asset value per
share of the class you are buying. The amount of any sales charge included in
your purchase price will be according to the following schedule:
<TABLE>
<CAPTION>
CLASS A SALES
CHARGE AS A % OF
------------------------
OFFERING NET AMOUNT CLASS B CLASS C
AMOUNT OF PURCHASE PRICE INVESTED SALES CHARGE SALES CHARGE
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Less than $50,000 5.50% 5.82% None None
$50,000 - $99,999 4.50% 4.71% None None
$100,000 - $249,999 3.50% 3.63% None None
$250,000 - $499,999 2.50% 2.56% None None
$500,000 - $999,999 2.00% 2.04% None None
$1,000,000 and over None None None None
-----------------------------------------------------------------------
</TABLE>
Although you do not pay an initial sales charge when you invest $1,000,000
or more in Class A Shares or when you buy any amount of Class B or Class C
Shares, you may pay a sales charge when you redeem your shares. See the section
entitled `Redemption Price' for details. Your securities dealer may be paid a
commission at the time of your purchase.
The sales charge you pay on your current purchase of Class A Shares may be
reduced under the circumstances listed below.
RIGHTS OF ACCUMULATION. If you are purchasing additional Class A Shares of
this Fund or Class A shares of any other Flag Investors fund or if you already
have investments in Class A shares, you may combine the value of your purchases
with the value of your existing investments to determine whether you qualify for
a reduced sales charge. (For this purpose your existing investments will be
valued at the higher of cost or current value.) You may also combine your
purchases and investments with those of your spouse and your children under the
age of 21 for this purpose. You must be able to provide sufficient information
to verify that you qualify for this right of accumulation.
LETTER OF INTENT. If you anticipate making additional purchases of Class A
Shares over the next 13 months, you may combine the value of your current
purchase with the value of your anticipated purchases to determine whether you
qualify for a reduced sales charge. You will be required to sign a letter of
intent specifying the total value of your anticipated purchases and to initially
purchase at least 5% of the total. When you make each purchase during the
period, you will pay the sales charge applicable to their combined value. If, at
the end of the 13-month period, the total value of your purchases is less than
the amount you indicated, you will be required to pay the difference between the
sales charges you paid and the sales charges applicable to the amount you
actually did purchase. Some of the shares you own will be redeemed to pay this
difference.
PURCHASES AT NET ASSET VALUE. You may buy Class A Shares without paying a
sales charge under the following circumstances:
- If you are reinvesting some or all of the proceeds of a redemption of
Class A Shares made within the last 90 days.
- If you are exchanging an investment in another Flag Investors fund for
an investment in this Fund (see the section entitled `Purchases by
Exchange' for a description of the conditions).
- If you are a current or retired Director of this or any affiliated fund,
a director, an employee or a member of the immediate family of an
employee of any of the following (or their respective affiliates): the
Fund's distributor, the Advisors or a securities dealer authorized to
sell shares of the Fund.
- If you are buying shares in any of the following types of accounts:
-- A qualified retirement plan;
-- A Flag Investors fund payroll savings plan program;
-- A fiduciary or advisory account with a bank, bank trust
department, registered investment advisory company, financial
planner or securities dealer purchasing shares on your behalf. To
qualify for this provision you must be paying an account
management fee for the fiduciary or advisory services. Your
securities dealer or servicing agent may charge you an additional
fee if you buy shares in this manner.
PURCHASES BY EXCHANGE
You may exchange Class A, Class B or Class C Shares of any other Flag
Investors fund for an equal dollar amount of Class A, Class B or Class C Shares,
respectively, without payment of the sales charges described above or any other
charge, up to four times a year. You may not exchange Flag Investors Cash
Reserve Prime Shares for shares of the Fund unless you acquired those shares
through a prior exchange from a fund for which you paid a sales charge. You may
enter both your redemption and purchase orders on the same business day or, if
you have already redeemed the shares of the other fund, you may enter your
purchase order within 90 days of the redemption. The Fund may modify or
terminate these offers of exchange upon 60 days' notice.
7
<PAGE>
You may request an exchange through your securities dealer or servicing
agent. Contact them for details on how to enter your order. If your shares are
in an account with the Fund's Transfer Agent, you may also request an exchange
directly through the Transfer Agent by mail or by telephone.
REDEMPTION PRICE
The amount of any sales charge deducted from your redemption price will be
determined according to the following schedule.
<TABLE>
<CAPTION>
SALES CHARGE AS A PERCENTAGE OF THE DOLLAR
AMOUNT SUBJECT TO CHARGE
(AS A % OF COST OR VALUE)
----------------------------------------
CLASS A CLASS B CLASS C
YEAR SINCE PURCHASE SALES CHARGE SALES CHARGE SALES CHARGE
-----------------------------------------------------------------
<S> <C> <C> <C>
First ..................... 1.00%* 5.00% 1.00%
Second .................... 0.50%* 4.00% None
Third ..................... None 3.00% None
Fourth .................... None 3.00% None
Fifth ..................... None 2.00% None
Sixth ..................... None 1.00% None
Seventh and Thereafter .... None None None
-----------------------------------------------------------------
</TABLE>
* You will pay a sales charge when you redeem Class A Shares only if your shares
were purchased at net asset value because they were part of an investment of $1
million or more.
DETERMINATION OF SALES CHARGE. The sales charge applicable to your
redemption is calculated in a manner that results in the lowest possible rate:
- No sales charge will be applied to shares you own as a result of
reinvesting dividends or distributions.
- If you have purchased shares at various times, the sales charge will be
applied first to shares you have owned for the longest period of time.
- If you acquired your shares through an exchange of shares of another
Flag Investors fund, the period of time you held the original shares
will be combined with the period of time you held the shares being
redeemed to determine the years since purchase. If you bought your
shares prior to January 18, 2000, you will pay the sales charge in
effect at the time of your original purchase.
- The sales charge is applied to the lesser of the cost of the shares or
their value at the time of your redemption.
WAIVER OF SALES CHARGE. You may redeem shares without paying a sales charge
under any of the following circumstances:
- If you are exchanging your shares for shares of another Flag Investors
fund of the same class.
- If your redemption represents the minimum required distribution from an
individual retirement account (IRA) or other retirement plan.
- If your redemption represents a distribution from a Systematic
Withdrawal Plan. This waiver applies only if the annual withdrawals
under your Plan are 12% or less of your share balance.
- If shares are being redeemed in your account following your death or a
determination that you are disabled. This waiver applies only under the
following conditions:
-- The account is registered in your name either individually, as a
joint tenant with rights of survivorship, as a participant in
community property or as a minor child under the Uniform Gifts or
Uniform Transfers to Minors Acts.
-- Either you or your representative notifies your securities
dealer, servicing agent or the Transfer Agent that such
circumstances exist.
- If you are redeeming Class A Shares, your original investment was at
least $3,000,000 and your securities dealer has agreed to return to the
Fund's distributor any payments it received when you bought your shares.
AUTOMATIC CONVERSION OF CLASS B SHARES. Your Class B Shares, along with any
reinvested dividends or distributions associated with those shares, will be
automatically converted to Class A Shares seven years after your purchase. If
you purchased your shares prior to January 18, 2000, your shares will be
converted to Class A Shares six years after your purchase. This conversion will
be made on the basis of the relative net asset values of the classes and will
not be a taxable event to you.
HOW TO CHOOSE THE CLASS THAT IS RIGHT FOR YOU
--------------------------------------------------------------------------------
Your decision as to which class of the Fund's shares is best for you should
be based upon a number of factors including the amount of money you intend to
invest and the length of time you intend to hold your shares.
If you choose Class A Shares, you will pay a sales charge when you buy your
shares, but the amount of the charge declines as the amount of your investment
increases. You will pay lower expenses while you hold the shares and, except in
the case of investments of $1,000,000 or more, no sales charge if you redeem
them.
If you choose Class B Shares, you will pay no sales charge when you buy
your shares, but your annual
8
<PAGE>
expenses will be higher than Class A Shares. You will pay a sales charge if you
redeem your shares within six years of purchase, but the amount of the charge
declines the longer you hold your shares and, at the end of seven years, your
shares convert to Class A Shares, thus eliminating the higher expenses.
If you choose Class C Shares, you will pay no sales charge when you buy
your shares or if you redeem them after holding them for at least a year. On the
other hand, expenses on Class C Shares are the same as those on Class B Shares
and, since there is no conversion to Class A Shares at the end of seven years,
the higher expenses continue for as long as you own your shares.
Your securities dealer is paid a fee when you buy shares and an annual fee
as long as you hold your shares. For Class A and Class B Shares, the annual fee
begins when you purchase your shares. For Class C Shares, it begins one year
after you purchase your shares. In addition to these payments, investment
advisor may provide significant compensation to securities dealers and servicing
agents for distribution, administrative and promotional services.
Your securities dealer or servicing agent may receive different levels of
compensation depending upon which class of shares you buy.
DISTRIBUTION PLANS AND SHAREHOLDER SERVICING
The Fund has adopted plans under Rule 12b-1 that allow the Fund to pay your
securities dealer or shareholder servicing agent distribution and other fees for
the sale of its shares. In addition, the Fund may pay shareholder servicing fees
on Class B and Class C Shares. Class A Shares pay an annual distribution fee
equal to 0.25% of average daily net assets. Class B and Class C Shares pay an
annual distribution fee equal to 0.75% of average daily net assets and an annual
shareholder servicing fee equal to 0.25% of average daily net assets. Because
these fees are paid out of net assets on an on-going basis, they will, over
time, increase the cost of your investment and may cost you more than paying
other types of sales charges.
DIVIDENDS AND TAXES
--------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute to shareholders substantially all of its
net investment income in the form of annual dividends and to distribute net
realized capital gains at least annually.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income and
net realized capital gains at least annually. The dividends and distributions
you receive may be subject to federal, state, local and foreign taxation,
depending on your tax situation. If so, they are taxable whether or not you
reinvest them. Income distributions are generally taxable at ordinary income tax
rates. Capital gains distributions are generally taxable at the rates applicable
to long-term capital gains regardless of how long you have owned your shares.
Each sale or exchange of the Fund's shares is generally a taxable event. For tax
purposes, an exchange of your Fund shares for shares of a different Flag
Investors fund is the same as a sale. The individual tax rate on any gain from
the sale or exchange of your shares depends upon your marginal tax rate and how
long you have held your shares.
If you have a tax-advantaged or other retirement account you will generally
not be subject to federal taxation of income and capital gains distributions
until you begin receiving your distributions from your retirement account. You
should consult your tax advisor regarding rules governing your own retirement
plan.
If you are a non-US investor in the Fund you may be subject to US
withholding and estate tax and are encouraged to consult your tax advisor prior
to investing in the Fund.
More information about taxes is in the Statement of Additional Information.
Please contact your tax advisor if you have specific questions about federal,
state, local or foreign income taxes.
ORGANIZATIONAL STRUCTURE
--------------------------------------------------------------------------------
The Fund is a `feeder fund' that invests substantially all of its assets in
the Top 50 US Portfolio. The Fund and the Portfolio have the same investment
objective. The Portfolio is advised by Deutsche Fund Management, Inc. and
sub-advised by Deutsche Asset Management, Inc. (See the section entitled
`Investment Advisor and Sub-Advisor.')
The Portfolio accepts investments from other feeder funds. A feeder fund
bears the Portfolio's expenses in proportion to its assets. Each feeder fund can
set its own transaction minimums, fund-specific expenses, and other conditions.
This arrangement allows the Fund's Directors to withdraw the Fund's assets from
the Portfolio if they believe doing so is in the shareholder's best interests.
If the Directors withdraw the Fund's assets, they would then consider whether
the Fund should hire its own investment advisor, invest in a different master
portfolio, or take other action.
9
<PAGE>
INVESTMENT ADVISOR AND SUB-ADVISOR
--------------------------------------------------------------------------------
Deutsche Fund Management, Inc. (`DFM'), the Portfolio's Advisor, is
responsible for managing the Portfolio's assets, including buying and selling
portfolio securities. The Advisor has delegated daily management of the
Portfolio's assets to the Sub-Advisor. Deutsche Asset Management, Inc. (`DeAM,
Inc.') is the Portfolio's Sub-Advisor. The address for the Advisor and
Sub-Advisor is 280 Park Avenue, New York, NY 10017.
The Advisor is entitled to receive an annual fee of 0.85% based on the
average daily net assets of the Portfolio. The Advisor pays the Sub-Advisor a
portion of this fee. The Advisor has agreed to waive its fee and reimburse
expenses of the Fund and Portfolio in order to maintain the Fund's total
operating expenses (other than extraordinary expenses) at not more than the
following percentages of average annual net assets of the Share classes through
January 1, 2002: 1.15% for Class A Shares; 1.90% for Class B Shares; and 1.90%
for Class C Shares.
The Advisor and the Sub-Advisor are subsidiaries of Deutsche Bank AG, a
major global banking institution. With total assets the equivalent of US $884.8
billion and 90,850 employees as of June 30, 2000, Deutsche Bank AG is one of
Europe's largest universal banks. It is engaged in a wide range of financial
services, including retail and commercial banking, investment banking and
insurance. Deutsche Bank AG and its affiliates may have commercial lending
relationships with companies whose securities may be held by the Portfolio.
PORTFOLIO MANAGERS
Following are the portfolio managers who are primarily responsible for the
day-to-day management of the Portfolio that is the underlying investment of the
Fund. Each portfolio manager has served as manager of the Portfolio since
October 1999.
Mr. Leo Grohowski has been a Vice President of DeAM, Inc. since July 1999.
Mr. Grohowski joined Bankers Trust in 1996, where he served as the Managing
Director and Head of Investment Management for the Trust and Investment Advisory
Group through 1999. He is currently Chief Investment Officer of Bankers Trust
Private Banking and Head of Active Equities for Deutsche Asset Management
Americas, supervising funds holding assets under management of $22 billion as of
September 30, 2000. Mr. Grohowski was Chief Investment Officer and Managing
Director of equity investments for HSBC Asset Management Americas from 1988 to
1996.
Mr. Owen Fitzpatrick has been a Vice President of DeAM, Inc. since March
2000. Mr. Fitzpatrick has 13 years experience in investment management. He
joined Bankers Trust in 1995 as Director and Portfolio Manager for Bankers Trust
Private Banking and co-head of the Equity Strategy Group. Mr. Fitzpatrick
supervises funds holding assets under management of $1.1 billion as of September
30, 2000. Mr. Fitzpatrick was a Vice President, Portfolio Manager and Research
Analyst for Princeton Bank & Trust Company from 1991 to 1995. Mr. Fitzpatrick is
a Chartered Financial Analyst.
ADMINISTRATOR
--------------------------------------------------------------------------------
Investment Company Capital Corp. (`ICCC') provides administration services
to the Fund. ICCC supervises the day-to-day operations of the Fund, including
the preparation of registration statements, proxy materials, shareholder
reports, compliance with all requirements of securities laws in the states in
which shares are distributed and, subject to the supervision of the Fund's Board
of Directors, oversight of the relationship between the Fund and its other
service providers. ICCC is also the Fund's Transfer Agent.
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand the
Fund's financial performance since the inception of the Fund's Class A, Class B
and Class C Shares. Certain information reflects financial results for a single
share. The total returns in the tables represent the rate an investor would have
earned on an investment in the Fund, assuming reinvestment of all dividends and
distributions.
This information has been audited by PricewaterhouseCoopers LLP, whose
report, along with the Fund's financial statements, is included in the Annual
Report which is available upon request.
The following financial information is for the fiscal year ended August 31,
2000. The financial information for the fiscal year ended August 31, 1999
includes results for the Fund when it was known as the Deutsche Top 50 U.S.
Fund.
10
<PAGE>
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.)
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A SHARES
---------------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED OCTOBER 2, 1997(1)
AUGUST 31, TO
---------------------------- AUGUST 31,
2000 1999 1998
---------- ---------- ---------
<S> <C> <C> <C>
Net asset value at beginning of period ............................ $17.89 $12.62 $12.50
---------- ---------- ---------
INVESTMENT OPERATIONS:
Expenses in excess of income ...................................... (0.10) (0.08) (0.03)
Net realized and unrealized gain on investments allocated
from Top 50 U.S. Portfolio ..................................... 4.55 5.35 0.15
------- ------ ------
Increase from investment operations ............................... 4.45 5.27 0.12
------- ------ ------
NET ASSET VALUE AT END OF PERIOD ..................................... $22.34 $17.89 $12.62
------- ------ ------
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) ........................... 24.87% 41.76% 0.96%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ................................. $10,784 $3,370 $2,056
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) ....................................................... 1.31% 1.50% 1.50%(4)
Expenses in excess of income(3) ................................... (0.65)% (0.52)% (0.44)%(4)
Portfolio turnover of Top 50 U.S. Portfolio ....................... 68% 58% 24%
</TABLE>
------------------------------
(1) Commencement of operations.
(2) Total return would have been lower had certain expenses not been reimbursed
by the Advisors. Total return has not been annualized for the period ended
August 31, 1998.
(3) Includes the Fund's allocated portion of the Portfolio's expenses net of
expense reimbursements. Had the Advisors not undertaken to reimburse such
expenses, the ratios of expenses and expenses in excess of income to
average net assets would have been as follows:
<TABLE>
<S> <C> <C> <C>
Expenses to average net assets ..................................... 4.81% 5.71% 11.58%(4)
Expenses in excess of income to average net assets ................. (4.15)% (4.73)% (10.52)%(4)
</TABLE>
(4) Annualized.
11
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B SHARES
---------------------------------------------------
FOR THE PERIOD
FOR THE YEAR ENDED MARCH 18, 1997(1)
AUGUST 31, TO
---------------------------- AUGUST 31,
2000 1999 1998
---------- ---------- ---------
<S> <C> <C> <C>
Net asset value at beginning of period ............................... $15.44 $10.96 $12.50
------ ------ -------
INVESTMENT OPERATIONS:
Expenses in excess of income ......................................... (0.18) (0.12) (0.06)
Net realized and unrealized gain (loss) on investments
allocated from Top 50 U.S. Portfolio .............................. 3.85 4.60 (1.48)
------ ------ -------
Increase (decrease) from investment operations ....................... 3.67 4.48 (1.54)
------ ------ -------
NET ASSET VALUE AT END OF PERIOD ........................................ $19.11 $15.44 $ 10.96
====== ====== =======
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) .............................. 23.77% 40.88% (12.32)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) .................................... $4,576 $2,764 $ 436
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) .......................................................... 2.09% 2.25% 2.25%(4)
Expenses in excess of income(3) ...................................... (1.42)% (1.30)% (1.35)%(4)
Portfolio turnover of Top 50 U.S. Portfolio .......................... 68% 58% 24%
</TABLE>
------------------
(1) Commencement of operations.
(2) Total return would have been lower had certain expenses not been reimbursed
by the Advisors. Total return has not been annualized for the period ended
August 31, 1998.
(3) Includes the Fund's allocated portion of the Portfolio's expenses net of
expense reimbursements. Had the Advisors not undertaken to reimburse such
expenses, the ratios of expenses and net investment income (expenses in
excess of income) to average net assets would have been as follows:
<TABLE>
<S> <C> <C> <C>
Expenses to average net assets ................................. 5.55% 6.83% 12.33%(4)
Expenses in excess of income to average net assets ............. (4.88)% (5.88)% (11.43)%(4)
</TABLE>
(4) Annualized.
12
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C SHARES
----------------------------------
FOR THE PERIOD
FOR THE SEPTEMBER 2, 1998(1)
YEAR ENDED TO
AUGUST 31, AUGUST 31,
2000 1999
------------- ---------------
<S> <C> <C>
Net asset value at beginning of period ................................................ $16.83 $12.50
------ ------
INVESTMENT OPERATIONS:
Expenses in excess of income .......................................................... (0.17) (0.09)
Net realized and unrealized gain on investments allocated from
Top 50 U.S. Portfolio .............................................................. 4.20 4.42
------ ------
Increase from investment operations ................................................... 4.03 4.33
------ ------
NET ASSET VALUE AT END OF PERIOD ......................................................... $20.86 $16.83
====== ======
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) ............................................... 23.95% 34.64%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ..................................................... $280 $136
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) ........................................................................... 2.07% 2.25%(4)
Expenses in excess of income(3) ....................................................... (1.41)% (1.31)%(4)
Portfolio turnover of Top 50 US Portfolio ............................................. 68% 58%
</TABLE>
-----------------
(1) Commencement of operations.
(2) Total return would have been lower had certain expenses not been reimbursed
by the Advisors. Total return has not been annualized for the period ended
August 31, 1999.
(3) Includes the Fund's allocated portion of the Portfolio's expenses net of
expense reimbursements. Had the Advisors not undertaken to reimburse such
expenses, the ratios of expenses and expenses in excess of income to
average net assets would have been as follows:
<TABLE>
<S> <C> <C>
Expenses to average net assets .................................................. 5.53% 7.15%(4)
Expenses in excess of income to average net assets .............................. (4.87)% (6.21)%(4)
</TABLE>
(4) Annualized.
16
<PAGE>
DISTRIBUTOR
ICC DISTRIBUTORS, INC.
ADMINISTRATOR AND TRANSFER AGENT
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
1-800-553-8080
INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
250 W. Pratt Street
Baltimore, Maryland 21201
CUSTODIAN
INVESTORS BANK & TRUST COMPANY
200 Clarendon Street
Boston, Massachusetts 02116
FUND COUNSEL
MORGAN, LEWIS & BOCKIUS LLP
1701 Market Street
Philadelphia, Pennsylvania 19103
<PAGE>
[LOGO]
FLAG INVESTORS
INVESTING WITH A DIFFERENCE -REGISTERED TRADEMARK-
Flag Investors - P.O. Box 515 - Baltimore, MD 21203 - (800) 767-FLAG
www.flaginvestors.com
--------------------------------------------------------------------------------
You may obtain the following additional information about the Fund, free of
charge, from your securities dealer or servicing agent or by calling (800)
767-FLAG:
- A statement of additional information (SAI) about the Fund that is
incorporated by reference into the prospectus.
- The Fund's most recent annual and semi-annual reports containing detailed
financial information and, in the case of the annual report, a discussion
of market conditions and investment strategies that significantly affected
the Fund's performance during its last fiscal year.
In addition, you may review information about the Fund (including the SAI) at
the Securities and Exchange Commission's Public Reference Room in Washington,
D.C. (Call 1-202-942-8090 to find out about the operation of the Public
Reference Room.) The EDGAR Database on the Commission's Internet site at
http://www.sec.gov has reports and other information about the Fund. Copies of
this information may be obtained, upon payment of a duplicating fee, by
electronic request at the following email address: [email protected], or by
writing the Public Reference Section of the Commission, Washington, D.C.
20549-0102.
For other shareholder inquiries, contact the Transfer Agent at (800) 553-8080.
For Fund information, call (800) 767-FLAG or your securities dealer or servicing
agent.
Investment Company Act File No. 811-8227 TOP50USPRO (01/01)
<PAGE>
[LOGO]
FLAG INVESTORS
INVESTING WITH A DIFFERENCE -REGISTERED TRADEMARK-
[GRAPHIC]
-------------------------------------------------
TOP 50 EUROPE
CLASS A SHARES, CLASS B SHARES AND CLASS C SHARES
-------------------------------------------------
PROSPECTUS
JANUARY 1, 2001
The Securities and Exchange Commission (SEC) has neither approved nor
disapproved these securities or passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>
[LOGO]
FLAG INVESTORS
INVESTING WITH A DIFFERENCE -REGISTERED TRADEMARK-
THIS MUTUAL FUND (THE 'FUND') SEEKS HIGH CAPITAL APPRECIATION AND, AS A
SECONDARY OBJECTIVE, REASONABLE DIVIDEND INCOME THROUGH ITS INVESTMENT IN THE
TOP 50 EUROPE PORTFOLIO.
The Fund invests all of its assets in the Top 50 Europe Portfolio of Flag
Investors Portfolios Trust (the 'Portfolio'), a separate mutual fund with
identical investment objectives and policies, through a master-feeder investment
fund structure. Therefore, all discussions in the prospectus regarding
investments relate to the Fund and the Portfolio.
The Fund offers shares through securities dealers and through financial
institutions that act as shareholder servicing agents. You may also buy shares
through the Fund's Transfer Agent. This Prospectus describes Flag Investors
Class A Shares ('Class A Shares'), Flag Investors Class B Shares ('Class B
Shares') and Flag Investors Class C Shares ('Class C Shares') of the Fund. These
separate classes give you a choice of sales charges and Fund expenses. (See the
section entitled 'Sales Charges.')
TABLE OF CONTENTS
INVESTMENT SUMMARY ........................................ 1
FEES AND EXPENSES OF THE FUND ............................. 3
INVESTMENT PROGRAM ........................................ 4
THE FUND'S NET ASSET VALUE ................................ 6
HOW TO BUY SHARES ......................................... 6
HOW TO REDEEM SHARES ...................................... 7
TELEPHONE TRANSACTIONS .................................... 7
SALES CHARGES ............................................. 8
HOW TO CHOOSE THE CLASS THAT IS RIGHT FOR YOU ............ 10
DIVIDENDS AND TAXES ...................................... 10
ORGANIZATIONAL STRUCTURE ................................. 11
INVESTMENT ADVISOR AND SUB-ADVISOR ....................... 11
ADMINISTRATOR ............................................ 12
FINANCIAL HIGHLIGHTS ..................................... 12
<PAGE>
INVESTMENT SUMMARY
--------------------------------------------------------------------------------
OBJECTIVES AND STRATEGIES
The Fund seeks high capital appreciation and, as a secondary objective,
reasonable dividend income through its investment in the Portfolio. The Fund,
through the Portfolio, seeks to achieve its objective by investing at least 65%
of its total assets in equity securities (primarily common and preferred stocks)
of companies located or having a business focus in Europe. The Fund generally
owns equity securities of 50 companies. The investment advisor and sub-advisor
(the 'Advisors') seek investments in companies considered to be of outstanding
quality in their particular field based on some or all of the following
attributes:
- Strong market position within their market;
- Profitability, predictability and duration of earnings growth,
reflected in sound balance sheet ratios and financial statements;
- High quality management with an orientation toward strong, long-term
earnings;
- Long-range strategic plans in place; and
- Publicly-held with broad distribution of financial information related
to their operations.
RISK PROFILE
The Fund may be suited for you if you are willing to accept the risks of
foreign investing in a particular foreign country or region in the hope of
achieving high capital appreciation and, secondarily, reasonable dividend
income.
GENERAL STOCK RISK. The value of an investment in the Fund will vary from
day to day based on changes in the prices of the securities that the Fund holds.
Those prices, in turn, reflect investor perceptions of the economy, the markets
and the companies held by the Fund.
STYLE RISK. As with any investment strategy, the strategy used in managing
the Fund will, at times, perform better than or worse than other investment
styles and the overall market. If the Advisors overestimate the return potential
of one or more foreign stocks, the Funds may underperform in the international
equities markets.
FOREIGN INVESTING RISK. Investing in foreign companies may entail different
risks than investing in the US companies. The prices of foreign securities may
be affected by adverse political, economic or social developments unique to a
country or region. Accounting and financial reporting standards differ from
those in the US and could convey incomplete information when compared to
information typically provided by US companies. Foreign securities may trade
infrequently and be subject to greater price fluctuations than other securities.
FOREIGN CURRENCY RISKS. Since the Fund's investments are denominated in
foreign currencies, any change in the value of those currencies in relation to
the US dollar will result in a corresponding change in the value of the Fund's
investments and may cause the Fund's investments to lose money.
RISKS OF INVESTING IN A PARTICULAR FOREIGN COUNTRY OR REGION. Since the
Fund may invest a significant portion of its assets in a particular foreign
country or geographic region, the Fund is subject to greater currency risk and
is more susceptible to adverse impact from negative economic events or actions
of foreign governments in such countries or regions.
RISK RELATED TO COMPANY SIZE. The Fund invests in securities of mid-market
capitalization companies that, as compared to larger companies, tend to have
fewer shareholders, less liquidity, more volatility, unproven track records,
limited products or services and limited access to capital, which could cause
the prices of these securities to vary, perhaps dramatically.
NON-DIVERSIFICATION RISKS. The Fund is nondiversified. As compared to a
diversified fund, the Fund is allowed to invest a higher percentage of its
assets in just a few issuers. This increases the Fund's risks by magnifying the
impact (positively or negatively) that any one issuer has on the Fund's
performance. The Fund generally attempts to maintain exposure to 50 issuers.
If you invest in the Fund, you could lose money. An investment in the Fund
is not a bank deposit and is not guaranteed or insured by the FDIC or any other
government agency.
1
<PAGE>
FUND PERFORMANCE
The following bar chart and table show the performance of the Fund both
year-by-year and as an average over different periods of time. The variability
of performance over time provides an indication of the risks of investing in the
Fund. This is an historical record and does not necessarily indicate how the
Fund will perform in the future.
CLASS A SHARES*
FOR YEARS ENDED DECEMBER 31,
<TABLE>
<S> <C>
1998 10.36%
1999 20.55%
</TABLE>
* The bar chart does not reflect sales charges. If it did, returns would be
less than those shown. For the period from December 31, 1999 through
September 30, 2000, the return for Class A Shares was (3.56)%.
During the two-year period shown in the bar chart, the highest return for a
quarter was 22.91% (quarter ended 12/31/99) and the lowest return for a quarter
was (20.60%) (quarter ended 9/30/98).
AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDED DECEMBER 31, 1999)
<TABLE>
<CAPTION>
MSCI MSCI MSCI
CLASS A EUROPE CLASS B EUROPE CLASS C EUROPE
SHARES(1) INDEX(2) SHARES(1) INDEX(2) SHARES(1) INDEX(2)
<S> <C> <C> <C> <C> <C> <C>
Past One Year ................................. 13.90% 16.23% 14.55% 16.23% 18.54% 16.23%
Since Inception ............................... 9.75%(3) 19.76%(4) 6.35%(5) 13.32%(6) 18.78%(7) 23.64%(8)
</TABLE>
----------
1 These figures assume the reinvestment of dividends and capital gains
distributions and include the impact of the maximum sales charges.
2 The MSCI Europe Index is a broad-based market index of European equity
securities.
3 October 2, 1997.
4 As of September 30, 1997.
5 March 30, 1998.
6 As of March 30, 1998.
7 September 2, 1998.
8 As of August 31, 1998.
2
<PAGE>
FEES AND EXPENSES OF THE FUND
--------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
SHAREHOLDER FEES: INITIAL SALES DEFERRED SALES DEFERRED SALES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT) CHARGE CHARGE CHARGE
------------- -------------- --------------
<S> <C> <C> <C>
Maximum sales charge (load) imposed on purchases (as a percentage of
offering price) .......................................................... 5.50% None None
Maximum deferred sales charge (load) (as a percentage of original purchase
price or redemption proceeds, whichever is lower) ........................ 1.00%(1) 5.00%(2) 1.00%(3)
Maximum sales charge (load) imposed on reinvested dividends ................. None None None
Redemption fee .............................................................. None None None
Exchange fee ................................................................ None None None
ANNUAL FUND OPERATING EXPENSES(4):
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management fee .............................................................. 1.00% 1.00% 1.00%
Distribution and/or service (12b-1) fees(5) ................................. 0.25% 1.00% 1.00%
Other expenses .............................................................. 2.61% 2.61% 2.61%
Total annual fund operating expenses (before fee waivers and
expense reimbursements) .................................................. 3.86% 4.61% 4.61%
Total fee waivers and reimbursements of fund expenses(6) .................... (2.26)% (2.26)% (2.26)%
Total net annual fund operating expenses (after fee waivers and
expense reimbursements) .................................................. 1.60% 2.35% 2.35%
===== ===== =====
</TABLE>
----------
(1)You will pay no sales charge on purchases of $1 million or more of Class A
Shares, but you may pay a deferred sales charge if you redeem your shares
within two years after your purchase unless you are otherwise eligible for
a sales charge waiver or reduction. (See section entitled 'Sales
Charges--Redemption Price.')
(2)You will pay a deferred sales charge if you redeem your shares within six
years after your purchase. The amount of the charge declines over time and
eventually reaches zero. Seven years after your purchase, your Class B
Shares automatically convert to Class A Shares. (See section entitled
'Sales Charges--Redemption Price.')
(3)Your will pay a deferred sales charge if you redeem your shares within one
year after purchase. (See section entitled 'Sales Charges--Redemption
Price.')
(4)Information on the annual operating expenses reflects the expenses of both
the Fund and the Portfolio, the master fund in which the Fund invests its
assets. (See section entitled 'Organizational Structure.')
(5)A portion of the shareholder servicing fee is allocated to your securities
dealer and to qualified banks for services provided and expenses incurred
in maintaining your account, responding to your inquiries, and providing
you with information about your investment.
(6)The Advisor has contractually agreed to waive its fees and reimburse
expenses of the Fund through January 1, 2002 to the extent necessary to
maintain the Fund's expense ratio at the level indicated as 'Total net
annual fund operating expenses (after fee waivers and expense
reimbursements).'
3
<PAGE>
EXAMPLE:
This Example is intended to help you compare the cost of investing in each
class of the Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR* 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
<S> <C> <C> <C> <C>
Class A Shares .............................................. $704 $1,484 $2,318 $4,665
Class B Shares .............................................. $738 $1,510 $2,434 $4,775
Class C Shares .............................................. $338 $1,210 $2,234 $5,040
You would pay the following expenses if you did not redeem your shares:
Class A Shares .............................................. $704 $1,484 $2,318 $4,665
Class B Shares .............................................. $238 $1,210 $2,234 $4,775
Class C Shares .............................................. $238 $1,210 $2,234 $5,040
</TABLE>
----------
* Based on Total Annual Fund Operating Expenses after fee waivers and expense
reimbursements for year one only.
Federal regulations require that the table above reflect the maximum sales
charge. However, you may qualify for reduced sales charges or no sales charge at
all. (See the section entitled 'Sales Charges.') If you hold your shares for a
long time, the combination of the initial sales charge you paid and the
recurring 12b-1 fees may exceed the maximum sales charges permitted by the
Conduct Rules of the National Association of Securities Dealers, Inc.
INVESTMENT PROGRAM
--------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks high capital appreciation and, as a secondary objective,
reasonable dividend income, through investment in the Portfolio. The Fund,
through the Portfolio, seeks to achieve its objective by investing at least 65%
of its total assets in equity securities (primarily common and preferred stocks)
of companies located in or having a business focus in European countries,
including those that are members of the European Union, the Convention on the
European Economic Area (CEEA), Poland, Switzerland, Slovakia, the Czech Republic
and Hungary.
The Advisors are responsible for managing the Fund's investments. (See the
section entitled 'Investment Advisor and Sub-Advisor.') There can be no
guarantee that the Fund will achieve its goals.
The Fund generally owns equity securities of 50 companies. The Advisors
seek companies considered to be of outstanding quality in their particular field
based on some or all of the following attributes:
- Strong market position within their market;
- Profitability, predictability and duration of earnings growth,
reflected in sound balance sheet ratios and financial statements;
- High quality management with an orientation toward strong, long-term
earnings;
- Long-range strategic plans in place; and
- Publicly-held with broad distribution of financial information related
to their operations.
The Advisors seek to select companies with above-average potential for
capital appreciation. The Advisors emphasize investments in companies that have
clear strategic goals, that concentrate on their core businesses and whose
management gives appropriate consideration to return on investment.
The Advisors target companies that are well positioned to take advantage of
the introduction of the single European currency. The Advisors focus on stocks
which meet their high standards in terms of management quality, earnings growth
and shareholder-oriented information policies.
The advent of the European Monetary Union ('EMU') has increased the
importance of the European equity markets and allowed a broader allocation of
investments among many countries rather than focusing investments in
historically stable countries. The Fund tends to have a heavier weighting of its
assets in German issuers, although this can change.
The Advisors may also select companies that have restructuring potential
along with strong value-oriented management strategies.
The Advisors monitor the companies selected for the Fund to assess risk by
analyzing possible changes in the earnings outlook and/or financial condition.
In order to assess risks, the Advisors monitor the annual and interim financial
statements of a broad universe of companies, conduct sector and industry
analyses, and maintain company contact, including company visits and attendance
at company meetings and analyst presentations. In addition, the Advisors assess
macroeconomic
4
<PAGE>
and stock market conditions in the various countries in which the companies held
by the Fund are domiciled or have their primary stock market listings.
The Advisors consider the geographic market focus of a company when
considering it for investment.
Although the Fund invests primarily in common and preferred stocks, the
Advisors may purchase other securities with equity characteristics, including
securities convertible into common stock and bonds with warrants. The Fund
invests principally in securities of companies that are listed on a stock
exchange or trade on a recognized, regulated market open to the public.
In assessing which investments to sell, the Advisors consider the following
factors, among others:
- Whether the company continues to meet the fund's criteria for an
initial investment in a security; and
- Changes in the economy or the company's business that negatively
impact the attractiveness of the security as an investment.
The Advisors may use hedging transactions to attempt to reduce specific
risks. For example, to protect the Fund against circumstances that would
normally cause the Fund's portfolio securities to decline in value, the Fund may
buy or sell a derivative contract that would normally increase in value under
the same circumstances. The Fund may also attempt to hedge by using forward
contracts, combinations of different derivatives contracts, or of derivatives
contracts and securities. The Fund's ability to hedge may be limited by the
costs of the derivatives contracts. The Fund may attempt to lower the cost of
hedging by entering into transactions that provide only limited protection,
including transactions that (1) hedge only a portion of the Fund, (2) use
derivatives contracts that cover a narrow range of circumstances or (3) involve
the sale of derivatives contracts with different terms.
RISK CONSIDERATIONS
An investment in the Fund involves risk. Over time, common stocks have
shown greater potential for growth than other types of securities, but in the
short run stocks can be more volatile than other types of securities. Stock
prices are sensitive to developments affecting particular companies and to
general economic conditions that affect particular industry sectors as a whole.
No one can predict how the markets or stock prices will behave in the future.
Investing in foreign companies may have different risks than investing in
US companies. An investment in a foreign company may be affected by
developments, including political developments, that are unique to that market.
These developments may not affect the US economy or the prices of US securities
in the same manner. Therefore, the prices of foreign common stocks may, at
times, move in a different direction than the prices of US common stocks.
Financial reporting standards for companies based in foreign markets may differ
from those in the United States.
From time to time, foreign capital markets may exhibit more volatility than
those in the United States. Stocks that trade less frequently can be more
difficult or more costly to buy or to sell than more liquid or active stocks. On
the whole, foreign exchanges are smaller and less liquid than the US market.
Additionally, some foreign governments regulate their exchanges less
stringently, and the rights of shareholders may not be as firmly established.
The Fund's investments are usually denominated in the currencies of the
countries in which they are traded. As a result, the Fund may be affected by
changes in the value of foreign currencies in relation to the value of the US
dollar. The value of a foreign currency may change in response to events that do
not affect the value of the investment in its home country.
The Fund invests a significant portion of its assets in specific regions or
countries of Europe. The Fund is therefore exposed to the risks associated with
that region or country and could be subject to greater risk due to unanticipated
and negative economic events, actions by foreign governments, currency movements
and/or market action in such countries or regions. For example, the Fund invests
a substantial portion of its assets in Germany.
The Fund invests in the shares of large, well-established companies and
smaller mid-sized companies. Investing in mid-sized companies poses unique
risks. The stocks of mid-sized companies tend to experience steeper fluctuations
in price than the stocks of larger companies. A shortage of reliable information
can also pose added risk. Industry-wide reversals may have a greater impact on
mid-sized companies, since they lack a large company's financial resources to
deal with setbacks. Company managers at mid-sized companies may have less
experience coping with adversity or capitalizing on opportunity than their
counterparts at larger companies. Finally, the stocks of mid-sized companies are
typically less liquid than large company stocks.
The Fund's ability to successfully use hedging techniques and derivative
transactions, including currency transactions, will depend on the ability of the
Advisors to predict the direction of the market and the correlation of the
transactions with changes in the value of the Fund's assets. Nevertheless,
hedging transactions will not eliminate risk even if they work as intended. In
addition, hedging strategies are not always successful, and could result in
increased expenses and losses to the Fund. Hedging transactions could expose the
Fund to the effect of leverage, which could increase the Fund's exposure to the
market and potential losses that it could have had it not entered into these
transactions.
5
<PAGE>
To reduce the Fund's risk under adverse market conditions, the Advisors may
make temporary defensive investments in cash, cash items, shorter-term,
higher-quality debt securities, money market instruments and similar
obligations, such as repurchase agreements and reverse repurchase agreements.
While engaged in a temporary defensive strategy, the Fund may not achieve its
investment objective. The Advisors would follow such a strategy only if they
believed the risk of loss in pursuing the Fund's primary investment strategies
outweighed the opportunity for gain.
THE FUND'S NET ASSET VALUE
--------------------------------------------------------------------------------
The price you pay when you buy shares or receive when you redeem shares is
based on the Fund's net asset value per share. When you buy Class A Shares, the
price you pay may be increased by a sales charge. When you redeem any class of
shares, the amount you receive may be reduced by a sales charge. See the section
entitled 'Sales Charges' for details on how and when these charges may or may
not be imposed.
The net asset value per share of the Fund is determined at the close of
regular trading on the New York Stock Exchange on each day the Exchange is open
for business. While regular trading ordinarily closes at 4:00 pm (Eastern Time),
it could be earlier, particularly on the day before a holiday. Contact the
Transfer Agent to determine whether the Fund will close early before a
particular holiday. Because the Fund owns foreign securities that trade in
foreign markets on days the Exchange may be closed, the value of the Fund's
assets may change on days you cannot purchase, redeem or exchange shares.
The net asset value per share is calculated by subtracting the liabilities
attributable to a class from its proportionate share of the Fund's assets and
dividing the result by the number of outstanding shares of the class. Because
the different classes have different distribution or service fees, their net
asset values may differ.
In valuing its assets, the Fund's investments are priced at their market
value. When price quotes for a particular security are not readily available or
may be unreliable, the security is priced at its 'fair value' using procedures
approved by the Fund's Board of Directors.
You may buy or redeem shares on any day the New York Stock Exchange is open
for business (a "business day"). If your order is entered before the net asset
value per share is determined for that day, the price you pay or receive will be
based on that day's net asset value per share. If your order is entered after
the net asset value per share is determined for that day, the price you pay or
receive will be based on the next business day's net asset value per share.
The following sections describe how to buy and redeem shares.
HOW TO BUY SHARES
--------------------------------------------------------------------------------
You may buy any class of the Fund's shares through your securities dealer
or through any financial institution that is authorized to act as a shareholder
servicing agent. Contact them for details on how to enter and pay for your
order. You may also buy shares by sending your check (along with a completed
Application Form) directly to the Fund.
You may buy Class A Shares unless you are in a defined contribution plan
with assets of $75 million or more.
Your purchase order may not be accepted if the sale of Fund shares has been
suspended or if it is determined that your purchase would be detrimental to the
interests of the Fund's shareholders. In this connection, the Fund specifically
reserves the right to refuse (i) any purchase or exchange request or (ii)
multiple purchase or exchange requests, submitted by a shareholder, group of
shareholders, commonly controlled accounts or a dealer, that are deemed by the
Fund, in its sole discretion, to involve excessive trading or to be part of a
market timing strategy. For these purposes, the Fund may consider, among other
factors, an investor's trading history in the Fund or an affiliated fund, the
funds involved, the amount of the investment and the background of the investors
or dealers involved.
INVESTMENT MINIMUMS
Your initial investment must be at least $2,000. Subsequent investments
must be at least $100. The following are exceptions to these minimums:
- If you are investing in an IRA account, your initial investment may be
as low as $1,000.
- If you are a shareholder of any other Flag Investors fund, your
initial investment may be as low as $500.
- If you are a participant in the Fund's Automatic Investing Plan, your
initial investment may be as low as $250. If you participate in the
monthly plan, your subsequent investments may be as low as $100. If
you participate in the quarterly plan, your subsequent investments may
be as
6
<PAGE>
low as $250. See the section entitled 'Automatic Investing Plan' for
details.
- There is no minimum investment requirement for qualified retirement
plans such as 401(k), pension or profit sharing plans.
INVESTING REGULARLY
You may make regular investments in the Fund through any of the following
methods. If you wish to enroll in any of these programs or if you need any
additional information, complete the appropriate section of the Application Form
or contact your securities dealer, your servicing agent, or the Transfer Agent.
AUTOMATIC INVESTING PLAN. You may elect to make a regular monthly or
quarterly investment in any class of shares. The amount you decide upon will be
withdrawn from your checking account using a pre-authorized check. When the
money is received by the Transfer Agent, it will be invested in the class of
shares selected at that day's offering price. Either you or the Fund may
discontinue your participation upon 30 days' notice.
DIVIDEND REINVESTMENT PLAN. Unless you elect otherwise, all income and
capital gains distributions will be reinvested in additional Fund shares at net
asset value. You may elect to receive your distributions in cash or to have your
distributions invested in shares of other Flag Investors funds. To make either
of these elections or to terminate automatic reinvestment, complete the
appropriate section of the Application Form or notify the Transfer Agent, your
securities dealer or your servicing agent at least five days before the date on
which the next dividend or distribution will be paid.
SYSTEMATIC PURCHASE PLAN. You may also purchase any class of shares through
a Systematic Purchase Plan. Contact your securities dealer or servicing agent
for details.
HOW TO REDEEM SHARES
--------------------------------------------------------------------------------
You may redeem any class of the Fund's shares through your securities
dealer or servicing agent. Contact them for details on how to enter your order
and for information as to how you will be paid. If you have an account with the
Fund that is in your name, you may also redeem shares by contacting the Transfer
Agent by mail or (if you are redeeming $50,000 or less) by telephone. The
Transfer Agent will mail your redemption check within seven days after it
receives your order in proper form. See the section entitled 'Telephone
Transactions' for more information on this method of redemption.
Your securities dealer, your servicing agent, or the Transfer Agent may
require the following documents before they redeem your shares:
- A letter of instructions specifying your account number and the number
of shares or dollar amount you wish to redeem. The letter must be
signed by all owners of the shares exactly as their names appear on
the account.
- If you are redeeming more than $50,000, a guarantee of your signature.
You can obtain one from most banks or securities dealers.
- Any stock certificates representing the shares you are redeeming. The
certificates must be either properly endorsed or accompanied by a duly
executed stock power.
- Any additional documents that may be required if your account is in
the name of a corporation, partnership, trust or fiduciary.
OTHER REDEMPTION INFORMATION
Any dividends payable on shares you redeem will be paid on the next
dividend payable date. If you have redeemed all of your shares by that time, the
dividend will be paid to you in cash whether or not that is the payment option
you have selected.
If you redeem sufficient shares to reduce your investment to $500 or less,
the Fund reserves the right to redeem the remaining shares after giving you 60
days' notice. The Fund also reserves the right to redeem shares in-kind under
certain circumstances.
If you own Fund shares having a value of at least $10,000, you may arrange
to have some of your shares redeemed monthly or quarterly under the Fund's
Systematic Withdrawal Plan. Each redemption under this plan involves all the tax
and sales charge implications normally associated with Fund redemptions. Contact
your securities dealer, your servicing agent, or the Transfer Agent for
information on this plan.
TELEPHONE TRANSACTIONS
--------------------------------------------------------------------------------
If your shares are in an account with the Transfer Agent, you may redeem
them in any amount up to $50,000 or exchange them for shares in another Flag
Investors fund by calling the Transfer Agent on any business day between the
hours of 8:30 am and 7:00 pm (Eastern Time). You are automatically entitled to
telephone transaction privileges but you may specifically request that no
telephone redemptions or exchanges be accepted for your account. You may make
this election when you complete the Application Form or at any time
7
<PAGE>
thereafter by completing and returning documentation supplied by the Transfer
Agent.
The Fund and the Transfer Agent will employ reasonable procedures to
confirm that telephoned instructions are genuine. These procedures include
requiring you to provide certain personal identification information when you
open your account and before you affect each telephone transaction. You may be
required to provide additional telecopied instructions. If these procedures are
employed, neither the Fund nor the Transfer Agent will bear any liability for
following telephone instructions that it reasonably believes to be genuine. Your
telephone transaction request will be recorded.
During periods of economic or market volatililty, you may experience
difficulty in contacting the Transfer Agent by telephone. In such event, you
should make your request by mail.
If you hold shares in certificate form, you may not exchange or redeem them
by telephone.
SALES CHARGES
--------------------------------------------------------------------------------
PURCHASE PRICE
The price you pay to buy shares will be the Fund's offering price; this is
calculated by adding any applicable sales charges to the net asset value per
share of the class you are buying. The amount of any sales charge included in
your purchase price will be according to the following schedule:
<TABLE>
<CAPTION>
CLASS A SALES
CHARGE AS a % OF
----------------
OFFERING NET AMOUNT CLASS B CLASS C
AMOUNT OF PURCHASE PRICE INVESTED SALES CHARGE SALES CHARGE
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $50,000.. 5.50% 5.82% None None
$50,000 - $99,999.. 4.50% 4.71% None None
$100,000 - $249,999.. 3.50% 3.63% None None
$250,000 - $499,999.. 2.50% 2.56% None None
$500,000 - $999,999.. 2.00% 2.04% None None
$1,000,000 and over.. None None None None
--------------------------------------------------------------------------------
</TABLE>
Although you do not pay an initial sales charge when you invest $1,000,000
or more in Class A Shares or when you buy any amount of Class B or Class C
Shares, you may pay a sales charge when you redeem your shares. See the section
entitled 'Redemption Price' for details. Your securities dealer may be paid a
commission at the time of your purchase.
The sales charge you pay on your current purchase of Class A Shares may be
reduced under the circumstances listed below.
RIGHTS OF ACCUMULATION. If you are purchasing additional Class A Shares of
this Fund or Class A shares of any other Flag Investors fund or if you already
have investments in Class A shares, you may combine the value of your purchases
with the value of your existing investments to determine whether you qualify for
a reduced sales charge. (For this purpose your existing investments will be
valued at the higher of cost or current value.) You may also combine your
purchases and investments with those of your spouse and your children under the
age of 21 for this purpose. You must be able to provide sufficient information
to verify that you qualify for this right of accumulation.
LETTER OF INTENT. If you anticipate making additional purchases of Class A
Shares over the next 13 months, you may combine the value of your current
purchase with the value of your anticipated purchases to determine whether you
qualify for a reduced sales charge. You will be required to sign a letter of
intent specifying the total value of your anticipated purchases and to initially
purchase at least 5% of the total. When you make each purchase during the
period, you will pay the sales charge applicable to their combined value. If, at
the end of the 13-month period, the total value of your purchases is less than
the amount you indicated, you will be required to pay the difference between the
sales charges you paid and the sales charges applicable to the amount you
actually did purchase. Some of the shares you own will be redeemed to pay this
difference.
PURCHASES AT NET ASSET VALUE. You may buy Class A Shares without paying a
sales charge under the following circumstances:
- If you are reinvesting some or all of the proceeds of a redemption of
Class A Shares made within the last 90 days.
- If you are exchanging an investment in another Flag Investors fund for
an investment in this Fund (see the section entitled 'Purchases by
Exchange' for a description of the conditions).
- If you are a current or retired Director of this or any affiliated
fund, a director, an employee or a member of the immediate family of
an employee of any of the following (or their respective affiliates):
the Fund's distributor, the Advisors or a securities dealer authorized
to sell shares of the Fund.
- If you are buying shares in any of the following types of accounts:
-- A qualified retirement plan;
-- A Flag Investors fund payroll savings plan program;
-- A fiduciary or advisory account with a bank, bank trust
department, registered investment advisory company, financial
planner or securities dealer purchasing shares on your behalf. To
qualify for this provision you must
8
<PAGE>
be paying an account management fee for the fiduciary or advisory
services. Your securities dealer or servicing agent may charge
you an additional fee if you buy shares in this manner.
PURCHASES BY EXCHANGE
You may exchange Class A, Class B or Class C shares of any other Flag
Investors fund for an equal dollar amount of Class A, Class B or Class C Shares,
respectively, without payment of the sales charges described above or any other
charge, up to four times a year. You may not exchange Flag Investors Cash
Reserve Prime Shares for shares of the Fund unless you acquired those shares
through a prior exchange from a fund for which you paid a sales charge. You may
enter both your redemption and purchase orders on the same business day or, if
you have already redeemed the shares of the other fund, you may enter your
purchase order within 90 days of the redemption. The Fund may modify or
terminate these offers of exchange upon 60 days' notice.
You may request an exchange through your securities dealer or servicing
agent. Contact them for details on how to enter your order. If your shares are
in an account with the Fund's Transfer Agent, you may also request an exchange
directly through the Transfer Agent by mail or by telephone.
REDEMPTION PRICE
The amount of any sales charge deducted from your redemption price will be
determined according to the following schedule.
<TABLE>
<CAPTION>
SALES CHARGE AS A PERCENTAGE OF THE DOLLAR
AMOUNT SUBJECT TO CHARGE
(AS a % OF COST OR VALUE)
------------------------------------------
CLASS A CLASS B CLASS C
YEAR SINCE PURCHASE SALES CHARGE SALES CHARGE SALES CHARGE
--------------------------------------------------------------------------------
<S> <C> <C> <C>
First ..................... 1.00%* 5.00% 1.00%
Second .................... 0.50%* 4.00% None
Third ..................... None 3.00% None
Fourth .................... None 3.00% None
Fifth ..................... None 2.00% None
Sixth ..................... None 1.00% None
Seventh and Thereafter .... None None None
--------------------------------------------------------------------------------
</TABLE>
* You will pay a sales charge when you redeem Class A Shares only if your
shares were purchased at net asset value because they were part of an
investment of $1 million or more.
DETERMINATION OF SALES CHARGE. The sales charge applicable to your
redemption is calculated in a manner that results in the lowest possible rate:
- No sales charge will be applied to shares you own as a result of
reinvesting dividends or distributions.
- If you have purchased shares at various times, the sales charge will
be applied first to shares you have owned for the longest period of
time.
- If you acquired your shares through an exchange of shares of another
Flag Investors fund, the period of time you held the original shares
will be combined with the period of time you held the shares being
redeemed to determine the years since purchase. If you bought your
shares prior to January 18, 2000, you will pay the sales charge in
effect at the time of your original purchase.
- The sales charge is applied to the lesser of the cost of the shares or
their value at the time of your redemption.
WAIVER OF SALES CHARGE. You may redeem shares without paying a sales charge
under any of the following circumstances:
- If you are exchanging your shares for shares of another Flag Investors
fund of the same class.
- If your redemption represents the minimum required distribution from
an individual retirement account (IRA) or other retirement plan.
- If your redemption represents a distribution from a Systematic
Withdrawal Plan. This waiver applies only if the annual withdrawals
under your Plan are 12% or less of your share balance.
- If shares are being redeemed in your account following your death or a
determination that you are disabled. This waiver applies only under
the following conditions:
-- The account is registered in your name either individually, as a
joint tenant with rights of survivorship, as a participant in
community property or as a minor child under the Uniform Gifts or
Uniform Transfers to Minors Acts.
-- Either you or your representative notifies your securities
dealer, servicing agent or the Transfer Agent that such
circumstances exist.
- If you are redeeming Class A Shares, your original investment was at
least $3,000,000 and your securities dealer has agreed to return to
the Fund's distributor any payments it received when you bought your
shares.
AUTOMATIC CONVERSION OF CLASS B SHARES. Your Class B Shares, along with any
reinvested dividends or distributions associated with those shares, will be
automatically converted to Class A Shares seven years after your purchase. If
you purchased your shares prior to January 18, 2000, your shares will be
converted to Class A Shares six years after your purchase. This conversion will
be made on the basis of the relative net asset values of the classes and will
not be a taxable event to you.
9
<PAGE>
HOW TO CHOOSE THE CLASS THAT IS RIGHT FOR YOU
--------------------------------------------------------------------------------
Your decision as to which class of the Fund's shares is best for you should
be based upon a number of factors including the amount of money you intend to
invest and the length of time you intend to hold your shares.
If you choose Class A Shares, you will pay a sales charge when you buy your
shares, but the amount of the charge declines as the amount of your investment
increases. You will pay lower expenses while you hold the shares and, except in
the case of investments of $1,000,000 or more, no sales charge if you redeem
them.
If you choose Class B Shares, you will pay no sales charge when you buy
your shares, but your annual expenses will be higher than Class A Shares. You
will pay a sales charge if you redeem your shares within six years of purchase,
but the amount of the charge declines the longer you hold your shares and, at
the end of seven years, your shares convert to Class A Shares, thus eliminating
the higher expenses.
If you choose Class C Shares, you will pay no sales charge when you buy
your shares or if you redeem them after holding them for at least a year. On the
other hand, expenses on Class C Shares are the same as those on Class B Shares
and, since there is no conversion to Class A Shares at the end of seven years,
the higher expenses continue for as long as you own your shares.
Your securities dealer is paid a fee when you buy shares and an annual fee
as long as you hold your shares. For Class A and Class B Shares, the annual fee
begins when you purchase your shares. For Class C Shares, it begins one year
after you purchase your shares. In addition to these payments, affiliates of the
Fund's investment advisor may provide significant compensation to securities
dealers and servicing agents for distribution, administrative and promotional
services.
Your securities dealer or servicing agent may receive different levels of
compensation depending upon which class of shares you buy.
DISTRIBUTION PLANS AND SHAREHOLDER SERVICING
The Fund has adopted plans under Rule 12b-1 that allow the Fund to pay your
securities dealer or shareholder servicing agent distribution and other fees for
the sale of its shares. In addition, the Fund may pay shareholder servicing fees
on Class B and Class C Shares. Class A Shares pay an annual distribution fee
equal to 0.25% of average daily net assets. Class B and Class C Shares pay an
annual distribution fee equal to 0.75% of average daily net assets and an annual
shareholder servicing fee equal to 0.25% of average daily net assets. Because
these fees are paid out of net assets on an on-going basis, they will, over
time, increase the cost of your investment and may cost you more than paying
other types of sales charges.
DIVIDENDS AND TAXES
--------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to distribute to shareholders substantially all of its
net investment income in the form of annual dividends and to distribute net
realized capital gains at least annually.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary is based on current tax laws, which may change.
The Fund will distribute substantially all of its net investment income and
net realized capital gains at least annually. The dividends and distributions
you receive may be subject to federal, state, local and foreign taxation,
depending on your tax situation. If so, they are taxable whether or not you
reinvest them. Income distributions are generally taxable at ordinary income tax
rates. Capital gains distributions are generally taxable at the rates applicable
to long-term capital gains regardless of how long you have owned your shares.
Each sale or exchange of the Fund's shares is generally a taxable event. For tax
purposes, an exchange of your Fund shares for shares of a different Flag
Investors fund is the same as a sale. The individual tax rate on any gain from
the sale or exchange of your shares depends upon your marginal tax rate and how
long you have held your shares.
If you have a tax-advantaged or other retirement account you will generally
not be subject to federal taxation of income and capital gains distributions
until you begin receiving your distributions from your retirement account. You
should consult your tax advisor regarding rules governing your own retirement
plan.
If you are a non-US investor in the Fund you may be subject to US
withholding and estate tax and are encouraged to consult your tax advisor prior
to investing in the Fund.
If more than 50% of the Fund's total assets at the end of the fiscal year
are invested in foreign securities, the Fund may elect to pass-through to you
your pro-rata share of foreign taxes paid by the Fund. The Fund will provide you
with the necessary information to reflect the credit on your individual income
tax return if this election is made.
More information about taxes is in the Statement of Additional Information.
Please contact your tax advisor if you have specific questions about federal,
state, local or foreign income taxes.
10
<PAGE>
ORGANIZATIONAL STRUCTURE
--------------------------------------------------------------------------------
The Fund is a 'feeder fund' that invests substantially all of its assets in
the Top 50 Europe Portfolio. The Fund and the Portfolio have the same investment
objective. The Portfolio is advised by Deutsche Fund Management, Inc. and
sub-advised by DWS International Portfolio Management GmbH. (See the section
entitled 'Investment Advisor and Sub-Advisor.')
The Portfolio accepts investments from other feeder funds. A feeder fund
bears the Portfolio's expenses in proportion to its assets. Each feeder fund can
set its own transaction minimums, fund-specific expenses, and other conditions.
This arrangement allows the Fund's Directors to withdraw the Fund's assets from
the Portfolio if they believe doing so is in the shareholders' best interests.
If the Directors withdraw the Fund's assets, they would then consider whether
the Fund should hire its own investment advisor, invest in a different master
portfolio, or take other action.
INVESTMENT ADVISOR AND SUB-ADVISOR
--------------------------------------------------------------------------------
Deutsche Fund Management, Inc. ('DFM'), the Portfolio's Advisor, is
responsible for managing the Portfolio's assets, including buying and selling
portfolio securities. The Advisor has delegated daily management of the
Portfolio's assets to the Sub-Advisor. DWS International Portfolio Management
GmbH ('DWS') is the Portfolio's Sub-Advisor. The address for the Advisor is 280
Park Avenue, New York, NY 10017. The address for DWS is Grueneburgweg 113-115,
60323 Frankfurt am Main, Germany.
The Advisor is entitled to receive an annual fee of 1.00% based on the
average daily net assets of the Portfolio. The Advisor pays the Sub-Advisor a
portion of this fee. The Advisor has contractually agreed to waive its fee and
reimburse expenses of the Fund and Portfolio in order to maintain the Fund's
total operating expenses (other than extraordinary expenses) at not more than
the following percentages of average annual net assets of the share classes
through January 1, 2002: 1.60% for Class A Shares; 2.35% for Class B Shares; and
2.35% for Class C Shares.
The Advisor and the Sub-Advisor are subsidiaries of Deutsche Bank AG, a
major global banking institution. With total assets the equivalent of US $884.8
billion and 90,850 employees as of June 30, 2000, Deutsche Bank AG is one of
Europe's largest universal banks. It is engaged in a wide range of financial
services, including retail and commercial banking, investment banking and
insurance. Deutsche Bank AG and its affiliates may have commercial lending
relationships with companies whose securities may be held by the Portfolio.
Other subsidiaries of Deutsche Bank AG include Deutsche Asset Management
Europe GmbH ('DeAM Europe'), a company with limited liability organized under
the laws of Germany. DeAM Europe subsidiaries include German-based DWS
Investment GmbH ('DWS Investment') and others based in Luxembourg, Austria,
Switzerland, France, Poland and Italy. Together, DeAM Europe subsidiaries serve
as manager and/or investment advisor to more than 200 mutual funds, having
aggregate assets under management of more than the equivalent of $103.4 billion
as of June 30, 2000. DeAM Europe, along with its subsidiaries, employs
approximately 698 professionals and is one of the largest mutual fund operators
in Europe based on assets under management.
The primary subsidiary of DeAM Europe is DWS Investment. Founded in 1956,
DWS Investment is the largest mutual fund company in Germany, holding a 22.3%
share of the German mutual fund market based on assets under management as of
June 30, 2000. DeAM Europe and its subsidiaries are known in the financial
market as 'DWS Group', an Investment Group of Deutsche Bank.
DeAM Europe subsidiaries have received widespread industry recognition in
Europe. For example, Standard & Poor's/Micropal, Europe's leading fund rating
organization, has accorded DWS Investment the following awards: 1994: best fund
manager for one, three, and five-year periods; 1995: best fund manager for one,
three, and five-year periods; 1996: best fund manager for three and five-year
periods; 1997: best fund manager for three and five-year periods; 1998: best
fund manager for one, three and five-year periods; and 1999: best fund manager
for one- and five-year periods. These awards were given to fund managers having
ten or more funds registered for sale in Germany, based on the manager with the
highest number of funds ranked first within various categories of investment
objectives defined by Micropal. Fund rankings are based on above-average
performance in Deutsche mark (DM) terms and below-average volatility.
PORTFOLIO MANAGEMENT
DWS uses a team approach to provide day-to-day portfolio management
services to the Portfolio in which the Fund invests. The DWS Portfolio
management team has five members, and includes Klaus Kaldemorgen and Klaus
Martini, who each have over 16 years of experience as an investment manager.
11
<PAGE>
ADMINISTRATOR
--------------------------------------------------------------------------------
Investment Company Capital Corp. ('ICCC') provides administration services
to the Fund. ICCC supervises the day-to-day operations of the Fund, including
the preparation of registration statements, proxy materials, shareholder
reports, compliance with all requirements of securities laws in the states in
which shares are distributed and, subject to the supervision of the Fund's Board
of Directors, oversight of the relationship between the Fund and its other
service providers. ICCC is also the Fund's Transfer Agent.
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
The financial highlights tables are intended to help you understand the
Fund's financial performance since the inception of the Fund's Class A, Class B
and Class C Shares. Certain information reflects financial results for a single
share. The total returns in the tables represent the rate an investor would have
earned on an investment in the Fund, assuming reinvestment of all dividends and
distributions.
This information has been audited by PricewaterhouseCoopers LLP, whose
report, along with the Fund's financial statements, is included in the Annual
Report which is available upon request.
The following financial information is for fiscal year ended August 31,
2000. The financial information for the fiscal year ended August 31, 1999
includes results for the Fund when it was known as the Deutsche Top 50 Europe
Fund.
12
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A SHARES
FOR THE PERIOD
OCTOBER 2, 1997(1)
FOR THE YEAR ENDED TO
AUGUST 31, AUGUST 31,
-------------------------- ----------
2000 1999 1998
--------- --------- ----------
<S> <C> <C> <C>
Net asset value at beginning of period ............................ $13.40 $13.03 $12.50
------ ------ ------
INVESTMENT OPERATIONS:
Net investment income (expenses in excess of income) .............. (0.03) 0.04 0.02
Net realized and unrealized gain on investments and foreign
currencies allocated from Top 50 Europe Portfolio .............. 3.10 0.33 0.51
------ ------ ------
Increase from investment operations ............................... 3.07 0.37 0.53
------ ------ ------
NET ASSET VALUE AT END OF PERIOD ..................................... $16.47 $13.40 $13.03
====== ====== ======
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) ........................... 22.91% 2.84% 4.24%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ................................. $10,912 $3,796 $1,208
RATIOS TO AVERAGE NET ASSETS:
Expenses(3)........................................................ 1.60% 1.60% 1.60%(4)
Net investment income (expenses in excess of income)(3) ........... (0.02)% 0.44% 0.50%(4)
Portfolio turnover of Top 50 Europe Portfolio ..................... 65% 61% 27%
</TABLE>
----------
1 Commencement of operations.
2 Total return would have been lower had certain expenses not been
reimbursed by the Advisors. Total return has not been annualized for the
period ended August 31, 1998.
3 Includes the Fund's allocated portion of the Portfolio's expenses net of
expense reimbursements. Had the Advisors not undertaken to reimburse such
expenses, the ratios of expenses and expenses in excess of income to
average net assets would have been as follows:
<TABLE>
<S> <C> <C> <C>
Expenses to average net assets .............................. 3.86% 4.73% 16.53%(4)
Expenses in excess of income to average net assets .......... (2.24)% (2.69)% (14.43)%(4)
</TABLE>
4 Annualized.
13
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B SHARES
FOR THE PERIOD
MARCH 30, 1998(1)
FOR THE YEAR ENDED TO
AUGUST 31, AUGUST 31,
----------------------- ----------
2000 1999 1998
---- ---- ----------
<S> <C> <C> <C>
Net asset value at beginning of period ............................. $11.89 $11.65 $12.50
------ ------ ------
INVESTMENT OPERATIONS:
Expenses in excess of income ....................................... (0.12) (0.04) (0.01)
Net realized and unrealized gain (loss) on investments and
foreign currencies allocated from Top 50 Europe Portfolio ....... 2.74 0.28 (0.84)
------ ------ ------
Increase (decrease) from investment operations ..................... 2.62 0.24 (0.85)
------ ------ ------
NET ASSET VALUE AT END OF PERIOD ...................................... $14.51 $11.89 $11.65
====== ====== ======
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) ............................ 22.04% 2.06% (6.80)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) .................................. $7,234 $6,395 $3,120
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) ........................................................ 2.35% 2.35% 2.35%(4)
Expenses in excess of income(3) .................................... (0.79)% (0.46)% (0.46)%(4)
Portfolio turnover of Top 50 Europe Portfolio ...................... 65% 61% 27%
</TABLE>
----------
1 Commencement of operations.
2 Total return would have been lower had certain expenses not been reimbursed
by the Advisors. Total return has not been annualized for the period ended
August 31, 1998.
3 Includes the Fund's allocated portion of the Portfolio's expenses net of
expense reimbursements. Had the Advisors not undertaken to reimburse such
expenses, the ratios of expenses and expenses in excess of income to
average net assets would have been as follows:
<TABLE>
<S> <C> <C> <C>
Expenses to average net assets ............................... 4.61% 5.39% 17.28%(4)
Expenses in excess of income to average net assets ........... (3.05)% (3.50)% (15.39)%(4)
</TABLE>
4 Annualized.
14
<PAGE>
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C SHARES
FOR THE PERIOD
FOR THE SEPTEMBER 2,1998(1)
YEAR ENDED TO
AUGUST 31, AUGUST 31,
2000 1999
---------- ----------------
<S> <C> <C>
Net asset value at beginning of period ...................................... $12.95 $12.50
------ ------
INVESTMENT OPERATIONS:
Expenses in excess of income ................................................ (0.13) (0.03)
Net realized and unrealized gain on investments and foreign currencies
allocated from Top 50 Europe Portfolio ................................... 2.98 0.48
------ ------
Increase from investment operations ......................................... 2.85 0.45
------ ------
NET ASSET VALUE AT END OF PERIOD ............................................... $15.80 $12.95
====== ======
TOTAL RETURN (BASED ON NET ASSET VALUE)(2) ..................................... 22.01% 3.60%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (000's) ........................................... $1,053 $967
RATIOS TO AVERAGE NET ASSETS:
Expenses(3) ................................................................. 2.35% 2.35%(4)
Expenses in excess of income(3) ............................................. (0.79)% (0.31)%(4)
Portfolio turnover of Top 50 Europe Portfolio ............................... 65% 61%
</TABLE>
----------
1 Commencement of operations.
2 Total return would have been lower had certain expenses not been reimbursed
by the Advisors. Total return has not been annualized for the period ended
August 31, 1999.
3 Includes the Fund's allocated portion of the Portfolio's expenses net of
expense reimbursements. Had the Advisors not undertaken to reimburse such
expenses, the ratios of expenses and expenses in excess of income to average
net assets would have been as follows:
<TABLE>
<S> <C> <C>
Expenses to average net assets ........................................ 4.61% 5.97%(4)
Expenses in excess of income to average net assets .................... (3.05)% (3.93)%(4)
</TABLE>
4 Annualized.
15
<PAGE>
This page has been intentionally left blank
<PAGE>
DISTRIBUTOR
ICC DISTRIBUTORS, INC.
TRANSFER AGENT
INVESTMENT COMPANY CAPITAL CORP.
One South Street
Baltimore, Maryland 21202
1-800-553-8080
INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
250 W. Pratt Street
Baltimore, Maryland 21201
CUSTODIAN
INVESTORS BANK & TRUST COMPANY
200 Clarendon Street
Boston, Massachusetts 02116
FUND COUNSEL
MORGAN, LEWIS & BOCKIUS LLP
1701 Market Street
Philadelphia, Pennsylvania 19103
<PAGE>
[LOGO]
FLAG INVESTORS
INVESTING WITH A DIFFERENCE -Registered Trademark-
Flag Investors - P.O. Box 515 - Baltimore, MD 21203 - (800) 767-FLAG
www.flaginvestors.com
--------------------------------------------------------------------------------
You may obtain the following additional information about the Fund, free of
charge, from your securities dealer or servicing agent or by calling (800)
767-FLAG:
- A statement of additional information (SAI) about the Fund that is
incorporated by reference into the prospectus.
- The Fund's most recent annual and semi-annual reports containing detailed
financial information and, in the case of the annual report, a discussion
of market conditions and investment strategies that significantly affected
the Fund's performance during its last fiscal year.
In addition you may review information about the Fund (including the SAI) at the
Securities and Exchange Commission's Public Reference Room in Washington, D.C.
(Call 1-202-942-8090 to find out about the operation of the Public Reference
Room.) The EDGAR Database on the Commission's Internet site at
http://www.sec.gov has reports and other information about the Fund. Copies of
this information may be obtained, upon payment of a duplicating fee, by
electronic request at the following email address: [email protected], or by
writing the Public Reference Section of the Commission, Washington, D.C.
20549-0102.
For other shareholder inquiries, contact the Transfer Agent at (800) 553-8080.
For Fund information, call (800) 767-FLAG or your securities dealer or servicing
agent.
Investment Company Act File No. 811-8227 TOP50EPRO (01/01)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 1, 2001
FLAG INVESTORS FUNDS, INC.
FLAG INVESTORS TOP 50 WORLD
FLAG INVESTORS TOP 50 EUROPE
FLAG INVESTORS TOP 50 ASIA
FLAG INVESTORS TOP 50 US
FLAG INVESTORS EUROPEAN MID-CAP FUND
FLAG INVESTORS JAPANESE EQUITY FUND
(Each Fund formerly named "Deutsche" rather than "Flag Investors.")
Flag Investors Funds, Inc. (the "Corporation") is an open-end,
non-diversified management investment company that offers investors a selection
of investment portfolios, each having separate and distinct investment
objectives and policies. This Statement of Additional Information ("SAI")
provides supplementary information pertaining to the above listed funds (the
"Funds").
Unlike other mutual funds which directly acquire and manage their own
portfolio of securities, each Fund seeks to achieve its investment objective
through a master-feeder investment fund structure, by investing all of its
investable assets in a corresponding, non-diversified open-end management
investment company (or series thereof) having the same investment objective
as such Fund. The investment companies that follow are the series of the Flag
Investors Portfolios Trust (renamed from Deutsche Portfolios effective
January 18, 2000) (the "Portfolios"), that correspond to the Funds:
Top 50 World Portfolio
Top 50 Europe Portfolio
Top 50 Asia Portfolio
Top 50 US Portfolio
European Mid-Cap Portfolio (formerly, Provesta Portfolio)
Japanese Equity Portfolio
The Funds' Prospectuses dated January 1, 2001 (the "Prospectuses"), as
they may be amended, revised or supplemented from time to time, provide the
basic information investors should know before investing. This SAI, which is not
a Prospectus, is intended to provide additional information regarding the
activities and operations of the Funds and the Portfolios and should be read
only in conjunction with the Prospectuses. You may request a copy of the
Prospectuses or a copy of this SAI, free of charge by written request at the
address, or by calling the telephone number, listed below or by contacting the
Flag Investors Funds transfer agent. This SAI is not an offer of any Fund for
which an investor has not received a Prospectus. Capitalized terms not otherwise
defined in this SAI have the meanings accorded to them in the Funds'
Prospectuses. The audited financial statements for the Funds for the fiscal year
ended August 31, 2000, are incorporated herein by reference to the Annual Report
to shareholders for the Funds and the Portfolios dated August 31, 2000. A copy
of the Corporation's Annual Reports may be obtained without charge by written
request at the address, or by calling the telephone number, listed below.
FLAG INVESTORS FUNDS, INC.
P.O. BOX 515
BALTIMORE, MARYLAND 21203
TOLL-FREE 1-800-767-FLAG
COMBFLAGSAI (01/01)
ICC DISTRIBUTORS, INC. Distributor
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
GENERAL INFORMATION AND HISTORY...................................................................................1
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS..................................................................1
INVESTMENT OBJECTIVES AND POLICIES...............................................................................37
PORTFOLIO TURNOVER...............................................................................................40
WHAT DO SHARES COST?.............................................................................................41
HOW ARE THE FUNDS SOLD?..........................................................................................42
DISTRIBUTION AND SERVICES PLANS..................................................................................42
REDEMPTION.......................................................................................................43
ACCOUNT AND SHARE INFORMATION....................................................................................44
TAX INFORMATION..................................................................................................50
WHO MANAGES AND PROVIDES SERVICES TO THE FUNDS?..................................................................51
BROKERAGE TRANSACTIONS...........................................................................................57
ADMINISTRATOR....................................................................................................59
CUSTODIAN AND FUND ACCOUNTANT....................................................................................60
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT.....................................................................61
INDEPENDENT ACCOUNTANTS..........................................................................................61
LEGAL COUNSEL....................................................................................................61
HOW DO THE FUNDS MEASURE PERFORMANCE?............................................................................62
FINANCIAL INFORMATION............................................................................................67
APPENDIX A......................................................................................................A-1
APPENDIX B......................................................................................................B-1
</TABLE>
1
<PAGE>
GENERAL INFORMATION AND HISTORY
Flag Investors Funds, Inc. (the "Corporation") is an open-end non-diversified
management investment company. Under the rules and regulations of the Securities
and Exchange Commission (the "SEC"), all mutual funds are required to furnish
prospective investors with certain information concerning the activities of the
company being considered for investment. The Corporation currently offers six
Funds.
Flag Investors Portfolios Trust (renamed from Deutsche Portfolios effective
January 18, 2000) ("Portfolio Trust") is an open-end, management investment
company that was organized as a trust under the laws of the State of New York.
The Portfolio Trust is currently comprised of six portfolios (which are referred
to individually as a "Portfolio" or collectively as the "Portfolios").
Important information concerning the Corporation and the Funds are included
in the Funds' Prospectuses, which may be obtained without charge from the
Funds' 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 Funds' 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 a Fund and
their business that is contained in the Registration Statement for the Funds
and their 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 Corporation was incorporated under the laws of the State of Maryland on May
22, 1997. The Corporation filed a registration statement with the SEC
registering itself as an open-end, non-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 (the
"Securities Act").
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
INVESTMENT OBJECTIVES
The following is a description of the Portfolios' investment objectives. The
Portfolios' investment objectives and the investment objectives of the
corresponding feeder Funds are identical. There can, of course, be no assurance
that each Portfolio will achieve its investment objective(s).
The investment objectives of each Portfolio (except the Japanese Equity
Portfolio) is to seek high capital appreciation and, as a secondary objective,
reasonable dividend income. The objective of the Japanese Equity Portfolio is to
seek high capital appreciation.
INVESTMENT POLICIES
Each Fund seeks to achieve its investment objective by investing all of its
assets in its corresponding Portfolio, which has the same investment objective
as the Fund. The principal investment strategies of the Portfolios and the
Funds, and the risks associated with these strategies, are described in each
Fund's prospectus. Additional information is provided below. The Funds may
withdraw their investments from their corresponding Portfolio at any time the
Board of Directors of the Corporation determines that it is in the best interest
of the Funds to do so. The investment characteristics of the Funds will
correspond directly to those of the corresponding Portfolios. Any percentage
limitation on the Portfolios' ability to invest in debt securities will not be
applicable during periods when the Portfolios pursue a temporary defensive
strategy as discussed below. The Portfolios are not obligated to pursue any of
these strategies and do not represent that these techniques are available now or
will be available at any time in the future.
2
<PAGE>
SECURITIES IN WHICH THE PORTFOLIOS INVEST
Since each Fund and its corresponding Portfolio have the same investment
objectives, policies and restrictions, discussions about a Fund and its
acceptable investments also pertain to its corresponding Portfolio and its
acceptable investments. Following is a table that indicates which types of
securities are:
- P = PRINCIPAL investment of a Fund and its corresponding Portfolio;
(bolded in chart)
- A = ACCEPTABLE (but not principal) investment of a Fund and its
corresponding Portfolio; or
- N = NOT AN ACCEPTABLE investment of a Fund and its corresponding
Portfolio.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
EUROPEAN JAPANESE
TOP 50 TOP 50 TOP 50 TOP 50 MID-CAP EQUITY
WORLD EUROPE ASIA US FUND FUND
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EQUITY SECURITIES P P P P P P
----------------------------------------------------------------------------------------------------------------------------
Common Stocks P P P P P P
----------------------------------------------------------------------------------------------------------------------------
Preferred Stocks A A A A A A
----------------------------------------------------------------------------------------------------------------------------
Real Estate Investment Trusts A A A A A A
----------------------------------------------------------------------------------------------------------------------------
Warrants A A A A A A
----------------------------------------------------------------------------------------------------------------------------
Initial Public Offerings ("IPOs") A A A A P A
----------------------------------------------------------------------------------------------------------------------------
FIXED INCOME SECURITIES A A A A P A
----------------------------------------------------------------------------------------------------------------------------
Treasury Securities A A A A P A
----------------------------------------------------------------------------------------------------------------------------
Agency Securities A A A A P A
----------------------------------------------------------------------------------------------------------------------------
Corporate Debt Securities A A A A P A
----------------------------------------------------------------------------------------------------------------------------
Commercial Paper A A A A P A
----------------------------------------------------------------------------------------------------------------------------
Demand Instruments A A A A P A
----------------------------------------------------------------------------------------------------------------------------
Insurance Contracts A A A A P A
----------------------------------------------------------------------------------------------------------------------------
Brady Bonds A A A A P A
----------------------------------------------------------------------------------------------------------------------------
Taxable Municipal Securities A A A A P A
----------------------------------------------------------------------------------------------------------------------------
Mortgage Backed Securities A A A A P A
----------------------------------------------------------------------------------------------------------------------------
Asset Backed Securities A A A A P A
----------------------------------------------------------------------------------------------------------------------------
Zero Coupon Securities A A A A P A
----------------------------------------------------------------------------------------------------------------------------
Bank Instruments A A A A P A
----------------------------------------------------------------------------------------------------------------------------
Credit Enhancement A A A A P A
----------------------------------------------------------------------------------------------------------------------------
Variable Rate Demand A A A A P A
Instruments
----------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE SECURITIES A A A A P A
----------------------------------------------------------------------------------------------------------------------------
FOREIGN SECURITIES A A A A P A
----------------------------------------------------------------------------------------------------------------------------
Depositary Receipts A A A A P A
----------------------------------------------------------------------------------------------------------------------------
DERIVATIVE CONTRACTS A A A A P A
----------------------------------------------------------------------------------------------------------------------------
Futures Contracts A A A A P A
----------------------------------------------------------------------------------------------------------------------------
Options A A A A P A
----------------------------------------------------------------------------------------------------------------------------
Special Transactions A A A A P A
----------------------------------------------------------------------------------------------------------------------------
Borrowing A A A A P A
----------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements A A A A P A
----------------------------------------------------------------------------------------------------------------------------
Reverse Repurchase Agreements A A A A P A
----------------------------------------------------------------------------------------------------------------------------
Delayed Delivery Transactions A A A A P A
----------------------------------------------------------------------------------------------------------------------------
Securities Lending A A A A P A
----------------------------------------------------------------------------------------------------------------------------
Investing in Securities of other A A A A P A
Investment Companies
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
EQUITY SECURITIES
Each Portfolio underlying the Funds may invest at least 65% of its total
assets in the equity securities of domestic and foreign issuers to the extent
consistent with its investment objectives and policies. As used herein,
"equity securities" include common stock,
3
<PAGE>
preferred stock, trust or limited partnership interests, rights and warrants (to
subscribe to or purchase such securities) and convertible securities (consisting
of debt securities or preferred stock that may be converted into common stock or
that carry the right to purchase common stock.)
COMMON STOCK (ALL PORTFOLIOS)
Common stocks, the most familiar type of equity securities, represent an
equity (i.e. ownership) interest in a corporation. They may or may not
pay dividends or carry voting rights. Common stock occupies the most
junior position in a company's capital structure. Although equity
securities have a history of long-term growth in value, their prices
fluctuate based on changes in a company's financial condition as well as
changes in overall market and economic conditions. This affects the value
of the shares of the Portfolios, and thus the value of your investment.
Smaller companies are especially sensitive to these factors.
WARRANTS (ALL PORTFOLIOS)
Each Portfolio underlying the Funds may purchase warrants in value of up
to 10% of the Portfolio's net assets. Warrants are securities that give
the Portfolio the right but not the obligation to buy a specified number
of shares of common stock at a specified price, which is often higher
than the market price at the time of issuance, for a specified period (or
in perpetuity). Warrants may be issued in units with other securities or
separately, and may be freely transferable and traded on exchanges.
Investing in warrants can provide a greater potential for profit or loss
than an equivalent investment in the underlying security, and thus, is a
speculative investment. At the time of issue, the cost of a warrant is
substantially less than the cost of the underlying security itself, and
price movements in the underlying security are generally magnified in the
price movements of the warrant. This leveraging effect enables the
investor to gain exposure to the underlying security with a relatively
low capital investment. This leveraging increases an investor's risk,
however, in the event of a decline in the value of the underlying
security and can result in a complete loss of the amount invested in the
warrant.
While the market value of a warrant tends to be more volatile than that
of the securities underlying the warrant, changes in the market value of
a warrant may not necessarily correlate with that of the underlying
security. A warrant ceases to have value if it is not exercised prior to
the expiration date, if any, to which the warrant is subject. The
purchase of warrants involves a risk that the Portfolio could lose the
purchase value of a warrant if the right to subscribe to additional
shares is not exercised prior to the warrant's expiration. Also, the
purchase of warrants involves the risk that the effective price paid for
the warrant added to the subscription price of the related security may
exceed the value of the subscribed security's market price such as when
there is no movement in the level of the underlying security. The value
of the warrant may decline because of a decline in the value of the
underlying security, the passage of time, changes in the interest rates
or dividend or other policies of the company whose equity underlies the
warrant or a change in the perception as to the future price of the
underlying security, or any combination thereof. Also warrants do not
entitle the holder to dividends or voting rights with respect to the
underlying securities and do not represent any rights in the assets of
the issuing company.
PREFERRED STOCKS (ALL PORTFOLIOS)
Preferred stock has a preference (i.e., ranks higher) in liquidation (and
generally dividends) over common stock but is subordinated (i.e., ranks
lower) in liquidation of fixed income securities. Dividends on preferred
stocks may be cumulative, and in such cases, all cumulative dividends
usually must be paid prior to dividend payments to common stockholders.
Because of this preference, preferred stocks generally entail less risk
than common stocks. As a general rule, the market value of preferred
stocks with fixed dividend rates and no conversion rights moves inversely
with interest rates and perceived credit risk, with the price determined
by the dividend rate. Some preferred stocks are convertible into other
securities (e.g., common stock) at a fixed price and ratio upon the
occurrence of certain events. The market price of convertible preferred
stocks generally reflects an element of conversion value. Because many
preferred stocks lack a fixed maturity date, these securities generally
fluctuate substantially in value when interest rates change; such
fluctuations often exceed those of long-term bonds of the same issuer.
Some preferred stocks pay an adjustable dividend that may be based on an
index, formula, auction procedure or other
4
<PAGE>
dividend rate reset mechanism. In the absence of credit deterioration,
adjustable rate preferred stocks tend to have more stable market values
than fixed rate preferred stocks.
All preferred stocks are subject to the same types of credit risks as
corporate bonds. In addition, because preferred stock is subordinate to
debt securities and other obligations of an issuer, deterioration in the
credit rating of an issuer will cause greater changes in the value of a
preferred stock than in a more senior debt security with similar yield
characteristics. Preferred stocks may be rated by Standard & Poor's
Ratings Services ("S&P") and Moody's Investors Service, Inc. ("Moody's")
although there is no minimum rating which a preferred stock must have to
be an eligible instrument of the Portfolio. Generally, however, the
preferred stocks in which the Portfolio invests will be rated at least
CCC by S&P or Caa by Moody's or, if unrated, of comparable quality in the
opinion of the Advisors. Preferred stocks rated CCC by S&P are regarded
as predominately speculative with respect to the issuer's capacity to pay
a preferred stock obligations and represent the highest degree of
speculation among rated securities between BB and CCC; preferred stocks
rated Caa by Moody's are likely to be in arrears on dividend payments.
Moody's ratings with respect to preferred stocks do not purport to
indicate the future status of payment of dividends.
CONVERTIBLE SECURITIES (ALL PORTFOLIOS)
A convertible security is a bond or preferred stock which may be
converted at a stated price within a specific period of time into a
specified number of shares of common stock of the same or different
issuer. Convertible securities are senior to common stock in a
corporation's capital structure, but are generally subordinate to
non-convertible debt securities. While providing a fixed income stream,
they are generally higher in yield than in the income derived from a
common stock but lower than that afforded by a non-convertible debt
security. A convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the
capital appreciation of common stock to which it is convertible. The
option allows the Portfolios to realize additional returns if the market
price of the equity securities exceeds the conversion price. For example,
the Portfolios may hold fixed income securities that are convertible into
shares of common stock at a conversion price of $10 per share. If the
market value of the shares of common stock reached $12, the Portfolios
could realize an additional $2 per share by converting their fixed income
securities. Convertible securities have lower yields than comparable
fixed income securities.
The terms of any convertible security determine its ranking in a
company's capital structure. In the case of subordinated convertible
debentures, the holders' claims on assets and earnings are subordinated
to the claims of other creditors, and are senior to the claims of
preferred and common shareholders. In the case of convertible preferred
stock, the holders' claim on assets and earnings are subordinated to the
claims of all creditors and senior to the claims of common shareholders.
In general, the market value of a convertible security is the greater of
its investment value (its value as a fixed income security) or its
conversion value (the value of the underlying shares of common stock if
the security is converted). As a fixed income security, the market value
of a convertible security generally increases when interest rates decline
and generally decreases as the market value of the underlying stock
declines. Investments in convertible securities generally entail less
risk than investments in the common stock of the same issuer.
5
<PAGE>
PARTICIPATION CERTIFICATES
Certain companies have issued participation certificates which entitle
the holder to participate only in dividend distributions, generally at
rates above those declared on the issuers' common stock, but not to vote,
nor usually to any claim for assets in liquidation. Participation
certificates trade like common stock on their respective stock exchanges.
Such securities may have higher yields; but, they may be less liquid than
common stock. The Advisor believes that certain participation
certificates have potential for long-term appreciation, depending on
their price relative to that of the issuer's equity securities (if
publicly traded) and other criteria.
REAL ESTATE INVESTMENT TRUSTS (REITS) (ALL PORTFOLIOS)
REITs are real estate investment trusts that lease, operate and finance
commercial real estate. REITs are exempt from federal corporate income
tax if they limit their operations and distribute most of their income.
Such tax requirements limit a REIT's ability to respond to changes in the
commercial real estate market.
INITIAL PUBLIC OFFERINGS (IPOS) (ALL PORTFOLIOS)
Each Portfolio may invest in IPOs. IPOs may be very volatile, rising and
falling rapidly based on, among other reasons, investor perceptions
rather than economic reasons. Additionally, IPOs may have a magnified
performance effect on a portfolio with a small asset base. A Fund may not
experience a similar impact on its performance as its assets grow, as
it is unlikely that the Fund will be able to obtain proportionately
larger IPO allocations.
FIXED INCOME SECURITIES
The Portfolios may invest in a broad range of domestic and foreign fixed income
(debt) securities. Although not a principal investment strategy, each Portfolio
is able to invest up to 20% of its net assets in investment grade fixed income
securities (excluding bank deposits and money market instruments). Japanese
Equity may invest up to 30% of its net assets in fixed income securities (other
than bank deposits and money market instruments).
Fixed income securities, including (but not limited to) bonds, are used by
issuers to borrow money from investors. The issuer pays the investor a fixed or
variable rate of interest, and must repay the amount borrowed at maturity. Some
debt securities, such as zero coupon bonds, do not pay current interest, but are
purchased at a discount from their face values.
The value of fixed income securities in each Portfolio generally varies
inversely with the changes in interest rates. Prices of fixed income securities
with longer effective maturities are more sensitive to interest rate changes
than those with shorter effective maturities.
In periods of declining interest rates, the yield (the income generated over a
stated period of time) of the fixed income securities in which a Portfolio may
invest may tend to be higher than prevailing market rates. In periods of rising
interest rates, the yield may tend to be lower. Also, when interest rates are
falling, the inflow of net new money to a Portfolio will likely be invested
in portfolio instruments producing lower yields than the balance of the
Portfolio's fixed income investments. In periods of rising interest rates, the
opposite can be true. The net asset value of a Portfolio investing in fixed
income securities can generally be expected to change as general levels of
interest rates fluctuate.
FIXED INCOME SECURITY RISK
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Fixed income securities generally expose a Portfolio to four types of
risk: (1) interest rate risk (the potential for fluctuations in bond
prices due to changing interest rates); (2) income risk (the potential
for a decline in the Portfolios' income due to the falling market
interest rates); (3) credit risk (the possibility that a bond issuer will
fail to make timely payments of either interest or principal to the
Portfolio); and (4) prepayment risk or call risk (the likelihood that,
during a period of falling interest rates, securities with high stated
interest rates will be prepaid, or "called" prior to maturity, requiring
the Portfolio to invest the proceeds at the generally lower interest
rates).
CORPORATE DEBT SECURITIES (ALL FUNDS)
Each Portfolio may invest in corporate debt securities. Corporate debt
securities are fixed income securities issued by businesses. Notes,
bonds, debentures and commercial paper are the most prevalent types of
corporate debt securities. A Portfolio may also purchase interests in
bank loans to companies. The credit risks of corporate debt securities
vary widely among issuers.
In addition, the credit risk of an issuer's debt security may vary based
on its priority for repayment. For example, higher ranking (senior) debt
securities have a higher priority than lower ranking (subordinated)
securities. This means that the issuer might not make payments on
subordinated securities while continuing to make payments on senior
securities. In addition, in the event of bankruptcy, holders of senior
securities may receive amounts otherwise payable to the holders of
subordinated securities.
U.S. GOVERNMENT SECURITIES (INCLUDING U.S. TREASURY SECURITIES AND AGENCY
SECURITIES) (ALL FUNDS)
Each Portfolio may invest its assets in securities issued or guaranteed
by the U.S. government, its agencies or instrumentalities. These
securities, including those which are guaranteed by federal agencies or
instrumentalities, may or may not be backed by the "full faith and
credit" of the United States. In the case of securities not backed by the
full faith and credit of the United States, it may not be possible to
assert a claim against the United States itself in the event the agency
or instrumentality issuing or guaranteeing the security for ultimate
repayment does not meet its commitments. Securities which are not backed
by the full faith and credit of the United States include, but are not
limited to, securities of the Tennessee Valley Authority, the Federal
National Mortgage Association (FannieMae), the U.S. Postal Service and
the Resolution Funding Corporation (REFCORP), each of which has a limited
right to borrow from the U.S. Treasury to meet its obligations, and
securities of the Federal Farm Credit System, the Federal Home Loan
Banks, the Federal Home Loan Mortgage Corporation (FHLMC) and the Student
Loan Marketing Association (SallieMae), the obligations of each of which
may be satisfied only by the individual credit of the issuing agency.
Securities which are backed by the full faith and credit of the United
States include Treasury bills, Treasury notes, Treasury bonds and
pass-through obligations of the Government National Mortgage Association
(GNMA), the Farmers Home Administration and the Export-Import Bank.
There is no percentage limitation with respect to investments in U.S.
government securities.
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VARIABLE RATE SECURITIES (ALL FUNDS)
Each Portfolio may in long-term maturity securities which are subject to
frequently available put option or tender option features under which the
holder may put the security back to the issuer or its agent at a
predetermined price (generally par) after giving specified notice. The
interest rate on a variable rate security changes at intervals according
to an index or a formula or other standard measurement as stated in the
bond contract. One common method is to calculate the interest rate as a
percentage of the rate paid on selected issues of Treasury securities on
specified dates. The put option or tender option right is typically
available to the investor on a weekly or monthly basis although on some
demand securities the investor has
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a daily right to exercise the put option. Variable rate securities with
the put option exercisable on dates on which the variable rate changes
are often called "variable rate demand notes."
The absence of an active secondary market for certain variable and
floating rate notes could make it difficult to dispose of the
instruments, and a Portfolio could suffer a loss if the issuer defaults
or during periods in which the Portfolio is not entitled to exercise its
demand rights. Variable and floating rate instruments held by the
Portfolio will be subject to the Portfolio's limitation on investments in
illiquid securities when a reliable trading market for the instruments
does not exist and the Portfolio may not demand payment of the principal
amount of such instruments within seven days.
DEMAND INSTRUMENTS (ALL PORTFOLIOS)
Demand instruments are corporate debt securities that the issuer must
repay upon demand. Other demand instruments require a third party,
such as a dealer or bank, to repurchase the security for its face value
upon demand. Each Portfolio treats demand instruments as short-term
securities, even though their stated maturity may extend beyond one year.
INSURANCE CONTRACTS (ALL PORTFOLIOS)
Insurance contracts include guaranteed investment contracts, funding
agreements and annuities. Each Portfolio treats these contracts as fixed
income securities.
ZERO COUPON SECURITIES AND DEFERRED INTEREST BONDS (ALL PORTFOLIOS)
Zero coupon and deferred interest bonds are debt obligations which are
issued at a significant discount from face value. The original discount
approximates the total amount of interest the bonds will accrue and
compound over the period until maturity or the first interest accrual
date at a rate of interest reflecting the market rate of the security at
the time of issuance. Zero coupon securities are redeemed at face value
at their maturity date without interim cash payments of interest or
principal. The amount of this discount is accrued over the life of the
security, and the accrual constitutes the income earned on the security
for both accounting and tax purposes. Because of these features, the
market prices of zero coupon securities are generally more volatile than
the market prices of securities that have similar maturities but that pay
interest periodically.
While zero coupon bonds do not require the periodic payment of interest,
deferred interest bonds generally provide for a period of delay before
the regular payment of interest begins. Although this period of delay is
different for each deferred interest bond, a typical period is
approximately one-third of the bond's term to maturity. Such investments
benefit the issuer by mitigating its initial need for cash to meet debt
service, but some also provide a higher rate of return to attract
investors who are willing to defer receipt of such cash.
The Portfolios will accrue income on such investments for tax and
accounting purposes, as required, which is distributable to shareholders
and which, because no cash is generally received at the time of accrual,
may require the liquidation of other portfolio securities to satisfy a
Portfolio's distribution obligations. See the section entitled "State
Taxes."
SHORT-TERM INSTRUMENTS (ALL PORTFOLIOS)
Short-term instruments consist of foreign and domestic: (1) short-term
obligations of sovereign governments, their agencies, instrumentalities,
authorities or political subdivisions; (2) other short-term debt securities
rated AA or higher by "S&P" or Aa or higher by "Moody's" or, if unrated,
deemed to be of comparable quality in the opinion of the Advisor; (3)
commercial paper; (4) bank obligations, including negotiable certificates of
deposit, time deposits and banker's acceptances; and (5) repurchase
agreements. At the time the Portfolios invest in commercial paper, bank
obligations or repurchase agreements, the issuer or the issuer's parent must
have outstanding debt rated AA or higher by S&P or Aa or higher by Moody's;
outstanding commercial paper or bank obligations rated A-1 by S&P or Prime-1
by Moody's; or, if no such ratings are available, the instrument must be
deemed to be of comparable quality in the opinion of the Advisor. These
instruments may be denominated in U.S. dollars or in foreign currencies.
Short-term instruments also include credit balances and bank certificates of
deposit, discounted treasury notes and bills issued by Germany, the states of
Germany, the European Union, OECD Members or quasi-governmental entities of
any of the foregoing. See Appendix A for a listing of the countries included
in these organizations and the additional markets and exchanges where the
Portfolios may invest.
The Portfolios may also invest in separately traded principal and interest
component of securities guaranteed or issued by the U.S. Government or its
agencies, instrumentalities or sponsored enterprises if such components trade
independently under the Separate Trading of Registered Interest and Principal
of Securities program ("STRIPS") or any similar program sponsored by the U.S.
Government. STRIPS are sold as zero coupon securities. See the section
entitled "Zero Coupon Securities and Deferred Interest Bonds."
When in the opinion of the Advisors it is necessary to adopt a temporary
defensive position because of unusual and adverse market or other conditions,
up to 100% of a Portfolio's assets may be invested in such short-term
instruments. Under normal circumstances each Portfolio will purchase bank
deposits and money market instruments to invest temporary cash balances or to
maintain liquidity to meet redemptions. However, for each Portfolio, except
the Top 50 US Portfolio, certificates of deposit from any one credit
institution may not account for more than 10% of a Portfolio's total assets.
When a Portfolio experiences large cash inflows, for example, through the
sale of securities and attractive investments are unavailable in sufficient
quantities, the Portfolio may hold short-term investments (or shares of money
market mutual funds) for a limited time pending availability of such
investments.
To the extent a Portfolio engages in short-term trading, it may realize
short-term capital gains or losses and incur increased transaction costs.
COMMERCIAL PAPER (ALL FUNDS)
Each Portfolio may invest its assets in commercial paper including variable
rate demand master notes issued by U.S. corporations or by non-U.S.
corporations (with the exception of Top 50 US) which are direct parents or
subsidiaries of U.S. corporations. Master notes are demand obligations that
permit the investment of fluctuating amounts at varying market rates of
interest pursuant to arrangements between the issuer and a U.S. commercial
bank acting as agent for the payees of such notes. Master notes are callable
on demand, but are not marketable to third parties. Consequently, the right
to redeem such notes depends on the borrower's ability to pay on demand. At
the date of investment, commercial paper must be rated within the highest
rating category for short-term debt obligations by at least two (unless only
rated by one) nationally recognized statistical rating organizations (e.g.,
Moody's and S&P) or, if unrated, are of comparable quality as determined by
or under the direction of the Portfolios' Board of Trustees. Any commercial
paper issued by a non-U.S. corporation must be U.S. dollar-denominated and
not subject to non-U.S. withholding tax at the time of purchase. Aggregate
investments in non-U.S. commercial paper of non-U.S. issuers cannot exceed
10% of a Portfolio's net assets. Since a Portfolio may contain commercial
paper issued by non-U.S. corporations, it may be subject to additional
investment risks with respect to those securities that are different in some
respects from obligations of U.S. issuers, such as currency exchange control
regulations, the possibility of expropriation, seizure or nationalization of
non-U.S. deposits, less liquidity and more volatility in non-U.S. securities
markets and the impact of political, social or diplomatic developments or the
adoption of other foreign government restrictions which might adversely
affect the payment of principal and interest on securities held by the
Portfolio. If it should become necessary, greater difficulties might be
encountered in invoking legal processes abroad than would be the case in the
United States. There may be less publicly available information about a
non-U.S. issuer, and non-U.S. issuers generally are not subject to uniform
accounting and financial reporting standards, practices and requirements
comparable to those applicable to U.S. issuers.
BANK INSTRUMENTS
Each Portfolio may invest its assets in U.S. dollar-denominated negotiable
certificates of deposit, fixed time deposits and bankers' acceptances of
banks, savings associations and savings banks organized under the laws of the
United States or any state thereof, including obligations of non-U.S.
branches of such banks, or of non-U.S. banks or their U.S. or non-U.S.
branches, provided that in each case, such bank has more than $500 million in
total assets, and has an outstanding short-term debt issue rated within the
highest rating category for short-term debt obligations by at least two
(unless only rated by one)nationally recognized statistical rating
organizations (e.g., Moody's and S&P)or, if unrated, are of comparable
quality as determined by or under the direction of the Portfolio's Board of
Trustees.
There is no additional percentage limitation with respect to investments in
negotiable certificates of deposit, fixed time deposits and bankers'
acceptances of U.S. branches of U.S. banks and U.S. branches of non-U.S.
banks that are subject to the same regulation as U.S. banks. Since a
Portfolio may contain U.S. dollar-denominated certificates of deposit, fixed
time deposits and bankers' acceptances that are issued by non-U.S. banks and
their non-U.S. branches, the Portfolio may be subject to additional
investment risks with respect to those securities that are different in some
respects from obligations of U.S. issuers, such as currency exchange control
regulations, the possibility of expropriation, seizure or nationalization of
non-U.S. deposits, less liquidity and more volatility in non-U.S. securities
markets and the impact of political, social or diplomatic developments or the
adoption of other foreign government restrictions which might adversely
affect the payment of principal and interest on securities held by the
Portfolio. If it should become necessary, greater difficulties might be
encountered in invoking legal processes abroad than would be the case in the
United States. Issuers of non-U.S. bank obligations may be subject to less
stringent or different regulations than are U.S. bank issuers, there may be
less publicly available information about a non-U.S. issuer, and non-U.S.
issuers generally are not subject to uniform accounting and financial
reporting standards, practices and requirements comparable to those
applicable to U.S. issuers. Income earned or received by a Portfolio from
sources within countries other than the United States may be reduced by
withholding and other taxes imposed by such countries. Tax conventions
between certain countries and the United States, however, may reduce or
eliminate such taxes. All such taxes paid by a Portfolio would reduce its net
income available for distribution to investors (i.e., the Fund and other
investors in the Fund); however, the Advisors would consider available
yields, net of any required taxes, in selecting securities of non-U.S.
issuers. While early withdrawals are not contemplated, fixed time deposits
are not readily marketable and may be subject to early withdrawal penalties,
which may vary. Assets of a Portfolio are not invested in obligations of the
Advisors, the Distributor, or in the obligations of the affiliates of any
such organization. Assets of a Portfolio are also not invested in fixed time
deposits with a maturity of over seven calendar days, or in fixed time
deposits with a maturity of from two business days to seven calendar days if
more than 10% of the Portfolio's net assets would be invested in such
deposits.
REPURCHASE AGREEMENTS (ALL PORTFOLIOS)
Repurchase agreements may be entered into for each Portfolio only with a
"primary dealer" (as designated by the Federal Reserve Bank of New York) in
U.S. government securities. This is an agreement in which the seller (the
"Lender") of a security agrees to repurchase from a Portfolio the security
sold at a mutually agreed upon time and price. As such, it is viewed as the
lending of money to the Lender. The resale price normally is in excess of the
purchase price, reflecting an agreed upon interest rate. The rate is
effective for the period of time assets of the Portfolio are invested in the
agreement and is not related to the coupon rate on the underlying security.
The period of these repurchase agreements is usually short, from overnight to
one week, and at no time are assets of the Portfolio invested in a repurchase
agreement with a maturity of more than one year. The securities which are
subject to repurchase agreements, however, may have maturity dates in excess
of one year from the effective date of the repurchase agreement. A Portfolio
always receives as collateral securities which are issued or guaranteed by
the U.S. government, its agencies or instrumentalities. Collateral is marked
to the market daily and has a market value including accrued interest at
least equal to 100% of the dollar amount invested on behalf of the Portfolio
in each agreement along with accrued interest. Payment for such securities is
made for a Portfolio only upon physical delivery or evidence of book-entry
transfer to the account of the Portfolio's Custodian. If the Lender defaults,
a Portfolio might incur a loss if the value of the collateral securing the
repurchase agreement declines and might incur disposition costs in connection
with liquidating the collateral. In addition, if bankruptcy proceedings are
commenced with respect to the Lender, realization upon the collateral on
behalf of a Portfolio may be delayed or limited in certain circumstances. A
repurchase agreement with more than seven days to maturity may not be entered
into for a Portfolio if, as a result, more than 10% of the Portfolio's net
assets would be invested in such repurchase agreements together with any
other investment for which market quotations are not readily available.
REVERSE REPURCHASE AGREEMENTS (ALL PORTFOLIOS)
Reverse repurchase agreements may be entered into for each Portfolio only
with a "primary dealer" (as designated by the Federal Reserve Bank of New
York) in U.S. government securities. This is an agreement in which a
Portfolio agrees to repurchase securities sold by them at a mutually agreed
upon time and price. As such, it is viewed as the borrowing of money for the
Portfolio. Proceeds of borrowings under reverse repurchase agreements are
invested for the Portfolio. This is the speculative factor known as
"leverage". If interest rates rise during the term of a reverse repurchase
agreement utilized for leverage, the value of the securities to be
repurchased for a Portfolio as well as the value of securities purchased with
the proceeds will decline. Proceeds of a reverse repurchase transaction are
not invested for a period which exceeds the duration of the reverse
repurchase agreement. A reverse repurchase agreement is not entered into for
a Portfolio if, as a result, more than one- third of the market value of the
Portfolio's total assets, less liabilities other than the obligations created
by reverse repurchase agreements, is engaged in reverse repurchase
agreements. In the event that such agreements exceed, in the aggregate,
one-third of such market value, the amount of the Portfolio's obligations
created by reverse repurchase agreements is reduced within three days
thereafter (not including Sundays and holidays) or such longer period as the
SEC may prescribe. A segregated account with the Custodian is established and
maintained for the Portfolio with liquid assets in an amount at least equal
to the Portfolio's purchase obligations under their reverse repurchase
agreements. Such a segregated account consists of liquid, high grade debt
securities marked to the market daily, with additional liquid assets added
when necessary to insure that at all times the value of such account is equal
to the purchase obligations.
DERIVATIVE SECURITIES (ALL PORTFOLIOS)
Each Portfolio may invest in various instruments that are commonly known as
"derivatives." Generally, a derivative is a financial arrangement, the value of
which is based on, or "derived" from, a traditional security, asset or market
index. Some "derivatives" such as mortgage-related and other asset-backed
securities are in many respects like any other investment, although they may be
more volatile and/or less liquid than more traditional debt securities. There
are, in fact, many different types of derivatives and many different ways to use
them. There are a range of risks associated with those uses. For example, a
Portfolio may use futures and options as a low-cost method of gaining exposure
to a particular securities market without investing directly in those securities
and for traditional hedging purposes to attempt to protect the Portfolio from
exposure to changing interest rates, securities prices or currency exchange
rates and for cash management or other investment purposes. The use of
derivatives may result in leverage, which tends to magnify the effects of an
instrument's price changes as market conditions change. Leverage involves the
use of a small amount of money to control a large amount of financial assets,
and can in some circumstances, lead to significant losses. Each Portfolio will
limit the leverage created by its use of derivatives for investment purposes by
"covering" such positions as required by the SEC. The Advisors may use
derivatives in circumstances where the Advisors believe they offer an economical
means of gaining exposure to a particular asset class. Derivatives will not be
used to increase portfolio risk above the level that could be achieved using
only traditional investment securities or to acquire exposure to changes in the
value of assets or indexes that by themselves would not be purchased for the
Portfolios. The use of derivatives for non-hedging purposes may be considered
speculative.
Each Portfolio's investment in options, futures or forward contracts, and
similar strategies depend on the Advisors' judgment as to the potential risks
and rewards of different types of strategies. Options and futures can be
volatile investments, and may not perform as expected. If the Advisors apply a
hedge at an inappropriate time or judges
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price trends incorrectly, options and futures strategies may lower a Portfolio's
return. A Portfolio could also experience losses if the prices of its options
and futures positions were poorly correlated with its other investments, or if
it could not close out its positions because of an illiquid secondary market.
Options and futures traded on foreign exchanges generally are not regulated by
U.S. authorities, and may offer less liquidity and less protection to a
Portfolio in the event of default by the other party to the contract.
Many derivative contracts are traded on securities or commodities exchanges.
Most derivative contracts bought and sold by a Portfolio underlying a Fund must
be admitted to official listing on a recognized futures or securities exchange
and the securities underlying the options must be within the applicable
investment objective and policies of the Portfolio. These exchanges set all the
terms of the contract except for the price. Investors make payments due under
their contracts through the exchange. Most exchanges require investors to
maintain margin accounts through their brokers to cover their potential
obligations to the exchange. Parties to the contract make (or collect) daily
payments to the margin accounts to reflect losses (or gains) in the value of
their contracts. This protects investors against potential defaults by the
counterparty. Trading contracts on an exchange also allows investors to close
out their contracts by entering into offsetting contracts. In the case of Top 50
US, contracts may also be purchased or sold by securities dealers that meet
certain creditworthiness standards (over-the-counter options). These options
place greater reliance on the dealer to fulfill the terms of the options, and
therefore entail greater risk to the Portfolios.
Transactions in options, futures contracts, options on futures contracts and
forward contracts entered into for non-hedging purposes involve greater risk and
could result in losses which are not offset by gains on other portfolio assets.
OPTIONS ON SECURITIES (ALL PORTFOLIOS)
Each Portfolio may purchase and write (sell) put and call options on
stocks. Options are rights, but not obligations to buy or sell an
underlying asset for a specified price (the exercise price) during, or at
the end of, a specified period. A call option gives the purchaser of the
option the right (but not the obligation) to buy, and obligates the
writer to sell, the underlying stock at the exercise price at any time
during the option period. Similarly, a put option gives the purchaser of
the option the right (but not the obligation) to sell, and obligates the
writer to buy the underlying stock at the exercise price at any time
during the option period.
A Portfolio may write (sell) covered call and put options to a limited
extent on its portfolio securities ("covered options") in an attempt to
increase income through the premiums they receive for writing the
option(s). However, in return for the premium, the Portfolio may forgo
the benefits of appreciation on securities sold or may pay more than the
market price on securities acquired pursuant to call and put options
written by the Portfolio.
A call option written by a Portfolio is "covered" if a Portfolio owns the
underlying security covered by the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or
for additional cash consideration held in a segregated account by its
custodian) upon conversion or exchange of other securities held in its
portfolio. A call option is also covered if a Portfolio holds a call
option on the same security and in the same principal amount as the
written call option where the exercise price of the call option so held
(a) is equal to or less than the exercise price of the written call
option or (b) is greater than the exercise price of the written call
option if the difference is segregated by a Portfolio in cash or liquid
securities.
When a Portfolio writes a covered call option, it gives the purchaser of
the option the right to buy the underlying security at the price
specified in the option (the "exercise price") by exercising the option
at any time during the option period. If the option expires unexercised,
the Portfolio will realize income in an amount equal to the premium
received for writing the option. If the option is exercised, a decision
over which the Portfolio has no control, the Portfolio must sell the
underlying security to the option holder at the exercise price. By
writing a covered call option, the Portfolio forgoes, in exchange for the
premium less the commission ("net premium"), the opportunity to profit
during the option period from an increase in the
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market value of the underlying security above the exercise price. In
addition, the Portfolio may continue to hold a stock which might
otherwise have been sold to protect against depreciation in the market
price of the stock.
A put option written by a Portfolio is "covered" when, among other
things, cash or liquid securities acceptable to the broker are placed in
a segregated account to fulfill the obligations undertaken. When a
Portfolio writes a covered put option, it gives the purchaser of the
option the right to sell the underlying security to the Portfolio at the
specified exercise price at any time during the option period. If the
option expires unexercised, the Portfolio will realize income in the
amount of the net premium received for writing the option. If the put
option is exercised, a decision over which the Portfolio has no control,
the Portfolio must purchase the underlying security from the option
holder at the exercise price. By writing a covered put option, the
Portfolio, in exchange for the net premium received, accepts the risk of
a decline in the market value of securities held by the underlying
security below the exercise price. The Portfolios will only write put
options involving securities for which a determination is made at the
time the option is written that the Portfolios wish to acquire the
securities at the exercise price.
A Portfolio may terminate its obligation as writers of a call or put
option by purchasing an option with the same exercise price and
expiration date as the option previously written. This transaction is
called a "closing purchase transaction." A Portfolio will realize a
profit or loss on a closing purchase transaction if the amount paid to
purchase an option is less or more, as the case may be, than the amount
received from the sale thereof. To close out a position as a purchaser of
an option, a Portfolio may enter into a "closing sale transaction" which
involves liquidating the Portfolio's position by selling the option
previously purchased. Where the Portfolio cannot effect a closing
purchase transaction, it may be forced to incur brokerage commissions or
dealer spreads in selling securities it receives or it may be forced to
hold underlying securities until an option is exercised or expires.
When a Portfolio write an option, an amount equal to the net premium
received by the Portfolio is included in the liability section of the
Portfolio's Statement of Assets and Liabilities as a deferred credit. The
amount of the deferred credit will be subsequently marked to market to
reflect the current market value of the option written. The current
market value of a traded option is the last sale price or, in the absence
of a sale, the mean between the closing bid and asked price. If an option
expires on its stipulated expiration date or if the Portfolio enters into
a closing purchase transaction, the Portfolio will realize a gain (or
loss if the cost of a closing purchase transaction exceeds the premium
received when the option was sold), and the deferred credit related to
such option will be eliminated. If a call option is exercised, the
Portfolio will realize a gain or loss from the sale of the underlying
security and the proceeds of the sale will be increased by the premium
originally received. The writing of covered call options may be deemed to
involve the pledge of the securities against which the option is being
written. Securities against which call options are written will be
identified on the Portfolios' books.
A Portfolio may also purchase call and put options on any securities in
which they may invest. A Portfolio would normally purchase a call option
in anticipation of an increase in the market value of such securities.
The purchase of a call option would entitle the Portfolio, in exchange
for the premium paid, to purchase a security at a specified price during
the option period. The Portfolio would ordinarily have a gain if the
value of the securities increased above the exercise price sufficiently
to cover the premium and would have a loss if the value of the securities
remained at or below the exercise price during the option period.
A Portfolio would normally purchase put options in anticipation of a
decline in the market value of securities in their portfolios
("protective puts") or securities of the type in which they are permitted
to invest. The purchase of a put option would entitle a Portfolio, in
exchange for the premium paid, to sell a security, which may or may not
be held by a Portfolio at a specified price during the option period. The
purchase of protective puts is designed merely to offset or hedge against
a decline in the market value of securities held by the Portfolio. Put
options also may be purchased by the Portfolio for the purpose of
affirmatively benefiting from a decline in the price of securities that
the Portfolios do not own. The Portfolio would ordinarily recognize a
gain if the value of the securities decreased below the exercise price
sufficiently to
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cover the premium and would recognize a loss if the value of the
securities remained at or above the exercise price. Gains and losses on
the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying portfolio securities.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent
that the option markets close before the markets for the underlying
securities, significant price and rate movements can take place in the
underlying securities markets that cannot be reflected in the option
markets. It is impossible to predict the volume of trading that may exist
in such options, and there can be no assurance that viable exchange
markets will develop or continue.
All options purchased or sold by a Portfolio will be traded on a
securities exchange or, in the case of the Top 50 US Portfolio, will be
purchased or sold by securities dealers (in the case of over-the-counter,
or "OTC," options) that meet creditworthiness standards approved by the
Portfolio Trust's Board of Trustees. In the case of OTC options, the Top
50 US Portfolio relies on the dealer from which it purchased the option
to perform if the option is exercised. Thus, when the Portfolio purchases
an OTC option, it relies on the dealer from which it purchased the option
to make or take delivery of the underlying securities. Failure by the
dealer to do so would result in the loss of the premium paid by the
Portfolio as well as loss of the expected benefit of the transaction.
The staff of the "SEC" has taken the position that, in general, purchased
OTC options and the underlying securities used to cover written OTC
options are illiquid securities. However, the Top 50 US Portfolio may
treat as liquid the underlying securities used to cover written OTC
options, provided it has arrangements with certain qualified dealers who
agree that such Portfolio may repurchase any option it writes for a
maximum price to be calculated by a predetermined formula. In these
cases, the OTC option itself would be considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
There is no limitation on the value of the options that may be purchased
or written by a Portfolio. However, the strike prices of the securities
options, together with the strike prices of the securities that underlie
other securities options already purchased or granted for the account of
each Portfolio, may not exceed 20% of the net assets of the Portfolio.
With respect to the European Mid-Cap Portfolio, the strike prices of
options on fixed income securities held by the Portfolio may not exceed
4% of the net assets of the Portfolio (i.e., 20% of the 20% investment
limitation on fixed income securities). Options on securities may be
purchased or granted to a third party only to the extent that the strike
prices of such options, together with the strike prices of options on
securities of the same issuer already purchased by or granted for the
account of a Portfolio, do not exceed 10% of the net assets of the
Portfolio. Options on securities may be written (sold) only to the extent
that the strike prices of such options, together with the strike prices
of options on securities of the same issuer already written for the
account of a Portfolio, do not exceed 2% of the net assets of the
Portfolio. When an option transaction is offset by a back- to-back
transaction (e.g., where a Portfolio writes a put option on a security
and purchases a put option on the same security having the same
expiration date), these two transactions will not be counted for purposes
of the limits set forth in this paragraph.
OPTIONS ON SECURITIES INDICES (ALL PORTFOLIOS)
Each Portfolio may also purchase and write exchange-listed and OTC put
and call options on securities indices. A securities index measures the
movement of a certain group of securities by assigning relative values to
the securities included in the index, fluctuating with changes in the
market values of the securities included in the index. Some securities
index options are based on a broad market index, such as the NYSE
Composite Index, or a narrower market index such as the Standard & Poor's
100. Indices may also be based on a particular industry or market
segment.
Options on securities indices are similar to options on securities except
that (1) the expiration cycles of securities index options are monthly,
while those of securities options are currently quarterly, and (2) the
delivery requirements are different. Instead of giving the right to take
or make delivery of stock at a
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specified price, an option on a securities index gives the holder the
right to receive a cash "exercise settlement amount" equal to (a) the
amount, if any, by which the fixed exercise price of the option exceeds
(in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of exercise, multiplied
by (b) a fixed "index multiplier." Receipt of this cash amount will
depend upon the closing level of the securities index upon which the
option is based being greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the index and the exercise
price of the option times a specified multiple. The writer of the option
is obligated, in return for the premium received, to make delivery of
this amount. Securities index options may be offset by entering into
closing transactions as described above for securities options.
As discussed in "Options on Securities," the Portfolios would normally
purchase a call option in anticipation of an increase in the market value
of the relevant index. The purchase of a call option would entitle the
Portfolios, in exchange for the premium paid, to purchase the underlying
securities at a specified price during the option period. A Portfolio
would ordinarily have a gain if the value of the underlying securities
increased above the exercise price sufficiently to cover the premium and
would have a loss if the value of the securities remained at or below the
exercise price during the option period.
As discussed in "Options on Securities," the Portfolios would normally
purchase put options in anticipation of a decline in the market value of
the relevant index ("protective puts"). The purchase of a put option
would entitle the Portfolios, in exchange for the premium paid, to sell
the underlying securities at a specified price during the option period.
The purchase of protective puts is designed merely to offset or hedge
against a decline in the market value of the index. A Portfolio would
ordinarily recognize a gain if the value of the index decreased below the
exercise price sufficiently to cover the premium and would recognize a
loss if the value of the index remained at or above the exercise price.
Gains and losses on the purchase of protective put options would tend to
be offset by countervailing changes in the value of the index.
Because the value of an index option depends upon movements in the level
of the index rather than the price of a particular stock, whether a
Portfolio will realize a gain or loss from the purchase or writing of
options on an index depends upon movements in the level of stock prices
in the stock market generally or, in the case of certain indices, in an
industry or market segment, rather than movements in the price of a
particular stock. Accordingly, successful use by the Portfolios of
options on stock indices will be subject to the Advisors' ability to
predict correctly movements in the direction of the stock market
generally or of a particular industry. This requires different skills and
techniques than predicting changes in the price of individual stocks.
Options on securities indices entail risks in addition to the risks of
options on securities. The absence of a liquid secondary market to close
out options positions on securities indices is more likely to occur,
although a Portfolio generally will purchase or write such an option only
if the Advisors believe the option can be closed out. Use of options on
securities indices also entails the risk that trading in such options may
be interrupted if trading in certain securities included in the index is
interrupted. A Portfolio will not purchase such options unless the
Advisors believe the market is sufficiently developed such that the risk
of trading in such options is no greater than the risk of trading in
options on securities. Price movements in the Portfolio may not correlate
precisely with movements in the level of an index and, therefore, the use
of options on indices cannot serve as a complete hedge. Because options
on securities indices require settlement in cash, the Advisors may be
forced to liquidate portfolio securities to meet settlement obligations.
A Portfolio's activities in index options may also be restricted by the
requirements of the Internal Revenue Code of 1986, as amended
(the "Code") for qualification as a regulated investment company.
In addition, the hours of trading for options on the securities indices
may not conform to the hours during which the underlying securities are
traded. To the extent that the option markets close before the markets
for the underlying securities, significant price and rate movements can
take place in the underlying securities markets that cannot be reflected
in the option markets. It is impossible to predict the volume of
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trading that may exist in such options, and there can be no assurance
that viable exchange markets will develop or continue.
OPTIONS ON FOREIGN SECURITIES INDICES (ALL PORTFOLIOS, EXCEPT TOP 50 US)
The Portfolios (with the exception of Top 50 US) may purchase and write
put and call options on foreign stock indices listed on domestic and
foreign stock exchanges. Each Portfolio (with the exception of Top 50 US)
may also purchase and write OTC Options on foreign stock indices.
A Portfolio may, to the extent allowed by federal and state securities
laws, invest in securities indices instead of investing directly in
individual non-U.S. securities . A Portfolio may also use foreign stock
index options for hedging purposes.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS (ALL PORTFOLIOS)
Each Portfolio may enter into futures contracts on securities, securities
indices, foreign currencies (with the exception of Top 50 US)and interest
rates. A Portfolio may also purchase and write (sell) options thereon
which are traded on exchanges designated by the Commodity Futures Trading
Commission (the "CFTC") or, if consistent with CFTC regulations, on
foreign exchanges (with the exception of Top 50 US). These futures
contracts are standardized contracts for the future delivery of, among
other things, a commodity, a non-U.S. currency, an interest rate
sensitive security or, in the case of index futures contracts or certain
other futures contracts, a cash settlement with reference to a specified
multiplier times the change in the index. An option on a futures contract
gives the purchaser the right (but not the obligation), in return for the
premium paid, to assume a position in a futures contract.
A Portfolio may enter into futures contracts and options on futures
contracts on securities, securities indices and currencies (with the
exception of Top 50 US) both to manage their exposure to changing
interest rates, security prices and currency exchange rates and as an
efficient means of managing allocations between asset classes. Aggregate
initial margin and premiums required to establish positions other than
those considered by the CFTC to be "bona fide hedging" will not exceed 5%
of a Portfolio's net asset value, after taking into account unrealized
profits and unrealized losses on any such contracts.
The successful use of futures contracts and options thereon draws upon
the Advisors' skill and experience with respect to such instruments and
are subject to special risk considerations. A liquid secondary market for
any futures or options contract may not be available when a futures or
options position is sought to be closed. In addition, there may be an
imperfect correlation between movements in the securities or currency in
a Portfolio. Successful use of futures or options contracts is further
dependent on the Advisors' ability to predict correctly movements in the
securities or foreign currency markets and no assurance can be given that
their judgment will be correct.
FUTURES CONTRACTS (ALL PORTFOLIOS)
Futures contracts provide for the future sale by one party and purchase
by another party of a specified amount of an underlying asset at a
specified price, date, and time. Entering into a contract to buy an
underlying asset is commonly referred to as buying a contract or holding
a long position in the asset. Entering into a contract to sell an
underlying asset is commonly referred to as selling a contract or holding
a short position in the asset. Futures contracts are considered to be
commodity contracts.
At the same time a futures contract is entered into, a Portfolio must
allocate cash or liquid securities as a deposit payment ("initial
margin"). When a Portfolio purchases or sells a futures contract, it is
required to make an initial margin deposit. Although the amount may
vary, initial margin can be as low as 1% or less of the notional
amount of the contract. Additional margin may be required as the contract
fluctuates in value. Since the amount of margin is relatively small
compared to the value of the securities covered by a futures contract,
the potential for gain or loss on a futures contract is much greater than
the amount of the Portfolio's initial margin deposit. Daily thereafter,
the futures contract is valued and the payment of "variation margin" may
be required, since each day the Portfolio would provide or receive cash
that reflects any decline or increase in the contract's value.
At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the
delivery of securities with a different interest rate from that specified
in the contract. In some, but not many, cases, securities called for by a
futures contract may not have been issued when the contract was written.
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Although futures contracts (other than those that settle in cash, such as
index futures) by their terms call for the actual delivery or acquisition
of the instrument underlying the contract, in most cases the contractual
obligation is fulfilled by offset before the date of the contract without
having to make or take delivery of the instrument underlying the
contract. The offsetting of a contractual obligation is accomplished by
entering into an opposite position in an identical futures contract on
the commodities exchange on which the futures contract was entered into
(or a linked exchange) calling for delivery in the same month. Such a
transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the instrument underlying the
contract. Since all transactions in the futures market are made, offset
or fulfilled through a clearinghouse associated with the exchange on
which the contracts are traded, a Portfolio will incur brokerage fees
when it enters into futures contracts.
When a Portfolio underlying the Funds purchases a futures contract, it
agrees to purchase a specified quantity of an underlying instrument at a
specified future date and price or to make or receive a cash payment
based on the value of a securities index or a financial instrument. When
a Portfolio sells a futures contract, it agrees to sell a specified
quantity of the underlying instrument at a specified future date and
price or to receive or make a cash payment based on the value of a
securities index or a financial instrument. When a Portfolio purchases or
sells a futures contract, the value of the futures contract tends to
increase and decrease in tandem with the value of its underlying
instrument or index. The price at which the purchase and sale will take
place is fixed when a Portfolio enters into the contract. Futures can be
held until their delivery dates or the positions can be (and normally
are) closed out, by entering into an opposing contract, before then.
The purpose of the acquisition or sale of a futures contract, in cases
where a Portfolio holds or intends to acquire fixed-income securities, is
to attempt to protect the Portfolio from fluctuations in interest or
foreign exchange rates without actually buying or selling fixed-income
securities or foreign currencies. For example, if interest rates were
expected to increase (which thus would cause the prices of debt
securities to decline), the Portfolio might enter into futures contracts
for the sale of debt securities. Such a sale would have much the same
effect as selling an equivalent value of the debt securities owned by the
Portfolio. If interest rates did increase, the value of the debt security
in the Portfolio would decline, but the value of the futures contracts to
the Portfolio would increase at approximately the same rate, thereby
keeping the net asset value of the Portfolio from declining as much as it
otherwise would have. The Portfolio could accomplish similar results by
selling debt securities and investing in bonds with short maturities when
interest rates are expected to increase. However, since the futures
market is more liquid than the cash market, the use of futures contracts
as an investment technique allows the Portfolio to maintain a defensive
position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline (thus
increasing the value of debt securities), futures contracts may be
purchased to attempt to hedge against anticipated purchases of debt
securities at higher prices. Since the fluctuations in the value of
futures contracts should be similar to those of debt securities, a
Portfolio could take advantage of the anticipated rise in the value of
debt securities without actually buying them until the market had
stabilized. At that time, the futures contracts could be liquidated and
the Portfolio could then buy debt securities on the cash market. The
segregated assets maintained to cover a Portfolio's obligations with
respect to such futures contracts will consist of cash or liquid
securities acceptable to the broker from its portfolio in an amount equal
to the difference between the fluctuating market value of such futures
contracts and the aggregate value of the initial and variation margin
payments made by the Portfolio with respect to such futures contracts.
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The ordinary spreads between prices in the cash and futures market, due
to differences in the nature of those markets, are subject to
distortions. First, all participants in the futures market are subject to
initial deposit and variation margin requirements. Rather than meeting
additional variation margin requirements, investors may close futures
contracts through offsetting transactions which could distort the normal
relationship between the cash and futures markets. Second, the liquidity
of the futures market depends on most participants entering into
offsetting transactions rather than making or taking delivery. To the
extent that many participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third,
from the point of view of speculators, the margin deposit requirements in
the futures market are less onerous than margin requirements in the
securities market. Therefore, increased participation by speculators in
the futures market may cause temporary price distortions. Due to the
possibility of distortion, a correct forecast of securities price,
general interest rate or currency exchange rate trends by the Advisor may
still not result in a successful transaction.
In addition, futures contracts entail significant risks. Although the
Advisors believe that use of such contracts will benefit a Portfolio, if
the Advisors' investment judgment about the general direction of interest
rates or an index is incorrect, the Portfolio's overall performance would
be poorer than if it had not entered into any such contract. For example,
if a Portfolio has hedged against the possibility of an increase in
interest rates or a decrease in an index which would adversely affect the
value of securities held in its portfolio and interest rates decrease or
securities prices increase instead, the Portfolio will lose part or all
of the benefit of the increased value of its securities which it has
hedged because it will have offsetting losses in its futures positions.
In addition, in such situations, if the Portfolio has insufficient cash,
it may have to sell securities from its portfolio to meet daily variation
margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. The
Portfolio may have to sell securities at a time when it may be
disadvantageous to do so.
FUTURES CONTRACTS ON SECURITIES INDICES (ALL PORTFOLIOS)
Each Portfolio may also enter into futures contracts providing for the
making and acceptance of a cash settlement based upon changes in the
value of an index of U.S. or non-U.S. securities (except for Top 50 US) .
This investment technique may be used as a low-cost method of gaining
exposure to a particular securities market without investing directly in
those securities, to hedge against anticipated future change in general
market prices which otherwise might either adversely affect the value of
securities held by a Portfolio, adversely affect the prices of securities
which are intended to be purchased at a later date for a Portfolio or as
an efficient means of managing allocation between asset classes. A
futures contract may also be entered into to close out or offset an
existing futures position.
When used for hedging purposes, each transaction futures contracts on a
securities index involves the establishment of a position which the
Advisors believe will move in a direction opposite to that of the
investment being hedged. If these hedging transactions are successful,
the futures positions taken for the Portfolio will rise in value by an
amount which approximately offsets the decline in value of the portion of
the Portfolio's investments that are being hedged. Should general market
prices move in an unexpected manner, the full anticipated benefits of
futures contracts may not be achieved or a loss may be realized.
For the purpose of hedging a Portfolio's assets, the Portfolio may sell
(but not purchase) stock index or interest rate futures contracts and may
purchase put or call options on futures contracts, options on securities
indices and any of the warrants described above. Any such transaction
will be considered a hedging transaction, and not subject to the
limitations on non-hedging transactions stated below, to the extent that
(1) in the case of stock index futures, options on securities indices and
warrants thereon, the contract value does not exceed the market value of
the shares held by a Portfolio for which the hedge is intended and such
shares are admitted to official listing on a stock exchange in the
country in which the relevant futures or securities exchange is based or
(2) in the case of interest rate futures and options on securities
indices and warrants thereon, the contract value does not exceed the
interest rate exposure associated with the assets held in the applicable
currency by a Portfolio. In carrying out a particular hedging strategy, a
Portfolio may sell futures contracts and purchase options or warrants
based on securities, financial instruments or indices that have issuers,
maturities or other characteristics that do not
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precisely match those of the Portfolio's assets for which such hedge is
intended, thereby creating a risk that the futures, options or warrants
position will not mirror the performance of such assets. A Portfolio may
also enter into transactions in futures contracts, options on futures,
options on indices and warrants for non-hedging purposes, as described
below.
OPTIONS ON FUTURES CONTRACTS (INCLUDING FUTURES CONTRACTS ON SECURITIES
INDICES) (ALL PORTFOLIOS EXCEPT TOP 50 US)
Each Portfolio may purchase and write (sell) options on futures contracts
for hedging purposes. For example, as with the purchase of futures
contracts, when a Portfolio is not fully invested, it may purchase a call
option on an interest rate sensitive futures contract to hedge against a
potential price increase on debt securities due to declining interest
rates.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an index or individual
security. Depending on the pricing of the option compared to either the
price of the futures contract upon which it is based or the price of the
underlying debt securities, it may or may not be less risky than
ownership of the futures contract or underlying debt securities.
The writing of a call option on a futures contract may constitute a
partial hedge against declining prices of the underlying portfolio
securities which are the same as or correlate with the security or
foreign currency that is deliverable upon exercise of the futures
contract. If the futures price at expiration of the option is below the
price specified in the premium received for writing the option ("exercise
price"), a Portfolio will retain the full amount of the net premium (the
premium received for writing the option less any commission), which
provides a partial hedge against any decline that may have occurred in
the Portfolio's holdings.
The writing of a put option on an index futures contract may constitute a
partial hedge against increasing prices of the underlying securities or
foreign currency that are deliverable upon exercise of the futures
contract. If the futures price at expiration of the option is higher than
the exercise price, a Portfolio will retain the full amount of the option
net premium, which provides a partial hedge against any increase in the
price of securities that the Portfolio intends to purchase.
If a put or call option a Portfolio has written is exercised, the
Portfolio will incur a loss that will be reduced by the amount of the net
premium it receives. Depending on the degree of correlation between
changes in the value of its portfolio securities and changes in the value
of its futures positions, the Portfolio's losses from existing options on
futures may to some extent be reduced or increased by changes in the
value of portfolio securities.
The purchase of a call or put option on a futures contract with respect
to an index is similar in some respects to the purchase of a call or
protective put option on an index. For example, a Portfolio may purchase
a put option on an index futures contract to hedge against the risk of
lowering securities values.
The amount of risk a Portfolio assumes when it purchases an option on a
futures contract with respect to an index is the premium paid for the
option plus related transaction costs. In addition to the correlation
risks discussed above, the purchase of such an option also entails the
risk that changes in the value of the underlying futures contract will
not be fully reflected in the value of the option purchased.
Each Portfolio (except Top 50 US) may purchase or sell stock index or
interest rate futures contracts, put or call options on futures, options
on securities indices and warrants other than for hedging purposes. Each
Portfolio (except Top 50 US) may enter into these transactions for
non-hedging purposes only to the extent that (1) the underlying contract
values, together with the contract values of any instrument then held by
the Portfolio for non-hedging purposes, do not exceed in the aggregate
20% of the net assets of the Portfolio and (2) such instruments relate to
categories of assets which the Portfolio is permitted to hold. The Top 50
US Portfolio does not limit its purchase or sale of stock index or
interest rate futures contracts, put or call options on futures, options
on securities indices and warrants for other than hedging purposes. In
addition,
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with respect to the European Mid-Cap Portfolio, the contract values of
all interest rate futures contracts and options and warrants on interest
rate futures contracts held for non-hedging purposes may not exceed 4% of
the net assets of the Portfolio (i.e., 20% of the 20% limitation on fixed
income securities).
WARRANTS ON FUTURES CONTRACTS (ALL PORTFOLIOS)
Each Portfolio may purchase warrants which, like options on futures
contracts and options on securities indices, entitle the holder to
purchase or sell a futures contract or to a cash payment reflecting the
price fluctuation in an index of securities. A Portfolio may also
purchase warrants that entitle the holder to a cash payment reflecting
the fluctuation in the value of certain financial futures contracts.
Warrants on futures contracts and warrants on securities indices differ
from the equivalent options in that: (1) they are securities issued by a
financial institution/special purpose issuer rather than contracts
entered into with a futures exchange and (2) they are traded on a
securities exchange rather than on a futures exchange. The use of
warrants will generally entail the same risks that are associated with a
Portfolio's positions in options on futures and options on securities
indices.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS (ALL PORTFOLIOS)
There is no assurance a liquid market will exist for any particular
option or futures contract at any particular time even if the contract is
traded on an exchange. In addition, exchanges may establish daily price
fluctuation limits for options and futures contracts and may halt trading
if a contract's price moves up or down more than the limit in a given
day. On volatile trading days when the price fluctuation limit is reached
or a trading halt is imposed, it may be impossible for a Portfolio to
enter into new positions or close out existing positions. If the market
for a contract is not liquid because of price fluctuation limits or
otherwise, it could prevent prompt liquidation of unfavorable positions,
and could potentially require a Portfolio to continue to hold a position
until delivery or expiration regardless of changes in its value. As a
result, a Portfolio's access to other assets held to cover its options or
futures positions could also be impaired.
COMBINED POSITIONS (ALL PORTFOLIOS)
Each Portfolio underlying the Funds may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the overall
position. For example, a Portfolio may purchase a put option and write a
call option on the same underlying instrument, in order to construct a
combined position whose risk and return characteristics are similar to
selling a futures contract. Another possible combined position would
involve writing a call option at one strike price and buying a call
option at a lower price, in order to reduce the risk of the written call
option in the event of a substantial price increase. Because combined
options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
POSITION LIMITS (ALL PORTFOLIOS)
Futures exchanges can limit the number of futures and options on futures
contracts that can be held or controlled by an entity. If an adequate
exemption cannot be obtained, a Portfolio or its Advisors may be required
to reduce the size of its futures and options positions or may not be
able to trade a certain futures or options contract in order to avoid
exceeding such limits.
OTHER LIMITATIONS
The Commodity Exchange Act prohibits U.S. persons, such as a Portfolio,
from buying or selling certain foreign futures contracts or options on
such contracts. Accordingly, no Portfolio will engage in foreign futures
or options transactions unless the contracts in question may lawfully be
purchased and sold by U.S. persons in accordance with applicable CFTC
regulations or CFTC staff advisories, interpretations and no- action
letters. In addition, in order to assure that a Portfolio will not be
considered a "commodity pool" for purposes of CFTC rules, the Portfolio
will enter into transactions in futures contracts or options on futures
contracts only if (1) such transactions constitute bona fide hedging
transactions, as defined under CFTC rules or (2) no more than 5% of the
Portfolio's net assets are committed as initial margin or premiums to
positions that do not constitute bona fide hedging transactions.
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ASSET COVERAGE FOR FUTURES CONTRACTS AND OPTIONS POSITIONS
Each Portfolio intends to comply with Section 4.5 of the regulations
under the Commodity Exchange Act, which limits the extent to which a
Portfolio can commit assets to initial margin deposits and option
premiums. In addition, each Portfolio will comply with guidelines
established by the SEC with respect to coverage of options and futures
contracts by mutual funds, and if the guidelines so require, will set
aside appropriate liquid assets in a segregated custodial account in the
amount prescribed. Securities held in a segregated account cannot be sold
while the futures contract or option is outstanding, unless they are
replaced with other suitable assets. As a result, there is a possibility
that segregation of a large percentage of a Portfolio's assets could
impede portfolio management or a Portfolio's ability to meet redemption
requests or other current obligations.
SWAP AGREEMENTS (ALL PORTFOLIOS EXCEPT TOP 50 US)
Each Portfolio (with the exception of Top 50 US) may enter into swaps
relating to indices, currencies, interest rates, equity and debt
interests of non-U.S. issuers without limit. A swap transaction is an
agreement between a Portfolio and a counterparty to act in accordance
with the terms of the swap contract. Index swaps involve the exchange by
a Portfolio with another party of the respective amounts payable with
respect to a notional principal amount related to one or more indexes.
Currency swaps involve the exchange of cash flows on a notional amount of
two or more currencies based on their relative future values. An equity
swap is an agreement to exchange streams of payments computed by
reference to a notional amount based on the performance of a basket of
stocks or a single stock. A Portfolio may enter into these transactions
to preserve a return or spread on a particular investment or portion of
its assets, to protect against currency fluctuations, as a duration
management technique or to protect against any increase in the price of
securities a Portfolio anticipates purchasing at a later date. A
Portfolio may also use such transactions for speculative purposes, such
as to obtain the price performance of a security without actually
purchasing the security in circumstances, for example, where the subject
security is illiquid, is unavailable for direct investment or is
available only on less attractive terms. Swaps have special risks
including possible default by the counterparty to the transaction,
illiquidity and, where swaps are used as hedges, the risk that the use of
a swap could result in losses greater than if the swap had not been
employed.
A Portfolio will usually enter into swaps on a net basis (i.e. the two
payment streams are netted out in a cash settlement on the payment date
or dates specified in the agreement, with the Portfolio receiving or
paying, as the case may be, only the net amount of the two payments).
Swaps do not involve the delivery of securities, other underlying assets
or principal. Accordingly, the risk of loss with respect to swaps is
limited to the net amount of payments that the Portfolio is contractually
obligated to make. If the counterparty to a swap defaults, the
Portfolio's risk of loss consists of the net amount of payments that the
Portfolio is contractually entitled to receive. Where swaps are entered
into for good faith hedging purposes, the Advisors believe such
obligations do not constitute senior securities under the 1940 Act and,
accordingly, will not treat them as being subject to the Portfolio's
borrowing restrictions. Where swaps are entered into for other than
hedging purposes, the Portfolio will segregate an amount of cash or other
liquid securities having a value equal to the accrued excess of its
obligations over entitlements with respect to each swap on a daily basis.
Whether the use of swap agreements will be successful in furthering its
investment objective will depend on the Advisors' ability to correctly
predict whether certain types of investments are likely to produce
greater returns than other investments. Swap agreements may be considered
to be illiquid because they are two party contracts and because they may
have terms of greater than seven days. Moreover, a Portfolio bears the
risk of loss of the amount expected to be received under a swap agreement
in the event of the default or bankruptcy of a swap agreement counter
party. The Portfolio will minimize this risk by entering into agreements
that mark to market no less frequently than quarterly. In addition, the
Portfolio will enter into swap agreements only with counter parties that
would be eligible for consideration as repurchase agreement
counterparties under the Portfolio's repurchase agreement guidelines.
Certain restrictions imposed on the Portfolios by the Code may limit the
Portfolio's ability to use swap agreements. Swap agreements also bear the
risk that a Portfolio will not be able to meet their obligation to the
counter party.
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This risk will be mitigated by investing the Portfolio in the specific
asset for which it is obligated to pay a return.
Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act and, therefore, are not regulated as futures or commodity
option transactions under the CEA, pursuant to regulations approved by
the CFTC effective February 22, 1993. To qualify for this exemption, a
swap agreement must be entered into by eligible participants, which
includes the following, provided the participant's total assets exceed
established levels: a bank or trust company, savings association or
credit union, insurance company, investment company subject to regulation
under the 1940 Act, commodity pool, corporation, partnership,
proprietorship, organization, trust or other entity, employee benefit
plan, governmental entity, broker-dealer, futures commission merchant,
natural person, or regulated foreign person. To be eligible, natural
persons and most other entities must have total assets exceeding $10
million; commodity pools and employee benefit plans must have assets
exceeding $5 million. In addition, an eligible swap transaction must meet
three conditions. First, the swap agreement may not be part of a fungible
class of agreements that are standardized as to their material economic
terms. Second, the creditworthiness of parties with actual or potential
obligations under the swap agreement must be a material consideration in
entering into or determining the terms of the swap agreement, including
pricing, cost or credit enhancement terms. Third, swap agreements may not
be entered into and traded on or through a multilateral transaction
execution facility.
This exemption is not exclusive, and participants may continue to rely on
existing exclusions for swaps, such as the Policy Statement issued in
July 1989 which recognized a "safe harbor" for swap transactions from
regulation as futures or commodity option transactions under the CEA or
its regulations. The Policy Statement applies to swap transactions
settled in cash that: (1) have individually tailored terms; (2) lack
exchange style offset and the use of a clearing organization or margin
system; (3) are undertaken in conjunction with a line of business; and
(4) are not marketed to the public.
Swap agreements are sophisticated instruments that can take many
different forms, and are known by a variety of names including caps,
floors, and collars. Common swap agreements that the Portfolios may use
include:
INTEREST RATE SWAPS (ALL PORTFOLIOS)
Interest rate swaps are contracts in which one party agrees to make
regular payments equal to a fixed or floating interest rate multiplied by
a stated principal amount of fixed income securities, in return for
payments equal to a different fixed or floating rate multiplied by the
same principal amount, for a specific period. For example, a $10 million
LIBOR swap would require one party to pay the equivalent of the London
Interbank Offer Rate of interest (which fluctuates) on $10 million
principal amount in exchange for the right to receive the equivalent of a
stated fixed rate of interest on $10 million principal amount.
CAPS AND FLOORS (ALL PORTFOLIOS)
Caps and Floors are contracts in which one party agrees to make payments
only if an interest rate or index goes above (Cap) or below (Floor) a
certain level in return for a fee from the other party.
TOTAL RETURN SWAPS (ALL PORTFOLIOS)
Total return swaps are contracts in which one party agrees to make
payments of the total return from the underlying asset or currency during
the specified period, in return for payments equal to a fixed or floating
rate of interest or the total return or currency from another underlying
asset.
MORTGAGE-BACKED SECURITIES (ALL PORTFOLIOS)
Each Portfolio may invest in mortgage-backed securities. A mortgage-backed
security consists of a pool of mortgage loans evidenced by promissory notes
secured by first mortgages or first deeds of trust or other similar security
instruments creating a first lien on owner occupied and non-owner occupied
one-unit to four-unit residential
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properties, multifamily (i.e., five or more) properties, agriculture properties,
commercial properties and mixed use properties.
The investment characteristics of adjustable and fixed rate mortgage-backed
securities differ from those of traditional fixed-income securities. The major
differences include the payment of interest and principal on mortgage-backed
securities on a more frequent (usually monthly) schedule, and the possibility
that principal may be prepaid at any time due to prepayments on the underlying
mortgage loans or other assets. These differences can result in significantly
greater price and yield volatility than is the case with traditional
fixed-income securities. As a result, if a Portfolio purchases mortgage-backed
securities at a premium, a faster than expected prepayment rate will decrease
both the market value and the yield to maturity from those which were
anticipated. A prepayment rate that is slower than expected will have the
opposite effect of increasing yield to maturity and market value. Conversely, if
a Portfolio purchases mortgage-backed securities at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
decrease yield to maturity and market values. To the extent that a Portfolio
invests in mortgage-backed securities, the Advisors may seek to manage these
potential risks by investing in a variety of mortgage-backed securities and by
using certain hedging techniques.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) (ALL PORTFOLIOS)
CMOs, including interests in real estate mortgage investment conduits
(REMICs), allocate payments and prepayments from an underlying
pass-through certificate among holders of different classes of mortgage
backed securities. This creates different prepayment and interest rate
risks for each CMO class.
SEQUENTIAL CMOS (ALL PORTFOLIOS)
In a sequential pay CMO, one class of CMOs receives all principal
payments and prepayments. The next class of CMOs receives all principal
payments after the first class is paid off. This process repeats for each
sequential class of CMO. As a result, each class of sequential pay CMOs
reduces the prepayment risks of subsequent classes.
PACS, TACS AND COMPANION CLASSES (ALL PORTFOLIOS)
More sophisticated CMOs include planned amortization classes (PACs) and
targeted amortization classes (TACs). PACs and TACs are issued with
companion classes. PACs and TACs receive principal payments and
prepayments at a specified rate. The companion classes receive principal
payments and prepayments in excess of the specified rate. In addition,
PACs will receive the companion classes' share of principal payments, if
necessary, to cover a shortfall in the prepayment rate. This helps PACs
and TACs to control prepayment risks by increasing the risks to their
companion classes.
IOS AND POS (ALL PORTFOLIOS)
CMOs may allocate interest payments to one class (Interest Only or IOs)
and principal payments to another class (Principal Only or POs). POs
increase in value when prepayment rates increase. In contrast, IOs
decrease in value when prepayments increase, because the underlying
mortgages generate less interest payments. However, IOs tend to increase
in value when interest rates rise (and prepayments decrease), making IOs
a useful hedge against interest rate risks.
FLOATERS AND INVERSE FLOATERS (ALL PORTFOLIOS)
Another variant allocates interest payments between two classes of CMOs.
One class (Floaters) receives a share of interest payments based upon a
market index such as LIBOR. The other class (Inverse Floaters) receives
any remaining interest payments from the underlying mortgages. Floater
classes receive more interest (and Inverse Floater classes receive
correspondingly less interest) as interest rates rise. This shifts
prepayment and interest rate risks from the Floater to the Inverse
Floater class, reducing the price volatility of the Floater class and
increasing the price volatility of the Inverse Floater class.
Z CLASSES AND RESIDUAL CLASSES (ALL PORTFOLIOS)
CMOs must allocate all payments received from the underlying mortgages to
some class. To capture any unallocated payments, CMOs generally have an
accrual (Z) class. Z classes do not receive any payments from the
underlying mortgages until all other CMO classes have been paid off. Once
this happens, holders
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of Z class CMOs receive all payments and prepayments. Similarly, REMICs
have residual interests that receive any mortgage payments not allocated
to another REMIC class.
ASSET-BACKED SECURITIES (ALL PORTFOLIOS)
Asset-backed securities are secured by and payable from, or directly or
indirectly represent undivided fractional interests in, pools of consumer loans
(unrelated to mortgage loans) held in a trust. Asset-backed securities may
provide periodic payments that consist of interest and/or principal payments.
Consequently, the life of an asset-backed security varies with the prepayment
and loss experience of the underlying assets. Payments of principal and interest
are typically supported by some form of credit enhancement, such as a letter of
credit, surety bond, limited guarantee or senior/subordination. The degree of
credit enhancement varies, but generally amounts to only a fraction of the
asset-backed security's par value until exhausted. If the credit enhancement is
exhausted, certificate-holders may experience losses or delays in payment if the
required payments of principal and interest are not made to the trust with
respect to the underlying loans. The value of the securities also may change
because of changes in the market's perception of creditworthiness of the
servicing agent for the loan pool, the originator of the loans or the financial
institution providing the credit enhancement. Asset-backed securities are
ultimately dependent upon payment of consumer loans by individuals, and the
certificate-holder generally has no recourse against the entity that originated
the loans.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities. However, the underlying assets are not first lien
mortgage loans or interests therein but include assets such as (but not limited
to) motor vehicle installment sale contracts, other installment sale contracts,
home equity loans, leases of various types of real and personal property, and
receivables from revolving credit (credit card) agreements. Such assets are
securitized through the use of trusts or special purpose corporations. Payments
or distributions of principal and interest on asset-backed securities may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution unaffiliated
with the issuer, or other credit enhancements may be present.
Asset-backed securities present certain additional risks that are not presented
by mortgage-backed securities. Primarily, these securities do not have the
benefit of the same type of security interest in the related collateral. Credit
card receivables are generally unsecured, and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to avoid payment of certain amounts owed on the
credit cards, thereby reducing the balance due. Most issuers of automobile
receivables permit the servicer to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that of
the holders of the related automobile receivables. In addition, because of the
large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have a proper security interest in all of the obligations
backing such receivables. Therefore, there is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support payments
on these securities. The market for privately issued asset-backed securities is
smaller and less liquid than the market for U.S. government mortgage-backed
securities. The asset-backed securities in which a Portfolio may invest are
limited to those which are readily marketable, dollar-denominated and rated BBB
or higher by S&P or Baa or higher by Moody's.
The yield characteristics of the asset-backed securities in which a Portfolio
may invest differ from those of traditional debt securities. Among the major
differences are that interest and principal payments are made more frequently on
asset-backed securities (usually monthly) and that principal may be prepaid at
any time because the underlying assets generally may be prepaid at any time. As
a result, if a Portfolio purchases these securities at a premium, a prepayment
rate that is faster than expected will reduce their yield, while a prepayment
rate that is slower than expected will have the opposite effect of increasing
yield. Conversely, if a Portfolio purchases these securities at a discount,
faster than expected prepayments will increase, while slower than expected
prepayments will reduce the yield on these securities. Amounts available for
reinvestment by the Portfolio are likely to be greater during a period of
declining interest rates and, as a result, are likely to be reinvested at lower
interest rates than during a period of rising interest rates.
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MORTGAGE-BACKED SECURITIES AND ASSET-BACKED SECURITIES - TYPES OF CREDIT SUPPORT
(ALL PORTFOLIOS)
Mortgage-backed securities and asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties. To
lessen the effect of failure by obligors on underlying assets to make payments,
such securities may contain elements of credit support. Such credit support
falls into two categories: (1) liquidity protection and (2) protection against
losses resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties; through
various means of structuring the transaction; or through a combination of such
approaches. A Portfolio will not pay any additional fees for such credit
support, although the existence of credit support may increase the price of a
security.
The ratings of mortgage-backed securities and asset-backed securities for which
third-party credit enhancement provides liquidity protection or protection
against losses from default are generally dependent upon the continued
creditworthiness of the provider of the credit enhancement. The ratings of such
securities could be subject to reduction in the event of deterioration in the
creditworthiness of the credit enhancement provider even in cases where the
delinquency and loss experience on the underlying pool of assets is better than
expected.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments, sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against future losses)
and "over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information with
respect to the level of credit risk associated with the underlying assets.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such a security.
SECURITIES OF NON-US ISSUERS (ALL PORTFOLIOS EXCEPT TOP 50 US)
Each Portfolio (with the exception of Top 50 US) may invest in securities of
non-U.S. issuers directly or in the form of American Depository Receipts
("ADRs"), European Depository Receipts ("EDRs"), Global Depository Receipts
("GDRs") and International Depository Receipts ("IDRs") or other similar
securities representing ownership of securities of non-U.S. issuers held in
trust by a bank or similar financial institution. EDRs and IDRs are receipts
issued in Europe typically by non-U.S. banking and trust companies that
evidence ownership of either foreign or U.S. securities. GDRs are receipts
issued by either a U.S. or non-U.S. banking institution evidencing ownership
of the underlying non-U.S. securities . Generally, ADRs, in registered form,
are designed for use in U.S. securities markets and EDRs, GDRs and IDRs, in
bearer form, are designed for use in European and international securities
markets. Top 50 US may invest only in ADRs that are traded on U.S.
exchanges. An ADR, EDR, GDR or IDR may be denominated in a currency different
from the currency in which the underlying foreign security is denominated.
These securities may not necessarily be denominated in the same currency as
the securities they represent. Designed for use in U.S., European and
international securities markets, respectively, ADRs, EDRs, GDRs and IDRs are
alternatives to the purchase of the underlying securities in their national
markets and currencies, but are subject to the same risks as the non-U.S.
securities to which they relate.
With respect to certain countries in which capital markets are either less
developed or not easily accessed, investments by the Portfolios may be made
through investment in other investment companies that in turn are authorized to
invest in the securities of such countries. Investment in other investment
companies is generally limited in amount by the 1940 Act, will involve the
indirect payment of a portion of the expenses (including advisory fees of such
other investment companies) and may result in a duplication of fees and
expenses.
The Portfolios (except the Top 50 US Portfolio) consider an issuer to be based
outside the United States if:
- it is organized under the laws of, or has a principal office located in,
another country; or
- the principal trading market for its securities is in another country; or
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- it (or its subsidiaries) derived in its most current fiscal year at least
50% of its total assets, capitalization, gross revenue or profit from
goods produced, services performed, or sales made a country other than
the US.
The Top 50 US Portfolio considers an issuer to be based outside the U.S. if:
- it is domiciled in another country; and
- it is not listed for trading on a U.S. Stock Exchange.
Each Portfolio (other than the Top 50 U.S. Portfolio) will invest primarily in
securities which are:
- listed on a stock exchange in countries that are members of the European
Union (EU), or the Convention on the European Economic Area (CEEA), or
included in another recognized, public, and regularly operating,
regulated market in these countries,
- admitted to official listing in countries that are members of the EU, the
CEEA, or the Organisation for Economic Cooperation and Development
(OECD), or
- under application for admission (within 12 months of their issue) to
official listing on one of these markets.
See Appendix A for a listing of the countries included in each of the above
organizations and the additional markets and exchanges where the Portfolios may
invest.
FOREIGN GOVERNMENT DEBT SECURITIES (ALL PORTFOLIOS EXCEPT TOP 50 US)
Each Portfolio (with the exception of Top 50 US) may invest in foreign
government debt securities which include debt obligations issued or
guaranteed by national, state or provincial governments or similar
political subdivisions and quasi-governmental and supranational entities
(collectively, "sovereign debt obligations"). Sovereign debt obligations,
especially those of developing countries, may involve a high degree of
risk. The issuer of such an obligation or the governmental authorities
that control the repayment of the obligation may be unable or unwilling
to repay principal and interest when due and may require renegotiation or
rescheduling of debt payments. In addition, prospects for repayment of
principal and interest may depend on political as well as economic
factors.
Quasi-governmental and supranational entities include international
organizations designated or supported by governmental entities to promote
economic reconstruction or development and international banking
institutions and related government agencies. Currently, the Portfolios
(with the exception of Top 50 US) intend to invest only in obligations
issued or guaranteed by the Asian Development Bank, the Inter-American
Development Bank, the World Bank, the African Development Bank, the
European Coal and Steel Community, the European Economic Community, the
European Investment Bank and the Nordic Investment Bank. Foreign
government securities also include mortgage-related securities issued or
guaranteed by national, state or provincial governmental
instrumentalities, including quasi-governmental agencies.
BRADY BONDS (ALL PORTFOLIOS EXCEPT TOP 50 US)
Each Portfolio (with the exception of Top 50 US) may invest in so-called
"Brady Bonds," which are issued as part of a debt restructuring in
exchange for cash and certain of the country's outstanding commercial
bank loans. Brady Bonds may be collateralized or uncollateralized, are
issued in various currencies (primarily U.S. dollar) and are actively
traded in the over-the-counter secondary market.
U.S. dollar-denominated collateralized Brady Bonds which may be fixed
rate par bonds or floating rate discount bonds, are collateralized in
full as to principal by U.S. Treasury zero coupon bonds that have the
same maturity as the stated bonds. Interest payments on such bonds are
generally collateralized by cash or liquid securities in an amount that,
in the case of fixed rate bonds, is equal to at least one year of rolling
interest payments or, in the case of floating rate bonds, is initially
equal to at least one year's rolling interest payments based on the
applicable interest rate at the time and adjusted at regular intervals
thereafter.
The International Monetary Fund (IMF) typically negotiates the exchange
to cure or avoid a default by restructuring the terms of the bank loans.
The principal amount of some Brady Bonds is collateralized by zero coupon
U.S. Treasury securities which have the same maturity as the Brady Bonds.
However, neither the U.S. government nor the IMF has guaranteed the
repayment of any Brady Bond.
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REGION AND COUNTRY INVESTING (ALL PORTFOLIOS EXCEPT TOP 50 US)
Each Portfolio (with the exception of Top 50 US) may focus their
investments in a particular region and/or in one or more foreign
countries. Focusing a Portfolio's investments in a particular region or
country will subject the Portfolio (to a greater extent than if its
investments in such region or country were more diversified) to the risks
of adverse securities markets, exchange rates and social, political or
economic developments which may occur in that particular region or
country.
CURRENCY MANAGEMENT (ALL PORTFOLIOS EXCEPT TOP 50 US)
In connection with each of the Portfolio's (with the exception of Top 50 US)
investments denominated in foreign currencies, the Advisors may choose to
utilize a variety of currency management (hedging) strategies. The Advisors seek
to take advantage of different yield, risk and return characteristics that
different currencies, currency denominations and countries can provide to U.S.
investors. In doing so, the Advisors will consider such factors as the outlook
for currency relationships, current and anticipated interest rates, levels of
inflation within various countries, prospects for relative economic growth and
government policies influencing currency exchange rates and business conditions.
CURRENCY EXCHANGE TRANSACTIONS (ALL PORTFOLIOS EXCEPT TOP 50 US)
Because each Portfolio (with the exception of Top 50 US) may buy and sell
securities denominated in currencies other than the U.S. dollar and
receive interest, dividends and sale proceeds in currencies other than
the U.S. dollar, a Portfolio from time to time may enter into currency
exchange transactions to convert to and from different currencies and to
convert foreign currencies to and from U.S. dollars. A Portfolio either
enters into these transactions on a spot (i.e., cash) basis at the spot
rate prevailing in the currency exchange market or uses forward currency
exchange contracts (discussed below) to purchase or sell currencies.
CURRENCY HEDGING (ALL PORTFOLIOS EXCEPT TOP 50 US)
Each Portfolio's (with the exception of Top 50 US) currency hedging
strategies will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase
or sale of forward currency with respect to specific receivables or
payables of a Portfolio generally accruing in connection with the
purchase or sale of its portfolio securities. Position hedging is the
sale of forward currency with respect to portfolio security positions.
The Portfolios may not position hedge to an extent greater than the
aggregate market value (at the time of entering into the hedge) of the
hedged securities.
Proper currency hedging is important because a decline in the U.S. dollar
value of a foreign currency in which a Portfolio's securities are
denominated will reduce the U.S. dollar value of the securities, even if
their value in the foreign currency remains constant. The use of currency
hedges does not eliminate fluctuations in the underlying prices of the
securities, but it does establish a rate of exchange that can be achieved
in the future. For example, in order to protect against diminutions in
the U.S. dollar value of non-dollar denominated securities they hold, a
Portfolio may purchase foreign currency put options. If the value of the
foreign currency does decline, the Portfolio will have the right to sell
the currency for a fixed amount in dollars and will thereby offset, in
whole or in part, the adverse effect on the U.S. dollar value of their
securities that otherwise would have resulted. Conversely, if a rise in
the U.S. dollar value of a currency in which securities to be acquired
are denominated is projected, thereby potentially increasing the cost of
the securities, the Portfolio may purchase call options on the particular
currency. The purchase of these options could offset, at least partially,
the effects of the adverse movements in exchange rates. The benefit to
the Portfolio derived from purchases of currency options, like the
benefit derived from other types of options, will be reduced by premiums
and other transaction costs. Because transactions in currency exchange
are generally conducted on a principal basis, no fees or commissions are
generally involved. Currency hedging involves some of the same risks and
considerations as other transactions with similar instruments. Although
currency hedges limit the risk of loss due to a decline in the value of a
hedged currency, at the same time, they also limit any potential gain
that might result should the value of the currency increase. If a
devaluation is generally anticipated, a Portfolio may not be able to
contract to sell a currency at a price above the devaluation level they
anticipate.
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FORWARD CURRENCY EXCHANGE CONTRACTS (ALL PORTFOLIOS EXCEPT TOP 50 US)
A forward currency exchange contract is an obligation by a Portfolio to
purchase or sell a specific currency at a future date, which may be any
fixed number of days from the date of the contract. Forward currency
exchange contracts establish an exchange rate at a future date. These
contracts are transferable in the interbank market conducted directly
between currency traders (usually large commercial banks and brokerages)
and their customers. A forward currency exchange contract may not have a
deposit requirement and may be traded at a net price without commission.
Each Portfolio (with the exception of Top 50 US) maintains with their
custodian a segregated account of cash or liquid securities in an amount
at least equal to their obligations under each forward currency exchange
contract. Neither spot transactions nor forward currency exchange
contracts eliminate fluctuations in the prices of a Portfolio's
securities or in foreign exchange rates, or prevent loss if the prices of
these securities should decline.
Each Portfolios (with the exception of Top 50 US) may enter into foreign
currency hedging transactions in an attempt to protect against changes in
currency exchange rates between the trade and settlement dates of
specific securities transactions, or changes in currency exchange rates
that would adversely affect a portfolio position or an anticipated
investment position. Since consideration of the prospect for currency
parities will be incorporated into the Advisors' long-term investment
decisions, a Portfolio will not routinely enter into currency hedging
transactions with respect to security transactions; however, the Advisors
believe that it is important to have the flexibility to enter into
currency hedging transactions when they determine that the transactions
would be in a Portfolio's best interest. Although these transactions tend
to minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time they tend to limit any potential gain that
might be realized should the value of the hedged currency increase. The
precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible because the future
value of such securities in foreign currencies will change as a
consequence of market movements in the value of such securities between
the date the forward contract is entered into and the date it matures.
The projection of currency market movements is extremely difficult, and
the successful execution of a hedging strategy is highly uncertain.
While these contracts are not presently regulated by the CFTC, the CFTC
may in the future assert authority to regulate forward contracts. In such
event a Portfolio's ability to utilize forward contracts may be
restricted. Forward contracts may reduce the potential gain from a
positive change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in poorer
overall performance for a Portfolio than if they had not entered into
such contracts. The use of currency forward contracts may not eliminate
fluctuations in the underlying U.S. dollar equivalent value of the prices
of or rates of return on a Portfolio's foreign currency denominated
portfolio securities and the use of such techniques will subject the
Portfolios to certain risks.
OPTIONS ON FOREIGN CURRENCIES (ALL PORTFOLIOS EXCEPT TOP 50 US)
Each Portfolio (with the exception of Top 50 US) may write covered put
and call options and purchase put call options on foreign currencies for
the purpose of protecting against declines in the dollar value of
portfolio securities and against increases in the dollar cost of
securities to be acquired. As with other types of options, however, the
writing of an option on foreign currency will constitute only a partial
hedge up to the amount of the premium received, and a Portfolio could be
required to purchase or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on
foreign currency may be used to hedge against fluctuations in exchange
rates although, in the event of exchange rate movements adverse to a
Portfolio's position, they may forfeit the entire amount of the premium
plus related transaction costs. In addition a Portfolio may purchase call
options on currency when the Advisors anticipate that the currency will
appreciate in value.
Each Portfolio (with the exception of Top 50 US) may also write options
on foreign currencies for the same types of hedging purposes. For
example, where a Portfolio anticipates a decline in the dollar value of
foreign currency denominated securities due to adverse fluctuations in
exchange rates they could, instead of purchasing a put option, write a
call option on the relevant currency. If the expected decline occurs, the
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options will most likely not be exercised, and the diminution in value of
portfolio securities will be offset by the amount of the premium
received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, a
Portfolio could write put options on the relevant currency which, if
rates move in the manner projected, will expire unexercised and allow a
Portfolio to hedge such increased cost up to the amount of the premium.
As in the case of other types of options, however, the writing of a
foreign currency option will constitute only a partial hedge up to the
amount of the premium, and only if rates move in the expected direction.
If this does not occur, the options may be exercised and a Portfolio
would be required to purchase or sell the underlying currency at a loss
which may not be offset by the amount of the premium. Through the writing
of options on foreign currencies, a Portfolio also may be required to
forego all or a portion of the benefits which might otherwise have been
obtained from favorable movements in exchange rates.
Each Portfolio (with the exception of Top 50 US) may write covered call
options on foreign currencies. A call option written on a foreign
currency by a Portfolio is "covered" if the Portfolio owns the underlying
foreign currency covered by the call or has an absolute and immediate
right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration identified on the
Portfolio's books) upon conversion or exchange of other foreign currency
held in its portfolio. A call option is also covered if a Portfolio has a
call on the same foreign currency and in the same principal amount as the
call written where the exercise price of the call held (a) is equal to or
less than the exercise price of the call written or (b) is greater than
the exercise price of the call written if the difference is segregated by
the Portfolio in cash or liquid securities.
There is no assurance that a liquid secondary market will exist for any
particular option, or at any particular time. If a Portfolio is unable to
effect closing purchase transactions with respect to covered options they
have written, the Portfolio will not be able to sell the underlying
currency or dispose of assets held in a segregated account until the
options expire or are exercised. Similarly, if a Portfolio is unable to
effect a closing sale transaction with respect to options they have
purchased, they would have to exercise the options in order to realize
any profit and will incur transaction costs upon the purchase or sale of
the underlying currency. A Portfolio pays brokerage commissions or
spreads in connection with its options transactions.
As in the case of forward contracts, certain options on foreign
currencies are traded over-the-counter and involve liquidity and credit
risks which may not be present in the case of exchange-traded currency
options. In some circumstances, a Portfolio's ability to terminate OTC
options may be more limited than with exchange-traded options. It is also
possible that broker-dealers participating in OTC options transactions
will not fulfill their obligations. A Portfolio intends to treat OTC
options as not readily marketable and therefore subject to its
limitations with respect to illiquid securities.
Each Portfolio (except the Top 50 US Portfolio) may enter into foreign
currency exchange transactions in an attempt to protect against changes
in foreign currency exchange rates between the trade and settlement dates
of specific securities transactions or anticipated securities
transactions. Each of these Portfolios may also enter into foreign
currency transactions to hedge currency risks associated with the assets
of a Portfolio denominated in foreign currencies or (in the case of the
European Mid-Cap Portfolio and Japanese Equity Portfolio) principally
traded in foreign currencies. The European Mid-Cap Portfolio, however,
does not presently intend to engage in such hedging activity but reserves
the ability to do so under circumstances in which the Advisors believes
that one or more currencies in which such Portfolio's assets are
denominated may suffer a substantial decline against the U.S. dollar.
Each Portfolio (except the European Mid-Cap Portfolio and the Top 50 US
Portfolio) may also enter into foreign currency transactions to hedge
against currencies other than the U.S. dollar. A Portfolio may purchase
or sell foreign currency contracts for forward delivery. To conduct the
hedging discussed above, a Portfolio would generally enter into a forward
contract to sell the foreign currency in which the investment is
denominated in exchange for U.S. dollars or other currency in which the
Advisors desire to protect the value of the Portfolio. A Portfolio may
also
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purchase option rights for the purchase or sale of currencies or currency
futures contracts or warrants which entitle the holder to the right to
purchase or sell currencies or currency futures contracts or to receive
payment of a difference, which is measured by the performance of
currencies or currency futures contracts, provided that these option
rights and warrants are admitted to official listing on an exchange.
The Portfolios underlying the Top 50 Funds (with the exception of the Top
50 US Portfolio) do not currently intend to engage in foreign currency
transactions as an investment strategy. However, each of these Portfolios
(except for the Top 50 US Portfolio) may enter into forward contracts to
hedge against changes in foreign currency exchange rates that would
affect the value of existing investments denominated or principally
traded in a foreign currency.
ADDITIONAL LIMITATIONS AND RISK FACTORS
ASSET COVERAGE (ALL PORTFOLIOS)
Each Portfolio will comply with the segregation or coverage guidelines
established by the SEC and other applicable regulatory bodies with
respect to certain transactions, including (but not limited to) options
written on securities and indexes; currency, interest rate and securities
index futures contracts and options on these futures contracts; and
forward currency contracts. These guidelines may, in certain instances,
require segregation by a Portfolio of cash or liquid securities to the
extent the Portfolio's obligations with respect to these strategies are
not otherwise covered through ownership of the underlying security or
financial instrument, by other portfolio positions or by other means
consistent with applicable regulatory policies. Unless the transaction is
covered, the segregated assets must at all times equal or exceed the
Portfolio's obligations with respect to these strategies. Segregated
assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate
them. As a result, there is a possibility that segregation of a large
percentage of a Portfolio's assets could impede portfolio management or
the Portfolio's ability to meet redemption requests or other current
obligations.
For example, a call option written on securities may require a Portfolio
to hold the securities subject to the call (or securities convertible
into the securities without additional consideration) or to segregate
assets (as described above) sufficient to purchase and deliver the
securities if the call is exercised. A call option written on an index
may require a Portfolio to own portfolio securities that correlate with
the index or to segregate assets (as described above) equal to the excess
of the index value over the exercise price on a current basis. A put
option written by a Portfolio may require the Portfolio to segregate
assets (as described above) equal to the exercise price. The Portfolio
could purchase a put option if the strike price of that option is the
same or higher than the strike price of a put option sold by the
Portfolio. If the Portfolio holds a futures contract, the Portfolio could
purchase a put option on the same futures contract with a strike price as
high or higher than the price of the contract held. The Portfolio may
enter into fully or partially offsetting transactions so that its net
position, coupled with any segregated assets (equal to any remaining
obligation), equals its net obligation. Asset coverage may be achieved by
other means when consistent with applicable regulatory policies.
In order to secure their obligations in connection with derivatives
contracts or special transactions, a Portfolios will either own the
underlying assets, enter into an offsetting transaction or set aside
readily marketable securities with a value that equals or exceeds the
Portfolio's obligations. Unless a Portfolio has other readily marketable
assets to set aside, it cannot trade assets used to secure such
obligations without entering into an offsetting derivative contract or
terminating a special transaction. This may cause the Portfolio to miss
favorable trading opportunities or to realize losses on derivative
contracts or special transactions.
The use of options, futures and foreign currency contracts is a highly
specialized activity which involves investment techniques and risks that
are different from those associated with ordinary portfolio transactions.
Gains and losses on investments in options and futures depend on the
Advisors' ability to predict the direction of stock prices, interest
rates, currency movements and other economic factors. The loss that may
be incurred by a Portfolio in entering into futures contracts and written
options thereon and
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forward currency contracts is potentially unlimited. There is no
assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain facilities of an
options clearing entity or other entity performing the regulatory and
liquidity functions of an options clearing entity inadequate, and thereby
result in the institution by an exchange of special procedures which may
interfere with the timely execution of customers' orders. Most futures
exchanges limit the amount of fluctuation permitted in a futures
contract's prices during a single trading day. Once the limit has been
reached no further trades may be made that day at a price beyond the
limit. The price limit will not limit potential losses, and may in fact
prevent the prompt liquidation of futures positions, ultimately resulting
in further losses. Options and futures traded on foreign exchanges
generally are not regulated by U.S. authorities, and may offer less
liquidity and less protection to the Portfolio in the event of default by
the other party to the contract.
Except as set forth above under "Futures Contracts" and "Options on
Futures Contracts", there is no limit on the percentage of the assets of
a Portfolio that may be at risk with respect to futures contracts and
related options or forward currency contracts. A Portfolio may not invest
more than 25% of its total assets in purchased protective put options.
The Portfolio's transactions in options, forward currency contracts,
futures contracts and options on futures contracts may be limited by the
requirements for qualification of the Portfolio as a regulated investment
company for tax purposes. See the section entitled "Taxes." There can be
no assurance that the use of these portfolio strategies will be
successful.
INITIAL PUBLIC OFFERINGS (IPOs) (ALL PORTFOLIOS)
IPOs may be very volatile, rising and falling rapidly based on, among
other reasons, investor perceptions rather than economic reasons.
Additionally, IPOs may have a magnified performance effect on a
portfolio with a small asset base. The Fund may not experience a
similar impact on its performance as its assets grow, as it is unlikely
that the Fund will be able to obtain proportionately larger IPO
allocations.
FOREIGN SECURITIES (ALL PORTFOLIOS EXCEPT TOP 50 US)
Each Portfolio (except the Top 50 US Portfolio), invests primarily in
foreign securities. Investment in securities of foreign issuers involves
somewhat different investment risks from those affecting securities of
U.S. domestic issuers.
The value of a Portfolio's investment in foreign securities may be
adversely affected by changes in political or social conditions,
diplomatic relations, confiscatory taxation, expropriation,
nationalization, limitation on the removal of funds or assets, or
imposition of (or change in) currency exchange controls or tax
regulations in those foreign countries. In addition, changes in
government administrations or economic or monetary policies in the United
States or abroad could result in appreciation or depreciation of
portfolio securities and could favorably or unfavorably affect a
Portfolio's operations. Furthermore, the economies of individual foreign
nations may differ from the U.S. economy, whether favorably or
unfavorably, in areas such as growth of gross domestic product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payments position; it may also be more difficult to obtain and enforce a
judgment against a foreign issuer. Any foreign investments made by the
Portfolios must be made in compliance with foreign currency restrictions
and tax laws restricting the amounts and types of foreign investments.
In addition, while the volume of transactions effected on foreign stock
exchanges has increased in recent years, in most cases it remains
appreciably below that of domestic securities exchanges. Accordingly, a
Portfolio's foreign investments may be less liquid and their prices may
be more volatile than comparable investments in securities of U.S.
companies. Moreover, the settlement periods for foreign securities, which
are often longer than those for securities of U.S. issuers, may affect
portfolio liquidity. In buying and selling securities on foreign
exchanges, purchasers normally pay fixed commissions that are generally
higher than the negotiated commissions charged in the United States. In
addition, there is generally less government supervision and regulation
of securities exchanges, brokers and issuers located in foreign countries
than in the United States.
Since each Portfolio's investments in foreign securities involve foreign
currencies, the value of the Portfolio's assets as measured in U.S.
dollars may be affected favorably or unfavorably by changes in currency
rates and in exchange control regulations, including currency blockage.
Because the Top 50 Europe Portfolio and the European Mid-Cap Portfolio do
not presently intend to engage in currency transactions to hedge currency
risks, these Portfolios may be more exposed to the aforementioned
currency risks.
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Certain of the risks associated with foreign investments are heightened
for the Top 50 Asia Portfolio and the Top 50 World Portfolio, which
invest in certain Asian countries. In some cases, political uncertainty
and political corruption in such countries could threaten to reverse
favorable trends toward market and economic reform, privatization and
removal of trade barriers, and further disruptions in Asian securities
markets could result. In addition, certain Asian countries have managed
currencies which are maintained at artificial levels relative to the U.S.
dollar rather than at levels determined by the market. This type of
system can lead to sudden and large adjustments in the currency which, in
turn, may have a disruptive and negative effect on foreign investors. For
example, in 1997 the Thai Baht lost 46.75% of its value against the U.S.
dollar. A number of Asian companies are highly dependent on foreign loans
for their operation. In 1997, several Asian countries were forced to
negotiate loans from the International Monetary Fund and other
supranational organizations which impose strict repayment term schedules
and require significant economic and financial restructuring. There can
be no assurance that such restructurings will not have an adverse effect
on individual companies, or securities markets, in which the Top 50 Asia
Portfolio or the Top 50 World Portfolio are invested.
EMERGING MARKETS (TOP 50 WORLD, TOP 50 EUROPE, TOP 50 ASIA, AND EUROPEAN
MID-CAP PORTFOLIOS ONLY)
The world's industrialized markets generally include (but are not limited
to) the following: Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Hong Kong, Ireland, Italy, Japan, Luxembourg,
Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland, the United Kingdom, and the United States. The world's
emerging markets generally include (but are not limited to) the
following: Argentina, Botswana, Bolivia, Brazil, Bulgaria, Chile, China,
Colombia, Costa Rica, the Czech Republic, Ecuador, Egypt, Greece,
Hungary, India, Indonesia, Israel, the Ivory Coast, Jordan, Korea,
Malaysia, Mexico, Morocco, Nicaragua, Nigeria, Pakistan, Peru,
Philippines, Poland, Romania, Russia, Slovakia, Slovenia, South Africa,
South Korea, Sri Lanka, Taiwan, Thailand, Turkey, Uruguay, Venezuela,
Vietnam and Zimbabwe.
Investments in securities of issuers in emerging markets countries may
involve a high degree of risk and many may be considered speculative.
Investments in developing and emerging markets may be subject to
potentially greater risks than those of other foreign issuers. These
risks include: (i) the small current size of the markets for such
securities and the low volume of trading, which result in less liquidity
and in greater price volatility; (ii) certain national policies which may
restrict a Portfolio's investment opportunities, including restrictions
on investment in issuers or industries deemed sensitive to national
interests; (iii) foreign taxation; (iv) the absence, until recently, of a
capital market structure or market oriented economy as well as issuers
without a long period of successful operations; (v) the possibility that
recent favorable economic developments may be slowed or reversed by
unanticipated political or social events in such countries or their
neighboring countries; and (vi) greater risk of expropriation,
confiscatory taxation, nationalization, and less social, political and
economic stability.
The risks involved in investing in securities of issuers in emerging
markets have been underscored by recent events. For example, issuers in
the Asia region have experienced currency volatility, political
instability and economic declines in recent months. In response to these
declines, Malaysia has enacted currency exchange controls, restricting
the repatriation of assets for a period of one year. In 1998, Russia
declared a moratorium on repayment of its own debt, substantially
devalued its currency and suspended the government- sponsored foreign
exchange market for its currency.
In addition, brokerage commissions, custodial services and other costs
relating to investment in emerging markets are generally more expensive
than in the United States. Such markets have been unable to keep pace
with the volume of securities transactions, making it difficult to
conduct such transactions. The inability of a Portfolio to make intended
securities purchases due to settlement problems could cause the Portfolio
to miss attractive investment opportunities. Inability to dispose of a
security due to settlement problems could result either in losses to a
Portfolio due to subsequent declines in the value of the security or, if
the Portfolios have entered into a contract to sell the security, could
result in possible liability to the purchaser.
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EURO RISKS (TOP 50 WORLD, TOP 50 EUROPE AND EUROPEAN MID-CAP ONLY)
On January 1, 1999, eleven countries of the European Economic and
Monetary Union (EMU) began implementing a plan to replace their national
currencies with a new currency, the euro. Full conversion to the euro is
slated to occur by July 1, 2002.
Although it is impossible to predict the impact of the conversion to the
euro on a Portfolio, the risks may include:
- changes in the relative strength and value of the U.S. dollar or
other major currencies;
- Adverse effects on the business or financial condition of European
issuers that the Fund holds in its portfolio; and
- Unpredictable effects on trade and commerce generally.
These and other factors could increase volatility in financial markets
worldwide and could adversely affect the value of securities held by a
Portfolio.
CURRENCY (ALL PORTFOLIOS EXCEPT TOP 50 US)
The Advisors attempt to manage currency risk by limiting the amount a
Portfolio invests in securities denominated in a particular currency.
However, diversification will not protect a Portfolio against a general
increase in the value of the U.S. dollar relative to other currencies.
LIQUIDITY (ALL PORTFOLIOS)
OTC derivative contracts are considered to be illiquid and generally
carry greater liquidity risk than exchange-traded contracts.
LEVERAGE (ALL PORTFOLIOS)
Leverage risk is created when an investment exposes a Portfolio to a
level of risk that exceeds the amount invested. Changes in the value of
such an investment magnify the Portfolio's risk of loss and potential for
gain. Leverage risk may exist when a Portfolio purchases securities while
it also has borrowed money.
INTEREST RATES (ALL PORTFOLIOS)
Interest rate risks apply to the Portfolios only to the extent they
invest in fixed income securities. Prices of fixed income securities rise
and fall in response to changes in the interest rate paid by similar
securities. Potential or anticipated changes in interest rates also may
affect the value of fixed income securities. Generally, when interest
rates rise, prices of fixed income securities fall. However, market
factors, such as the demand for particular fixed income securities, may
cause the price of certain fixed income securities to fall while the
prices of other securities rise or remain unchanged.
Interest rate changes have a greater effect on the price of fixed income
securities with longer durations. Duration measures the price sensitivity
of a fixed income security to changes in interest rates.
CREDIT (ALL PORTFOLIOS)
Credit risk is the possibility that an issuer will default on a security
by failing to pay interest or principal when due. If an issuer defaults,
a Portfolio will lose money. Credit risk is only a risk for a Portfolio
if it invests in fixed income securities or chooses to lend securities.
Many fixed income securities receive credit ratings from services such as
Standard & Poor's and Moody's Investor Service. These services assign
ratings to securities by assessing the likelihood of issuer default.
Lower credit ratings correspond to higher credit risk. If a security has
not received a rating, a Portfolio must rely entirely upon the Advisor's
credit assessment.
Fixed income securities generally compensate for greater credit risk by
paying interest at a higher rate. The difference between the yield of a
security and the yield of a U.S. Treasury security with a comparable
maturity (the spread) measures the additional interest paid for risk.
Spreads may increase generally in response to adverse economic or market
conditions. A security's spread may also increase if the security's
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rating is lowered, or the security is perceived to have an increased
credit risk. An increase in the spread will cause the price of the
security to decline.
Credit risk includes the possibility that a party to a transaction
involving a Portfolio will fail to meet its obligations. This could cause
the Portfolio to lose the benefit of the transaction or prevent the
Portfolio from selling or buying other securities to implement their
investment strategies.
PREPAYMENTS (ALL PORTFOLIOS)
Investments in mortgage-backed and asset-backed securities share many of
the same risks of prepayment.
Unlike traditional fixed income securities, which pay a fixed rate of
interest until maturity (when the entire principal amount is due)
payments on mortgage backed securities include both interest and a
partial payment of principal. Partial payment of principal may be
comprised of scheduled principal payments as well as unscheduled payments
from the voluntary prepayment, refinancing, or foreclosure of the
underlying loans. These unscheduled prepayments of principal create risks
that can adversely affect a Portfolio holding mortgage backed securities.
For example, when interest rates decline, the value of mortgage backed
securities generally rise. However, when interest rates decline,
unscheduled prepayments can be expected to accelerate, and a Portfolio
would be required to reinvest the proceeds of the prepayments at the
lower interest rates then available. Unscheduled prepayments would also
limit the potential for capital appreciation on mortgage backed
securities.
Conversely, when interest rates rise, the values of mortgage backed
securities generally fall. Since rising interest rates typically result
in decreased prepayments, this could lengthen the average lives of
mortgage backed securities, and cause their value to decline more than
traditional fixed income securities.
Generally, mortgage backed securities compensate for the increased risk
associated with prepayments by paying a higher yield. The additional
interest paid for risk is measured by the difference between the yield of
a mortgage backed security and the yield of a U.S. Treasury security with
a comparable maturity (the spread). An increase in the spread will cause
the price of the mortgage backed security to decline. Spreads generally
increase in response to adverse economic or market conditions. Spreads
may also increase if the security is perceived to have an increased
prepayment risk or is perceived to have less market demand.
COMPLEX CMOS (ALL PORTFOLIOS)
CMOs with complex or highly variable prepayment terms, such as companion
classes, IOs, POs, Inverse Floaters and residuals, generally entail
greater market, prepayment and liquidity risks than other mortgage backed
securities. For example, their prices are more volatile and their trading
market may be more limited.
RISKS ASSOCIATED WITH FUTURES, OPTIONS AND WARRANTS (ALL PORTFOLIOS)
The successful use of futures, options and warrants depends on the
ability of the Advisors of the Portfolios to predict the direction of the
market or, in the case of hedging transactions, the correlation between
market movements and movements in the value of the Portfolios' assets,
and is subject to various additional risks. The investment techniques and
skills required to use futures, options and warrants successfully are
different from those required to select equity securities for investment.
The correlation between movements in the price of the futures contract,
option or warrant and the price of the securities or financial
instruments being hedged is imperfect and the risk from imperfect
correlation increases, with respect to stock index futures, options and
warrants, as the composition of a Portfolio's portfolio diverges from the
composition of the index underlying such stock index futures, options or
warrants. If a Portfolio has hedged portfolio securities by purchasing
put options or selling futures contracts, the Portfolio could suffer a
loss which is only partially offset or not offset at all by an increase
in the value of the Portfolio's securities. As noted, a Portfolio may
also enter into transactions in future contracts, options and warrants
for other than hedging purposes (subject to applicable law), including
speculative transactions, which involve greater risk. In particular, in
entering into such transactions, a Portfolio may experience losses which
are not offset by gains on other portfolio positions, thereby reducing
its gross income. In addition, the markets for such instruments may be
volatile from time to time, which could increase the risk incurred by a
Portfolio in
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entering into such transactions. The ability of a Portfolio to close out
a futures, options or warrants position depends on a liquid secondary
market.
As noted above, the Portfolios intend to adhere to certain policies
relating to the use of futures contracts, which should have the effect of
limiting the amount of leverage by the Portfolios.
Although foreign currency exchange transactions are intended to minimize
the risk of loss due to a decline in the value of the hedged currency, at
the same time they limit any potential gain that might be realized should
the value of the hedged currency increase. The precise matching of the
forward contract amounts and the value of the securities involved will
not generally be possible because the future value of such securities in
foreign currencies will change as a consequence of market movements in
the value of such securities between the date the forward contract is
entered into and the date it matures. The projection of currency market
movements is difficult, and the successful execution of a hedging
strategy is highly uncertain.
CORRELATION OF PRICE CHANGES (ALL PORTFOLIOS)
Because there are a limited number of types of exchange-traded options
and futures contracts, it is likely that the standardized options and
futures contracts available will not match a Portfolio's current or
anticipated investments exactly. Each Portfolio may invest in options and
futures contracts based on securities with different issuers, maturities,
or other characteristics from the securities in which it typically
invests, which involves a risk that the options or futures position will
not track the performance of a Portfolio's other investments.
Options and futures contracts prices can also diverge from the prices of
their underlying instruments, even if the underlying instruments match a
Portfolio's investments well. Options and futures contracts prices are
affected by such factors as current and anticipated short term interest
rates, changes in volatility of the underlying instrument, and the time
remaining until expiration of the contract, which may not affect security
prices the same way. Imperfect correlation may also result from differing
levels of demand in the options and futures markets and the securities
markets, from structural differences in how options and futures and
securities are traded, or from imposition of daily price fluctuation
limits or trading halts. A Portfolio may purchase or sell options and
futures contracts with a greater or lesser value than the securities it
wishes to hedge or intends to purchase in order to attempt to compensate
for differences in volatility between the contract and the securities,
although this may not be successful in all cases. If price changes in a
Portfolio's options or futures positions are poorly correlated with its
other investments, the positions may fail to produce anticipated gains or
result in losses that are not offset by gains in other investments.
SHAREHOLDER LIABILITY RISKS (ALL PORTFOLIOS)
The Portfolio Trust's Declaration of Trust provides that the Funds and
other entities investing in a Portfolio (e.g., other investment
companies, insurance company separate accounts and common and commingled
trust funds) are each liable for all obligations of the Portfolios.
However, the risk of a Fund incurring financial loss on account of such
liability is limited to circumstances in which both inadequate insurance
existed and the Portfolio itself was unable to meet its obligations.
Accordingly, the Directors of the Corporation believe that neither the
Funds nor their shareholders will be adversely affected by reason of the
investment of all of the assets of the Funds in the Portfolios.
RISK MANAGEMENT (ALL PORTFOLIOS)
Each Portfolio may employ non-hedging risk management techniques.
Examples of such strategies include synthetically altering the duration
of a portfolio or the mix of securities in a portfolio. For example, if
the Advisors wish to extend maturities in a fixed income portfolio in
order to take advantage of an anticipated decline in interest rates, but
does not wish to purchase the underlying long term securities, it might
cause the Portfolio to purchase futures contracts on long-term debt
securities. Similarly, if the Advisors wish to decrease fixed income
securities or purchase equities, it could cause a Portfolio to sell
futures contracts on debt securities and purchase futures contracts on a
stock index. Because these risk management techniques involve leverage,
the possibility exists, as with all leveraged transactions, of losses as
well as gains that are
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greater than if these techniques involved the purchase and sale of the
securities themselves rather than their synthetic derivatives.
OTHER INVESTMENTS AND INVESTMENT PRACTICES
TO BE ANNOUNCED SECURITIES (TBAS) - PURCHASE COMMITMENTS (ALL
PORTFOLIOS) As with other delayed delivery transactions, a seller
agrees to issue a TBA security at a future date. However, the seller
does not specify the particular securities to be delivered. Instead,
a Portfolio agrees to accept any security that meets specified terms.
TBA purchase commitments may be considered securities in themselves,
and involve a risk of loss if the value of the security to be
purchased declines prior to settlement date. This risk is in addition
to the risk of decline in the value of the Portfolio's other assets.
Unsettled TBA purchase commitments are valued at the current market
value of the underlying securities. For example, in a TBA mortgage
backed transaction, a Portfolio and the seller would agree upon the
issuer, interest rate and terms of the underlying mortgages. The
seller would not identify the specific underlying mortgages until it
issues the security. TBA mortgage backed securities increase interest
rate risks because the underlying mortgages may be less favorable
than anticipated by a Portfolio.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES (ALL PORTFOLIOS)
Each Portfolio may purchase securities on a when-issued or delayed
delivery basis. Delivery of and payment for these securities can take
place a month or more after the date of the purchase commitment. The
payment obligation and the interest rate that will be received on
when-issued and delayed-delivery securities are fixed at the time the
buyer enters into the commitment. Due to fluctuations in the value of
securities purchased or sold on a when-issued or delayed-delivery basis,
the yields obtained on such securities may be higher or lower than the
yields available in the market on the dates when the investments are
actually delivered to the buyers. When-issued securities may include
securities purchased on a "when, as and if issued" basis, under which the
issuance of the security depends on the occurrence of a subsequent event,
such as approval of a merger, corporate reorganization or debt
restructuring. The value of such securities is subject to market
fluctuation during this period and no interest or income, as applicable,
accrues to the Portfolio until settlement takes place.
At the time a Portfolio makes the commitment to purchase securities on a
when-issued or delayed delivery basis, it will record the transaction,
reflect the value each day of such securities in determining its net
asset value and, if applicable, calculate the maturity for the purposes
of average maturity from that date. At the time of settlement a
when-issued security may be valued at less than the purchase price. To
facilitate such acquisitions, each Portfolio (with the exception of
Top 50 US) maintains with their custodian a segregated account of cash
or liquid securities in an amount at least equal to such commitments. It
may be expected that a Portfolio's net assets will fluctuate to a greater
degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. On delivery dates for such
transactions, a Portfolio will meet its obligations from maturities or
sales of securities and/or from cash flow. If the Portfolio chooses to
dispose of the right to acquire a when-issued security prior to its
acquisition, it could, as with the disposition of any other portfolio
obligation, incur a gain or loss due to market fluctuation. It is the
current policy of the Portfolios not to enter into when-issued
commitments exceeding in the aggregate 15% of the market value of a
Portfolio's total assets, less liabilities other than the obligations
created by when-issued commitments. When a Portfolio engages in
when-issued or delayed-delivery transactions, it relies on the other
party to consummate the trade. Failure of the seller to do so may result
in a Portfolio incurring a loss or missing an opportunity to obtain a
price considered to be advantageous.
LENDING OF PORTFOLIO SECURITIES - SECURITIES LENDING (ALL PORTFOLIOS)
Each Portfolio may lend portfolio securities to borrowers that the
Advisors deem creditworthy. In return, a Portfolio receives cash or
liquid securities from the borrower as collateral. The borrower must
furnish additional collateral if the market value of the loaned
securities increases. Also, the borrower must pay the Portfolio the
equivalent of any dividends or interest received on the loaned
securities.
A Portfolio will reinvest cash collateral in securities that qualify as
an acceptable investment for the Funds. However, the Portfolio may pay
all or a portion of the interest earned on the cash collateral to the
borrower.
Loans are subject to termination at the option of a Portfolio or the
borrower. The Portfolio will not have the right to vote on securities
while they are on loan, but it will terminate a loan in anticipation of
any important vote. The Portfolio may pay administrative and custodial
fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash collateral to a securities lending agent or
broker. Borrowed securities are returned when the loan is terminated. Any
appreciation or depreciation in the market price of the borrowed
securities which occurs during the term of the loan accrues to a
Portfolio and its investors.
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Securities lending activities are subject to interest rate risks and
credit risks. These transactions create leverage risks.
The following conditions will be met whenever portfolio securities of a
Portfolio are loaned: (1) the Portfolio must receive at least 100%
collateral from the borrower; (2) the borrower must increase such
collateral whenever the market value of the securities loaned rises above
the level of the collateral; (3) the Portfolio must be able to terminate
the loan at any time; (4) the Portfolio must receive reasonable interest
on the loan, as well as payments in respect of any dividends, interest or
other distributions on the loaned securities, and any increase in market
value; (5) the Portfolio may pay only reasonable custodian and finder's
fees in connection with the loan; and (6) while voting rights on the
loaned securities may pass to the borrower, the Portfolio must terminate
the loan and regain the right to vote the securities if a material event
occurs conferring voting rights and adversely affecting the investment.
In addition, a Portfolio will consider all facts and circumstances,
including the creditworthiness of the borrowing financial institution. No
Portfolio will lend its securities to any officer, Trustee, Director,
employee or other affiliate of the Corporation or the Portfolio Trust,
the Manager, the Advisor or the Distributor, unless otherwise permitted
by applicable law. Each Portfolio may lend its portfolio securities up to
one-third of the value of its total assets.
Each Portfolio may lend its securities on a demand basis provided the
market value of the assets transferred in securities loans together with
the market value of the securities already transferred as a securities
loan for the Portfolio's account to the same borrower does not exceed 10%
of total net assets of the Portfolio.
BORROWING (ALL PORTFOLIOS)
Each Portfolio may borrow money, except in amounts not to exceed
one-third of the Fund's total assets (including the amount borrowed) (i)
from banks for temporary or short-term purposes or for the clearance of
transactions, (ii) in connection with the redemption of interests in the
Portfolio or Fund Shares or to finance failed settlements of portfolio
trades without immediately liquidating portfolio securities or other
assets, (iii) in order to fulfill commitments or plans to purchase
additional securities pending the anticipated sale of other portfolio
securities or assets and (iv) pursuant to reverse repurchase agreements
entered into by the Portfolio.
Under the 1940 Act, each Portfolio is required to maintain continuous
asset coverage of 300% with respect to such borrowings and to sell
(within three days) sufficient portfolio holdings to restore such
coverage if it should decline to less than 300% due to market
fluctuations or otherwise, even if such liquidation of the Portfolios'
holdings may be disadvantageous from an investment standpoint.
Leveraging by means of borrowing may exaggerate the effect of any
increase or decrease in the value of a Portfolio's securities and the
Portfolio's NAV per share, and money borrowed by the Portfolio will be
subject to interest and other costs (which may include commitment fees
and/or the cost of maintaining minimum average balances) that may exceed
the income received from the securities purchased with the borrowed
funds.
INTERESTS IN OTHER LIMITED LIABILITY COMPANIES
Entities such as limited partnerships, limited liability companies,
business trusts and companies organized outside the United States may
issue securities comparable to common or preferred stock.
INVESTMENT RATINGS (ALL PORTFOLIOS)
The fixed income securities in which each Portfolio invests must be rated
investment grade (in one of the four highest rating categories) by one or
more nationally recognized rating service or be of comparable quality to
securities having such ratings. For example, Standard and Poor's, a
rating service, assigns ratings to investment grade securities (AAA, AA,
A, and BBB) based on their assessment of the likelihood of the issuer's
inability to pay interest or principal (default) when due on each
security. Lower credit ratings correspond to higher credit risk. If a
security has not received a rating, a Portfolio must rely entirely upon
the Advisors' credit assessment that the security is comparable to
investment grade. Securities rated BBB have speculative characteristics.
LISTED SECURITIES (ALL PORTFOLIOS)
Each Portfolio will invest primarily in listed securities ("Listed
Securities"). Listed Securities are defined as securities meeting at
least one of the following requirements: (a) they are listed on a stock
exchange in a Member State or in another state which is a party to the
CEEA, or are included on another regulated market
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in a Member State or in another state party to the CEEA whose market is
recognized, open to the public and operates regularly; (b) they are
admitted to the official listing on one of the stock exchanges listed in
Appendix A or included on one of the regulated markets listed in Appendix
A; or (c) application is to be made for admission to official listing on
one of the aforementioned stock exchanges or inclusion in one of the
aforementioned regulated markets and such admission or inclusion is to
take place within 12 months of their issue.
UNLISTED SECURITIES AND NOTES (ALL PORTFOLIOS)
Up to a total of 10% of the net assets of each Portfolio may be invested
in:
(a) securities that are consistent with the Portfolio's investment
objective and policies, which are not admitted to official listing
on one of the stock exchanges or included on one of the regulated
markets, described above;
(b) interests in loans which are portions of an overall loan granted
by a third party and for which a note has been issued (Notes),
provided these Notes can be assigned at least twice after purchase
by the Portfolio, and the Note was issued by:
- the Federal Republic of Germany (Germany), a special
purpose fund of Germany, a state of Germany, the European
Union or a member state of the Organization for Economic
Cooperation and Development (an OECD Member),
- another German domestic authority, or a regional government
or local authority of another Member State or another state
party to the CEEA for which a zero weighting was notified
according to Article 7 of the Council Directive 89/647/EEC
of 18 December 1989 on a solvency ratio for credit
institutions (Official Journal EC No. L386, p. 14),
- other corporate bodies or institutions organized under
public law and registered domestically in Germany or in
another Member State or another state party to the CEEA,
- other debtors, if guaranteed as to the payment of interest
and repayment of principal by one of the aforementioned
bodies, or
- companies which have issued securities which are admitted
to official listing on a German or other foreign stock
exchange.
Investments in Notes are subject to each Portfolio's overall limitation
on fixed income securities (30% for the Japanese Equity Portfolio and 20%
for all other Portfolios).
The current Member States, the states party to the CEEA and OECD Members
are listed in Appendix A.
INVESTMENT OBJECTIVE AND POLICIES
The investment objectives and policies of each Fund and its corresponding
Portfolio are identical, unless otherwise specified. Accordingly, references
below to a Fund also include its corresponding Portfolio unless the context
requires otherwise. Similarly, references to a Portfolio also include its
corresponding Fund unless the context requires otherwise.
A Fund's investment objectives and its fundamental investment policies cannot
be changed unless authorized by the "vote of a majority of its outstanding
voting securities" which is defined as a vote of (i) 67% or more of the
outstanding voting securities present at a meeting, if the holders of more
than 50% of the outstanding voting securities are present in person or
represented by proxy; or (ii) more than 50% of the outstanding voting
securities, whichever is less. A Fund's non-fundamental investment policies,
however, may be changed by the Board without shareholder approval.
Shareholders will be notified before any material change in these limitations
becomes effective. Whenever a Fund is requested to vote on a change in the
fundamental investment policies of its corresponding Portfolio, the
Corporation will hold a meeting of Fund shareholders and will cast its votes
as instructed by such Fund's shareholders.
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Unless otherwise noted and except with respect to borrowing money, there will be
no violation of any investment restriction if that restriction is complied with
at the time the relevant action is taken even if there is a later change in
market value of an investment, in net or total assets, in the securities rating
of the investment, or any other later change.
FUNDAMENTAL INVESTMENT POLICIES
Each Portfolio is classified as "non-diversified" under the 1940 Act,
which means that each corresponding Fund is not limited by the 1940 Act with
respect to the portion of its assets which may be invested in securities of a
single company (although certain diversification requirements are in effect
imposed by Code). The possible assumption of large positions in the securities
of a small number of companies may cause the performance of a Fund to fluctuate
to a greater extent than that of a diversified investment company as a result of
changes in the financial condition or in the market's assessment of the
companies.
TOP 50 WORLD will invest at least 65% of its total assets in equity
securities. TOP 50 EUROPE will invest at least 65% of its total assets in the
equity securities of issuers located in European countries. TOP 50 ASIA will
invest at least 65% of its total assets in the equity securities of issuers with
a domicile or business focus in Asian countries. TOP 50 US will invest at least
65% of its total assets in the equity securities of issuers located in the
United States.
At least 65% of the EUROPEAN MID-CAP Portfolio's total assets are
invested in European equity securities issued by companies with market
capitalizations of between $115 million and $19 billion. At least 65% of the
JAPANESE EQUITY Portfolio's total assets are invested in equity securities
issued by Japanese companies, which may include, for the purposes of meeting
such 65% minimum, up to 5% of the total assets in securities that grant the
right to acquire Japanese securities.
No Portfolio may purchase securities or other obligations of issuers
conducting their principal business activity in the same industry if its
investments in such industry would equal or exceed 25% of the value of the
Portfolio's total assets, provided that the foregoing limitation shall not apply
to investments in securities issued by the U.S. government or its agencies or
instrumentalities. Unless Sections 8(b)(1) and 13(a) of the 1940 Act or any SEC
or SEC staff interpretations thereof are amended or modified and except that the
Corporation may invest all of each Fund's assets in its corresponding Portfolio,
each of the Funds and its corresponding Portfolio may not:
1. Purchase any security if, as a result, 25% or more of its total assets
would be invested in securities of issuers in any single industry. This
limitation shall not apply to securities issued or guaranteed as to
principal or interest by the U.S. government or instrumentalities.
2. Issue senior securities. For purposes of this restriction, borrowing
money in accordance with paragraph 3 below, making loans in accordance
with paragraph 7 below, the issuance of Shares in multiple classes or
series, the purchase or sale of options, futures contracts, forward
commitments, swaps and transactions in repurchase agreements are not
deemed to be senior securities.
3. Borrow money, except in amounts not to exceed one-third of the Fund's
total assets (including the amount borrowed) (i) from banks for temporary
or short-term purposes or for the clearance of transactions, (ii) in
connection with the redemption of interests in the Portfolio or Fund
Shares or to finance failed settlements of portfolio trades without
immediately liquidating portfolio securities or other assets, (iii) in
order to fulfill commitments or plans to purchase additional securities
pending the anticipated sale of other portfolio securities or assets and
(iv) pursuant to reverse repurchase agreements entered into by the
Portfolio.
4. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Portfolio
may be deemed to be an underwriter under the Securities Act of 1933 (the
"1933 Act").
5. Purchase or sell real estate except that a Portfolio may (i) acquire or
lease office space for its own use, (ii) invest in securities of issuers
that invest in real estate or interests therein, (iii) invest in
securities that are secured by
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<PAGE>
real estate or interests therein, (iv) purchase and sell mortgage-related
securities and (v) hold and sell real estate acquired by the Portfolio as
a result of the ownership of securities.
6. Purchase or sell commodities or commodity contracts, except the Portfolio
may purchase and sell financial futures contracts, options on financial
futures contracts and warrants and may enter into swap and forward
commitment transactions.
7. Make loans, except that the Portfolio may (i) lend portfolio securities
with a value not exceeding one-third of the Portfolio's total assets,
(ii) enter into repurchase agreements, and (iii) purchase all or a
portion of an issue of debt securities (including privately issued debt
securities), bank loan participation interests, bank certificates of
deposit, bankers' acceptances, debentures or other securities, whether or
not the purchase is made upon the original issuance of the securities.
NON-FUNDAMENTAL INVESTMENT POLICIES
8. Up to 5% of the total assets of each Portfolio underlying the Funds
(except TOP 50 US) may be invested in shares of investment companies,
provided these shares are offered to the public without limitation on the
number of shares, the shareholders have the right to redeem their shares,
and the investment companies have investment policies consistent with
those of the Fund. The Portfolio underlying TOP 50 US may invest up to 5%
of its total assets in the securities of any one investment company and
invest in the aggregate up to 10% of its total assets in the securities
of investment companies as a group. Each Portfolio may not own more than
3% of the total outstanding voting stock of any other investment company.
As a shareholder of another investment company, a Portfolio would bear,
along with other shareholders, its pro rata portion of the other
investment company's expenses, including advisory fees.
9. Acquire any illiquid investments, such as repurchase agreements with more
than seven days to maturity, if as a result thereof, more than 15% of the
market value of the Portfolio's net assets would be in investments that
are illiquid;
10. Invest more than 10% of its net assets in unlisted securities and Notes;
11. Sell any security short, except to the extent permitted by the 1940 Act.
Transactions in futures contracts and options shall not constitute
selling securities short; or
12. Purchase securities on margin, but a Portfolio may obtain such short term
credits as may be necessary for the clearance of transactions.
In addition to the investment policies discussed herein and in the
Prospectus, each Fund, except Top 50 US and its corresponding Portfolio, has
adopted additional non-fundamental investment policies. These non-fundamental
investment policies require that each such Fund and its corresponding Portfolio
may not (except that the Corporation may invest all of each Fund's assets in its
corresponding Portfolio):
13. Invest more than 10% of its net assets in the securities of any one
issuer or invest more than 40% of its net assets in the aggregate in the
securities of those issuers in which the Portfolio has invested in excess
of 5% but not more than 10% of its net assets. For purposes of this
restriction, mortgage bonds and municipal bonds as well as bonds and
Notes issued by Germany, the states of Germany, a member state of the EU,
a state party to the Convention on the European Economic Area ("CEEA"), a
member state of the OECD or the EU shall be valued at half of their
value. Bonds of credit institutions situated in a member state of the EU
or state party to the CEEA, shall be valued at half their value, provided
that the credit institutions are by law subject to a special public
supervision to protect the holders of such bonds, and provided the funds
raised through the issue of such bonds are invested in accordance with
the legal provisions in assets, which provide sufficient coverage for the
ensuing liabilities throughout the entire life of the bonds, and which in
case of deficiency of the issuer are earmarked for prior redemption of
principal and payment of interest. Securities and Notes issued by
companies in the same affiliated group shall be considered securities of
the same issuer (borrower);
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14. Purchase bonds of the same issuer to the extent that their total value
exceeds 10% of the total value of the bonds outstanding of the same
issuer. This restriction does not apply to bonds issued by a national
government, a local authority of a member state of the EU, a state party
to the CEEA or by the EU, or if one of these bodies guarantees the
payment of interest or the repayment of principal. For purchases, the
above limit need not be complied with if the total value of the
outstanding bonds of the same issuer cannot be determined; and
15. Purchase non-voting shares of the same issuer to the extent that the
total value exceeds 10% of the total value of non-voting shares of the
issuer.
PORTFOLIO TURNOVER
Although the Portfolios do not intend to invest for the purpose of
seeking short-term Portfolio's profits, securities in the Portfolios will be
sold whenever the Advisors believe it is appropriate to do so in light of the
investment objective of each Fund and each Portfolio, without regard to the
length of time a particular security may have been held. The estimated annual
portfolio turnover rate for the Top 50 World Portfolio, Top 50 Europe Portfolio,
Top 50 Asia Portfolio, Top 50 US Portfolio, European Mid-Cap Portfolio, and
Japanese Equity Portfolio is generally not expected to exceed 105%, 80%, 100%,
80%, 180%, and 150%, respectively.
<TABLE>
<CAPTION>
PORTFOLIO TURNOVER RATE AS OF
PORTFOLIO AUGUST 31, 1999 AUGUST 31, 2000
--------------------------------------------------------
<S> <C> <C>
Top 50 World 79% 101%
Top 50 Europe 61% 65%
Top 50 Asia 51% 48%
Top 50 US 58% 68%
European Mid-Cap 89% 72%
Japanese Equity 133% 120%
</TABLE>
A 100% annual turnover rate would occur, for example, if all portfolio
securities (excluding short-term obligations) were replaced once in a period of
one year, or if 10% of the portfolio securities were replaced ten times in one
year. The rate of portfolio turnover of each Portfolio may exceed that of
certain other mutual funds with the same investment objective. The amount of
brokerage commissions and taxes on realized capital gains to be borne by the
shareholders of a Fund tend to increase as the level of portfolio activity
increases.
WHAT DO SHARES COST?
MARKET VALUES
Each Fund computes its net asset value once daily on Monday through
Friday as described in the Prospectus. The net asset value will not be computed
on the day the following legal holidays 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. On days when U.S. trading
markets close early in observance of these holidays, each Fund and its
corresponding Portfolio would expect to close for purchases and redemptions at
the same time. The days on which net asset value is determined are the Fund's
business days.
A Fund's net asset value per share fluctuates. The net asset value for
shares of each class is determined by adding the interest of such class of
shares in the market value of a Fund's total assets (i.e., the value of its
investment in the Portfolio and other assets), subtracting the interest of such
class of shares in the liabilities of such Fund and those attributable to such
class of shares, and dividing the remainder by the total number of such class of
shares outstanding. The net asset value for each class of shares may differ due
to the variance in daily net income realized by each class. Such variance will
reflect only accrued net income to which the shareholders of a particular class
are
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entitled. Values of assets in each Portfolio are determined on the basis of
their market value or where market quotations are not determinable, at fair
value as determined by the Trustees of the Portfolio Trust.
Market values of portfolio securities are determined as follows:
The fixed income portion of the Portfolios and portfolio securities with a
maturity of 60 days or more, including securities that are listed on an exchange
or traded over the counter, are valued using prices supplied daily by an
independent pricing service or services that (i) are based on the last sale
price on a national securities exchange or, in the absence of recorded sales, at
the average of readily available closing bid and asked prices on such exchange
or at the average of readily available closing bid and asked prices in the
over-the-counter market, if such exchange or market constitutes the broadest and
most representative market for the security and (ii) in other cases, take into
account various factors affecting market value, including yields and prices of
comparable securities, indication as to value from dealers and general market
conditions. If such prices are not supplied by a Portfolio's independent pricing
service, such securities are priced in accordance with procedures adopted by the
Trustees of the Portfolio Trust. All portfolio securities with a remaining
maturity of less than 60 days are valued by the amortized cost method.
The value of investments listed on a U.S. securities exchange, other than
options on stock indexes, is based on the last sale prices on the NYSE generally
at 4:00 p.m. (U.S. Eastern time) or, in the absence of recorded sales, at the
average of readily available closing bid-and-asked prices on such exchange.
Securities listed on a foreign exchange considered by the Advisor to be a
primary market for the securities are valued at the last quoted sale price
available before the time when net assets are valued. Unlisted securities, and
securities for which the Advisor determines the listing exchange is not a
primary market, are valued at the average of the quoted bid-and-asked prices in
the over-the-counter market. The value of each security for which readily
available market quotations exist is based on a decision as to the broadest and
most representative market for such security. For purposes of calculating net
asset value, all assets and liabilities initially expressed in foreign
currencies will be converted into U.S. dollars at the prevailing market rates
available at the time of valuation.
Options on stock indexes traded on U.S. national securities exchanges are
valued at the close of options trading on such exchanges which is currently 4:10
p.m. (U.S. Eastern time). Stock index futures and related options, which are
traded on U.S. futures exchanges, are valued at their last sales price as of the
close of such futures exchanges which is currently 4:15 p.m. (U.S. Eastern
time). Options, futures contracts and warrants traded on a foreign stock
exchange or on a foreign futures exchange are valued at the last price available
before the time when the net assets are valued. Securities or other assets for
which market quotations are not readily available (including certain restricted
and illiquid securities) are valued at fair value in accordance with procedures
established by and under the general supervision and responsibility of the
Trustees of the Portfolio Trust. Such procedures include the use of independent
pricing services that use prices based upon yields or prices of securities of
comparable quality, coupon, maturity and type; indications as to values from
dealers; and general market conditions.
Trading in securities on most foreign exchanges and over-the-counter
markets is normally completed before the close of the NYSE and may also take
place on days on which the NYSE is closed. If events materially affecting the
value of securities occur between the time when the exchange on which they are
traded closes and the time when a Portfolio's net asset value is calculated,
such securities will be valued at fair value in accordance with procedures
established by and under the general supervision of the Trustees, although the
actual calculation may be done by others.
HOW ARE THE FUNDS SOLD?
Under the Distributor's Contract with the Funds, the Distributor (ICC
Distributors, Inc.) offers Shares on a continuous, best-efforts basis. ICC
Distributors, Inc. is a Delaware corporation organized in August 1995, and is
the principal distributor for a number of investment companies. In connection
with any sale, the Distributor may from time to time offer certain items of
nominal value to any shareholder or investor.
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SUBSCRIPTIONS
Under normal circumstances, a Fund will sell Shares by check or wire
transfer of funds, as described in the Prospectuses. Shareholders may opt to
subscribe to a Fund in whole or in part by a contribution of readily available
marketable securities to a Portfolio of a Fund.
PURCHASING SHARES THROUGH AN INVESTMENT PROFESSIONAL
The investment professional which maintains investor accounts in Class B
Shares or Class C Shares with a Fund must do so on a fully disclosed basis
unless it accounts for share ownership periods used in calculating the CDSC. In
addition, advance payments made to an investment professional may be subject to
reclaim by the Distributor for accounts transferred to the investment
professional which does not maintain investor accounts on a fully disclosed
basis and does not account for share ownership periods.
SUPPLEMENTAL PAYMENTS
Investment professionals who initiate and are responsible for
purchases of $1 million or more may be paid fees out of the assets of the
Distributor (but not out of Fund assets). Securities laws may require certain
investment professionals such as depository institutions to register as
dealers. The Distributor may pay dealers an amount up to 4.0% of the net
asset value of Class B Shares and 1.0% of the net asset value of Class C
Shares purchased by their clients or customers as an advance payment. These
payments will be made directly by the Distributor from its assets, and will
not be made from the assets of a Fund. Dealers may voluntarily waive receipt
of all or any portion of these advance payments. The Distributor may pay all
or a portion of the distribution fee discussed above to investment
professionals that waive all or any portion of the advance payments.
DISTRIBUTION AND SERVICES PLANS
Under a distribution and services plan adopted in accordance with Rule
12b-1 of the 1940 Act, Class A Shares, Class B Shares and Class C Shares are
subject to a distribution plan (Distribution Plan), and to a service plan
(Service Plan).
Under the Distribution Plan, Class A Shares will pay a fee to the
Distributor in an amount computed at an annual rate of 0.25% of the average
daily net assets of Class A Shares. Class B Shares and Class C Shares will pay a
fee to the Distributor in an amount computed at an annual rate of 0.75% of the
average daily net assets of Class B Shares and Class C Shares. The Distributor
uses these fees to finance any activity which is principally intended to result
in the sale of Class A Shares, Class B Shares and Class C Shares of a Fund
subject to the Distribution Plan. Because distribution fees to be paid by a Fund
to the Distributor may not exceed an annual rate of 0.25% of Class A Shares and
0.75% of Class B Shares' and Class C Shares' average daily net assets, it will
take the Distributor a number of years to recoup the expenses, including
payments to other dealers, it has incurred for its sales services and
distribution-related support services pursuant to the Distribution Plan. The
Distribution Plan is a compensation-type plan. As such, a Fund makes no payments
to the Distributor except as described above. Therefore, a Fund does not pay for
unreimbursed expenses of the Distributor, including amounts expended by the
Distributor in excess of amounts received by it from a Fund, interest, carrying
or other financing charges in connection with excess amounts expended, or the
Distributor's overhead expenses. However, the Distributor may be able to recover
such amounts or may earn a profit from payments made by shares under the
Distribution Plan.
Under the Service Plan, each Fund pays to ICC Distributors, Inc. for the
provision of certain services to the holders of Class B Shares and Class C
Shares a fee computed at an annual rate of 0.25% of the average daily net assets
of each such class of shares. The services provided may include personal
services relating to shareholder accounts, such as answering shareholder
inquiries regarding the Fund, providing reports and other information to
shareholders and investment professionals, and services related to the
maintenance of shareholder accounts, and other services. ICC Distributors, Inc.
determines the amounts to be paid to investment professionals, the schedules of
such fees and the basis upon which such fees will be paid.
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Furthermore, with respect to Class A Shares, Class B Shares and Class C
Shares, the Distributor may offer to pay a fee from its own assets to financial
institutions as financial assistance for providing substantial sales services,
distribution related support services, or shareholder services.
REDEMPTION
A 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, a Fund will redeem Shares by check or by wire
transfer of funds, as described in the Prospectuses. 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 readily marketable 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 "What Do Shares Cost?," and such valuation will be
made as of the same time the redemption price is determined. The Fund, however,
has elected to be governed by Rule 18f-1 under the 1940 Act pursuant under which
it is obligated to redeem Shares solely in cash up to the lesser of $250,000 or
1% of its net asset value during any 90-day period for any one shareholder.
Certain changes in a Portfolio's investment objective, policies or
restrictions, or a failure by a Fund's shareholders to approve a change in its
corresponding Portfolio's investment objective or restrictions, may require
withdrawal of the Fund's interest in the Portfolio. Any such withdrawal could
result in a distribution in kind of portfolio securities (as opposed to a cash
distribution) from the Portfolio which may or may not be readily marketable. The
distribution in kind may result in the Fund having a less diversified portfolio
of investments or adversely affect the Fund's liquidity, and the Fund could
incur brokerage, tax or other charges in converting the securities to cash.
ACCOUNT AND SHARE INFORMATION
VOTING RIGHTS
Each share of a Fund or class shall have equal rights with each other
share of that Fund or class with respect to the assets of the Corporation
pertaining to that Fund or class. Upon liquidation of a Fund, shareholders of
each class are entitled to share pro rata in the net assets of the Fund
available for distribution to their class.
Shareholders of a Fund are entitled to one vote for each full share held
and to a fractional vote for fractional shares. Shareholders in each Fund
generally vote in the aggregate and not by class, unless the law expressly
requires otherwise or the Directors determine that the matter to be voted upon
affects only the interests of shareholders of a particular Fund or class of
shares. The voting rights of shareholders are not cumulative. Shares have no
preemptive or conversion rights (other than the automatic conversion of Class B
Shares into Class A Shares as described in the Prospectuses). Shares are fully
paid and nonassessable by the Corporation. It is the intention of the
Corporation not to hold meetings of shareholders annually. The Directors of the
Corporation may call meetings of shareholders for action by shareholder vote as
may be required by the 1940 Act or as may be permitted by the Articles of
Incorporation or By-laws.
Directors may be removed by the Board or by shareholders at a special
meeting. A special meeting of shareholders will be called by the Board upon the
written request of shareholders who own at least 10% of the Corporation's
outstanding shares of all series entitled to vote.
The Corporation's Articles of Incorporation provide that the presence in
person or by proxy of the holders of record of one third of the shares
outstanding and entitled to vote shall constitute a quorum at all meetings of
44
<PAGE>
shareholders of a Fund, except as otherwise required by applicable law. The
Articles of Incorporation further provide that all questions shall be decided by
a majority of the votes cast at any such meeting at which a quorum is present,
except as otherwise required by applicable law.
The Corporation's Articles of Incorporation provide that, at any meeting
of shareholders of a Fund or Class, a financial intermediary may vote any shares
as to which that financial intermediary is the agent of record and which are
otherwise not represented in person or by proxy at the meeting, proportionately
in accordance with the votes cast by holders of all shares otherwise represented
at the meeting in person or by proxy as to which that financial intermediary is
the agent of record. Any shares so voted by a financial intermediary are deemed
represented at the meeting for purposes of quorum requirements.
Whenever the Corporation is requested to vote on a matter pertaining to a
Portfolio, the Corporation will vote its shares without a meeting of
shareholders of its corresponding Fund if the proposal is one that, if made with
respect to the Fund, would not require the vote of shareholders of the Fund, as
long as such action is permissible under applicable statutory and regulatory
requirements. For all other matters requiring a vote, the Corporation will hold
a meeting of shareholders of the Fund and, at the meeting of investors in its
corresponding Portfolio, the Corporation will cast all of its votes in the same
proportion as the votes of the Fund's shareholders even if all Fund shareholders
did not vote. Even if the Corporation votes all its shares at the Portfolio
Trust meeting, other investors with a greater pro rata ownership in the
Portfolio could have effective voting control of the operations of the
Portfolio.
As of November 27, 2000, the following shareholders owned of record,
beneficially, or both, 5% or more of outstanding Shares:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
FUNDS NAME AND ADDRESS OWNED OF BENEFICIALLY PERCENTAGE OF
RECORD OWNED OWNERSHIP
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EUROPEAN MID-CAP Deutsche Bank Securities Inc. X 45.91% of Class A Shares
C/F 360-01618-83
1251 6th Avenue
New York, NY 10020-1104
Merrill Lynch Pierce Fenner & Smith X 12.64% of Class A Shares
Attn: Fund Administration Team
4800 Deer Lake Drive 3rd Floor
Jacksonville, FL 32246-6484
Fidelity Investments X 7.92% of Class A Shares
Institutional Operations Co., Inc.
(FIIOC) As Agent for Certain
Employee Benefit Plans
100 Magellan Way KW1C
Covington, KY 41015-1999
Merrill Lynch Pierce Fenner & Smith X 51.97% of Class B Shares
Attn: Fund Administration Team
4800 Deer Lake Drive 3rd Floor
Jacksonville, FL 32246-6484
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
FUNDS NAME AND ADDRESS OWNED OF BENEFICIALLY PERCENTAGE OF
RECORD OWNED OWNERSHIP
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Merrill Lynch Pierce Fenner & Smith X 53.89% of Class C Shares
Attn: Fund Administration Team
4800 Deer Lake Drive 3rd Floor
Jacksonville, FL 32246-6484
------------------------------------------------------------------------------------------------------------------------------------
JAPANESE EQUITY Merrill Lynch Pierce Fenner & Smith X 29.96% of Class A Shares
Attn: Fund Administration Team
4800 Deer Lake Drive 3rd Floor
Jacksonville, FL 32246-6484
Donaldson Lufkin Jenrette Securities X 5.88% of Class A Shares
Corporation, Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
LPL Financial Services X 5.18% of Class A Shares
A/C 3968-8469
9785 Towne Centre Drive
San Diego, CA 92121-1968
Merrill Lynch Pierce Fenner & Smith X 81.54% of Class B Shares
Attn: Fund Administration Team
4800 Deer Lake Drive 3rd Floor
Jacksonville, FL 32246-6484
Investment Company Capital Corp. X 100.00% of Class C Shares
1 South Street
Baltimore, MD 21202-3298
------------------------------------------------------------------------------------------------------------------------------------
TOP 50 WORLD Charles Schwab & Co, Inc. X 25.21% of Class A Shares
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
Fidelity Investments X 25.14% of Class A Shares
Institutional Operations Co., Inc.
(FIIOC) As Agent for Certain
Employee Benefit Plans
100 Magellan Way KW1C
Covington, KY 41015-1999
Merrill Lynch Pierce Fenner & Smith X 35.67% of Class B Shares
Attn: Fund Administration Team
4800 Deer Lake Drive 3rd Floor
Jacksonville, FL 32246-6484
Parker Hunter Incorporated X 6.18% of Class B Shares
P.O. Box 7629
3525 Ellwood Road
New Castle, PA 16101-6121
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
FUNDS NAME AND ADDRESS OWNED OF BENEFICIALLY PERCENTAGE OF
RECORD OWNED OWNERSHIP
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Company Capital Corp. X 88.74% of Class C Shares
1 South Street
Baltimore, MD 21202-3298
------------------------------------------------------------------------------------------------------------------------------------
TOP 50 ASIA Bankers Trust Company X 62.20% of Class A Shares
FBO 2499992424
P.O. Box 9005
Church Street Station
New York, NY
Fidelity Investments X 11.18% of Class A Shares
Institutional Operations Co., Inc.
(FIIOC) As Agent for Certain
Employee Benefit Plans
100 Magellan Way KW1C
Covington, KY 41015-1999
Merrill Lynch Pierce Fenner & Smith X 9.94% of Class A Shares
Attn: Fund Administration Team
4800 Deer Lake Drive 3rd Floor
Jacksonville, FL 32246-6484
Bear Stearns Securities Corp. X 5.29% of Class A Shares
FBO 102-22352-10
1 Metrotech Center North
Brooklyn, NY 11201-3870
------------------------------------------------------------------------------------------------------------------------------------
TOP 50 ASIA Merrill Lynch Pierce Fenner & Smith X 53.72% of Class B Shares
Attn: Fund Administration Team
4800 Deer Lake Drive 3rd Floor
Jacksonville, FL 32246-6484
Investment Company Capital Corp. X 69.02% of Class C Shares
1 South Street
Baltimore, MD 21202-3298
NFSC FEBO #HDM-389072 X 13.09% of Class C Shares
NFSC / FMTC IRA
6850 Lake Devonwood Drive
Fort Meyers, FL 33908-7201
First Clearing Corp. X 8.05% of Class C Shares
A/C 2071-3776
605 Lenox Ct.
Champaign, IL 61822-7800
Merrill Lynch Pierce Fenner & Smith X 7.32% of Class C Shares
Attn: Fund Administration Team
4800 Deer Lake Drive 3rd Floor
Jacksonville, FL 32246-6484
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
FUNDS NAME AND ADDRESS OWNED OF BENEFICIALLY PERCENTAGE OF
RECORD OWNED OWNERSHIP
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TOP 50 US Bankers Trust Company X 20.21% of Class A Shares
FBO 2591854040
P.O. Box 9005
Church Street Station
New York, NY 10008
Fidelity Investments X 14.16% of Class A Shares
Institutional Operations Co., Inc.
(FIIOC) As Agent for Certain
Employee Benefit Plans
100 Magellan Way KW1C
Covington, KY 41015-1999
Parker Hunter Incorporated X 6.83% of Class B Shares
P.O. Box 7629
3525 Ellwood Road
New Castle, PA 16101-6121
Merrill Lynch Pierce Fenner & Smith X 6.60% of Class B Shares
Attn: Fund Administration Team
4800 Deer Lake Drive 3rd Floor
Jacksonville, FL 32246-6484
Parker Hunter Incorporated X 5.38% of Class B Shares
U/A DTD 2/1/80
404 Wellington Ct.
Venice, FL 34292-3157
------------------------------------------------------------------------------------------------------------------------------------
TOP 50 US Advest Inc. X 27.07% of Class C Shares
768-00246-14
90 State House Square
Hartford, CT 06103-3708
Merrill Lynch Pierce Fenner & Smith X 21.06% of Class C Shares
Attn: Fund Administration Team
4800 Deer Lake Drive 3rd Floor
Jacksonville, FL 32246-6484
Donaldson Lufkin Jenrette Securities X 22.99% of Class C Shares
Corporation, Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
DB Alex. Brown LLC X 6.33% of Class C Shares
FBO 248-98894-16
P.O. Box 1346
Baltimore, MD 21203-1346
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
FUNDS NAME AND ADDRESS OWNED OF BENEFICIALLY PERCENTAGE OF
RECORD OWNED OWNERSHIP
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TOP 50 EUROPE Fidelity Investments X 40.44% of Class A Shares
Institutional Operations Co., Inc.
(FIIOC) As Agent for Certain
Employee Benefit Plans
100 Magellan Way KW1C
Covington, KY 41015-1999
Merrill Lynch Pierce Fenner & Smith X 16.85% of Class A Shares
Attn: Fund Administration Team
4800 Deer Lake Drive 3rd Floor
Jacksonville, FL 32246-6484
Bankers Trust Co. X 12.89% of Class A Shares
FBO 2508262424
P.O. Box 9005
New York, NY 10007
NFSC FBBO #AB1-003859 X 5.48% of Class A Shares
P.O. Box 191429
San Juan, PR 00919-1429
Merrill Lynch Pierce Fenner & Smith X 43.65% of Class B Shares
Attn: Fund Administration Team
4800 Deer Lake Drive 3rd Floor
Jacksonville, FL 32246-6484
Merrill Lynch Pierce Fenner & Smith X 66.77% of Class C Shares
Attn: Fund Administration Team
4800 Deer Lake Drive 3rd Floor
Jacksonville, FL 32246-6484
Advest Inc. X 5.08% of Class C Shares
768-00246-14
90 Steak House Square
Hartford, CT 06103-3708
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Shareholders owning 25% or more of outstanding Shares may be in
control and be able to affect the outcome of certain matters presented
for a vote of shareholders.
Interests in a Portfolio have no preference, preemptive,
conversion or similar rights and are fully paid and non-assessable. The
Portfolio Trust is not required to hold annual meetings of investors, but
will hold special meetings of investors when, in the judgment of its
Trustees, it is necessary or desirable to submit matters for an investor
vote. Each investor is entitled to a vote in proportion to the share of
its investment in a Portfolio.
As used in this SAI and the Prospectuses, the term "majority of
the outstanding voting securities" (as defined in the 1940 Act) currently
means the vote of (i) 67% or more of the outstanding voting securities
present at a meeting, if the holders of more than 50% of the outstanding
voting securities are present in person or represented by proxy; or (ii)
more than 50% of the outstanding voting securities, whichever is less.
In addition to selling beneficial interests to its corresponding
Fund, a Portfolio may sell beneficial interests to other mutual funds or
institutional investors. Such investors will invest in a Portfolio on the
same terms and
49
<PAGE>
conditions and will pay a proportionate share of the Portfolio's
expenses. However, the other investors investing in the Portfolio may
sell shares of their own fund using a different pricing structure than
the corresponding Fund. Such different pricing structures may result in
differences in returns experienced by investors in other funds that
invest in the Portfolio. Such differences in returns are not uncommon and
are present in other mutual fund structures.
The Declaration of Trust of the Portfolio Trust provides that a
Fund and other entities investing in a Portfolio (e.g., other investment
companies, insurance company separate accounts and common and commingled
trust funds) are each liable for all obligations of the Portfolio.
However, the risk of a Fund incurring financial loss on account of such
liability is limited to circumstances in which both inadequate insurance
existed and the Portfolio itself was unable to meet its obligations.
Accordingly, the Directors of the Corporation believe that neither the
Funds nor their shareholders will be adversely affected by reason of the
investment of all of the assets of a Fund in its corresponding Portfolio.
TAX INFORMATION
FEDERAL TAXES
Each Fund intends to meet requirements of Subchapter M of the
Internal Revenue Code (the "Code") applicable to regulated investment
companies. If these requirements are not met, it will not receive special
tax treatment and will pay federal, and possibly state and local,
corporate income tax on its net income, and distributions to shareholders
will be taxed as ordinary dividend income to the extent of each Fund's
earnings and profits.
Each Fund will be treated as a single, separate entity for federal
income tax purposes so that income earned and capital gains and losses
realized by the Corporation's other Funds will be separate from those
realized by the Fund. All Funds are entitled to a loss carry-forward,
which may reduce the taxable gain that those Funds would realize, and to
which the shareholder would otherwise be subject, in the future. As of
August 31, 2000, the Top 50 US Fund had available capital loss
carry-forwards to be utilized to offset future net capital gains.
To avoid federal excise taxes, the Code requires that a Fund
distribute to shareholders by December 31 of each year at least 98% of
its taxable ordinary income earned during the calendar year and at least
98% of its capital gain net income earned during the 12 month period
ending October 31; plus 100% of any undistributed amounts from the prior
year. The Funds intend to make sufficient distributions to avoid these
excise taxes, but can give no assurances that all taxes will be
eliminated.
Each Fund intends to distribute at least annually to its
shareholders substantially all of its net investment income and realized
net capital gains. Each Portfolio intends to elect to be treated as a
partnership for U.S. federal income tax purposes. As such, each Portfolio
generally should not be subject to U.S. taxes.
FOREIGN INVESTMENTS (ALL PORTFOLIOS EXCEPT TOP 50 US)
If a Portfolio (with the exception of Top 50 US) purchases foreign
securities, the investment income of the Portfolio may be subject to
foreign withholding or other taxes that could reduce the return on these
securities. Tax treaties between the United States and foreign countries,
however, may reduce or eliminate the amount of foreign taxes to which the
Portfolios would be subject. The effective rate of foreign tax cannot be
predicted since the amount of a Portfolio's assets to be invested within
various countries is uncertain. However, each Portfolio (with the
exception of Top 50 US) intends to operate so as to qualify for
treaty-reduced tax rates where available.
If a Portfolio invests in futures contracts, options and certain
other investments (such as the stock of foreign corporations, which are
as Passive Foreign Investment Companies (PFICs)), the Portfolio may be
subject special tax rules. In a given case, these rules may accelerate
income to a Fund, defer its losses, convert short-term capital losses
into long-term capital losses, or otherwise affect the character of a
Fund's net income. These rules could therefore effect the amount, timing
and character of distributions to shareholders.
50
<PAGE>
If more than 50% of the value of a Portfolio's assets at the end
of the tax year is represented by stock or securities of foreign
corporations, its corresponding Fund intends to qualify for certain Code
stipulations that would allow the Fund to elect pass-through the pro-rata
share of foreign taxes paid by the Fund to the shareholders, who may be
able to claim a foreign tax credit or deduction on their U.S. income tax
returns. The Code may limit a shareholder's ability to claim a foreign
tax credit. Shareholders who elect to deduct their portion of the Fund's
foreign taxes rather than take the foreign tax credit must itemize
deductions on their income tax returns.
STATE TAXES
Each Fund may be subject to state or local taxes in jurisdictions
in which that Fund is deemed to be doing business. In addition, the
treatment of a Fund and its for state and local tax purposes might differ
from treatment under the federal income tax laws. Shareholders should
consult their own tax advisors with regarding state or local taxes
affecting their investment in a Fund.
U.S. federal regulations require that a shareholder provide a
certified taxpayer identification number ("TIN") upon opening an account.
A TIN is either the Social Security number or employer identification
number of the record owner of the account. Failure to furnish a certified
TIN to a Fund could subject a shareholder to a penalty which will be
imposed by the IRS on the Fund and passed on by the Fund to the
shareholder. With respect to individual investors and certain
non-qualified retirement plans, U.S. federal regulations generally
require the Funds to withhold ("backup withholding") and remit to the
U.S. Treasury 31% of any dividends and distributions (including the
proceeds of any redemption) payable to a shareholder if such shareholder
fails to certify either that the TIN furnished in connection with opening
an account is correct, or that such shareholder has not received notice
from the IRS of being subject to backup withholding as a result of a
failure to properly report taxable dividend or interest income on a
federal income tax return. Furthermore, the IRS may notify the Funds to
institute backup withholding if the IRS determines a shareholder's TIN is
incorrect. Backup withholding is not an additional tax; amounts withheld
may be credited against the shareholder's U.S. federal income tax
liability.
TAX TREATMENT OF REINVESTMENTS
Generally, a reinvestment of the proceeds of a redemption of
shares in a Fund will not alter the federal income tax status of any
capital gain realized on the redemption of the shares. However, any loss
on the disposition of the shares in a Fund will be disallowed to the
extent shares of the same Fund are purchased within a 61-day period
beginning 30 days before and ending 30 days after the disposition of
shares. Further, if the proceeds are reinvested within 90 days after the
redeemed shares were acquired, the sales charge imposed on the original
acquisition, to the extent of the reduction in the sales charge on the
reinvestment, will not be taken into account in determining gain or loss
on the disposition of the original shares, but will be treated instead as
incurred in connection with the acquisition of the replacement shares.
WHO MANAGES AND PROVIDES SERVICES TO THE FUNDS?
OFFICERS AND BOARD OF DIRECTORS OF THE CORPORATION AND TRUSTEES OF THE
PORTFOLIO TRUST
The Directors of the Corporation, Trustees of the Portfolio Trust
and their executive officers are responsible for managing the Corporation
and Portfolio Trust's business affairs and for exercising all the
Corporation and Portfolio Trust's powers except those reserved for the
shareholders.
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 R. BURT, Director / Trustee (2/3/47)
51
<PAGE>
IEP Advisors, LLP, 1275 Pennsylvania Avenue, NW, 10th Floor, Washington,
DC 20004. Chairman, IEP Advisors, Inc.; Chairman of the Board, Weirton
Steel Corporation; Member of the Board, Archer Daniels Midland Company
(agribusiness operations), Hollinger International, Inc. (publishing),
Homestake Mining (mining and exploration), HCL Technologies (information
technology) and Anchor Technologies (gaming software and equipment);
Director, Mitchell Hutchins family of funds (registered investment
companies); and Member, Textron Corporation International Advisory
Council. Formerly, Partner, McKinsey & Company (consulting), 1991-1994;
U.S. Chief Negotiator in Strategic Arms Reduction Talks (START) with
former Soviet Union and U.S. Ambassador to the Federal Republic of
Germany, 1985-1989.
*RICHARD T. HALE, President (as of 12/19/00) (7/17/45)
Managing Director, DB Alex. Brown LLC (formerly BT Alex. Brown
Incorporated), Deutsche Asset Management Americas; Director and
President, Investment Company Capital Corp. (registered investment
advisor). Director and President, Deutsche Asset Management Mutual Funds
(registered investment companies). Chartered Financial Analyst. Formerly,
Director, ISI Family of Funds (registered investment companies).
JOSEPH R. HARDIMAN, Director / Trustee (5/27/37)
8 Bowen Mill Road, Baltimore, Maryland 21212. Private Equity Investor and
Capital Markets Consultant; Director, Wit Capital Group (registered
broker dealer), Corvis Corporation, (optical networks), The Nevis Fund
(registered investment company), and ISI Family of Funds (registered
investment companies). Formerly, Director, Circon Corp. (medical
instruments), November 1998-January 1999; President and Chief Executive
Officer, The National Association of Securities Dealers, Inc. and The
NASDAQ Stock Market, Inc., 1987-1997; Chief Operating Officer of Alex.
Brown & Sons Incorporated, (now DB Alex.Brown LLC), 1985-1987; and
General Partner, Alex. Brown & Sons Incorporated (now DB Alex. Brown
LLC), 1976-1985.
LOUIS E. LEVY, Director / Trustee (11/16/32)
26 Farmstead Road, Short Hills, New Jersey 07078. Household International
(banking and finance) and ISI Family of Funds (registered investment
companies). Formerly, Chairman of the Quality Control Inquiry Committee,
American Institute of Certified Public Accountants, 1992-1998; Trustee,
Merrill Lynch Funds for Institutions, 1991-1993; Adjunct Professor,
Columbia University-Graduate School of Business, 1991-1992; Director,
Kimberly-Clark Corporation, retired 2000 and Partner, KPMG Peat Marwick,
retired 1990.
EUGENE J. McDONALD, Director / Trustee (7/14/32)
Duke Management Company, Erwin Square, Suite 1000, 2200 West Main Street,
Durham, North Carolina 27705. Executive Vice President, Investment
Counsel Duke University (education, research and health care); Lead
Director, National Commerce Bank Corporation (NCBC) (banking); Director,
Victory Funds (registered investment companies); Chairman, Winston Hedged
Equity Group; Board Member, Red Hat, Inc. Formerly, Executive Vice
Chairman and Director, Central Carolina Bank & Trust (banking); Director,
AMBAC Treasurers Trust (registered investment company), DP Mann Holdings
(insurance) and ISI Family of Funds (registered investment companies);
President, Duke Management Company (investments), retired 2000.
REBECCA W. RIMEL, Director / Trustee (4/10/51)
The Pew Charitable Trusts, One Commerce Square, 2005 Market Street, Suite
1700, Philadelphia, Pennsylvania 19103-7017. President and Chief
Executive Officer, The Pew Charitable Trusts (charitable foundation); and
Director and Executive Vice President, The Glenmede Trust Company
(investment trust and wealth management). Formerly, Executive Director,
The Pew Charitable Trusts and Director, ISI Family of Funds (registered
investment companies).
*TRUMAN T. SEMANS, Director / Trustee (10/27/26)
52
<PAGE>
Brown Investment Advisory & Trust Company, 19 South Street, Baltimore, MD
21202. Vice Chairman, Brown Investment Advisory & Trust Company
(formerly, Alex.Brown Capital Advisory & Trust Company) and Director,
Virginia Hot Springs, Inc. (property management); Director of Agronex
(biotechnology). Formerly, Managing Director and Vice Chairman, Alex.
Brown & Sons Incorporated (now DB Alex.Brown LLC); Director, Investment
Company Capital Corp. (registered investment advisor) and Director, ISI
Family of Funds (registered investment companies).
ROBERT H. WADSWORTH, Director / Trustee (1/29/40)
4455 E. Camelback Road, Suite 261 E., Phoenix, Arizona 85018. President,
Investment Company Administration LLC, President, Trustee, Trust for
Investment Managers (registered investment company) and President,
Director, First Fund Distributors, Inc. (registered broker-dealer);
Director, The Germany Fund, Inc., The New Germany Fund, Inc., The Central
European Equity Fund, Inc., and Vice President, Professionally Managed
Portfolios and Advisors Series Trust (registered investment companies).
Formerly, President, Guinness Flight Investment Funds, Inc. (registered
investment companies).
CARL W. VOGT, ESQ., Director / Trustee (4/20/36)
Fulbright & Jaworski L.L.P., 801 Pennsylvania Avenue, N.W., Washington,
D.C. 20004-2604. Senior Partner, Fulbright & Jaworski L.L.P. (law);
Director, Yellow Corporation (trucking), American Science & Engineering
(x-ray detection equipment) and ISI Family of Funds (registered
investment companies). Formerly, Chairman and Member, National
Transportation Safety Board; Director, National Railroad Passenger
Corporation (Amtrak); Member, Aviation System Capacity Advisory Committee
(Federal Aviation Administration); Interim President of Williams College.
AMY M. OLMERT, Secretary (5/14/63)
Director, Deutsche Asset Management; Formerly, Vice President, BT Alex.
Brown Incorporated, (now DB Alex. Brown LLC), 1997-1999; Senior Manager,
Coopers & Lybrand L.L.P. (now PricewaterhouseCoopers LLP), 1988-1997.
DANIEL O. HIRSCH, Assistant Secretary (3/27/54)
Director, Deutsche Asset Management. Formerly, Principal, BT Alex. Brown
Incorporated, (now DB Alex. Brown), 1998-1999; Assistant General Counsel,
United States Securities and Exchange Commission, 1993-1998.
CHARLES A. RIZZO, Treasurer (8/5/57)
Director, Deutsche Asset Management; Formerly, Vice President and
Department Head, BT Alex. Brown Incorporated (now DB Alex. Brown LLC),
1998-1999; Senior Manager, Coopers & Lybrand L.L.P. (now
PricewaterhouseCoopers LLP), 1993-1997.
------------------------------
* Messrs. Hale and Semans are directors who are "interested persons" as
defined in the Investment Company Act.
Directors / Trustees and officers of the Funds are also directors and
officers of some or all of the other investment companies managed,
advised, or administered by Investment Company Capital Corporation
("ICCC") or its affiliates. There are currently 23 funds in the Flag
Investors Funds and Deutsche Banc Alex. Brown Cash Reserve Fund, Inc.
fund complex (the "Fund Complex"). Mr. Semans serves as Chairman of five
funds and as a Director of 18 other funds in the Fund Complex. Mr. Hale
serves as Chairman of three funds and as President of 20 other funds in
the Fund Complex. Ms. Rimel and Messrs. Burt, Levy, McDonald, Wadsworth
and Vogt serve as Directors of each fund in the Fund Complex. Mr.
Hardiman serves as director of each of these funds except for Flag
Investors Emerging Growth Fund, Inc. and Flag Investors Short-term
Intermediate Fund, Inc. Mr. Rizzo serves as Treasurer, Ms. Olmert serves
as Secretary and Mr. Hirsch serves as Assistant Secretary, of each of
the funds in the Fund Complex.
Neither the Corporation nor the Portfolio Trust requires employees, and
none of the executive officers devotes full time to the affairs of the
Corporation or Portfolio Trust or receives any compensation from a Fund
or a Portfolio.
53
<PAGE>
Some of the Directors of the Fund are customers of, and have had normal
brokerage transactions with, DB Alex. Brown LLC 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.
As of November 27, 2000, the Corporation's Board and Officers as a group
owned 1.05% of Japanese Equity Class A Shares. The group owned less than
1% of the remaining Funds' outstanding Class A, Class B, and Class C
Shares.
The following table shows total compensation received as a Director and
Trustee from the Corporation and Portfolio Trust and the total
compensation received from the Corporation, the Portfolio Trust and the
Fund Complex for the most recent fiscal year ended August 31, 2000. As of
March 28, 2000, the Corporation and Portfolio Trust joined the Flag Fund
Complex, as described below.
<TABLE>
<CAPTION>
AGGREGATE
AGGREGATE COMPENSATION
NAME COMPENSATION PENSION OR PAYABLE FROM THE
PAYABLE FROM RETIREMENT CORPORATION, THE
THE CORPORATION BENEFITS ACCRUED PORTFOLIO TRUST
AND THE AS PART OF FUND AND THE FUND
POSITION WITH CORPORATION AND PORTFOLIO TRUST PORTFOLIO TRUST EXPENSES COMPLEX
---------------------------------------------------------------- ----------------- ------------------- ------------------
<S> <C> <C> <C>
RICHARD R. BURT (1) $12,087.25 (3) $41,250.00
DIRECTOR/TRUSTEE
JOSEPH R. HARDIMAN $87.25 (3) $39,000.00
DIRECTOR/TRUSTEE
LOUIS E. LEVY $109.64 (3) $49,000.00
DIRECTOR/TRUSTEE
EUGENE J. MCDONALD $109.64 (3) $49,000.00
DIRECTOR/TRUSTEE
REBECCA W. RIMEL $87.25 (3) $39,000.00
DIRECTOR/TRUSTEE
TRUMAN T. SEMANS*
DIRECTOR/TRUSTEE $0 $0 $0
RICHARD T. HALE*
PRESIDENT/TRUSTEE $0 $0 $0
(since December 19, 2000)
CARL W. VOGT (4) $0 (3) $39,000
DIRECTOR / TRUSTEE
ROBERT H. WADSWORTH (1) $12,587.25 (3) $41,750.00
DIRECTOR/TRUSTEE
EDWARD SCHMULTS (2) $12,000.00 N/A $ -
WERNER WALBROEL (2) $12,500.00 N/A $ -
</TABLE>
54
<PAGE>
--------------------------
* Messrs. Hale and Semans are directors who are "interested persons" as defined
in the Investment Company Act.
(1) Messrs. Burt and Wadsworth were trustees of the original Deutsche Funds and
subsequently became directors of Flag Investors Funds, Inc.
(2) Mr. Walbroel resigned as Director/Trustee effective March 22, 2000. Mr.
Schmults completed his term as Director/Trustee effective March 22, 2000.
(3) The Fund Complex has adopted a Retirement Plan for eligible Directors, as
described below. The actuarially computed pension expense for the Funds for the
year ended December 31, 1999 was approximately $1,189.
(4) Formerly, President of the Funds. Mr. Vogt was elected as Director for the
Funds on December 19, 2000.
Upon joining the Flag Fund Complex as of March 28, 2000, the Corporation and
Portfolio Trust began participating in the Complex's Retirement Plan for
Directors who are not employees of the any fund, a fund's Administrator or its
respective 30 affiliates (the "Directors Retirement Plan"). After completion of
six years of service, each participant in the Directors Retirement Plan will be
entitled to receive an annual retirement benefit equal to a percentage of the
fee earned by the participant in his or her last year of service. Upon
retirement, each participant will receive annually 10% of such fee for each year
that he or she served after completion of the first five years, up to a maximum
annual benefit of 50% of the fee earned by the participant in his or her last
year of service. The fee will be paid quarterly, for life, by each fund for
which he or she serves. The Directors Retirement Plan is unfunded and unvested.
Such fees are allocated to each fund in the Flag Fund Complex based upon the
relative net assets of such fund to the Flag Fund Complex. Mr. McDonald has
qualified for, but has not received, benefits.
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, 2000 are as follows: for Mr. McDonald, 8 years; for Mr. Levy, 6
years; for Ms. Rimel and Mr. Vogt, 5 years; for Mr. Hardiman, 2 years; and for
Mr. Burt and Mr. Wadsworth, 1 year.
<TABLE>
<CAPTION>
ESTIMATED ANNUAL BENEFITS PAYABLE BY FUND COMPLEX UPON RETIREMENT
YEARS OF SERVICE CHAIRMEN OF AUDIT AND EXECUTIVE COMMITTEES OTHER PARTICIPANTS
---------------- ------------------------------------------ ------------------
<S> <C> <C>
6 years $4,900 $3,900
7 years $9,800 $7,800
8 years $14,700 $11,700
9 years $19,600 $15,600
10 years or more $24,500 $19,500
</TABLE>
Any Director who receives fees from a fund is permitted to defer 50% to 100% of
his or her annual compensation pursuant to a Deferred Compensation Plan. Messrs.
Levy, McDonald, Burt, Wadsworth, and Ms. Rimel have each executed a Deferred
Compensation Agreement. Currently, the deferring Directors may select from among
various Flag Investors funds and Deutsche Banc Alex. Brown Cash Reserve Fund,
Inc. in which all or part of their deferral
55
<PAGE>
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 Corporation and the Portfolios' advisor,
Deutsche Funds Management, have each adopted a Code of Ethics pursuant to Rule
17j-1 under the Investment Company Act of 1940. The Corporation's and Advisors'
Codes of Ethics permit access persons, as this term is defined in the Code of
Ethics, to trade securities that may be purchased or held by the Portfolios for
their own accounts, subject to compliance with preclearance procedures. In
addition, the Corporation's and Advisors' Codes provide for trading "blackout
periods" that prohibit trading by personnel within periods of trading by the
Portfolios in the same security. The Corporation's and Advisors' Codes prohibit
short term trading profits and personal investment in initial public offerings,
and requires prior approval with respect to purchases of securities in private
placements. The Codes are on file with and available from the SEC.
DWS International Portfolio Management GmbH ("DWS"), the sub-advisor of
each of the Portfolios except the Top 50 US Portfolio, has adopted a Code of
Ethics pursuant to Rule 17j-1 under the 1940 Act. DWS's Code permits access
persons to trade securities that may be purchased or held by the Portfolios but
prohibits front-running, frequent buying and selling, and purchase of restricted
list securities without prior approval. DWS's Code also requires prior approval
for personal investments in initial public offerings and prohibits investments
in private placements.
Deutsche Asset Management, Inc. ("DeAM"), the sub-advisor of the Top 50
US Portfolio, has adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940
Act. DeAM's Code permits access persons to trade securities that may be
purchased or held by the Portfolios for their own accounts, subject to
compliance with the Code's preclearance requirements. In addition, DeAM's Code
also provides for trading "blackout periods" that prohibit trading by personnel
within periods of trading by the Portfolios in the same security. The Code
prohibits short-term trading and personal investment in initial public
offerings, and requires prior approval with respect to purchases of securities
in private placements.
The Portfolios' principal underwriter, ICC Distributors, Inc., is not
required to adopt a Code of Ethics as it meets the exception provided by Rule
17j-1(c)(3) under the 1940 Act.
ADVISOR
Each Fund has not retained the services of an investment manager or
advisor since each Fund seeks to achieve its investment objectives by investing
all of its investable assets in its corresponding Portfolio.
The advisor (manager) to each Portfolio is Deutsche Fund Management,
Inc. ("DFM"), an indirect subsidiary of Deutsche Bank AG, a major global
banking institution headquartered in Germany. DFM is a Delaware corporation
and registered investment advisor. For these services, DFM receives an annual
fee from each Portfolio, which is computed daily and paid monthly, equal to a
percentage of the average daily net assets of such Portfolio as follows:
1.00% for Top 50 World Portfolio, Top 50 Europe Portfolio and Top 50 Asia
Portfolio; and 0.85% for Top 50 US Portfolio, European Mid-Cap Portfolio, and
Japanese Equity Portfolio. (See the table below entitled "Fees Paid by the
Portfolio Trust' for advisory fees paid by each Portfolio to DFM for the last
three fiscal years.)
Subject to the overall supervision of the Portfolio Trust's Trustees, DFM
is responsible for the day-to-day investment decisions, the execution of
portfolio transactions and the general management of each Portfolio's
investments and provides certain supervisory services. Under its investment
management agreement with the Portfolio Trust (the Management Agreement), DFM is
permitted, subject to the approval of the Board of Trustees of the Portfolio
Trust, to delegate to a third party responsibility for management of the
investment operations of each Portfolio. DFM has delegated this responsibility
to the Sub-Advisor. DFM retains overall responsibility, however, for supervision
of the investment management program for each Portfolio.
Until recently, the Glass-Steagall Act and other applicable laws
generally prohibited banks (including foreign banks having U.S. operations, such
as Deutsche Bank) from engaging in the business of underwriting or distributing
securities in the United States. The Board of Governors of the Federal Reserve
System interpreted these laws as prohibiting a bank holding company registered
under the Federal Bank Holding Company Act (or a foreign
56
<PAGE>
bank subject to such Act's provisions) or certain subsidiaries thereof from
sponsoring, organizing, or controlling a registered open-end investment company
continuously engaged in the issuance of its shares, such as the Corporation. The
Board of Governors did not prohibit a holding company (or a foreign bank in this
capacity) or a subsidiary thereof from acting as investment manager and
custodian to such an investment company. Recent changes in federal statutes and
regulations concerning the permissible activities of banks or trust companies,
and future judicial and administrative decisions and interpretations of the
changes to federal statutes and regulations, will repeal most, if not all, of
these prohibitions over the next year, when the changes take effect.
INVESTMENT SUB-ADVISOR
On behalf of the Portfolio Trust, DFM has entered into an investment
sub-advisory agreement (Sub-Advisory Agreements) with DWS for each Portfolio
(with the exception of TOP 50 US PORTFOLIO) and with DeAM, Inc. for TOP 50 US
PORTFOLIO. It is each Sub-Advisor's responsibility, under the overall
supervision of DFM, to conduct the day-to-day investment decisions of the
respective Portfolios, arrange for the execution of portfolio transactions
and generally manage each Portfolio's investments in accordance with its
investment objective, policies and restrictions. DWS and DeAM, Inc. are
registered investment advisors. For these services, the respective
Sub-Advisor receives from DFM and not the Portfolios an annual fee, which is
computed daily and may be paid monthly, equal to a percentage of the average
daily net assets of each Portfolio as follows: 1.00% for TOP 50 WORLD
PORTFOLIO, TOP 50 EUROPE PORTFOLIO and TOP 50 ASIA PORTFOLIO; and 0.85% for
TOP 50 US PORTFOLIO, EUROPEAN MID-CAP PORTFOLIO, and JAPANESE EQUITY
PORTFOLIO. (See the table below entitled 'Fees Paid by the Portfolio Trust'
for sub-advisory fees paid by DFM to DWS for the last three fiscal years.)
The Sub-Advisor shall not be liable to the Corporation, Portfolio Trust
or any Fund shareholder for any losses that may be sustained in the purchase,
holding, or sale of any security or for anything done or omitted by it, except
acts or omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon it by its contract.
BROKERAGE TRANSACTIONS
The Portfolio Trust trades securities for a Portfolio if it believes that
a transaction net of costs (including custodian charges) will help achieve the
Portfolio's investment objective. Changes in a Portfolio's investments are made
without regard to the length of time a security has been held, or whether a sale
would result in the recognition of a profit or loss. Therefore, the rate of
turnover is not a limiting factor when changes are appropriate. Specific
decisions to purchase or sell securities for a Portfolio are made by its
portfolio manager who is an employee of the Sub-Advisor. The portfolio manager
may serve other clients of the Sub-Advisor in a similar capacity.
The primary consideration in placing portfolio securities transactions
with broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Sub-Advisor attempts to achieve this result by selecting
broker-dealers to execute transactions on behalf of the Portfolios and other
clients of the Advisor on the basis of their professional capability, the value
and quality of their brokerage services, and the level of their brokerage
commissions. In the case of securities traded in the over-the-counter market
(where no stated commissions are paid but the prices include a dealer's markup
or markdown), the Sub-Advisor normally seeks to deal directly with the primary
market makers, unless in its opinion, best execution is available elsewhere. In
the case of securities purchased from underwriters, the cost of such securities
generally includes a fixed underwriting commission or concession. From time to
time, soliciting dealer fees are available to the Sub-Advisor on the tender of a
Portfolio's securities in so-called tender or exchange offers.
In connection with the selection of such brokers or dealers and the
placing of such orders, the Sub-Advisor seeks for each Portfolio in its best
judgment, prompt execution in an effective manner at the most favorable price.
Subject to this requirement of seeking the most favorable price, securities may
be bought from or sold to broker-dealers who have furnished statistical,
research and other information or services to the Sub-Advisor or the Portfolio
or who have sold or are selling Shares of the Fund and other mutual funds
distributed by the Distributor, subject to any applicable laws, rules and
regulations.
57
<PAGE>
The investment advisory fee that each Portfolio pays to the Sub-Advisor
will not be reduced as a consequence of the Sub-Advisor's receipt of brokerage
and research services. While such services are not expected to reduce the
expenses of the Sub-Advisor, the Sub-Advisor would, through the use of the
services, avoid the additional expenses which would be incurred if it should
attempt to develop comparable information through its own staff or obtain such
services independently.
In certain instances there may be securities that are suitable as an
investment for a Portfolio as well as for one or more of the Sub-Advisor's other
clients. Investment decisions for the Portfolios and for the Sub-Advisor's other
clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more clients are selling the same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment advisor, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could adversely affect the
price of or the size of the position obtainable in a security for a Portfolio.
When purchases or sales of the same security for a Portfolio and for other
portfolios managed by the Sub-Advisor occur contemporaneously, the purchase or
sale orders may be aggregated in order to obtain any price advantages available
to large volume purchases or sales.
Deutsche Bank AG or one of its subsidiaries or affiliates may act as one
of the agents of the Portfolios in the purchase and sale of portfolio
securities, options or futures transactions when, in the judgment of the
Sub-Advisor, that firm will be able to obtain a price and execution at least as
favorable as other qualified brokers or futures commission merchants. As one of
the principal brokers for the Portfolios, Deutsche Bank AG or its affiliates may
receive brokerage commissions or other transaction-related compensation from the
Portfolios.
The Sub-Advisor may direct a portion of a Portfolio's securities
transactions to certain unaffiliated brokers which in turn use a portion of the
commissions they receive from a Portfolio to pay other unaffiliated service
providers on behalf of that Portfolio for services provided for which the
Portfolio would otherwise be obligated to pay. Such commissions paid by a
Portfolio are at the same rate paid to other brokers for effecting similar
transactions in listed equity securities.
On August 31, 2000, the Portfolios owned securities of the following
regular broker/dealers:
58
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO BROKER / DEALER AMOUNT OWNED
-------------------------------------------------------------------------------------------
<S> <C> <C>
EUROPEAN MID-CAP None
TOP 50 US Lehman Brothers $362,500.00
Morgan Stanley Dean Witter Co. $548,568.75
Citigroup Inc. $1,081,883.13
Axa Financial Inc. $569,250.00
Chase Manhattan Corp. $729,168.75
Marsh & McLennan Co. $712,500.00
American Express Co. $733,150.00
JAPANESE EQUITY Nomura Securities Co., Ltd. $701,729.71
Orix Corp. $332,817.70
Sanwa Bank $255,407.11
TOP 50 ASIA Nomura Securities Co., Ltd. $3,040,828.76
DBS Group Holdings Ltd. $2,811,202.78
HSBC Holdings plc $3,592,168.52
Australia & New Zealand $538,777.13
Banking Group Ltd.
Banking Group Ltd. $2,579,921.55
Overseas Union Bank Ltd. 2,579.921.55
TOP 50 WORLD HSBC Holdings plc $990,550.43
Axa Financial Inc. $794,424,.74
Citigroup Inc. $926,216,.62
Morgan Stanley Dean Witter Co. $430,250.00
TOP 50 EUROPE Credit Suisse Group $520,684.32
UBS AG $899,296.21
Axa Financial $882,094.22
Dresdner Bank AG $1,576,019.20
ING Groep NV $979,648.41
</TABLE>
For the fiscal year ended August 31, 2000, the Portfolios paid $5,121.94 in
brokerage commissions to Deutsche Bank London, an affiliated broker, which
represents 0.89% of the aggregate brokerage commissions paid and 6.64% of the
aggregate principal amount of trades by affiliated brokers.
For the fiscal year ended August 31, 2000, the Portfolios paid $71,795.49 in
brokerage commissions to Deutsche Bank Frankfurt, an affiliated broker, which
represents 12.48% of the aggregate brokerage commissions paid and 93.11% of the
aggregate principal amount of trades by affiliated brokers.
For the fiscal year ended August 31, 2000, the Portfolios paid $189 in brokerage
commissions to Deutsche Morgan Grenfell, Ltd., an affiliated broker, which
represents 0.033% of the aggregate brokerage commissions paid and 0.25% of the
aggregate principal amount of trades by affiliated brokers.
ADMINISTRATOR
Investment Company Capital Corp. (ICCC), a subsidiary of Deutsche Bank,
AG, provides administrative personnel and services (including certain legal and
financial reporting services) necessary to operate the Funds. The Administrator,
among other things, (i) prepares, files and maintains the Funds' governing
documents, registration statements and regulatory documents; (ii) prepares and
coordinates the printing of publicly disseminated documents; (iii) monitors
declaration and payment of dividends and distributions; (iv) projects and
reviews the Funds' expenses; (v) performs internal audit examinations; (vi)
prepares and distributes materials to the Directors of the Corporation; (vii)
coordinates the activities of all service providers; (viii) monitors and
supervises collection of tax reclaims; and
59
<PAGE>
(ix) prepares shareholder meeting materials. ICCC provides these services at the
following annual rate of the average aggregate daily net assets of each Fund as
specified below:
<TABLE>
<CAPTION>
MAXIMUM ADMINISTRATIVE FEE* AVERAGE AGGREGATE DAILY NET ASSETS OF EACH FUND
--------------------------------------------------------------------------------------------------------
<S> <C>
0.065 of 1% on the first $200 million
--------------------------------------------------------------------------------------------------------
0.0525 of 1% on assets in excess of $200 million
--------------------------------------------------------------------------------------------------------
</TABLE>
*The Administrator receives a minimum annual fee of $75,000 per Fund.
OPERATIONS AGENT
ICCC serves as operations agent to the Portfolios. The Operations Agent of
the Portfolios, among other things, (i) prepares governing documents,
registration statements and regulatory filings; (ii) performs internal audit
examinations; (iii) prepares expense projections; (iv) prepares materials for
the Trustees of the Portfolio Trust; (v) coordinates the activities of all
service providers; (vi) conducts compliance training for the Advisor; (vii)
prepares investor meeting materials and (viii) monitors and supervises
collection of tax reclaims. ICCC provides these services at the annual rate
of 0.035% of the average daily net assets of each Portfolio. (See the table
below entitled `Fees Paid by the Portfolio Trust' for operations agent fee
paid by each Portfolio to ICCC for the last three fiscal years.)
The operations agency fee received for each Portfolio, during any fiscal year,
shall be at least $60,000. The operations agency fee received for each
Portfolio, corresponding Fund and any other fund investing in the Portfolio,
taken together, shall be at least $75,000 for the first year of the Portfolio's
operation and $125,000 for the second year, in each case payable to the
Operations Agent and the Administrator.
ADMINISTRATIVE AGENT
ICCC serves as sub-administrative agent to the Portfolios.* The Administrative
Agent, (i) files and maintains governing documents, registration statements and
regulatory filings; (ii) maintains a telephone line; (iii) approves annual
expense budgets; (iv) authorizes expenses; (v) distributes materials to the
Trustees of the Portfolio Trust; (vi) authorizes dividend distributions; (vii)
maintains books and records; (viii) files tax returns; and (ix) maintains the
investor register. ICCC provides these services at the following annual rate of
the average aggregate daily net assets of each Portfolio as specified below:
* As of September 1, 2000. Previously, IBT Fund Services (Canada) Inc. ("IBT")
and Federated Services Company served as sub-administrators. On April 1, 2000,
IBT and ICCC served as sub-administrators.
<TABLE>
<CAPTION>
MAXIMUM ADMINISTRATIVE AGENT FEE* AVERAGE AGGREGATE DAILY NET ASSETS OF EACH PORTFOLIO
----------------------------------------------------------------------------------------------------------
<S> <C>
0.025 of 1% on the first $200 million
----------------------------------------------------------------------------------------------------------
0.02 of 1% on the next $800 million
----------------------------------------------------------------------------------------------------------
0.01 of 1% on assets in excess of $1 billion
----------------------------------------------------------------------------------------------------------
</TABLE>
*The administrative agency fee received for each Portfolio shall be at least
$50,000 for the third year.
(See the table below entitled `Fees Paid by the Portfolio Trust' for
administrative agent fees paid by each Portfolio to ICCC for the last three
fiscal years.)
CUSTODIAN AND FUND ACCOUNTANT
Investors Bank & Trust Company ("IBT Co.") is custodian for the securities
and cash of each Funds' and each Portfolio's assets. Foreign instruments
purchased by the Portfolios are held by various subcustodial arrangements
employed by IBT Co. IBT Fund Services (Canada) Inc. ("IBT"), provides fund
accounting services to the Funds and the Portfolios including: (i)
calculation of the daily net asset value for the Funds and the Portfolios;
(ii) monitoring compliance with investment portfolio restrictions, including
all applicable federal and state securities and other regulatory
requirements; and (iii) monitoring each Fund's and Portfolio's compliance
with the requirements applicable to a regulated investment company under the
Code. IBT Co. and IBT provide these services at the following annual average
aggregate daily net assets of each portfolio as specified below:
<TABLE>
<CAPTION>
MAXIMUM CUSTODY AND ACCOUNTING FEE* AVERAGE AGGREGATE DAILY NET ASSETS OF EACH PORTFOLIO
--------------------------------------------------------------------------------------------------------------------
<S> <C>
0.020 of 1% on the first $200 million
--------------------------------------------------------------------------------------------------------------------
0.015 of 1% on the next $800 million
--------------------------------------------------------------------------------------------------------------------
0.010 of 1% on assets in excess of $1 billion
--------------------------------------------------------------------------------------------------------------------
</TABLE>
*The custodian fee received for each Portfolio shall be at least $40,000 in the
third year.
For the fiscal year ended August 31, 2000, IBT Co. and IBT were paid the
following as compensation for providing custody and accounting services:
<TABLE>
<CAPTION>
------------------------------ -----------------
CUSTODY AND
PORTFOLIO ACCOUNTING FEES
------------------------------ -----------------
<S> <C>
European Mid-Cap Portfolio $100,857
------------------------------ -----------------
Japanese Equity Portfolio $100,941
------------------------------ -----------------
Top 50 Asia Portfolio $129,456
------------------------------ -----------------
Top 50 Europe Portfolio $102,450
------------------------------ -----------------
Top 50 US Portfolio $62,702
------------------------------ -----------------
Top 50 World Portfolio $94,926
------------------------------ -----------------
</TABLE>
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
ICCC maintains all necessary shareholder records. The Fund pays the transfer
agent a fee based on the size, type, and number of accounts and transactions
made by shareholders.
60
<PAGE>
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP is the independent accountant for the
Corporation and Portfolio Trust. The independent accountants conduct
annual audits of financial statements, assist in the preparation and/or
review of federal and state income tax returns and provide consulting as
to matters of accounting and federal and state income taxation for each
Fund or Portfolio, as the case may be.
LEGAL COUNSEL
MORGAN, LEWIS & BOCKIUS LLP SERVES AS COUNSEL TO THE PORTFOLIOS TRUST.
<TABLE>
<CAPTION>
FEES PAID BY THE PORTFOLIO TRUST FOR SERVICES FOR FISCAL YEAR/PERIODS ENDED AUGUST 31
------------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO MANAGER SUB-ADVISORY FEE OPERATIONS AGENT ADMINISTRATIVE AGENT
NAME FEE PAID PAID** FEE PAID FEE PAID
------------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998* 2000 1999 1998* 2000 1999 1998* 2000 1999 1998*
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Top 50 $318,965 $153,724 $76,939 $50,843 $23,057 $57,704 $59,865 $120,354 $67,036 $49,486 $44,697 $36,556
World
Portfolio
------------------------------------------------------------------------------------------------------------------------------------
Top 50
Europe $397,086 $272,729 $87,638 $65,399 $47,461 $65,728 $59,926 $114,606 $66,445 $49,583 $44,583 $36,556
Portfolio
------------------------------------------------------------------------------------------------------------------------------------
Top 50
Asia $826,934 $389,911 $189,797 $142,492 $57,526 $142,347 $60,166 $110,830 $61,738 $49,583 $44,582 $35,112
Portfolio
------------------------------------------------------------------------------------------------------------------------------------
Top 50
US $240,525 $210,939 $70,740 $126,198 $107,156 $49,934 $59,980 $116,881 $66,335 $49,583 $44,583 $36,556
Portfolio
------------------------------------------------------------------------------------------------------------------------------------
European
Mid-Cap $435,338 $188,736 $31,021 $63,942 $26,595 $21,897 $59,916 $112,867 $64,498 $49,583 $44,583 $34,889
Portfolio
------------------------------------------------------------------------------------------------------------------------------------
Japanese $192,297 $54,632 $11,948 $21,369 $7,713 $8,433 $59,883 $121,732 $65,332 $49,583 $44,583 $34,445
Equity
Portfolio
------------------------------------------------------------------------------------------------------------------------------------
US Money $303,614 $374,550 $215,792 $206,771 $280,913 $161,844 $85,502 $62,622 $28,933 $105,891 $27,855 $56,920
Market
Porfolio
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The commencement of operations for the Portfolios are as follows:
October 2, 1997: Top 50 World, Top 50 Europe, Top 50 US
October 14, 1997: Top 50 Asia
October 17, 1997: European Mid-Cap
October 20, 1997: Japanese Equity
March 25, 1998: US Money Market. The US Money Market Fund (Class A and
Class B Shares) was terminated on May 1, 2000.
** The Sub-Advisory fee was paid by DFM out of the advisory fee it
received from the Portfolios.
<TABLE>
<CAPTION>
FEES PAID BY THE FUNDS FOR SERVICES FOR THE FISCAL YEAR/PERIODS ENDED AUGUST 31
------------------------------------------------------------------------------------------------------------------------------------
FUND NAME ADMINISTRATIVE FEE BROKERAGE COMMISSIONS PAID
------------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998* 2000 1999 1998*
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Top 50 World $74,857 $1,305 $226 $112,479 $45,307 $46,910
------------------------------------------------------------------------------------------------------------------------------------
Top 50 Europe $74,814 $5,807 $700 $71,653 $86,609 $39,913
------------------------------------------------------------------------------------------------------------------------------------
Top 50 Asia $74,854 $7,197 $197 $247,976 $214,463 $233,262
------------------------------------------------------------------------------------------------------------------------------------
Top 50 US $74,833 $3,116 $1,064 $38,406 $39,461 $24,027
------------------------------------------------------------------------------------------------------------------------------------
61
<PAGE>
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------------
European Mid-Cap Fund $74,811 $10,716 $941 $89,331 $70,019 $41,688
------------------------------------------------------------------------------------------------------------------------------------
Japanese Equity Fund $74,857 $2,699 $182 $148,716 $55,077 $16,547
------------------------------------------------------------------------------------------------------------------------------------
US Money Market Fund $49,832 $7,443 $130 N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The commencement of operations for the funds are as follows:
October 2, 1997: Top 50 World, Top 50 Europe, Top 50 US
October 14, 1997: Top 50 Asia
October 17, 1997: European Mid-Cap
October 20, 1997: Japanese Equity
March 25, 1998: US Money Market. The US Money Market Fund (Class A
and Class B Shares) terminated on May 1, 2000.
FRONT-END SALES CHARGE REALLOWANCES (CLASS A SHARES FOR ALL FUNDS)
The Distributor receives a front-end sales charge on certain Share
sales. The Distributor generally pays up to 90% (and as much as 100%) of
this charge to investment professionals for sales and/or administrative
services. Any payments to investment professionals in excess of 90% of
the front-end sales charge are considered supplemental payments. The
Distributor retains any portion not paid to an investment professional.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
FUND NAME FOR THE FISCAL YEAR ENDED AUGUST 31, 2000
------------------------------------------------------------------------------------------------
12B-1 FEE SHAREHOLDER SERVICES FEE
------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS B CLASS C
SHARES SHARES SHARES SHARES SHARES
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Top 50 World $2,898 $19,290 $69 $6,430 $23
------------------------------------------------------------------------------------------------
Top 50 Europe $4,305 $52,839 $8,141 $17,613 $2,714
------------------------------------------------------------------------------------------------
Top 50 Asia $26,482 $48,418 $91 $16,139 $30
------------------------------------------------------------------------------------------------
Top 50 US $3,641 $25,218 $1,498 $8,406 $499
------------------------------------------------------------------------------------------------
European Mid-Cap Fund $14,065 $75,271 $18,500 $25,090 $6,167
------------------------------------------------------------------------------------------------
Japanese Equity Fund $4,965 $56,176 $71 $18,725 $24
------------------------------------------------------------------------------------------------
</TABLE>
Fees are allocated among classes based on their pro rata share of
fund assets, except for marketing (Rule 12b-1) fees and shareholder
services fees, which are borne only by the applicable class of
shares.
HOW DO THE FUNDS MEASURE PERFORMANCE?
The Funds may advertise Share performance by using the SEC's standard
method for calculating performance applicable to all mutual funds. The
SEC also permits this standard performance information to be accompanied
by non-standard performance information.
Share performance reflects the effect of non-recurring charges, such as
maximum sales charges, which, if excluded, would increase the total
return and yield. The performance of Shares depends upon such variables
as: portfolio quality; average portfolio maturity; type and value of
portfolio securities; changes in interest rates; changes or differences
in the Fund's or any class of Shares' expenses; and various other
factors.
Share performance fluctuates on a daily basis largely because net
earnings fluctuate daily. Both net earnings and offering price per Share
are factors in the computation of yield and total return.
AVERAGE ANNUAL TOTAL RETURNS AND YIELD
Total returns given for the last fiscal year or since inception period
ended August 31, 2000.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
FUND NAME AVERAGE ANNUAL TOTAL RETURN AVERAGE ANNUAL TOTAL RETURN
WITHOUT SALES CHARGES/CDSC WITH SALES CHARGES/CDSC
------------------------------------------------------------------------------------------------------------------------------------
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS A SHARES CLASS B SHARES CLASS C SHARES
One Year / One Year / One Year / One Year / One Year / One Year /
Since Inception Since Inception Since Inception Since Inception Since Inception Since Inception
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Top 50 World (1) 12.95% 12.10% N/A 6.74% 7.09% N/A
17.17% 15.64% 14.92% 14.57% 3.20%
------------------------------------------------------------------------------------------------------------------------------------
Top 50 Europe (2) 22.91% 22.04% 22.01% 16.15% 17.04% 21.01%
9.93% 6.35% 12.45% 7.82% 5.20% 12.45%
------------------------------------------------------------------------------------------------------------------------------------
Top 50 Asia (3) 17.54% 16.68% N/A 11.07% 11.68% N/A
21.90% 34.18 19.53% 33.30% 0.97%
------------------------------------------------------------------------------------------------------------------------------------
Top 50 US (4) 24.87% 23.83% 23.95% 18.01% 18.83% 22.95%
22.06% 18.89% 29.25% 19.71% 17.94% 29.25%
------------------------------------------------------------------------------------------------------------------------------------
European Mid-Cap 45.74% 44.33% 44.42% 37.73% 39.34% 43.42%
Fund (5) 22.83% 20.36% 26.19% 20.43% 19.40% 26.19%
------------------------------------------------------------------------------------------------------------------------------------
Japanese Equity 25.57% 22.66% N/A 18.66% 17.66% N/A
Fund (6) 27.85% 53.36% 25.35% 52.43% 2.11%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Inception Dates: Class A Shares - October 2, 1997
Class B Shares - May 4, 1998
Class C Shares - May 31, 2000
(2) Inception Dates: Class A Shares - October 2, 1997
Class B Shares - March 30, 1998
Class C Shares - September 2, 1998
(3) Inception Dates: Class A Shares - October 14, 1997
Class B Shares - May 5, 1998
Class C Shares - May 31, 2000
(4) Inception Dates: Class A Shares - October 2, 1997
Class B Shares - March 18, 1998
Class C Shares - September 2, 1998
(5) Inception Dates: Class A Shares - October 17, 1997
Class B Shares - March 30, 1998
Class C Shares - September 2, 1998
(6) Inception Dates: Class A Shares - October 20, 1997
Class B Shares - August 10, 1998
Class C Shares - May 31, 2000
TOTAL RETURN
Total return represents the change (expressed as a percentage) in the
value of Shares over a specific period of time, and includes the
investment of income and capital gains distributions.
The average annual total return for Shares is the average compounded rate
of return for a given period that would equate a $1,000 initial
investment to the ending redeemable value of that investment. The ending
redeemable value is computed by multiplying the number of Shares owned at
the end of the period by the net asset value per Share at the end of the
period. The number of Shares owned at the end of the period is based on
the number of Shares purchased at the beginning of the period with
$1,000, less any applicable sales charge, adjusted over the period by any
additional Shares, assuming the annual reinvestment of all dividends and
distributions.
When Shares of a Fund are in existence for less than a year, the Fund may
advertise cumulative total return for that specific period of time,
rather than annualizing the total return.
63
<PAGE>
YIELD
The yield of Shares is calculated by dividing: (i) the net investment
income per Share earned by the Shares over a 30-day period; by (ii) the
maximum offering price per Share on the last day of the period. This
number is then annualized using semi-annual compounding. This means that
the amount of income generated during the 30-day period is assumed to be
generated each month over a 12-month period and is reinvested every six
months. The yield does not necessarily reflect income actually earned by
Shares because of certain adjustments required by the SEC and, therefore,
may not correlate to the dividends or other distributions paid to
shareholders.
To the extent investment professionals and broker/dealers charge fees in
connection with services provided in conjunction with an investment in
Shares, the Share performance is lower for shareholders paying those
fees.
PERFORMANCE COMPARISONS
From time to time, a Fund may quote performance in reports, sales literature and
advertisements published by the Corporation. Current performance information for
a Fund may be obtained by calling 1-800-767-3524.
Advertising and sales literature may include:
- references to ratings, rankings, and financial publications and/or
performance comparisons of Shares to certain indices;
- charts, graphs and illustrations using the Fund's returns, or returns in
general, that demonstrate investment concepts such as tax-deferred
compounding, dollar-cost averaging and systematic investment;
- discussions of economic, financial and political developments and their
impact on the securities market, including the portfolio manager's views
on how such developments could impact the Funds; and
- information about the mutual fund industry from sources such as the
Investment Company Institute.
GENERAL
The performance of each of the classes of Fund Shares will vary from time
to time depending upon market conditions, the composition of a Portfolio,
and its operating expenses. Consequently, any given performance quotation
should not be considered representative of a Fund's performance for any
specified period in the future. In addition, because performance will
fluctuate, it may not provide a basis for comparing an investment in a
Fund with certain bank deposits or other investments that pay a fixed
yield or return for a stated period of time.
Comparative performance information may be used from time to time in
advertising a Fund's Shares, including appropriate market indices or data
from Lipper, Micropal, Inc., Ibbotson Associates, Morningstar Inc., the
Dow Jones Industrial Average and other industry publications.
The Fund may quote information from reliable sources regarding individual
countries and regions, world stock exchanges, and economic and
demographic statistics.
INFORMATION AND COMPARISONS RELATING TO THE FUNDS, SECONDARY MARKET
TRADING, NET ASSET SIZE, PERFORMANCE AND TAX TREATMENT
Information regarding various aspects of each Fund, including the net
asset size thereof, as well as the performance and the tax treatment of
Fund Shares, may be included from time to time in advertisements, sales
literature and other communications as well as in reports to current or
prospective investors.
64
<PAGE>
Information may be provided to prospective investors to help such
investors assess their specific investment goals and to aid in their
understanding of various financial strategies. Such information may
present current economic and political trends and conditions and may
describe general principles of investing such as asset allocation,
diversification and risk tolerance, as well as specific investment
techniques.
Information regarding the net asset size of a Fund may be stated in
communications to prospective or current investors for one or more time
periods, including annual, year-to-date or daily periods. Such
information may also be expressed in terms of the total number of Fund
Shares outstanding as of one or more time periods. Factors integral to
the size of a Fund's net assets, such as the volume and activity of
purchases and redemptions of Fund Shares, may also be discussed, and may
be specified from time to time or with respect to various periods of
time. Comparisons of such information during various periods may also be
made and may be expressed by means of percentages. Information may be
provided to investors regarding capital gains distributions by the Funds,
including historical information relating to such distributions.
Comparisons between the Funds and other investment vehicles such as
mutual funds may be made regarding such capital gains distributions,
including the expected effects of differing levels of portfolio
adjustments on such distributions and the potential tax consequences
thereof.
Information may also be provided in communications to prospective or
current investors comparing and contrasting the relative advantages of
investing in Fund Shares as compared to other investment vehicles, such
as mutual funds, both on an individual and a group basis (e.g., stock
index mutual funds). Such information may include comparisons of costs,
expense ratios, expressed either in dollars or basis points, securities
lending activities, permitted investments and hedging activities (e.g.,
engaging in options or futures transactions), price volatility and
portfolio turnover data and analyses. In addition, such information may
quote, reprint or include portions of financial, scholarly or business
publications or periodicals, including model allocation schedules or
portfolios as the foregoing relate to the comparison of Fund Shares to
other investment vehicles, current economic financial and political
conditions, investment philosophy or techniques or the desirability of
owning Fund Shares. Such information may be provided both before and
after deduction of sales charges.
Information on the performance of a Fund on the basis of changes in net
asset value per Fund Share, with or without reinvesting all dividends
and/or any distributions of capital in additional Fund Shares, may be
included from time to time in a Fund's performance reporting. The
performance of a Fund may also be compared to the performance of money
managers as reported in market surveys such as SEI Fund Evaluation Survey
(a leading data base of tax-exempt funds) or mutual funds such as those
reported by Lipper, Morningstar, Micropal, Money Magazine's Fund Watch or
Wiesenberger Investment Companies Service, each of which measures
performance following their own specific and well-defined calculation
measures, or of the NYSE Composite Index, the American Stock Exchange
Index (indices of stocks traded on the NYSE and the American Stock
Exchange, respectively), the Dow Jones Industrial Average (an index of 30
widely traded industrial common stocks), any widely recognized foreign
stock and bond index or similar measurement standards during the same
period of time.
Information relating to the relative net asset value performance of Fund
Shares may be compared against a wide variety of investment categories
and asset classes, including common stocks, small capitalization stocks,
ADRs, long and intermediate term corporate and government bonds, Treasury
bills, futures contracts, the rate of inflation in the United States
(based on the Consumer Price Index ("CPI") or other recognized indices)
and other capital markets and combinations thereof. Historical returns of
the capital markets relating to a Fund may be provided by independent
statistical studies and sources, such as those provided to Ibbotson
Associates. The performance of these capital markets is based on the
returns of different indices. Information may be presented using the
performance of these and other capital markets to demonstrate general
investment strategies. For example, performance of Fund Shares may be
compared to the performance of selected asset classes such as short-term
U.S. Treasury bills, long-term U.S. Treasury bonds, long-term corporate
bonds, mid-capitalization stocks, small capitalization stocks and various
classes of foreign stocks and may also be measured against the rate of
inflation as set forth in well-known indices (such as the CPI).
Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. Performance of Fund Shares
may
65
<PAGE>
also be compared to that of other indices or compilations that may be
developed and made available to the investing public in the future. Of
course, such comparisons will only reflect past performance of Fund
Shares and the investment categories, indices or compilations chosen and
no guarantees can be made of future results regarding the performance of
either Fund Shares or the asset classes chosen for such comparisons.
You may use financial publications and/or indices to obtain a more
complete view of Share performance. When comparing performance, you
should consider all relevant factors such as the composition of the index
used, prevailing market conditions, portfolio compositions of other
funds, and methods used to value portfolio securities and compute
offering price. The financial publications and/or indices which the Fund
uses in advertising may include:
- EUROPEAN MID-CAP FUND may be compared to the DAX Composite Index
("CDAX"), Financial Times ("FT")/Standard & Poor's Medium-Small Cap
Europe Index, Deutscher Aktien Index ("DAX"), Mid-Cap Deutscher Aktien
Index ("MDAX"), DSX Mid-Cap and the Morgan Stanley Capital Index
("MSCI") - Europe Index;
- JAPANESE EQUITY FUND may be compared to the Tokyo Price Index ("TOPIX"),
Nikkei-225 Index, and the MSCI Japan Index;
- TOP 50 WORLD may be compared to the MSCI-World Index;
- TOP 50 EUROPE may be compared to the MSCI-Europe Index;
- TOP 50 ASIA may be compared to the MSCI Pacific Index and MSCI Pacific ex
Japan Index;
- TOP 50 US may be compared to Standard & Poor's 500 Index.
Each index is an unmanaged index of common security prices, converted
into U.S. dollars where appropriate. Any index selected by a Fund for
information purposes may not compute total return in the same manner as
the Fund and may exclude, for example, dividends paid, as well as
brokerage and other fees.
Information comparing the portfolio holdings relating to a particular
Fund with those of relevant stock indices or other investment vehicles,
such as mutual funds or futures contracts, may be advertised or reported
by the Fund. Equity analytic measures, such as price/earnings ratio,
price/book value and price/cash flow and market capitalizations, may be
calculated for the portfolio holdings and may be reported on an
historical basis or on the basis of independent forecasts.
Information may be provided by a Fund on the total return for various
composites of the different Funds. These composite returns might be
compared to other securities or indices utilizing any of the comparative
measures that might be used for the individual Fund, including
correlations, standard deviation, and tracking error analysis.
Past results may not be indicative of future performance. The investment
return and net asset value of Shares of each Fund will fluctuate so that
the Shares, when redeemed, may be worth more or less than their original
cost.
ECONOMIC AND MARKET INFORMATION
Advertising and sales literature for the Funds may include discussions of
economic, financial and political developments and their effect on the
securities market. For example, such advertisements and/or sales
literature may include statements such as the following setting forth the
Manager's views on certain trends and/or opportunities: European
companies are among the world's strongest from which an investor could
derive potential benefits by investing in high-quality European companies
with strong balance sheets; Europe's stock markets are growing quickly
because Europeans are turning to equities, seeking higher long-term
return potential, which creates opportunities for non-European investors;
the advent of the European Monetary Union, and the resultant single
currency is expected to spur dramatic change by galvanizing Europe into a
single,
66
<PAGE>
globally competitive economy; and European companies are working to
improve shareholder value through restructuring aimed at operating more
efficiently and meeting performance targets. Such discussions may also
take the form of commentary on these developments by Fund or Portfolio
managers and their views and analysis on how such developments could
affect the Funds. In addition, advertising and sales literature may quote
statistics and give general information about the mutual fund industry,
including the growth of the industry, from sources such as the Investment
Company Institute.
FINANCIAL INFORMATION
The Financial Statements, including notes thereto and the report of
PricewaterhouseCoopers, for the Funds for the fiscal year ended August 31, 2000,
were audited by PricewaterhouseCoopers LLP and are incorporated herein by
reference to the Annual Report to Shareholders of Flag Investors Funds, Inc.
(formerly Deutsche Funds, Inc.) filed with the SEC, dated August 31, 2000.
67
<PAGE>
APPENDIX A
MEMBER STATES OF THE EUROPEAN UNION
Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, Netherlands, Portugal, Spain, Sweden, United Kingdom
ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT MEMBERS
Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France,
Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg,
Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Spain, Sweden,
Switzerland, Turkey, United Kingdom, United States
STATES PARTY TO THE CONVENTION ON THE EUROPEAN ECONOMIC AREA
Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland,
Italy, Liechtenstein, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden,
United Kingdom
EXCHANGES IN EUROPEAN COUNTRIES WHICH ARE NOT MEMBER STATES EUROPEAN UNION AND
NOT STATES PARTY TO THE CONVENTION ON THE EUROPEAN ECONOMIC AREA.
CZECH REPUBLIC
Prague
HUNGARY
Budapest
POLAND*
Warsaw
SLOVAKIA
Bratislavia
SWITZERLAND
Basel, Geneva, Zurich
EXCHANGES IN NON-EUROPEAN COUNTRIES**
ARGENTINA
Buenos Aires
AUSTRALIA
ASX (Sydney, Hobart, Melbourne, Perth)
BRAZIL
Sao Paulo, Rio de Janiero
CANADA
Toronto, Vancouver, Montreal
CHILE
Santiago
HONG KONG
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<PAGE>
Hong Kong Stock Exchange
INDIA
Mumbai, Calcutta, Delhi, Madras
INDONESIA
Jakarta
JAPAN
Tokyo, Osaka, Nagoya, Kyoto, Fukuoto, Niigata, Sapporo, Hiroshima
MALAYSIA
Kuala Lumpur
MEXICO
Mexico City
NEW ZEALAND
Wellington Christchurch/Invercargill, Auckland
PERU
Lima
PHILIPPINES
Manila
SINGAPORE
Singapore
SOUTH AFRICA
Johannesburg
SOUTH KOREA
Seoul
TAIWAN
Taipei
THAILAND
Bangkok
USA
American Stock Exchange (AMEX), Boston, Chicago, Cincinnati, New York Stock
Exchange (NYSE), Philadelphia, San Francisco Pacific Stock Exchange, Los Angeles
Pacific Stock Exchange
REGULATED MARKETS IN COUNTRIES WHICH ARE NOT MEMBERS OF THE EUROPEAN UNION AND
NOT CONTRACTING STATES OF THE TREATY ON THE EUROPEAN ECONOMIC AREA
CANADA***
Over-the-Counter Market
JAPAN***
Over-the-Counter Market
69
<PAGE>
SOUTH KOREA***
Over-the Counter Market
SWITZERLAND
Free Trading Zurich, Free Trading Geneva, Exchange Bern Over the Counter Market
of the members of the International Securities Market Association (ISMA), Zurich
UNITED STATES***
NASDAQ-SYSTEM
Over-the-Counter Market (organized markets by the National Association of
Securities Dealers, Inc.)
* Top 50 World, Top 50 Europe, Top 50 Asia, and European Mid-Cap Only.
** Not applicable to the European Mid-Cap Fund.
*** European Mid-Cap Fund Only
70
<PAGE>
APPENDIX B
STANDARD & POOR'S
LONG-TERM DEBT RATING DEFINITIONS
AAA--The highest rating assigned by Standard & Poor's. Capacity to pay interest
and repay principal is extremely strong.
AA--A very strong capacity to pay interest and repay principal and differs from
the higher-rated issues only in small degree.
A--A strong capacity to pay interest and repay principal although it is somewhat
more susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
BBB--Regarded as having an adequate capacity to pay interest and repay
principal. Although normally exhibiting adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than in higher-rated categories.
BB--Less near-term vulnerability to default than other speculative issues.
However, faces major ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. Also used for debt subordinated to
senior debt that is assigned an actual or implied BBB rating.
B--A greater vulnerability to default but currently has the capacity to meet
interest payments and principal repayments. Adverse business, financial, or
economic conditions will likely impair capacity or willingness to pay interest
and repay principal. Also used for debt subordinated to senior debt that is
assigned an actual or implied BB or BB- rating.
CCC--A currently identifiable vulnerability to default, and dependent upon
favorable business, financial, and economic conditions to meet timely payment of
interest and repayment of principal. In the event of adverse business,
financial, or economic conditions, not likely to have the capacity to pay
interest and repay principal. Also used for debt subordinated to senior debt
that is assigned an actual or implied B or B rating.
CC--Typically applied to debt subordinated to senior debt that is assigned an
actual or implied CCC debt rating.
C--Typically applied to debt subordinated to senior debt which is assigned an
actual or implied CCC debt rating. May be used to cover a situation where a
bankruptcy petition has been filed, but debt service payments are continued.
COMMERCIAL PAPER (CP) RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
A-1--Indicates that the degree of safety regarding timely payment is strong.
Those issues determined to possess extremely strong safety characteristics are
denoted with a plus sign (+) designation.
A-2--Capacity for timely payment is satisfactory. However, the relative degree
of safety is not as high as for issues designated A-1.
SHORT-TERM MUNICIPAL OBLIGATION RATINGS
A Standard & Poor's (S&P) note rating reflects the liquidity concerns and market
access risks unique to notes.
SP-1--Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a plus
sign (+) designation.
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<PAGE>
SP-2--Satisfactory capacity to pay principal and interest.
VARIABLE RATE DEMAND NOTES (VRDNS) AND TENDER OPTION BONDS (TOBS) RATINGS
S&P assigns dual ratings to all long-term debt issues that have as part of their
provisions a variable rate demand feature. The first rating (long-term rating)
addresses the likelihood of repayment of principal and interest when due, and
the second rating (short-term rating) describes the demand characteristics.
Several examples are AAA/A-1+, AA/A-1+, A/A-1. (The definitions for the
long-term and the short-term ratings are provided below.)
MOODY'S INVESTORS SERVICE
LONG-TERM BOND RATING DEFINITIONS
AAA--Judged to be of the best quality. The smallest degree of investment risk
and 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,
comprise what are generally known as high-grade bonds. Rated lower than the best
bonds because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat larger
than in Aaa securities.
A--Possess many favorable investment attributes and considered as
upper-medium-grade obligations. Factors giving security to principal and
interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
BAA--Considered as medium-grade obligations (i.e., neither highly protected nor
poorly secured). Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Lack outstanding
investment characteristics and in fact have speculative characteristics as well.
BA--Judged to have speculative elements; future cannot be considered as well
assured. Often the protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class.
B--Generally lack characteristics of the desirable investment. Assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
CAA--Poor standing. May be in default or there may be present elements of danger
with respect to principal or interest.
CA--Represent obligations which are speculative in a high degree. Such issues
are often in default or have other marked shortcomings.
C--The lowest-rated class of bonds, and issues so rated can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
COMMERCIAL PAPER RATINGS
P-1--A superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries, high
rates of return on funds employed, conservative capitalization structure with
moderate reliance on debt and ample asset protection, broad margins in earning
coverage of fixed financial charges and high internal cash generation,
well-established access to a range of financial markets and assured sources of
alternate liquidity.
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<PAGE>
P-2--A strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
SHORT-TERM MUNICIPAL OBLIGATION RATINGS
Moody's Investor Service (Moody's) short-term ratings are designated Moody's
Investment Grade (MIG or VMIG). (See below.) The purpose of the MIG or VMIG
ratings is to provide investors with a simple system by which the relative
investment qualities of short-term obligations may be evaluated.
MIG1--Denotes best quality. There is present strong protection by established
cash flows, superior liquidity support or demonstrated broad based access to the
market for refinancing.
MIG2--Denotes high quality. Margins of protection are ample although not so
large as in the preceding group.
VARIABLE RATE DEMAND NOTES (VRDNS) AND TENDER OPTION BONDS (TOBS) RATINGS
Short-term ratings on issues with demand features are differentiated by the use
of the VMIG symbol to reflect such characteristics as payment upon periodic
demand rather than fixed maturity dates and payment relying on external
liquidity. In this case, two ratings are usually assigned, (for example,
Aaa/VMIG-1); the first representing an evaluation of the degree of risk
associated with scheduled principal and interest payments, and the second
representing an evaluation of the degree of risk associated with the demand
feature. The VMIG rating can be assigned a 1 or 2 designation using the same
definitions described above for the MIG rating.
FITCH, INC./FITCH INVESTORS SERVICE, L.P.
LONG-TERM DEBT RATING DEFINITIONS
AAA--Investment grade and of the highest credit quality. The obligor has an
exceptionally strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA--Considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A--Considered to be investment grade and of high credit quality. The obligor's
ability to pay interest and repay principal is considered to be strong, but may
be more vulnerable to adverse changes in economic conditions and circumstances
than bonds with higher ratings.
BBB--Considered to be investment grade and of satisfactory credit quality. The
obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB--Considered speculative. The obligor's ability to pay interest and repay
principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified which could assist the
obligor in satisfying its debt service requirements.
B--Considered highly speculative. While bonds in this class are currently
meeting debt service requirements, the probability of continued timely payment
of principal and interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity throughout the life of
the issue.
CCC--Certain identifiable characteristics which, if not remedied, may lead to
default. The ability to meet obligations requires an advantageous business and
economic environment.
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CC--Minimally protected. Default in payment of interest and/or principal seems
probable over time.
C--Imminent default in payment of interest or principal.
SHORT-TERM DEBT RATING DEFINITIONS
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance for timely payment, only slightly less in degree than issues rated
F-1+.
F-2--Good Credit Quality. Issues carrying this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as for
issues assigned F-1+ and F-1 ratings.
COMMERCIAL PAPER RATING DEFINITIONS
FITCH-1--(Highest Grade) Regarded as having the strongest degree of assurance
for timely payment.
FITCH-2--(Very Good Grade) Assurance of timely payment only slightly less in
degree than the strongest issues.
LONG-TERM DEBT RATINGS
NR--Indicates that both the bonds and the obligor or credit enhancer are not
currently rated by S&P or Moody's with respect to short-term indebtedness.
However, management considers them to be of comparable quality to securities
rated A-1 or P-1.
NR(1)--The underlying issuer/obligor/guarantor has other outstanding debt rated
AAA by S&P or Aaa by Moody's.
NR(2)--The underlying issuer/obligor/guarantor has other outstanding debt rated
AA by S&P or Aa by Moody's.
NR(3)--The underlying issuer/obligor/guarantor has other outstanding debt rated
A by S&P or Moody's.
OTHER CONSIDERATIONS
Among the factors considered by Moody's in assigning bond, note and commercial
paper ratings are the following: (i) evaluation of the management of the issuer;
(ii) economic evaluation of the issuer's industry or industries and an appraisal
of speculative-type risks which may be inherent in certain areas; (iii)
evaluation of the issuer's products in relation to competition and customer
acceptance; (iv) liquidity; (v) amount and quality of long-term debt; (vi) trend
of earnings over a period of 10 years; (vii) financial strength of a parent
company and the relationships which exist with the issuer; and (viii)
recognition by management of obligations which may be present or may arise as a
result of public interest questions and preparations to meet such obligations.
Among the factors considered by S&P in assigning bond, note and commercial paper
ratings are the following: (i) trend of earnings and cash flow with allowances
made for unusual circumstances, (ii) stability of the issuer's industry, (iii)
the issuer's relative strength and position within the industry and (iv) the
reliability and quality of management.
74
<PAGE>
ADDRESSES
FLAG INVESTORS TOP 50 WORLD
FLAG INVESTORS TOP 50 EUROPE
FLAG INVESTORS TOP 50 ASIA
FLAG INVESTORS TOP 50 US
FLAG INVESTORS EUROPEAN MID-CAP FUND
FLAG INVESTORS JAPANESE EQUITY FUND
One South Street
Baltimore, Maryland 21202
INVESTMENT ADVISOR
Deutsche Fund Management, Inc.
280 Park Avenue
New York, New York 10017
INVESTMENT SUB-ADVISORS
DWS International Portfolio Management GmbH
Grueneburgweg 113-115
60323 Frankfurt am Main, Germany
Deutsche Asset Management, Inc.
280 Park Avenue
New York, New York 10017
DISTRIBUTOR
ICC Distributors, Inc.
2 Portland Square
Portland, Maine 04101
ADMINISTRATOR, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Investment Company Capital Corp.
One South Street
Baltimore, Maryland 21202
CUSTODIAN
Investors Bank & Trust Co.
200 Clarendon Street
Boston, Massachusetts 02116
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
250 W. Pratt Street
Baltimore, Maryland 21201
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
75
<PAGE>
PART C. OTHER INFORMATION.
ITEM 23. EXHIBITS:
(a) (i) Copy of Articles of Amendment and Restatement of the
Registrant; (2)
(ii) Conformed copy of Articles of Amendment; (6)
(iii) Conformed copy of Articles Supplementary of Registrant;
(6)
(iv) Conformed copy of Articles of Amendment Certificate of
Correction; (6)
(v) Conformed copy of Articles of Amendment; (8)
(b) (i) Copy of By-Laws of the Registrant; (1)
(ii) Copy of Amendment #1 to the By-Laws; (9)
(c) Copy of Specimen Certificate for shares of common stock
of the Registrant; (5)
(d) (i) Copy of Investment Advisory Agreement of the Registrant;
(2)
(ii) Copy of Investment Management Agreement; (3)
(iii) Conformed copy of Amended Letter Agreement regarding
Expense Ratio Caps; (10)
(e) (i) Conformed copy of Distributor's Contract including
Exhibits A and B thereto; (4)
(ii) Conformed copy of Exhibit C to the Distributor's
Contract; (6)
(iii) Form of Distribution Agreement including Appendix A and
B thereto; (7)
(iv) Conformed copy of Mutual Funds Sales and Service
Agreement; (4)
(f) Not applicable;
(g) (i) Conformed copy of Custodian Agreement between Investors
Bank and Trust and the Registrant; (4)
(ii) Custodian Agreement between Deutsche Portfolios and
Investors Bank and Trust Company; (2)
(iii) Conformed copy of Delegation Agreement between Deutsche
Portfolios and Investors Bank and Trust Company including
Appendix A-D; (6)
(h) (i) Conformed copy of Series Master Services Agreement
between Investment Company Capital Corporation and the
Registrant;+
(ii) Conformed copy of Fund Accounting Agreement between IBT
Fund Services (Canada) Inc. and the Registrant; (4)
(iii) Conformed copy of Appendix A-C to Fund Accounting
Agreement between IBT Fund Services (Canada) Inc. and
the Registrant; (6)
<PAGE>
(iv) Conformed copy of Services Agreement; (4)
(v) Form of Amendment #1 to Exhibit 1 of the Services
Agreement; (6)
(vi) Conformed copy of Master License Agreement between the
Registrant and Deutsche Banc Alex. Brown, LLC; +
(vii) Conformed copy of Letter Agreement between Flag
Investors Funds, Inc. and Deutsche Fund Management,
Inc.; +
(i) Copy of Opinion and Consent of Counsel as to legality of
shares being registered; +
(j) Conformed copy of consent of Independent Accountants;+
(k) Not applicable;
(l) Copy of investment representation letters from initial
shareholders; (3)
(m) (i) Conformed copy of Distribution and Services Plan; (4)
(ii) Conformed copy of Exhibit C to the Distribution and
Service Plan; (6)
(n) Not applicable
(o) Conformed copy of Amended and Restated Multiple Class
Plan including Exhibit A; (10)
(p) Codes of Ethics
(i) Code of Ethics of Registrant; +
(ii) Deutsche Funds Management, Inc.; +
(iii) DWS International Portfolio Management;+
(iv) Deutsche Asset Management;+
(q) Conformed copy of Powers of Attorney. +
--------------------------------------------
(+): Filed electronically herewith.
1. Response is incorporated by reference to Registrant's Registration
Statement on Form N-1A filed on May 23, 1997. (File Nos. 333-7008
and 811-8227)
2. Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 4 on Form N-1A filed on August 1, 1997. (File Nos.
333-7008 and 811-8227)
3. Response is incorporated by reference to Registrant's Pre-Effective
Amendment No. 6 on Form N-1A filed on September 23, 1997. (File Nos.
333-7008 and 811-8227)
4. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 1 on Form N-1A filed on April 13, 1998. (File Nos.
333-7008 and 811-8227)
5. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 2 on Form N-1A filed on September 1, 1998. (File Nos.
333-7008 and 811-8227)
6. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 3 on Form N-1A filed on November 2, 1998. (File Nos.
333-7008 and 811-8227)
7. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 5 on Form N-1A filed on October 29, 1999. (File Nos.
333-7008 and 811-8227)
8. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 6 on Form N-1A filed on December 30, 1999. (File Nos.
333-7008 and 811-8227)
9. Response is incorporated by reference to Registrant's Post-Effective
Amendment No. 8 on Form N-1A filed on March 31, 2000. (File Nos.
333-7008 and 811-8227)
10. Response is incorporated by reference to Registrant's
Post-Effective Amendment No. 9 on Form N-1A filed on June 1, 2000
(File Nos. 333-7008 and 811-8227)
<PAGE>
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT:
None
ITEM 25. INDEMNIFICATION:
Reference is made to Article EIGHT of Registrant's Articles of Amendment and
Restatement.
Registrant, its Directors and officers, and persons affiliated with
them are insured against certain expenses in connection with the defense of
actions, suits or proceedings, and certain liabilities that might be imposed as
a result of such actions, suits or proceedings.
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to Directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer of controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER:
Deutsche Fund Management, Inc. ("DFM"), DWS International Portfolio Management
GmbH ("DWS-IPM") and Deutsche Bank Investment Management Inc.("DBIMI") (formerly
Deutsche Morgan Grenfell Investment Management Inc. ("DMGIM"))are each indirect
subsidiaries of Deutsche Bank AG.
Investment Company Capital Corp. ("ICCC"); indirect, wholly-owned subsidiary
of Deutsche Bank AG; investment advisor and fund administrator, Majority
Shareholder of DFM (Since 06/00).
Deutsche Bank AG, a publicly-held global financial institution, trading on the
Frankfurt Stock Exchange; shareholder of DFM (since 9/94).
Allianz Holdings AG, a publicly-held global financial institution, Shareholder
of DFM (Since 12/95).
Udo Behrenwaldt, Director of DFM (since (5/97); Managing Director of DWS-IPM
(since 5/97); Executive
<PAGE>
Director of DB Investment Management, S.A. (since 7/87); Managing Director of
DWS-DGW (since 11/75).
Holger Naumann, Director of DFM (since 1/97); Head of Business Development/
Controlling at Deutsche Asset Management Europe (Since 01/00); Head of
Participations at DWS-DGW (12/95-12/99) Account Officer at Deutsche Bank S.p.A.
(10/92-11/95).
Richard T. Hale, Jr., Managing Director of Deutsche Asset Management, Inc.
("DeAM") (since 06/99); President of DFM (since 01/00); Director and President
of ICCC (since 3/87); Managing Director of DB Alex. Brown LLC (formerly Alex.
Brown and Sons Inc.) (12/85 - 6/99).
Ross Youngman, Managing Director of DeAM (since 05/99); Managing Director of DFM
(since 01/00); Managing Director of Bankers Trust (08/93 - 05/99).
Daniel O. Hirsch, Director of DeAM (since 06/99); Vice President and Secretary
of DFM (since 01/00); Principal of DB Alex. Brown LLC (formerly BT Alex. Brown,
Inc.); Various Positions with Staff of the United States Securities and Exchange
Commission (1982-1998).
Walter (Jim) L. Knell, Director and Controller of DeAM (since 06/99); Treasurer
of DFM (since 01/00); Vice President of DB Alex. Brown LLC (1998 - 06/99);
Executive Committee of Care Resources (1993 - 1998).
ITEM 27. PRINCIPAL UNDERWRITERS:
(a) ICC Distributors, Inc., the Distributor for shares of the Registrant,
acts as principal underwriter for the following open-end investment companies:
BT Advisor Funds, BT Institutional Funds, BT Pyramid Mutual Funds, Cash
Management Portfolio, Intermediate Tax Free Portfolio, NY Tax Free Money
Portfolio, Treasury Money Portfolio, International Equity Portfolio, Equity 500
Index Portfolio, Capital Appreciation Portfolio, Asset Management Portfolio, BT
Investment Portfolios, Deutsche Banc Alex. Brown Cash Reserve Fund, Inc., Flag
Investors Communications Fund, Inc., Flag Investors Emerging Growth Fund, Inc.,
the Flag Investors Total Return U.S. Treasury Fund Shares of Total Return U.S.
Treasury Fund, Inc., the Flag Investors Managed Municipal Fund Shares of Managed
Municipal Fund, Inc., Flag Investors Short-Intermediate Income Fund, Inc., Flag
Investors Value Builder Fund, Inc., Flag Investors Real Estate Securities Fund,
Inc., Flag Investors Equity Partners Fund, Inc., Flag Investors Series Funds,
Inc.(formerly known as Flag Investors International Fund, Inc.), Flag Investors
Funds, Inc. (formerly known as Deutsche Funds, Inc.), Flag Investors Portfolios
Trust (formerly known as Deutsche Portfolios), Morgan Grenfell Investment Trust,
Glenmede Fund, Inc. and Glenmede Portfolios.
<PAGE>
<TABLE>
<CAPTION>
(b)
(1) (2) (3)
Name and Principal Positions and Offices Positions and Offices
Business Address With Distributor With Registrant
------------------ ---------------------- ---------------------
<S> <C> <C>
John Y. Keffer President, --
Two Portland Square ICC Distributors, Inc.
Portland, ME 14101
David I. Goldstein Vice President and Secretary, --
Two Portland Square ICC Distributors, Inc.
Portland, ME 14101
Benjamin L. Niles Vice President, --
Two Portland Square ICC Distributors, Inc.
Portland, ME 14101
Nanette K. Chern Chief Compliance Officer, --
Two Portland Square ICC Distributors, Inc.
Portland, ME 14101
Ronald H. Hirsh Treasurer, --
Two Portland Square ICC Distributors, Inc.
Portland, ME 14101
Marc D. Keffer Assistant Secretary, --
Two Portland Square ICC Distributors, Inc.
Portland, ME 14101
(c) Not applicable
</TABLE>
<PAGE>
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS:
All accounts and records required to be maintained by Section
31(a) of the Investment Company Act of 1940 and Rules 31a-1
through 31a-3 promulgated thereunder are maintained at one of the
following locations:
Flag Investors Funds, Inc. ........ One South Street
Baltimore, MD 21202
ICC Distributors, Inc. Two Portland Square
(Distributor) ..................... Portland, ME 04101
Investment Company Capital Corp. One South Street
(Transfer Agent, Administrator).... Baltimore, MD 21202
Deutsche Fund Management, Inc. 280 Park Avenue
(Adviser) ......................... New York, NY 10017
IBT Fund Services (Canada) Inc. One First Place
(Fund Accountant) ................. King Street West,
Suite 2800 P.O. Box
231 Toronto, Ontario
M5X1C8
Investors Bank & Trust Co. 200 Clarendon Street
(Custodian) ....................... Boston, MA 02116
ITEM 29. MANAGEMENT SERVICES:
Not applicable
ITEM 30. UNDERTAKINGS:
Registrant hereby undertakes to comply with the provisions of
Section 16(c) of the 1940 Act with respect to the removal of
Trustees and the calling of special shareholder meetings by
shareholders.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, FLAG INVESTORS FUNDS,
INC.,certifies that it meets all of the requirement for effectiveness of this
registration statement under Rule 485(b) under the Securities Act and has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Baltimore, on the 22nd day
of December, 2000.
FLAG INVESTORS FUNDS, INC.
BY: /s/ Richard T. Hale*
Richard T. Hale, President
December 22nd, 2000
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to its Registration Statement has been signed below by the following person in
the capacity and on the date indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Richard T. Hale*
Richard T. Hale President and Director December 22, 2000
(Chief Executive Officer and
Acting Principal Financial
Officer)
/s/ Eugene J. McDonald* December 22, 2000
Eugene J. McDonald Director
/s/ Louis E. Levy* December 22, 2000
Louis E. Levy Director
/s/ Richard R. Burt* December 22, 2000
Richard R. Burt Director
/s/ Robert H. Wadsworth* December 22, 2000
Robert H. Wadsworth Director
/s/ Truman T. Semans* December 22, 2000
Truman T. Semans Director
/s/ Joseph R. Hardiman* December 22, 2000
Joseph R. Hardiman Director
/s/ Carl W. Vogt* December 22, 2000
Carl W. Vogt Director
/s/ Rebecca W. Rimel* December 22, 2000
Rebecca W. Rimel Director
/s/ Charles A. Rizzo* December 22, 2000
Charles A. Rizzo Treasurer
(Chief Financial and
Accounting Officer)
* By Power of Attorney
By: /s/ Daniel O. Hirsch Attorney In Fact December 22nd, 2000
Daniel O. Hirsch For the Persons
Listed Above
</TABLE>
AUTHORIZATION TO EXECUTE POWERS OF ATTORNEY
PROPOSED RESOLUTIONS:
RESOLVED, that Edward J. Veilleux, Amy M. Olmert and Daniel O. Hirsch are
authorized to sign the Registration Statements on Form N-1A, and any
Post-Effective Amendments thereto, of each Fund in the FLAG FUNDS
COMPLEX on behalf of each Fund's President pursuant to a properly
executed power of attorney.
RESOLVED, that Edward J. Veilleux, Amy M. Olmert and Daniel O. Hirsch are
authorized to sign the Registration Statements on Form N-1A, and any
Post-Effective Amendments thereto, of each Fund in the FLAG FUNDS
COMPLEX on behalf of each Fund's Chief Financial Officer pursuant to
a properly executed power of attorney.
